Indian Financial System

Indian Financial System Dilipraj Dongre

Financial System
Existence of a well organized financial system
Promotes the well being and standard of living of the people of a country
Money and monetary assets
Mobilize the saving
Promotes investment

Financial System
Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products
Suppliers of funds (Mainly households) Flow of financial services Incomes , and financial claims Seekers of funds (Mainly business firms and government) Flow of funds (savings)

Indian Financial System Non- Organized Organized Money lenders Local bankers Traders Landlords Pawn brokers Chit Funds Regulators Financial Institutions Financial Markets Financial services

Evolution of Financial System Barter Money Lender Nidhi's/Chit Funds Indigenous Banking Cooperative Movement Societies Banks Joint-Stock Banks

Consolidation Commercial Banks Nationalization Investment Banks Development Financial Institutions Investment/Insurance Companies Stock Exchanges Market Operations Specialized Financial Institutions Merchant Banking Universal Banking

Financial System Savers Lenders Households Foreign Sectors Investors Borrowers Corporate Sector Govt.Sector Un-organized Sector Economy Interrelation--Financial system & Economy

Organized Indian Financial System Money Market Instrument Capital Market Instrument Forex Market Capital Market Money Market Credit Market Primary Market Financial Instruments Financial Markets Financial Intermediaries Secondary Market Regulators

Financial Markets
Mechanism which allows people to trade
Affected by forces of supply and demand
Process used
In Finance, Financial markets facilitates

Why Capital Markets Exist
Capital markets facilitate the transfer of capital ( i.e. financial) assets from one owner to another.
They provide liquidity.
Liquidity refers to how easily an asset can be transferred without loss of value.
A side benefit of capital markets is that the transaction price provides a measure of the value of the asset.

Role of Capital Markets
Mobilization of Savings & acceleration of Capital Formation
Promotion of Industrial Growth
Raising of long term Capital
Ready & Continuous Markets
Proper Channelisation of Funds
Provision of a variety of Services

Indian Capital Market - Historical perspective
Stock Market was for a privileged few
Archaic systems - Out cry method
Lack of Transparency - High tones costs
No use of Technology
Outdated banking system
Volumes - less than Rs. 300 cr per day
No settlement guarantee mechanism - High risks

Indian Capital markets - Chronology
1994-Equity Trading commences on NSE
1995-All Trading goes Electronic
1996- Depository comes in to existence
1999- FIIs Participation- Globalisation
2000- over 80% trades in Demat form
2001- Major Stocks move to Rolling Sett
2003- T+2 settlements in all stocks
2003 - Demutualisation of Exchanges

Capital Markets - Reforms
Each scam has brought in reforms - 1992 / 2001
Screen based Trading through NSE
Capital adequacy norms stipulated
Dematerialization of Shares - risks of fraudulent paper eliminated
Entry of Foreign Investors
Investor awareness programs
Rolling settlements
Inter-action between banking and exchanges

Reforms / Initiatives post 2000
Corporatisation of exchange memberships
Banning of Badla / ALBM
Introduction of Derivative products - Index / Stock Futures & Options
Reforms/Changes in the margining system
STP - electronic contracts
Margin Lending
Securities Lending

MARKET STRUCTURE (JULY 31, 2005)
22 Stock Exchanges,
Over 10000 Electronic Terminals at over 400 locations all over India.
9108 Stock Brokers and 14582 Sub brokers
9644 Listed Companies
2 Depositories and 483 Depository Participants
128 Merchant Bankers, 59 Underwriters
34 Debenture Trustees, 96 Portfolio Managers
83 Registrars & Transfer Agents, 59 Bankers to Issue
4 Credit Rating Agencies

Indian Capital Market Market Instruments Intermediaries Primary Secondary Equity Debt Hybrid Regulator
Brokers
Investment Bankers
Stock Exchanges
Underwriters
SEBI Players Corporate Intermediaries CRA Banks/FI FDI /FII Individual

Stock Exchanges in INDIA
Mangalore Stock Exchange
Hyderabad Stock Exchange
Uttar Pradesh Stock Exchange
Coimbatore Stock Exchange
Cochin Stock Exchange
Bangalore Stock Exchange
Saurashtra Kutch Stock Exchange
Pune Stock Exchange
National Stock Exchange
OTC Exchange of India
Calcutta Stock Exchange
Inter-connected Stock Exchange (NEW)
Madras Stock Exchange
Bombay Stock Exchange
Madhya Pradesh Stock Exchange
Vadodara Stock Exchange
The Ahmedabad Stock Exchange
Magadh Stock Exchange
Gauhati Stock Exchange
Bhubaneswar Stock Exchange
Jaipur Stock Exchange
Delhi Stock Exchange Assoc
Ludhiana Stock Exchange

The role of the stock exchange
Raising capital for businesses
Mobilizing savings for investment
Facilitate company growth
Redistribution of wealth

The role of the stock exchange
Corporate governance
Creates investment opportunities for small investors
Government raises capital for development projects
Barometer of the economy

Growth Pattern of the Indian Stock Market Sl.No. As on 31st December 1946 1961 1971 1975 1980 1985 1991 1995 1 No. of Stock Exchanges 7 7 8 8 9 14 20 22 2 No. of Listed Cos. 1125 1203 1599 1552 2265 4344 6229 8593 3 No. of Stock Issues of Listed Cos. 1506 2111 2838 3230 3697 6174 8967 11784 4 Capital of Listed Cos. (Cr. Rs.) 270 753 1812 2614 3973 9723 32041 59583 5 Market value of Capital of Listed Cos. (Cr. Rs.) 971 1292 2675 3273 6750 25302 110279 478121 6 Capital per Listed Cos. (4/2) (Lakh Rs.) 24 63 113 168 175 224 514 693 7 Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) 86 107 167 211 298 582 1770 5564 8 Appreciated value of Capital per Listed Cos. (Lak Rs.) 358 170 148 126 170 260 344 803

Capital Market Instruments ADR / GDR Equity Debt Equity Shares Preference Shares Debentures Zero coupon bonds Deep Discount Bonds Hybrid

Factors contributing to growth of Indian Capital Market
Establishment of Development banks & Industrial financial institution.
Legislative measures
Growing public confidence
Increasing awareness of investment opportunities

Factors contributing to growth of Indian Capital Market
Growth of underwriting business
Setting up of SEBI
Mutual Funds
Credit Rating Agencies

Indian Capital Market deficiencies
Lack of transparency
Physical settlement
Variety of manipulative practices
Institutional deficiencies
Insider trading

Money Market
Market for short-term money and financial assets that are near substitutes for money.
Short-Term means generally period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost

Money Market
It is a place for Large Institutions and government to manage their short-term cash needs
It is a subsection of the Fixed Income Market
It specializes in very short-term debt securities
They are also called as Cash Investments

Defects of Money Market
Lack of Integration
Lack of Rational Interest Rates structure
Absence of an organized bill market
Shortage of funds in the Money Market
Seasonal Stringency of funds and fluctuations in Interest rates
Inadequate banking facilities

Money Market Instruments
Treasury Bills
Commercial Paper
Certificate of Deposit
Money Market Mutual Funds
Repo Market

Segment Issuer Instruments Government Central Government Zero Coupon Bonds, Coupon Bearing Bonds, Capital Index Bonds, Treasury Bills. Public Sector Government Agencies / Statutory Bodies Govt. Guaranteed Bonds, Debentures Public Sector Units PSU Bonds, Debenture, Commercial Paper Private Corporate Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits Banks Certificate of Deposits, Bonds Financial Institutions Certificate of Deposits, Bonds

Financial Regulators

Financial Regulators
Securities and Exchange Board of India (SEBI)
Reserve Bank of India
Ministry of Finance

Security Exchange Board of India (SEBI)
Securities and Exchange Board of India (SEBI) was first established in the year 1988
Its a non-statutory body for regulating the securities market
It became an autonomous body in 1992

Functions Of SEBI
Regulates Capital Market.
Checks Trading of securities.
Checks the malpractices in securities market.

Functions Of SEBI
It enhances investor's knowledge on market by providing education.
It regulates the stockbrokers and sub-brokers.
To promote Research and Investigation

Objectives of SEBI
It tries to develop the securities market.
Promotes Investors Interest.
Makes rules and regulations for the securities market.

The Recent Initiatives Undertaken
Sole Control on Brokers
For Underwriters
For Share Prices
For Mutual Funds

Reserve Bank of India
Established on April 1, 1935 in accordance with the provisions of the RBI Act, 1934.
The Central Office of the Reserve Bank has been in Mumbai.
It acts as the apex monetary authority of the country.

Functions Of RBI
Monetary Authority:
Formulation and Implementation of monetary policies.
Maintaining price stability and ensuring adequate flow of credit to the Productive sectors.
Issuer of currency:
Issues and exchanges or destroys currency and coins.
Provide the public adequate quantity of supplies of currency notes and coins.

Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations
Maintain public confidence, protect depositors' interest and provide cost-effective banking services.
Authority On Foreign Exchange:
Manages the Foreign Exchange Management Act, 1999.
Facilitate external trade, payment, promote orderly development and maintenance of foreign exchange market.
Functions Of RBI

Developmental role:
Performs a wide range of promotional functions to support national objectives.
Related Functions:
Banker to the Government: performs merchant banking function for the central and the state governments.
Maintains banking accounts of all scheduled banks.
Functions Of RBI

Monetary Measures
(a) Bank Rate:
The Bank Rate was kept unchanged at 6.0 per cent.
(b) Reverse Repo Rate:
The Repo rate is around 7 per cent and Reverse repo rate is around 6.10 per cent.
(c) Cash Reserve Ratio:
The cash reserve ratio (CRR) of scheduled banks is currently at 5.0 per cent.

Reforms in the Financial System
Pre-reforms period
Steps taken
Objectives
Conclusion

Pre-Reforms Period
The period from the mid 1960s to the early 1990s.
Characterized by:
Administered interest rates
Industrial licensing and controls
Dominant public sector
Limited competition
High capital-output ratio

Pre-Reforms Period
Banks and financial institutions acted as a deposit agencies.
Price discovery process was prevented.
Government failed to generate resources for investment and public services.
Till 90s it was closed, highly regulated, and segmented system.

Steps Taken
Economic reforms initiated in June 1991.
The committee appointed under the chairmanship of M Narasimham.
He submitted report with all the recommendations
Government liberalized the various sectors in the economy.
Reform of the public sector and tax system.

Objectives
Reorientation of the economy
Macro economic stability
To Increase competitive efficiency in the operations
To remove structural rigidities and inefficiencies
To attain a balance between the goals of financial stability & integrated & efficient markets

Recommendations
Reduce the level of state ownership in banking
Lift restrictions on foreign ownership of banks
Spur the development of the corporate-bond market
Strengthen legal protections

Recommendations
Deregulate the insurance industry
Drop proposed limits on pension reforms
Increase consumer ownership of mutual-fund products
Introduce a gold deposit scheme

Recommendations
Speed up the development of electronic payments.
Separate the RBI's regulatory and central-bank functions
Lift the remaining capital account controls
Phase out statutory priority lending and restrictions on asset allocation

Conclusion
The financial system is fairly integrated, stable, efficient.
Weaknesses need to be addressed.
The reforms have been more capital centric in nature.
Foreign capital flows and foreign exchange reserves have increased but absorption of foreign capital is low.

Thank you

Indian Financial System

by diliprajdongre on Jul 22, 2009

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