Indian Financial System
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Indian Financial System

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Overview of Indian Financial System

Overview of Indian Financial System

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Indian Financial System Indian Financial System Presentation Transcript

  • 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