The financial system works through financial market . A financial market is one which deals in money i.e., borrowing money from those who have surplus and lending it to those who need it. Like demand and supply of goods ad services in the product market there is also a demand for and supply of money in the financial market. On the basis of functions the financial market can be divided as Money market Capital market
Money Market Organise Unorganise d d Commercial Regional Cooperative Indigenous Non banking Banks Rural banks Bankers finance Banks companiesPublic Privat Foreign Bankssector ebanks Sector banks
Commercial banks Public sector banks Private sector banks Foreign banks
Established on Oct 2, 1975. Provides specialized knowledge on rural practices and requirements. Initially 5 RRB’s were set up , sponsored by syndicate bank ,UTI,SBI, PNB and UCB. Right now , number of RRB’S is pegged at 67
Co operative Banks in India are registered under the Co-operativeSocieties Act. The cooperative bank is also regulated by the RBI.They are governed by the Banking Regulations Act 1949 andBanking Laws (Co-operative Societies) Act, 1965. Cooperative banks Cooperative banks in India finance rural in India finance areas under: urban areas under : Farming Self-employment Cattle Industries Milk Small scale units Hatchery Home finance Personal finance Consumer finance Personal finance
INDIGENOUS BANKING According to the Indian Central Banking Enquiry Committee, "an indigenous banker is any individual or private firm receiving deposits and dealing in Hundies or lending money". Their area of operation is limited, they know their customers intimately. They can watch whether the loan granted is used for the purpose or not. Therefore these types of bankers are existing even now. The Shroffs, the Marwaris, the Multans, the Jains, the Sowcars, the Mahajans, Kharties, Seths and Banias are some of leading indigenous bankers.
DIFFERENCE BETWEEN INDIGENOUSBANKING & MONEY LENDER Acceptance of Deposits The Indigenous banker used to accept Moneylenders do not accept deposits on current accounts as well as deposits but they simply fixed deposits (not permissible now). lend money (own funds) Dealing in Hundies They do not deal in Hundies. Purpose of lending They generally provide finance to agriculture and do not finance for consumption. Rate of Interest The rates of interest charged by indigenous bankers are moderate and consistent with the market conditions. The rates of interest charged by the moneylenders are very high..
NON BANKING FINANCIALCOMPANY Non-banking financial companies: are financial institutions that provide banking services without bank licences . NBFC’s can be classified in following categories:I. Developing financial institutionII. Leasing companiesIII. investment companiesIV. venture capital companies
Capital marketGovt. Securities Industrial Development Non bankingmarket securities Financial finance market Institutions companies New issue Old issues market market IFCI , IDBI , SFCs , UTI etc. Merchant banks , mutual funds, leasing cos.
Low profits High CRR and SLR Huge NON PERFOMING ASSETS Concessional rates Restriction on new entry Low capital adequacy ratio
Resulted in Distorted interest rate mechanism Gross inefficiencies at the micro level Low capital levels of banks Adverse affect on the viability and profitability of banks Transparency, accounting and prudential norms could not be strictly followed in banking operations Lack of incentive to seek efficiency
CATEGORISED IN THE TWO ASPECT REFORMS IN BANKING SECTOR REFORMS IN CAPITAL MARKET
REDUCTION IN STATUTORY LIQUIDITY RATIO (38.5% to 25% ) REDUCTION IN CASH RESERVE RATIO (15% to 3% ) DEREGULATION OF INTEREST RATES CAPITAL ADEQUACY REQUIREMENT PRUDENTIAL REFORMS
TRANSPARENCY OF OPERATIONS RECOVERY OF NON – PERFORMING ASSETS IMPROVEMENT OF RISK MANAGEMENT INTRODUCING COMPETITION IN THE BANKING SECTOR
Increase in the net profit Increase in the capital adequacy ratio Decrease in the non performing assets
Branch expansion of commercialBank Group banksNumber of branches as on June Rural 30 Branches % of rural as on branche 30.6.2011 s to total 1969 1991 2001 branche 2011 sA. SBI and 2,462 12,168 1330 17976 6230 34.7associates 6B Nationalized 4553 29517 3250 44862 14325 31.9Banks 4C RRBs - 14522 1445 15777 11876 75.3 9Total PSBs 7015 56207 6026 78615 32431 41.3 9D Other sch. 900 3801 4995 11842 1341 11.3banksE Foreign Banks 130 140 186 318 7 2.2F All scheduled 8045 60148 6545 90775 33779 37.2bank 0G Non scheduled 217 42 - 55 16 29.1
Establishment of SEBIEstablishment of Credit Rating AgenciesGrowing merchant banking activitiesGrowing electronic transactionsGrowing stock exchangesGrowth of derivatives transactionCommodity trading
•1998 The cabinet decides to allow40% foreign equity in privateinsurance companies – 26% to foreigncompanies and 14% to non-resident&investors (FIIs)•1999 The Standing Committeeheaded by Murali Deora decidesthat foreign equity in privateinsurance should be limited to 26%•The IRA Act was renamed as theInsurance Regulatory andDevelopment Authority (IRDA) Act• 2012 central government approves49% FDI in insurance sector
NBFCs do offer all sorts of banking services, such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activities. Compulsory registration Maintainence of required assets Efficient operation Maintainence of reserve
Phase 1. Establishment and Growth of Unit Trust of India 1964-1987Phase II. Entry of Public Sector Funds - 1987-1993:-Phase III. Emergence of Private Sector Funds - 1993-96:-Phase IV. Growth and SEBI Regulation - 1996-2012.
Entry of FDI in private as well as in public banks In private banks1. FDI cap has been raised to 49% through automatic route .2. Though through government approval route FDI cap can be raised to 74% In public banks1. FDI cap has been raised to 49% through automatic route
OBJECTIVE-to institutionalize and strengthen themechanism for maintaining financialsector stability, financial sectordevelopment and inter-regulatory co-ordination.
Composition: The Council shall have the following composition:A The Union Finance Minister as the Chairperson.b. its members includes:I . Governor Reserve Bank of India (RBl),ii. Finance Secretary and/ or Secretary, Department of Economic Affairs (DEA),iii. Secretary, Department of Financial Services (DFS),iv. Chief Economic Advisor, Ministry of Finance,v. Chairman, Securities and Exchange Board of India (SEBI),vi. Chairman, insurance Regulatory and Development Authorityvii. Chairman Pension Fund Regulatory and Development Authority (PFRDA),c. Joint Secretary (Capital Markets), DEA, will be the Secretary ofthe Council,d. The Chairperson may invite any person whose presence is deemednecessary for any of its meeting (s).
Responsibility of the Council:The Council deals with issues relating to:a. Financial stabilityb. Financial sector developmentc. Inter -regulatory coordinationd. Financial literacye. Financial inclusionf. Macro prudential supervision of the economy including thefunctioning of large financial conglomerates.
Meaning-any change in the terms and conditionsof the loan or credit, especially in respect of itsservicing, is called restructuring of loan/ debt.Why is restructuring required?To assist the borrowers who are temporarily indistress, in particular, where the distress iscaused by circumstances beyond the control ofthe borrower
Trends in restructuring-RegulatoryconcernsNot permitted in a transparent and objective manner bybanks nor is it being resorted to in a non-discriminatorymannerpublic sector banks share a disproportionate burden ofsuch accountsthe small and marginal borrowers are discriminatedagainst by the banks for restructuring of their accounts,even if found viable.CDR Mechanism has prompted banks to avoid usingother means of credit management judiciously, i.e.,proper due-diligence before sanctioning a credit facility,regular and proper monitoring of accounts after
Investor Awareness CampaignFor making Indian capital market moresecure for Indian and foreigninvestors, SEBI has started investorsawareness campaign. For this, SEBIhas made his official sites subdomain at http://investor.sebi.gov.in/Under this campaign, Workshops/Seminars Conducted by InvestorAssociations recognised by SEBI.
A banking license is a pre –requisite for a financial institution that wants to provide banking servicesRBI is considering new bank licenses to promotersin the private sector and also to NBFCs
Banking licenses to privateplayers/corporate challenge oropportunity ?
As challenge•Fear of self dealing•Concentration of economic powerAs opportunity•Financial inclusion•Large capital•Innovative technology•Increase competition•Even in mutual fund and insurance industryprivate players manages thousand of croresof investors money
RBI must ensure new banking licenses are notgiven to corporate houses whose track recordsare not good.More emphasis on safe guards• limits on group exposure•Corporate governance•Transparency•Long term commitment•Strict controlling and reporting guidelinesRegular review after 2- 5 years
Deteriorating quality of assetsBasel III norms requirementFinancial inclusionIssues in convergence with InternationalFinancial Reporting Standards(IFRS)Competition in retail banking
Capital adequacy ratioCapital Adequacy Ratio (CAR), also called Capital to Risk(Weighted) Assets Ratio (CRAR)It’s a ratio of a banks capital to its risk. National regulators track a banks CAR to ensure that it can absorb reasonableamount of loss and complies with statutory capitalrequirements.Capital adequacy ratio is the ratio which determines thebanks capacity to meet the time liabilities and other riskssuch as credit risk, operational risk etc. A banks capital isthe "cushion" for potential losses, and protects the banksdepositors and other lenders. Banking regulators in mostcountries define and monitor CAR to protect depositors,
Capital adequacy ratio Capital Adequacy Ratio (CAR) is calculated by using following formulae: CAR= tier 1 capital +tier 2 capital/ risk weighted assets where tier 1 capital means (paid up capital + statutory reserves + disclosed free reserves) - (equity investments in subsidiary + intangible assets + current & b/f losses)& tier 2 capital represents A)Undisclosed Reserves, B)General Loss reserveswhere Risk can either be weighted assets or the respective national regulators minimum total capital requirement.
Basel III Basel III (or the Third Basel Accord) is a global regulatory standard on bank capital adequacy and stress testing agreed upon by the members of the Basel Committee on Banking Supervision in 2010–11, and scheduled to be introduced from 2013 until 2018.The third instalment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. Critics suggest that greater regulation is responsible for the slow recovery from the late-2000s financial crisis, and that the tighter Basel III requirements may further negatively affect the stability of the financial system .
India has seen mixed outcome in the first phase of reforms.While the Indian financial sector boosted, at the same timecapital market thrived with the opening up of sectors andimplementation of NEP 1991, but flip side of it also showsthat the NEP 1991 wasn’t successful in giving the sameaffects in the rural sector .The major focus of earlier reforms remained ,to pitch in thecapital ,which was priority of the country at that time andimprove the efficiency of public sector banks .observing current market environment we can easily realizethat we have entered into an era of second generation ofreforms . This time too if these reforms are not implementedin the judicious manner they will pose a great threat to RRB’sand domestic banking services. As it is important to keep inmind that excessive competition may create an unstable
BIBLIOGRAPHYRakeshmohan’s reportwww.assocham.comwww.rbi.comwww.finmin.comRBI BULLETIN 2008-12The Hindu articlesThe Economic Times ArticlesBusiness todayBusiness lines