Meaning of the Financial System
A set of sub systems of financial
Intermediates with the flow of funds
between savers and borrowers.
Facilitates transfer and allocation of
scarce resources efficiently and
Indian Financial System
Formal and Informal Financial
• The financial systems of most developing countries
are characterized by co-existence and co-operation
between the formal and informal financial sectors.
• The formal financial sector is characterized by the
presence of an organized, institutional and regulated
system which caters to the financial needs of the
modern spheres of economy.
• The informal financial sector is an unorganized, noninstitutional and non-regulated system dealing with
traditional and rural spheres of the economy.
Organized Indian Financial System
Components of the Financial System
• The formal financial system comes under the
regulations of the ministry of finance (MOF),
reserve Bank of India (RBI), Securities and
Exchange board of India (SEBI) and other
Types of Financial Institutions
Banking: creators and purveyors of credit.
Non-banking: purveyors of credit
Developmental financial institutions
Functions of Financial Institutions
Provide three transformation services
Liability, asset and size transformation
Money Market – A market for short-term debt
Capital Market – A market for long-term equity and debt
Primary Market – A market for new issues
Secondary Market – A market for trading outstanding
Link Between Primary and Secondary
A buoyant secondary market is indispensable for
of a vibrant primary market.
The secondary market provides a basis for the determination of
prices of new issues.
Depth of the secondary market depends on the primary market.
Bunching of new issues affects prices in the
Why Capital Markets Exist
• Capital markets facilitate the transfer of
capital (i.e. financial) assets from one owner
• 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
• Promotion of Industrial Growth
• Raising of long term Capital
• Ready & Continuous Markets
• Proper Channelisation of Funds
• Provision of a variety of Services
Provision of liquidity
Key Elements of a Well-functioning
A strong legal and regulatory environment
Sound public finances and public debt management
A central bank
Sound banking system
Well-functioning securities market
Indian Financial System – An Overview
* Upto 1951
* 1951 to 1990
* Early Nineties
* Present Status Globalisation
Control of Money Lenders
No Laws / Total Private Sector
No Regulatory Bodies
Hardly any industrialization
Banks – Traditional lenders for Trade and that too short
Main concentration on Traditional Agriculture
Narrow industrial securities market (i.e. Gold/Bullion/Metal
but largely linked to London Market)
Absence of intermediatary institutions in long-term
financing of industry
Industry had limited access to outside saving/resources.
1951 to 1990
Moneylenders ruled till 1951. No worth-while Banks at that
time. Industries depended upon their own money. 1951
5 years PLAN commenced.
PVT. SECTORS TO PUBLIC SECTOR – MIXED ECONOMY
1st 5 year PLAN in 1951 – Planned Economic Process. As
part of Alignment of Financial Systems – Priorities laid
down by Govt. – Policies.
MAIN Elements of Fin. Organisations
i. Public ownership of Financial Institution
ii. Strengthening of Institutional Structure
iii. Protection to Investors
iv. Participation in Corporate Management
v. Organisational Deficiencies.
1956 (take-over of Imperial Bank of India)
1956 (Merges of over 250 Life Insurance Companies)
1969 (14 major banks with Deposits of over Rs. 50
1980 (6 more Banks)
Insurance 1972 (General Insurance Corp. GIC by New India,
Oriental, united and National.
Development Financial Institutions : (DFIs)
• Started providing Working Capital also
• Set up CREDIT RATING AGENCIES
CRISIL(IPO IN 1993-94; standard & poor acquires 9.68% in 1996-97 S & P acquires
shares / holding up to 58.46%)
ICRA Set up in 1991 by leading FIs/Banks/Fin. Ser. Cos. And Moody’s CARE
Set-up by IFCI/Banks.
FITCH a 100% subsidiary of FITCH Group.
Privatisation of DFI
Reduction in Govt. holding & Public Participation e.g. IFCI Ltd., IDBI Ltd., ICICI Ltd.
• Conversion into Banking / Merger into Banking Companies IDBI Bank & ICICI Bank
• Issuance of Bond by DFIs without Govt.’s Guarantees to mobilize resources.
• Reduction in holding of Govt. in Banks, i.e. Public Participation / Listing
Rise & Growth of Service Sector industries.
Reliance & Dependence on technology.
E-mail & mobile made sea-change in communication, data collection etc.
Computerization – a catch phrase and inevitable need of an hour.
Dependent on Capital Market rather than only Debts dependency.
Scalability of operations through globally competitive size.
Broad basing of Board.
NBFC under RBI governance to finance retail assets and mobilize small/medium
Very large NBFCs are emerging (Shri Ram Transport Finance, Birla, Tata Finance,
Sundaram Finance, Reliance Finance, DLF, Religare etc.