Indian Financial System


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Indian Financial System

  2. 2.  FINANCIAL SYSTEM:A financial system or financial sector functions as an intermediary andfacilitates the flow of funds from the areas of surplus to the areas ofdeficit.
  3. 3.  Non-banking Financial Institutions provide loans and hire-purchasefinance, mostly for retail assets and are regulated by RBI Insurance sector in India has been traditionally dominated by stateowned Life Insurance Corporation and General InsuranceCorporation and its four subsidiaries. RBI also regulates foreign exchange under the Foreign ExchangeManagement Act (FERA). Securities and Exchange Board of India (SEBI) established under theSecurities and Exchange aboard of India Act, 1992 is the regulatoryauthority for capital markets in India India has a financial system that is regulated by independentregulators in the sectors of banking, insurance, capital markets,competition and various services sectors Reserve bank of India (RBI) established in 1935 is the Central bank.
  4. 4. Role/ Functions of Financial System:* It serves as a link between savers and investors.* It assists in the selection of the projects to be financed and alsoreviews the performance of such projects periodically.* It provides payment mechanism for exchange of goods and services.* It provides a mechanism for the transfer of resources acrossgeographic boundaries.* It provides a mechanism for managing and controlling the riskinvolved in mobilizing savings and allocating credit.* It promotes the process of capital formation by bringing together thesupply of saving and the demand for investible funds.* It helps in lowering the cost of transaction and increase returns.Reduce cost motives people to save more.* It provides you detailed information to the operators/ players in themarket such as individuals, business houses, Governments etc.
  5. 5. Financial institutions:Financial institutions are the intermediaries who facilitates smoothfunctioning of the financial system by making investors and borrowersmeet.They mobilize savings of the surplus units and allocate them inproductive activities promising a better rate of return.Financial institutions also provide services to entities seeking advises onvarious issues ranging from restructuring to diversification plans.Financial institutions act as financial intermediaries because they act asmiddlemen between savers and borrowersWere these financial institutions may be of Banking or Non-Bankinginstitutions.
  6. 6.  INDIAN BANKING SECTOR: The first bank in India, called The General Bank of India wasestablished in the year 1786, Reserve Bank of India was establishedin April 1935 To streamline the functioning and activities of commercial banks, theGovernment of India came up with the Banking Companies Act, 1949which was later changed to Banking Regulation Act 1949 as peramending Act of 1965 Reserve Bank of India was vested with extensive powers for thesupervision of banking in India as a Central Banking Authority
  7. 7. Role Of RBI• Monetary Authority• Issuer of Currency• Banker and Debt Manager to Government• Banker to Banks• Regulator of the Banking System• Manager of Foreign Exchange• Regulator and Supervisor of the Payment andSettlement Systems• Maintaining Financial Stability• Developmental Role
  8. 8. NationalizationOn 19th July, 1969, major process of nationalization was carried out. Atthe same time 14 major Indian commercial banks of the country werenationalized. In 1980, another six banks were nationalized, and thusraising the number of nationalized banks to 20Seven more banks were nationalized with deposits over 200 Crores. Tillthe year 1980 approximately 80% of the banking segment in India wasunder government’s ownershipthe Banking Regulation Act was amended in 1993 and thus the gates forthe new private sector banks were opened
  9. 9. The following are the major steps taken by the Government of India toRegulate Bankinginstitutions in the country:-1949 : Enactment of Banking Regulation Act.1955 : Nationalization of State Bank of India.1959 : Nationalization of SBI subsidiaries.1961 : Insurance cover extended to deposits.1969 : Nationalization of 14 major Banks.1971 : Creation of credit guarantee corporation.1975 : Creation of regional rural banks.1980 : Nationalization of seven banks with deposits over 200 Crores
  10. 10.  Non-Banking Financial Company (NBFC) Difference between banks & NBFCs Every NBFC should be registered with RBI Different types/categories of NBFCs registered with RBI• Asset Finance Company (AFC) :• Investment Company (IC)• Loan Company (LC)• Infrastructure Finance Company (IFC)• Systemically Important Core Investment Company• Infrastructure Debt Fund:• Non-Banking Financial Company - Micro Finance Institution• Non-Banking Financial Company – Factors (NBFC-Factors)
  11. 11. Financial Markets:Finance is a prerequisite for modern business and financial institutionsplay a vital role in economic system.Its through financial markets the financial system of an economy works.The main functions of financial markets are:1. to facilitate creation and allocation of credit and liquidity;2. to serve as intermediaries for mobilization of savings;3. to assist process of balanced economic growth;4. to provide financial convenience
  12. 12. Financial InstrumentsAnother important constituent of financial system is financialinstruments.They represent a claim against the future income and wealth of others.It will be a claim against a person or an institutions, for the payment ofthe some of the money at a specified future date.
  13. 13. Financial Services:Efficiency of emerging financial system largely depends upon the qualityand variety of financial services provided by financial intermediaries.The term financial services can be defined as "activites, benefits andsatisfaction connected with sale of money, that offers to users andcustomers, financial related value".
  14. 14. Pre-reforms PhaseUntil the early 1990s, the role of the financial system in India was primarily restricted to thefunction of channeling resources from the surplus to deficit sectors. Whereas the financialsystem performed this role reasonably well, its operations came to be marked by some seriousdeficiencies over the years. The banking sector suffered from lack of competition, low capitalbase, low Productivity and high intermediation cost. After the nationalization of large banks in1969 and 1980, the Government-owned banks dominated the banking sector. The role oftechnology was minimal and the quality of service was not given adequate importance. Banksalso did not follow proper risk management systems and the prudential standards were weak.All these resulted in poor asset quality and low profitability. Among non-banking financialintermediaries, development finance institutions (DFIs) operated in an over-protectedenvironment with most of the funding coming from assured sources at concessional terms. Inthe insurance sector, there was little competition. The mutual fund industry also suffered fromlack of competition and was dominated for long by one institution, viz., the Unit Trust of India.Non-banking financial companies (NBFCs) grew rapidly, but there was no regulation of theirasset side. Financial markets were characterized by control over pricing of financial assets,barriers to entry, high transaction costs and restrictions on movement of funds/participantsbetween the market segments. This apart from inhibiting the development of the markets alsoaffected their efficiency.
  15. 15. Financial Sector Reforms• The far-reaching changes in the Indian economysince liberalization have had a deep impact on theIndian financial services sector. Financial sectorreforms that were initiated by the governmentsince the early ‘90s have been to meet thechallenges of a complex financial architecture. Thishas ensured that the new emerging face of theIndian financial sector will culminate in a strong,transparent and resilient system.
  16. 16. Broadly, financial sector reforms can be categorized in twophases.The first phase of economic reforms that started in 1985focused on increasing productivity, new technology importand effective use of human resourcesthe second phase, beginning in 1991-92, the governmentaimed at reducing fiscal deficit by opening the economy toforeign investmentsFinancial sector reforms during this period focused onmodification of the policy framework, improvement infinancial health of the entities and creation of a competitiveenvironment.
  17. 17. These reforms targeted three interrelated issues viz.(i)strengthening the foundations of the banking system;(ii)streamlining procedures, upgrading technology and humanresource development(iii)structural changes in the system
  18. 18. Raising the Foreign Direct Investment (FDI) cap in the insurance andpension sector. This will lead to foreign players being able to acquire alarger share in their joint ventures that are already operating in thecountry.The revised Companies Bill is now just a small step away from beinglaw.steps has been taken in the form of allowing new banks to set up shop.Private corporates, public sector entities and Non Banking FinanceCompanies with a strong track record can now apply to set up newbanks and the Reserve bank of India will consider these applications inthe coming months