This document provides a summary of a study comparing financial innovation, changes, survival and growth in the Indian and international markets. It discusses various financial innovations that have occurred in banking, microfinance, derivatives and insurance sectors in India and the US over the past year. The study aims to establish a relationship between financial innovativeness and market growth through an analysis of 10 companies from India and the US. It examines factors influencing market growth like investors' behavior, economic policies and regulations.

1. “A Comparative Study of Financial Innovation, Changes, Survival and Growth of Indian and International Market”.<br />Submitted by <br />Lalita Punjabi <br />Bhawana Bhagwani<br />Nilima Vijay <br />Soniya Agrawal<br />Student -Poornima Group of Colleges, <br /> M.B.A. Finance & Marketing (dual) <br />e- mail id: lalita.41269@gmail.com<br />Contact No - 9460708391<br />“A Comparative Study of Financial Innovation, Changes, Survival and Growth of Indian and International Market”.<br />ABSTRACT <br />A financial market is a mechanism that allows people to buy and sell (trade ) financial securities, commodities, and other fungible item. Financial market innovations are simply new products (e.g., adjustable rate mortgages; exchange-traded index funds); new services (e.g., on-line <br />securities trading; Internet banking); new ―production‖ processes (e.g., electronic record-keeping for securities; credit scoring); or new Organizational forms (e.g., a new type of electronic exchange for trading securities; Internet-only banks). <br />This paper investigates the link between the financial innovation, its performance and its growth. In this work, we try to explain that the costly information of acquisition, analysis and fear of risk is a major barrier to the participation of investors and firms, so what are the different steps, taken by the financial intermediaries to overcome this problem as an innovation? The common features of the process include product innovation and advertising, securitization, liberalization of domestic financial market practices, globalization of markets. <br />It will provide an insight of different parameters which influence the growth of financial market as investor’s behavior, economic policies, international market, and different regulatory issues. This will help to establish a positive relation between innovativeness and growth. The hypothesis is confirmed through an analysis of data related to 10 companies majorly from India and USA. This paper uses mathematical tools, as Correlation to establish the degree of correlation between the innovativeness and growth of the market. It offers a review of product and process changes that have occurred in recent international financial markets, an analysis of the factors leading to all changes, an examination of the implications for financial market participants, for individuals and the aggregate macro economy from both a positive and policy perspective. <br />JEL codes: G20 <br />Key words : Securitization, macro economy, sophisticated market, product innovation. Tables appear at the end of this paper. <br /> <br /> 1. Introduction <br />The financial system plays an important role in promoting economic growth not only by channeling savings into investments but also by improving allocate efficiency of resources. This paper investigates the relationship between the financial innovativeness and survival and growth of financial markets in India and in international finance market, various new financial innovations in the field of banking, insurance, capital market and mutual funds in the last one year in India and USA. The following passage from Miller (1986) is typical quot;
... the word revolution is entirely appropriate for describing the changes in financial institutions and instruments that have occurred in the past twenty yearsquot;
. Financial engineering has been most comprehensively defined by Finnerty (1988) as design, development and implementation of innovative financial instruments and processes, and formulation of solutions to the problems in finance. Innovative financial solutions may include new financial instruments (such as payment card, reverse mortgage product, arbitrage fund, Micro Insurance and many more) or new processes such as (Mobile payment service, DMA facility, ABSA process, NOW trading <br />gateway, etc. ). The paper endeavors to track the growth of new financial instruments, new forms of mutual funds, new types of life insurance products, new form of residential mortgages and new risk management instruments introduced in India &USA. <br />Dufey and Giddy (1981) in their theory of innovation in international market found that innovations in international market arise usually when the financial institutions are able to fulfill one of the four functions: (a ) Liquid and standardized instruments for payments in individual currencies; (b) Mechanism for conducting monitory exchange between currencies; (c) <br />Institutions and market for channeling savings internationally; and (d) As a mechanism for allocating, diversifying and compensating for risk. <br />The financial development of India has played important role in the growth process . The purpose of this paper has been to explore the potential of the developments of the financial sector in India and in Western countries in the next decade. India reduced public investment and adopted policies to raise private investment during <br />the reform process. For India also it has been shown that the development of banks and other financial institutions positively affects the growth process. In a recent study Das and GuhaKhasnabis (2005 ) has shown that financial development positively affects credit disbursement from the organized sector in the presence of imperfections in the loans market, which in turn affects the growth process via the transmission mechanism. <br />In our discussion we also bring in the issues pertaining to barriers of the participation of investors and steps of remedies taken by financial intermediaries to remove these barriers and implications of financial innovation on GDP contribution and profit earning of different financial institutions. <br />With this introduction remaining paper is organized into 4 sections. Section 1 begins with a brief description of the financial system of USA & India and their recent innovations, and Section 2 discusses a comparative account of the rates of growth and profit earning of financial companies for the two countries Section 3 barriers of the participation of investors and institutions in financial market. Steps of remedies taken by government and institutions to remove barriers next section discusses. Concluding observations are set out in the last section. <br />2. Financial system of USA & India and their recent innovation <br />A characteristic feature of the financial system in India is the dominance of banking sector that acted as the principal institution for intermediation of household savings and source of finance for firms. In fact it is more so in China than in India. In India apart from banks other non-banking financial institutions including insurance companies, mutual funds and post office savings banks have been playing important role for mobilizing savings. There is also prevalence of NBFIs, like development banks, insurance companies, mutual funds or other kinds of specialized financial institutions, such as Export Import Bank . Financial innovation provides opportunities for hedging risk and reducing individual transaction cost but at the same time exposes economic units to additional costs and risk by creating new risk and sometimes resulting in ballooning of transactions. <br />4 <br />2.1Indian Financial Innovations <br />2.1.1FINANCIAL ENGINEERING IN THE BANKING SECTOR <br />Financial engineering in the banking sector tries to ensure that the banking becomes competitive and performance oriented. The recent innovations in the Indian banking sector have been discussed below: <br />2.1.1.1 Rollover Overdraft <br />In this a broker avails the overdraft facility from bank A with a provision that it has to be repaid in 5 days. During current liquidity crisis the broker may have insufficient funds in that account. To overcome this problem of insufficient funds the brokers have innovated a new financial process whereby the broker, bank A and bank B come together to overcome the liquidity crisis. The process is applicable if RTGS facility is offered by bank A and bank B. This ensures that funds are there in the account of the broker with bank B at the time when bank A presents the brokers cheque for clearing. <br />2.1.1.2 Electronic Fund Transfer <br />RTGS/NEFT facility enables customers to transfer fund from one bank to the other within a very short time. There exists three mode of electronic payment: Real Time Gross Settlement (RTGS), National Electronic Fund Transfer (NEFT) System and Electronic Clearing Service (ECS). <br />NEFT is available for transaction below 1 lakh while RTGS is available for transaction over 1 Lakh. <br />2.1.1.3. Biometric ATMs for National Rural Employment Guarantee Act (NREGA) <br />To reduce corruption, the rural people under NREGA can get their thumb impression registered at the biometric ATM and can subsequently withdraw money using the thumb impression <br />2.1.1.4.―Mobile Payment Service by Banks<br /> In 2008 banks has been permitted by RBI to provide mobile payment services, which enable customers to transfer up to Rs. 25,000 per transaction. <br />Mini statements, checking of account history, alerts on accounts activity, passing of set <br />thresholds, monitoring the term deposit, access to card statement, mutual funds/equity statement, insurance policy/ pension plan management .It provide the flexibility of anywhere, anytime banking and reduce transaction cost. <br />2.1.1.5. New Deposit cure Investment Product <br />A fixed deposit scheme with envisages investment of interest earned on term deposit in an equity mutual fund by a way of systematic investment plan. This has an advantage of giving safety on the principal invested in this fixed deposit and a possibility to earn additional return on interest earnings. <br />2.1.1.6. Dual Facility on Single Card <br />Debit cum ATM card which allows an individual to use funds available in his bank account. User will have debit as well as credit facility in a single card. The card will reduce the cost, improve efficiency and free the user from the requirement of carrying multiple cards. <br />2.1.1.7. Fully Electronic Transactional System <br />This system allows bi-directional capabilities. Transactions can be submitted by the customer for online update. It comprises technology covering computerization, networking and security, inter-bank payment gateway and legal infrastructure. <br />2.1.1.8. The Indian Financial Network (Infinet) <br />The Indian Financial Network, a VSAT-based communication back-bone for the national payment system.The INFINET is a Closed User Group (CUG) Network and uses a blend of communication technologies such as VSATs and Terrestrial Leased Lines. The network consists of over 700 VSATs located in 127 cities of the country and utilizes one full transponder on INSAT 3 B. Applications such as Real Time Gross Settlement, Central Funds Management System, Security Settlement System, Electronic Clearing System and Electronic Funds Transfer, being developed by the RBI will be ported on the INFINET. <br /> <br />2.1.1.9 Real Time Gross Settlement (RTGS ) <br />RTGS is an electronic settlement system of Reserve Bank of India without involvement of papers. To facilitate an Efficient, Secure, Economical, Reliable and Expeditious System. <br />2.1.2. FINANCIAL ENGINEERING IN THE MICROFINANCE SECTOR <br />During SHG revolution in India, rapid introduction of a range of savings -credit products was made by NGO based MFIs for expanding their microcredit clientele. At the early ninties, SHG concept was spread out by NGOs as SHG became a to evelopmental and livelihood project. Self help groups were the launching pad for the microfinance ol for initiating a d product penetration and practiced by almost all the MFIs. Some of the NGOs/or MFIs that penetrated largely through SHG Federation are, PREM, BASIX, SKS Microfinance, KAS Foundation, BISWA, Ashmita, Sanghamitra etc. <br />One of the major initiations was taken in 1999 through the extensive network of the formal banking sector i.e., 196 Regional Rural Banks (RRBs) spread over 14,000 branches in 375 <br />districts nation-wide, covering, on an average, about three villages per branch. <br />The supply of insurance services to the poor has increased substantially from 2000 onwards. There are a large number of low premium schemes, which covers against death, accidents, natural calamities, and loss of assets due to fire, theft, etc. Also MFIs extended insurances against crop, Livestock and other business along with the subsidized loans. KAS Foundation in Orissa has demonstrated its efficiency and effectiveness by bringing all the clients into livestock insurance. <br />One of the important innovations is bringing Non Timber Forest Products (NTFP) collectors into Self Help Goups (SHGs) and linking the Self HelpGroups to Microfinance without physical collateral. <br />KAS foundation and BISWA have collaborated with ICICI Lombard. KAS Foundation and BISWA provide micro loan for Income generation activities to SHG/Groups/Individuals in groups or SHGs. <br />Similarly, SKS Micro finance had tied up with Life Insurance Corporation to provide health insurance and it covered 150,000 SKS clients and their spouses in the case of death. <br />BASIX, in collaboration with ICICI Lombard and with technical assistance from the Commodity Risk Management of the World Bank, piloted the sale of rainfall-indexed weather insurance to 230 farmers during the monsoon season of 2003. <br />Reduction of the cost of bad debt is done by intercollaboration of MFIs and providing on time rebate. For Example, BASIX has collaborated with local grass root level non Government Organizations, agribusiness firms, and commercial financial institutions. <br />2.1.3. FINANCIAL ENGINEERING IN THE DERIVATIVE MARKET <br />Derivatives trading commenced in Indian market in 2000 with the introduction of Index futures at BSE, and subsequently, on National Stock Exchange (NSE). <br />2.1.3.1. Derivatives Products Traded in Derivatives Segment of BSE <br />The BSE created history on June 9, 2000 when it launched trading in Sensex based futures <br />contract for the first time. It was followed by trading in index options on June 1, 2001 ; in stock options and single stock futures (31 stocks) on July 9, 2001 and November 9, 2002, respectively. Currently, the number of stocks under single futures and options is 1096. BSE achieved another milestone on September 13, 2004 when it launched Weekly Options. <br />Products Traded in Derivatives Segment of the BSE with Introduction Date <br />1. Index Futures- Sensex June 9,2000 <br />2. Index Options- Sensex June 1, 2001 <br />3. Stock Option on 109 Stocks July 9, 2001 <br />4. Stock futures on 109 Stocks November 9, 2002 <br />5. Weekly Option on 4 Stocks September 13, 2004 <br />6. Chhota (mini) SENSEX January 1, 2008 <br />7. Futures & Options on Sectoral indices namely BSE TECK, BSE FMCG, BSE Metal, BSE Bankex and BSE Oil & Gas. N.A. <br />8. Currency Futures on US Dollar Rupee October 1, 2008 Source : Compiled from BSE website <br /> <br />2.1.3.2. Derivatives Products Traded in Derivatives Segment of NSE <br />NSE started trading in index futures, based on popular S&P CNX Index, on June 12, 2000 as its first derivatives product. Trading on index options was introduced on June 4, 2001. Futures on individual securities started on November 9, 2001. The futures contracts are available on 2338 securities stipulated by the Securities & Exchange Board of India (SEBI). Trading in options on individual securities commenced from July 2, 2001. The NSE achieved another landmark by launching Mini Index Futures & Options with a minimum contract size of Rs 1 lac. NSE crated history by launching currency futures contract on US Dollar-Rupee on August 29, 2008. <br />Products Traded in F&O Segment of NSE with Introduction Date : <br />1. Index Futures- S&P CNX Nifty June 12,2000 <br />2. Index Options- S&P CNX Nifty June 4, 2001 <br />3. Stock Option on 233 Stocks July 2, 2001 <br />4. Stock futures on 233 Stocks November 9, 2001 <br />5. Interest Rate Futures- T - Bills and 10 Years Bond June 23, 2003 <br />6. CNX IT Futures & Options August 29, 2003 <br />7. Bank Nifty Futures & Options June 13, 2005 <br />8. CNX Nifty Junior Futures & Options June 1, 2007 <br />9. CNX 100 Futures & Options June 1, 2007 <br />10. Nifty Midcap 50 Futures & Options October 5, 2007 <br />11. Mini index Futures & Options - S&P CNX Nifty index January 1, 2008 <br />12. long Term Option contracts on S&P CNX Nifty Index March 3,200 8 <br />13. Currency Futures on US Dollar Rupee August 29, 2008 <br />14. S& P CNX Defty Futures & Options December 10, 2008 Source : Compiled from NSE website <br />2.1.4. INNOVATIONS IN THE INSURANCE SECTOR <br />2.1.4.1. Jeevan Aastha <br />(LIC) launched a hybrid product called quot;
Jeevan Aasthaquot;
which combines features of Fixed <br />Deposits/Debt, equity and life insurance product. It is a closed ended single premium product which offers guaranteed benefits to the customer on maturity and death whichever is earlier. <br />The minimum risk coverage that can be availed is Rs. 1.5 lakh. The product has been bundled with income tax benefits under section 80C and section 10(10 D) making this product attractive for Indian middle class. <br />2.1.4.2. Market Linked Pension Product <br />It enables policy holder to increase premiums with the rising income. Being a market linked pension product it provides performance over the long term and ensures good living standard after retirement. It has an inbuilt risk in case the market plummets in the long run. <br />2.1.4.3. Insurance Linked Education Loan <br />The Indian Banks' Association has engineered a model education loan product. In this product the insurance premium will be a part of the expenses for the loan. The product will come with a provision of top up loan for students for further studies up to Rs. 4,00,000 of the loan amount. A cap or rate of interest which will not exceed benchmark prime lending rate (BPLR) has been fixed. For loans above Rs. 4, 00,000 the rate of interest will not be more than 100 basis point over the BPLR. <br />2.1.4.4. Micro Insurance for Women <br />Life Insurance Corporation (LIC), Punjab National Bank (PNB) and Govt. of India have used <br />financial innovation to provide life and permanent disability covers for credit linked women Self Help Groups (SHGs) linked to PNB. This life insurance scheme will have an annual premium of Rs 200 of which 50 % will be paid by the insured and the rest will come from the social security fund of the Central Government. <br />2.1.4.5 The rainfall insurance policies are an example of ―index insurance ‖, that is, a Contract whose payouts are linked to a publicly observable index like rainfall, temperature or a Commodity price. The first Indian rainfall insurance policies were developed by ICICI Lombard,a large general insurer, with technical support from the World Bank. <br />2.1.5. INNOVATIONS IN CAPITAL MARKET <br />2.1.5.1. Currency Futures <br />August 2008 saw the launch of currency derivatives at National Stock Exchange. A currency future is a futures contract where the underlying is a specific foreign currency and amount. Profits and losses depend on the relative movements of the two currencies <br />2.1.5.2. Applications Supported by Block Amount (ASBA) Process <br />ASBA is an application for subscribing to an issue which contains an authorization to block the application money in the applicant's bank account. It has an advantage the applicant's does not lose interest for the period the money remains blocked. It has saved the banks from first transferring the money from the bank to the company and back to individual applicant's account. <br />2.1.5.3. India VIX-The Volatility Index <br />India VIX is a volatility based index based on Nifty 50 option prices. The purpose of the index is to capture the implied volatility embedded in option prices. It shows the amount by which the underlying index is expected to fluctuate in the near future <br />2.1.5.4. National Spot Exchange Limited (NSEL) <br />The NSEL helps in reduction of costs and enables farmers to realize better price for their <br />produce. Farmer does not need pan card number, ration card and other formalities, which are <br />necessary in future trading. In future market the delivery is not guaranteed but in the spot market, the contracts are designed with compulsory delivery on T 1 and T 3 basis. This is the first spot exchange for agriculture commodities in the world. <br />2.1.5.5. Extension of Circuit Breaker to Index based Market <br />Circuit breakers are normally applied to individual scripts to suspend trading in case they show excessive volatility. Advantage of Index based market wide circuit breaker is that it provides stability to the index and enhances investor's protection. <br />2.1.5.6. Arbitrage Fund <br />They are equity and derivative funds providing a way of realizing reasonable returns from <br />equities with risk hedged by derivatives. The Arbitrage Fund tries to capitalize on the stock price differences between the spot market (cash segment) and the derivative market (F & O segment). <br />2.1.5.7. ULIP Variants <br />They combine features of mutual funds, pension funds and insurance policies. The product is a long-term vehicle for life cover and investment and will now be attractive to long-term investors. Notable features are enhanced minimum sum assured, an increased lock -in period of five years and capping of surrender charges which are extremely beneficial to policyholders. In addition to these, the capping of expense guidelines has brought down the cost of Ulips for the customer, even if he holds the policy for a period of 5-7 years. <br />2.2. USA FINANCIAL MARKET INNOVATION <br />In the last twenty years the US financial market has been characterized by a big expansion of both the prime and the secondary credit markets. <br />Many of the new products (e.g. currency and interest rate swaps, currency and interest rate <br />options) are of obvious assistance for risk management purposes —— to enable the individual or firm to tailor the various dimensions of risk (e.g. currency, maturity, credit, interest rate, default, and so forth) more precisely than before. Other products (e.g. Note Issuance Facilities And Eurocurrency Commercial Paper) appear to directly reduce the cost of funding a desired financial position. <br />A lot of investment funds like, the hedge funds, the money market fund and the mutual funds were established and started to grow rapidly. In addition the investment banking industry began to change to a more quot;
transactionalquot;
form. <br />Foreign Exchange and the Euro—markets <br />In recent times, the foreign exchange market has been organized as a dispersed, broker—dealer market with high—speed telecommunications systems linking together the various participants in this worldwide, 24-hour market. <br />The volume and efficiency of the market is such that the spread between bid and offer prices in the spot market is often one—tenth of one percent, or less, for the major currencies. In 1981, the United States acknowledged the importance of these new offshore markets and authorized the establishment of International Banking Facilities within existing U.S. banking institutions. <br />New risk management and funding vehicles —— futures, options, and swaps —— that came into existence in the early 1970 s and have experienced extraordinary growth, and importance <br />beyond what the numerical entries nay suggest. <br />Modern examples of process innovations include the SWIFT (Society for Worldwide Interbanic Financial Transfers) network for foreign exchange payments, the grey market (or pre -market) in Eurobond trading, the Euro—clear and Cedel systems for clearing Eurobonds, the MESA network for clearing ECU transactions, and the establishment of 19 formal linkages and dual listings between U.S. and foreign stock and commodity exchanges. The European Monetary System (EMS ) might be viewed as a process innovation intended to stabilize European exchange rates and, in turn, facilitate the use of the ECU. <br />The evolution of zero—coupon securities provide a good case in point. Zero—coupon securities had existed for some time (e.g. Treasury bills and U.S. Savings Bonds). In the 1970s, aggressive reading of the Federal tax code (regulatory channel) encouraged dealers and investors to separate (unbundle) the principal and coupon components of Treasury securities as distinct products. <br />3 Growth data and analysis <br />3.1 Indian financial market <br />3.1.1 Banking sector <br />As a result of the reforms, the number of banks increased rapidly. In 1991, there were 27 publicsector banks and 26 domestic private banks with 60,000 branches, 24 foreign banks with 140 branches and 20 foreign banks with a representative office. <br />Between January 1993 and March 1998, 24 new private banks (nine domestic and 15 foreign) entered the market; the total number of scheduled commercial banks, Excluding specialized banks such as the Regional Rural Banks rose from 75 in 1991 /92 To 99 in 1997/98. <br /> <br />Profitability of banks is likely to be positively correlated with efficiency and soundness. The <br />correlation is expected to be greater for public-sector banks. For example, the average correlation coefficient between profitability and cost efficiency in 1993-2000 was -0.7 for public-sector banks, -0.48 for private domestic banks, and for -0.3 for foreign banks. The average correlation coefficient between profitability and soundness was 0.76 for public-sector banks, 0.59 for private banks, and 0.37 for private banks. <br />The extent of financial deepening measured by total deposits in GDP has risen only modestly <br />from 30 per cent in 1991 to 38 percent in 1999. Outstanding government and corporate bonds as a share of GDP rose from 14 per cent in 1991 to 18 per cent in 1999 and from only 0.7 per cent in 1996 to 2 per cent in 19 98, respectively, while equity market capitalization dropped from 37 per cent in 1995 to 28 per cent in 1999. <br />IMF report (2001) indicates that the risk-weighted capital ratio has improved from 1996/97 to 1999/2000 : from 10.4 per cent to 11.9 per cent for foreign banks, from 11.7 per cent to 12.4 per cent for old private domestic banks, and from 10 per cent to 10.7 per cent for public sector banks, while that of new private domestic banks declined from 15.3 percent to 13.4 per cent. <br />Net profits of the scheduled commercial banks improved from 0.8 per cent to 1.1 per cent <br />between 1997-98 and 2003-04. Capital adequacy of scheduled commercial banks at 13 per cent as at end-March 2004 stood significantly higher than the minimum stipulated ratio of nine per cent. The non-performing assets (NPAs) declined from 7.3 per cent as at end-March 1998 to 2.9 per cent as at end-March 2004. The net interest margin, however, continues to be at High levels <br />Table 1 about here <br />In particular, public-sector and private domestic banks increased their share of investment in <br />government bonds in assets in 1993-2000 from 21 per cent to 23 per cent and from 21 per cent to 27 per cent, respectively. <br />Foreign and private domestic banks increased medium- to long-term credit in 1993-2000 from <br />7.5 per cent to 17 per cent and from 10 per cent to 13 per cent. <br />Foreign banks attempt to improve their income by expanding their lending operations as <br />compared with other domestic banks. The ratio of foreign banks surged from 56 per cent in 1993 to 94 per cent in 2000, while the two other types of banks maintained the ratio at about 40 per cent over the same 112 period. <br />As reforms are introduced % of service sector increased in GDP. In service sector financial sector’s share has also been increased. <br />Table 2 about here <br />We can explain the relationship of innovativeness by establishing a relation between bank’s income with the growth of India so we are trying to explain this with the help of correlation between bank ’s income and India GDP. <br />Table 3 about here <br />YearIncome ofGDP(Y)X*YX^2Y^2bank(X)19937.64.937.2457.7624.0119947.36.144.5353.2937.21199557.336.52553.2919965.57.540.1530.2556.2519976.34.628.9839.6921.1619985.85.934.2233.6434.8119995.36.936.5728.0947.61200045.622.41631.36Total46.848.8280.53283.72305.7<br />Correlation between x &y R= (n *∑ x*y)-(∑x)(∑y)<br />√ [n∑x^2-(∑x)^2] [n ∑y^2-(∑y)^2]Formula (1)<br />R= - .007 <br />3.1.2 Indian Stock market<br />Since 1991/92, the primary market has grown fast as a result of the removal of investment <br />restrictions in the overall economy and a repeal of the restrictions imposed by the Capital Issues Control Act. <br />In 1991 /92, Rs62.15 billion was raised in the primary market. This figure rose to Rs276.21 billion in 1994 /95. As a result of reforms, the performance of capital market has improved significantly measured in terms of size of the secondary market and liquidity. <br />To establish a relationship between share market and growth of India we are trying to find out the correlation between liquidity traded value and its size % of GDP. <br />Table 4 about here <br />YearLiquiditySize % ofX^2Y^2X*Y<br />tradedGDP(Y)<br />value(X)%<br />200078.747.16193.692218.43706.77<br />200111227.412544750.763068.8<br />20023626.81296718.24964.8<br />200337.723.21421.2538.24874.64<br />200457.843.33340.81874.82502.74<br />TOTAL322.2167.824795.696100.4411117.75<br />Correlation between x &y R= (n *∑ x*y)-(∑x)(∑y) <br />√ [n∑x^2-(∑x) ^2] [n ∑y^2-(∑y)^2] <br />=-.000034<br />The Table given below portrays the overall growth pattern of Indian stock markets since <br />independence. It is quite evident from the Table that Indian stock markets have not only grown just in number of exchanges, but also in number of listed companies and in capital of listed companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was due to the favoring government policies towards security market industry. <br />Table 5 about here <br />Total market capitalization as of 1997 /98 was Rs5, 898 billion equivalent to about half of <br />India’s annual gross domestic product (GDP) for the same fiscal year. India compares favorably with other emerging markets in this respect. <br />Table 6 about here.<br />16 <br />Turnover in the Indian stock exchanges is high, implying that they are dominated by speculative investments. While price levels have been depressed, the total turnover on BSE and NSE has been increasing. <br />The combined turnover for 1996/97 was almost three times the level of the previous year. The annual average growth rate from 1994/95 to 1996/97 was 56 percent in nominal terms. <br />Figure 1 about here <br />3.1.3 Indian Insurance market <br />Presently there are 12 general insurance companies with 4 public sector companies and 8 private insurers. According to estimates, private insurance companies have a 10 percent share of the market, up from 4 percent in 2001. In the first half of 2002, the private companies booked premiums worth Rs 6.34 billion. <br />3.1.3.1 Life Insurance Market <br />It has an annual growth rate of 15-20.Total value of the Indian insurance market (2004-05) is <br />estimated at Rs. 450 billion (US$10 billion). According to government sources, the insurance <br />and banking services' contribution to the country's gross domestic product (GDP ) is 7 %. The <br />funds available with the state-owned Life Insurance Corporation (LIC) for investments are 8% of GDP. <br />The Indian life insurance market generated total revenues of $41.36 billion in 2007, thus <br />representing a compound annual growth rate (CAGR) of 11.84 % for the period spanning 2000 -2007. Life insurance market had a growth of $22.46 billion within a period of 7 years with a growth rate of 118.24%. Estimated life premiums rose from INR1, 470,800 million ($36.77 billion) in 2006 to INR1, 301,540 million ($32.54billion) in 2005. It is envisaged that life premiums in 2011 will be $65.96 billion, a growth larger than they were in 2007. <br />The performance of the market is forecast to accelerate, with an anticipated CAGR of 9.78 % for the four-year period 2007-2011 expected to drive the market to a value of $65.96 billion by the end of 2011. There would be a growth of $24.6 billion i.e. 59.48% in the next 4 years. <br />17 <br />3.1.3.2. Non life Insurance <br />Non-life premiums in India were $6.53 billion in 2007. Gross written premium (GWP ) in the Indian non-life insurance market reached a value of $5.75 billion in 2006, this representing an annual growth of 13.55 % for the period spanning 2006-2007. Estimated non-life premiums rose from INR230 billion ($5.75 billion) in 2006 to INR261 billion ($6.53 billion) in 2007. We anticipate that non-life premiums will grow by a CAGR of 9.40% between 2007-2011. <br />According to data released by IRDA, the general insurance industry recorded 13.42 per cent growth in gross premium collected during 2009-10. The industry collected gross premium of US$ 7.84 billion in 2009-10 compared with US$ 6.91 billion in 2008-09. <br />The public sector players posted 13.85 per cent growth in gross premium in 2009 -10. At the <br />same time, private players recorded a 12.82 per cent increase in gross premium till March 2010. <br />3.2 United States financial market <br />The financial landscape has changed dramatically through the greater use of markets rather than institutions to intermediate between borrowers and lenders. This change can be seen in the development of extensive secondary markets for loans, which means that a large fraction of mortgages—and a growing fraction of other household loans and business loans—is now securitized. <br />New capital raised by the private sector was only around Rs.600 crore in 1981 -82. There <br />was a dramatic rise since the beginning of 1990s. The new capital raised rose to Rs 20,000 <br />crore in 1992-93 and further to Rs26,000 crore in 1994-95. The amount mobilised from the <br />primary market 1996-97 was approximately Rs10, 500 crore. The increase in the non -food credit made available by the banking system in 1994-95 and 1995-96 was Rs. 45,775 crore and Rs44,938 crore respectively. <br />US mutual fund assets now represent about 85 percent of the value of bank deposits, up from about 10 percent in the early 1980s. <br />18 <br />3.2.1 Banking growth: <br />By the end of 2000, a year in which a record level of financial services transactions with a <br />market value of $10.5 trillion occurred, the top ten banks commanded a market share of more than 80% and the top five, 55%. Of the top ten banks ranked by market share, seven were large universal-type banks (three American and four European), and the remaining three were large <br />U.S. investment banks who between them accounted for a 33% market share. <br />According to the forecast about growth of bank is assumed that US will have a growing GDP till 2018 from 2010 as from 100 to 119 but the return on bank equity will fluctuate from 1 5.5% (2010) to 12.7% (2013) and 12.1 % (2018). <br />Table 7 about here <br />Table 8 about here <br />Following figure shows the major banks of United States with their holdings <br />Figure 2 about here <br />3.2.2 Stock market growth <br />Capitalization of corporate equity in the U.S. has risen steadily as a percentage of GDP, from <br />Around 50 per cent in 1975 to nearly 75 per cent in 1994 (OECD-Financial Market Trends, #62, November, 1995). <br />Trends shows that major parameters of stock exchange as NASDAQ and DOW JONESis<br />continuously increasing from 1995-98.<br />Figure 3 about <br />Table 9 about here <br />In US market we can explain the growth of financial market with the help of relationship between indicator of stock market NASDAQ’s movement and GDP <br />YearNASDAQ’sGDP(Y)X^2Y^2X*Y<br />movement(X)<br />US$<br />1995180741432400549673961334520<br />1996200783840000614342441567600<br />1997250833262500694222242083000<br />19984008793160000773168493517200<br />1999300935390000874786092805900<br />20005009951250000990224014975500<br />2001800102866400001058017968228800<br />200230010642900001132521643192600<br />TOTAL293072609136490018629520127705120<br />Correlation between x &y R= (n *∑ x*y)-(∑x)(∑y) <br />√ [n∑x^2-(∑x) ^2] [n ∑y^2-(∑y) ^2] R= .0007 <br />4. Barriers of investment : <br /> Higher levels of uncertainty, risk, and corruption increase capital costs. <br /> lack of expert and dedicated institutions for implementation, lack of political will and Accountability, fierce resistance by insiders, and rampant corruption.  There is weak political will in attacking corruption and reducing protection for vested interests. <br /> Resistance to change within public organizations preserves discretionary power and the opportunity for corruption. <br />20 <br /> There is weak leadership and poor coordination in the reform process between initiatives for streamlining n administrative procedures. In one country the central unit responsible for overseeing implementation moved among three institutions over the reform period in response to political intrigue among ministers. This caused a decline of support for and participation in the reforms. <br /> Even when recommendations are adopted and laws are changed, many are not <br />implemented by the responsible ministries. A major reason given by FIAS for lack of implementation was inadequate resources, particularly manpower and technology, in addition to poor organization and bureaucratic resistance. <br /> Action plans contain no performance measures to ensure that legal revisions achieve expected results. <br /> Although some procedures were improved, the costs of other procedures actually <br />increased over the reform period so that, on net, private companies are worse off. <br /> Ongoing corruption damages the credibility of the government and its policy reforms among private Investors. <br /> Other uncoordinated reforms undermine progress. For example, decentralization in some countries led to proliferation of administrative barriers and incentives for revenue generation at the regional and local levels that increased the burdens of multiple taxes and licensing fees. <br /> The financial systems of most developing countries still lack the proper balance. In <br />Almost all developing countries, commercial banks still play an overwhelmingly important role in the entire financial system. This condition has been the result of both an institutional inertia and the government policy orientation. Securities markets are essentially related to an advanced form of business finance, and as a consequence many developing countries find their securities markets at only an early stage of development. Both the volume as well as the institutional structure is inadequate compared to that of industrialized countries where securities markets have played a vital role in the overall allocative process of savings and investment funds. Not only the securities markets but also nonbank financial institutions constitute a relatively small part of the financial system in a typical developing country. <br /> <br />5. Steps taken by different financial institution to remove barriers: <br /> The Reserve Bank has undertaken a project titled quot;
Project Financial Literacyquot;
. The <br />objective of the project is to disseminate information regarding the central bank and <br />general banking concepts to various target groups, such as, school and college. It would be disseminated through presentations, pamphlets, brochures, films, as also through the Reserve Bank's website. The Reserve Bank has already created a link on its web site for the common person to give him/her the ease of access to financial information in English and Hindi, and 12 Indian regional languages. <br /> A financial education site was launched on November 14, 2007 commemorating the <br />Children’s Day. Mainly aimed at teaching basics of banking, finance and central banking to children in different age groups, the site will also eventually have information useful to other target groups, such as, women, rural and urban poor, defence personnel and senior <br />citizens. The comic books format has been used to explain complexities of banking, finance and central banking in a simple and interesting way for children. <br /> The Bank Negara Malaysia has established a Credit Counselling and Debt Management Agency (CCDMA) to provide credit counselling and loan restructuring advice to individuals. The establishment of CCDMA is to proactively ensure that the household sector continue to be resilient by providing an avenue for existing and potential individual borrowers to seek advice and assistance on managing their credit while at the same time promoting a sound and robust banking system by facilitating debt repayment efforts and minimizing incidence of non-payment arising from poor debt management. banks must register in the U.S. as broker-dealers under Section 15 of the Securities and Act 1934 if they provide global custody and certain related services directly to U.S. Investors from outside the U.S. <br /> In an attempt to help consumers understand this practice and its implications, the <br />Federal Reserve Board twice designed model disclosures that were intended to inform consumers about payment allocation. <br />22 <br />6. Conclusion <br />According to this research we can conclude that still financial market has to go a long path <br />because still it is not a major contributor in GDP. As we can see that there is negative correlation between bank ’s assets and GDP, besides this stock market also has not a positive correlation with its contribution to GDP whether in India but in USA stock market has a little bit positive effect on GDP, so in India financial market is still in slow in pace. <br />Although government and different financial institutions has taken many steps to remove these financial barriers, Still many investors are not aware about the products available in financial market and if they are aware major barriers hamper the growth of financial market, to reduce these barriers both financial institutions and government has to take many steps to build a faith in investors. <br />From this analysis a major issue has arisen that which sector should be accelerated whether bank and its product or stock market as both has their advantages and disadvantages. It only depends on the country’s economic, political, legal and social behavior and stability. <br />References: <br />Reddy, Y. V. 1997. ―The Future of India’s Debt Market. ‖ Reserve Bank of India Bulletin, November. <br />Endo, Tadashi. 1998. The Indian Securities Market —A Guide for Foreign and Domestic Investors. Vision Books. India. Securities and Exchange Board of India. 1995/96 and 1996/97. Annual Report. India : SEBI. <br />Danielsson, J. and J.-P. Zigrand (2003): quot;
What Happens When You Reg- ulate Risk? Evidence from a Simple Equilibrium Model,quot;
Journal of Eco- nomic Literature. Jermann, U. and V. Quadrini (2009): quot;
Financial Innovations and the Macroeconomic <br />Volatility,quot;
Working Paper. <br />Jappelli, T. and M. Pagano, 1989, ―Consumption and Capital Market Imperfections: An International Comparison, ‖ American Economic Review 79 (5), 1088-1105. Rangarajan, C. 1997. ―Activating Debt Markets in India. ‖ Reserve Bank of India Bulletin. October <br />Appendix/Facts and figures : <br />Table 1: Select Performance Indicators - Indian Commercial Banks (Percent) <br />Item/Year (April-March)1997-982000-012003-04<br />I. Net NPAs *<br />Scheduled Commercial Banks7.36.22.9<br />Public Sector Banks8.26.73.0<br />III. Net Profit/Loss to Total Assets<br />Scheduled Commercial Banks<br />0.80.51.1<br />Public Sector Banks0.80.41.1<br />IV. Net Interest Income (Spread) to Total Assets<br />Scheduled Commercial Banks3.02.92.9<br />Public Sector Banks2.92.93.0<br />Source : Report on Trend and Progress of Banking in India. <br />Table 2: Share of the service sector in India's GDP (in Rs. crore ). <br />Figures in brackets indicate percentage share of financial sectors and subsectors. <br />*Figures for 1994-95 onwards are on a changed base (1993-94=100), so they show huge increases compared to the preceding period. <br />Year99-9898-9797-9696-9595-94*94-9393-9292-9191-9090-8989-88<br />service56900553764249857246398042320010897410214297045927336630650177<br />(51.16)(51.24)(49.91)(50.08)(49.15)(45.62)(45.34)(45.35)(43.69)(42.25)(40.99<br />BankingNA658145803451343451901611113861131071116958283408<br />&(6.27)(5.81)(5.54)(5.25)(6.74)(6.15)(6.13)(5.26)(3.72)(2.78)<br />insuranc e <br />Total11122061049191998978926412861064238864225268213983212253156566122427<br />GDP: <br />Source: Studies by Reserve Bank of India <br />Table 3 performance indicators of banking sector <br />Table 4: Select Indicators of the Indian Stock<br /> Market (Rs . billion ) <br />YearCapitalNo. ofSizeLiquidity<br />(April -RaisedListed% ofTraded<br />March)Cos .$GDPvalue<br />ratio(%)<br />1992- 93198NA25.16.1<br />1995- 96160NA44.39.9<br />1999- 0052588947.178.7<br />2000- 0149595527.4112<br />2001- 0257578226.836<br />2002- 0319565023.237.7<br />2003- 0432552843.357.8<br />NA - Not available. <br />Source : Annual Report and Handbook of Statistics on the Indian Economy (Reserve Bank of India). <br />Table 5 <br />Growth Pattern of the Indian Stock Market<br />Sl.No. As on 31st<br />December<br />No. of<br />1946 1961 1971 1975 1980<br />77889<br />198519911995<br />142022<br />1<br />Stock Exchanges<br />2<br />3<br />4<br />5<br />6<br />7<br />8<br />No. of<br />Listed Cos.<br />No. of Stock<br />Issues of<br />Listed Cos.<br />Capital of Listed Cos. (Cr. Rs.)<br />Market value of Capital of Listed Cos. (Cr. Rs.)<br />Capital per<br />Listed Cos. (4 /2) (Lakh Rs.)<br />Market Value of Capital per Listed Cos. (Lakh Rs.)<br />(5/2)<br />Appreciated value of Capital per<br />Listed Cos. (Lak Rs.)<br />1125 1203 1599 1552 2265 434462298593<br />1506 2111 2838 3230 3697 6174896711784<br />270753 1812 2614 3973 972332041 59583<br />971 1292 2675 3273 6750 25302 110279 478121<br />2463113168175224514693<br />8610716721129858217705564<br />358170148126170260344803 <br /> <br />Table 6 <br />Number of Listed Companies and Market <br />Year Number of Listed CompaniesAmount of Capitalization(Rs billion)1995/969,1005,7231996/979,8904,8831997/989,8335,8981999a9,8775,741<br />As of March. <br />Source : Reserve Bank of India, Report on Currency and Finance, 1998-1999. <br />Table 7 about here <br />United States: Cumulative Effects Results <br />Avg 20102011201220132014201520162018Real GDP (2010 = 100) Base100102.7105.2108.1110.6113.6116.7119Return on bank equity (%)Base15.5%11.4%12.9%12.7%13.8%13.0%12.3%12.1%<br />Table 8 about here<br />Total Credit Market Instruments Held in Financial Sector<br />Dec-09Change since (%saar)<br />$ billion% of totalDec-08Dec-06<br />Commercial banks9.00523.6-4.53.8<br />Savings banks and credit unions1.8044.7-10.6-5.8<br />Insurance companies3.88310. 24.32.4<br />Money market funds2.0315.3-24.19.2<br />Finance companies1.5504.1-11.8-5.1<br />GSE and GSE-backed pools8.08721.21.28.0<br />Table 9 about here<br />United State ’s Real Gross Domestic product<br />(% Annual Growth)<br />Country2004200520062007200820092010United State3.63.12.72.10.4-2.43.1<br />Figure 1 <br />Turnover of Stock Trading in India <br />Rs billion <br />700 <br />600 500 400 300200100<br /> <br />1994/951995/961996/97<br />Source: Securities and Exchange Board of India, Annual Report, 1995/96 and 1996/9 Figure 2 about here <br />MAJOR FOREIGN BANKS IN LATIN AMERICA, BY SHARE OF TOTAL LENDING, 2001 <br />(Percentages ) 10 <br />8 <br />6 4 2 <br />0 <br />CitibankSCHBBVAFleetB ostonHSBCSudamerisABN AmroScotiaBankBNLLl oyds<br />Figure 3 about here <br />UNITED S TATES : INDICATORS OF STOCK MARKET TRENDS , 1991 -2002 <br />1000 <br />800 <br />600nasdaq<br />400dow jones<br />200 0 <br />Jan-Jan-Jan-Jan-Jan-Jan-jan -jan-<br />959697989900001002<br />(1995=100) <br />Source : Bloomberg. <br />Note : Nasdaq: Index of share prices among technology firms. Dow Jones: Index of share Prices on the New York Stock Exchange. <br />28 <br />