Indian Financial System
Indian financial system consists of formal
and informal financial system.
Based on the financial system financial
market, financial instruments and financial
depending upon functionality.
Formal and Informal Financial
The financial systems of most developing
countries are characterized by co-existence and
co-operation between the formal and informal
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, non-institutional and non-regulated
system dealing with traditional and rural spheres
of the economy.
Component of Formal Financial
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 regulatory bodies.
Indian Financial System – An Overview
* Upto 1951
* 1951 to 1990
* Early Nineties Privatisation
* Present Status Globalisation
Indian Financial System – An Overview
Orderly mechanism & structure in economy.
Mobilises the monetary resources/capital from
Distributes resources to needy sectors.
Transformation of savings into investment &
Financial Markets – Places where the
above activities take place
Control of Money Lenders
No Laws / Total Private Sector
No Regulatory Bodies
Hardly any industrialization
Banks – Traditional lenders for Trade and that too
Main concentration on Traditional Agriculture
Gold/Bullion/Metal but largely linked to London Market)
Absence of intermediatary institutions in long-term
financing of industry
1951 to 1990
Moneylenders ruled till 1951. No worth-while Banks at
that time. Industries depended upon their own money.
5 years PLAN commenced.
PVT. SECTORS TO PUBLIC SECTOR – MIXED
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.
Directing the Capital in conformity with Planning priorities
Encouragement to new entrepreneurs and small set-ups
Development of Backward Region
State Finance Corporation (1951) Purely Mortgage institution
IDBI (1964) As subsidiary of RBI to provide Project / Term Finance
ICICI (1966) Channelizing of Foreign Currency Loan from World
Bank to Pvt. Sector and underwriting of Capital issues.
• SIDC’s & SIIC State Level Corporations for SME sector
• UTI (1964) to enable small investors to share Industrial Growth
• IRCI (1971) to take care of rehabilitation of sick-mills promoted by
IDBI, Banks & LIC-Name changed to IIBI in 1997
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.,
Conversion into Banking / Merger into Banking Companies IDBI 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 sized savings.
Very large NBFCs are emerging (Shri Ram Transport Finance, Birla, Tata
Finance, Sundaram Finance, Reliance Finance, DLF, Religare etc.
GLOBAL FINANCIAL SYSTEMS
IBRD (World Bank) Long-Term Capital Assistance
To finance PRIVATE enterprises in the form of loans & equity
Affiliate of World Bank Soft – Loan window of the Bank. Mainly for
developing & under-developed nations. Re-payment period upto 50
years Govt. & Private, both, eligible.
Multilateral Investment Guarantee Agency – an affiliate of World
Bank Provides guarantee for investment in needy countries.
(Economic Commission for Asia & Far East)
promote investment in Asia & Far East and also finance priority
area. Also co-ordinates with U.N. agencies.
Global Financial System – An Overview
Functions of Financial Market
Cost of Transactions (saver search & information costs)
Transfer of savings from one sector to other
Reflects as Barometer for economic growth
Commercial Paper/Debentures etc.
Cross Border Bonds /instruments.
STRUCTURE OF FINANCIAL MARKETS IN INDIA
Financial Markets in India
RRBs, co-op etc)