Indian Financial

System
Ghanali Gawde
Financial System
Existence of a well organized financial
system
Promotes the well being and standard of
living of the people of a country
Money and monetary assets
Mobilize the saving
Promotes investment
 Financial System of any country consists
of financial markets, financial
intermediation and financial instruments
or financial products

Flow of funds
Seekers of funds (savings)
Suppliers of funds
(Mainly business firms
Flow of financial services (Mainly households)
and government)
Incomes , and financial
claims

Financial System
 Indian Financial System

Non- Organized
Organized
Money lenders
Regulators
Local bankers
Financial Institutions
Traders
Financial Markets
Landlords
Financial services
Pawn brokers
Chit Funds
Evolution of Financial System
Barter

Money Lender

Nidhi's/Chit Funds

Indigenous Banking

Cooperative Movement

Societies Banks

Joint-Stock Banks
 Consolidation
Commercial Banks

Nationalization
Investment Banks

Development Financial Institutions

Investment/Insurance Companies
Stock Exchanges
Market Operations
Specialized Financial Institutions

Merchant Banking
Universal Banking
 Interrelation--Financial system & Economy

Financial System

Savers Lenders Households Foreign

Sectors

Investors Corporate Sector Un-organized

Borrowers Govt.Sector Sector

Economy
 Organized Indian Financial System

Regulators Financial Financial Financial

Instruments Markets Intermediaries

Forex Capital Money Credit

Market Market Market Market

Primary Market

Secondary Market

Money Market Capital Market

Instrument Instrument
Mechanism which allows people to trade

Affected by forces of supply and demand

Process used

In Finance, Financial markets facilitates

Financial Markets
Capital markets facilitate the transfer of capital
(i.e. financial) assets from one owner to another.
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.

Why Capital Markets Exist

Mobilization of Savings & acceleration of
Capital Formation
Promotion of Industrial Growth
Raising of long term Capital
Ready & Continuous Markets
Proper Channelisation of Funds
 Provision of a variety of Services

Role of Capital Markets

 Stock Market was for a privileged few
Archaic systems - Out cry method
Lack of Transparency - High tones costs
No use of Technology
Outdated banking system
Volumes - less than Rs. 300 cr per day
No settlement guarantee mechanism - High
risks

Indian Capital Market - Historical

perspective
 1994-Equity Trading commences on NSE
1995-All Trading goes Electronic
1996- Depository comes in to existence
1999- FIIs Participation- Globalisation
2000- over 80% trades in Demat form
2001- Major Stocks move to Rolling Sett
2003- T+2 settlements in all stocks
2003 - Demutualisation of Exchanges

Indian Capital markets - Chronology

Each scam has brought in reforms - 1992 / 2001
Screen based Trading through NSE
Capital adequacy norms stipulated
Dematerialization of Shares - risks of fraudulent
paper eliminated
Entry of Foreign Investors
Investor awareness programs
Rolling settlements
Inter-action between banking and exchanges

Capital Markets - Reforms

 Corporatisation of exchange memberships
Banning of Badla / ALBM
Introduction of Derivative products - Index /
Stock Futures & Options
Reforms/Changes in the margining system
STP - electronic contracts
Margin Lending
Securities Lending

Reforms / Initiatives post 2000

 MARKET STRUCTURE
(JULY 31, 2005)

• 22 Stock Exchanges,
• Over 10000 Electronic Terminals at over 400 locations all
over India.
• 9108 Stock Brokers and 14582 Sub brokers
• 9644 Listed Companies
• 2 Depositories and 483 Depository Participants
• 128 Merchant Bankers, 59 Underwriters
• 34 Debenture Trustees, 96 Portfolio Managers
• 83 Registrars & Transfer Agents, 59 Bankers to Issue
• 4 Credit Rating Agencies
 Indian Capital Market

Market Instruments Intermediaries Regulator

SEBI
•Brokers
•Investment Bankers
Primary Secondary •Stock Exchanges
•Underwriters

Equity Hybrid Debt

Players

CRA Corporate Intermediaries Individual Banks/FI FDI /FII

Stock Exchanges in INDIA
 Mangalore Stock Exchange  Bombay Stock Exchange
 Hyderabad Stock  Madhya Pradesh Stock
Exchange
 Uttar Pradesh Stock Exchange
Exchange  Vadodara Stock Exchange
 Coimbatore Stock  The Ahmedabad Stock
Exchange
 Cochin Stock Exchange Exchange
 Bangalore Stock Exchange  Magadh Stock Exchange
 Saurashtra Kutch Stock  Gauhati Stock Exchange
Exchange  Bhubaneswar Stock
 Pune Stock Exchange
 National Stock Exchange Exchange
 OTC Exchange of India  Jaipur Stock Exchange
 Calcutta Stock Exchange  Delhi Stock Exchange
 Inter-connected Stock Assoc
Exchange (NEW)  Ludhiana Stock Exchange
 Madras Stock Exchange
 Raising capital for businesses

 Mobilizing savings for investment

 Facilitate company growth

 Redistribution of wealth

The role of the stock exchange

 Corporate governance

 Createsinvestment opportunities for small

investors

 Government raises capital for development

projects

 Barometer of the economy

The role of the stock exchange

 Growth Pattern of the Indian Stock Market
Sl.N As on 31st 1946 1961 1971 1975 1980 1985 1991 1995
o. December
No. of 7 7 8 8 9 14 20 22
1
Stock Exchanges
No. of 1125 1203 1599 1552 2265 4344 6229 8593
2
Listed Cos.
No. of Stock 1506 2111 2838 3230 3697 6174 8967 11784
3 Issues of
Listed Cos.
Capital of Listed 270 753 1812 2614 3973 9723 32041 59583
4
Cos. (Cr. Rs.)
Market value of 971 1292 2675 3273 6750 25302 11027 47812
5 Capital of Listed 9 1
Cos. (Cr. Rs.)
Capital per 24 63 113 168 175 224 514 693
6 Listed Cos. (4/2)
(Lakh Rs.)
Market Value of 86 107 167 211 298 582 1770 5564
Capital per Listed
7
Cos. (Lakh Rs.)
(5/2)
Appreciated value 358 170 148 126 170 260 344 803
of Capital per
8
 Capital Market Instruments

Equity Hybrid Debt

Deep
Equity Preference ADR / GDR Debentures Zero coupon
Shares bonds Discount
Shares
Bonds
 Establishment of Development banks &
Industrial financial institution.
Legislative measures
Growing public confidence
Increasing awareness of investment
opportunities
Factors contributing to growth of
Indian Capital Market
 Growth of underwriting business
Setting up of SEBI
Mutual Funds
Credit Rating Agencies

Factors contributing to growth of

Indian Capital Market
Indian Capital Market deficiencies

Lack of transparency
Physical settlement
Variety of manipulative practices
Institutional deficiencies
Insider trading
Market for short-term money and financial
assets that are near substitutes for money.

 Short-Term means generally period upto one

year and near substitutes to money is used to
denote any financial asset which can be quickly
converted into money with minimum
transaction cost

Money Market
Money Market
Itis a place for Large Institutions and
government to manage their short-term cash
needs

It is a subsection of the Fixed Income Market

It specializes in very short-term debt securities

 They are also called as Cash Investments

Defects of Money Market

Lack of Integration
Lack of Rational Interest Rates structure
Absence of an organized bill market
Shortage of funds in the Money Market
Seasonal Stringency of funds and fluctuations in
Interest rates
Inadequate banking facilities
  Treasury Bills
 Commercial Paper
 Certificate of Deposit
 Money Market Mutual Funds
 Repo Market

Money Market Instruments

Segment Issuer Instruments

Govern Central Zero Coupon Bonds, Coupon Bearing Bonds,

ment Government Capital Index Bonds, Treasury Bills.

Government
Public Agencies /
Govt. Guaranteed Bonds, Debentures
Sector Statutory
Bodies
Public Sector
PSU Bonds, Debenture, Commercial Paper
Units
Debentures, Bonds, Commercial Paper, Floating
Private Corporate Rate Bonds, Zero Coupon Bonds, Inter-
Corporate Deposits
Banks Certificate of Deposits, Bonds
Financial
Certificate of Deposits, Bonds
Institutions
Financial Regulators
 Securities and Exchange Board of India (SEBI)

Reserve Bank of India

Ministry of Finance

Financial Regulators
Securities and Exchange Board of India
(SEBI) was first established in the year
1988
Its a non-statutory body for regulating
the securities market
It became an autonomous body in 1992

Security Exchange Board of India

(SEBI)
Functions Of SEBI

Regulates Capital Market.

Checks Trading of securities.

Checks the malpractices in securities market.

Functions Of SEBI
Itenhances investor's knowledge on market by
providing education.

It regulates the stockbrokers and sub-brokers.

To promote Research and Investigation

It tries to develop the securities market.

Promotes Investors Interest.

Makes rules and regulations for the securities

market.

Objectives of SEBI
The Recent Initiatives
Undertaken
Sole Control on Brokers
For Underwriters
For Share Prices
For Mutual Funds
Established on April 1, 1935 in accordance with
the provisions of the RBI Act, 1934.

The Central Office of the Reserve Bank has been

in Mumbai.

Itacts as the apex monetary authority of the

country.

Reserve Bank of India

Monetary Authority:
 Formulation and Implementation of monetary
policies.
 Maintaining price stability and ensuring adequate
flow of credit to the Productive sectors.
Issuer of currency:
 Issues and exchanges or destroys currency and coins.
 Provide the public adequate quantity of supplies of

currency notes and coins.

Functions Of RBI
 Functions Of RBI
Regulator and supervisor of the financial system:
 Prescribes broad parameters of banking operations
 Maintain public confidence, protect depositors' interest
and provide cost-effective banking services.

Authority On Foreign Exchange:

 Manages the Foreign Exchange Management Act, 1999.
 Facilitate external trade, payment, promote orderly
development and maintenance of foreign exchange
market.
 Functions Of RBI
Developmental role:
 Performs a wide range of promotional functions to
support national objectives.

Related Functions:
 Banker to the Government: performs merchant banking
function for the central and the state governments.
 Maintains banking accounts of all scheduled banks.
(a) Bank Rate:
The Bank Rate was kept unchanged at 6.0 per cent.
(b) Reverse Repo Rate:
The Repo rate is around 7 per cent and Reverse
repo rate is around 6.10 per cent.
(c) Cash Reserve Ratio:
The cash reserve ratio (CRR) of scheduled banks is
currently at 5.0 per cent.

Monetary Measures
  Pre-reforms period
 Steps taken
 Objectives
 Conclusion

Reforms in the Financial System

 The period from the mid 1960s to the early 1990s.
 Characterized by:

◦ Administered interest rates

◦ Industrial licensing and controls
◦ Dominant public sector
◦ Limited competition
◦ High capital-output ratio

Pre-Reforms Period
Banks and financial institutions acted as a
deposit agencies.
Price discovery process was prevented.
Government failed to generate resources for
investment and public services.
Till
90s it was closed, highly regulated, and
segmented system.

Pre-Reforms Period
Economic reforms initiated in June 1991.
The committee appointed under the
chairmanship of M Narasimham.
He submitted report with all the
recommendations
Government liberalized the various sectors in
the economy.
Reform of the public sector and tax system.

Steps Taken
 Reorientation of the economy
Macro economic stability
To Increase competitive efficiency in the
operations
To remove structural rigidities and inefficiencies
To attain a balance between the goals of financial
stability & integrated & efficient markets

Objectives
Reduce the level of state ownership in
banking
Lift
restrictions on foreign ownership of
banks
Spurthe development of the corporate-bond
market
Strengthen legal protections

Recommendations
Deregulate the insurance industry
Drop proposed limits on pension reforms
Increase consumer ownership of mutual-fund
products
Introduce a gold deposit scheme

Recommendations
Speedup the development of electronic
payments.
Separate the RBI's regulatory and central-bank
functions
Lift the remaining capital account controls
Phase out statutory priority lending and
restrictions on asset allocation

Recommendations
The financial system is fairly integrated, stable,
efficient.
Weaknesses need to be addressed.
The reforms have been more capital centric in
nature.
Foreign capital flows and foreign exchange reserves
have increased but absorption of foreign capital is
low.

Conclusion
Thank you