INDIAN FINANCIAL SYSTEM

Presented by

Dr.S.C.Bihari

WHAT IS A FINANCIAL SYSTEM

Financial system: An integral part of modern economy. The financial system of a country : A set of Organizations, Instruments, Markets, Services and Methods of operations, procedures Closely interrelated with each other.

The basic requirements for any efficient financial system are:

1. Efficient monetary system; 2. Facilities for creation of capital; and 3. Efficient financial markets.

An efficient monetary system

Indicates an efficient medium of exchange for goods and services. It is the unit of Measurement in the economy.
The system should have the facilities:

To create capital to meet the demands of the economy-- By mobilizing the savings of the surplus units to the demanding units.

Structure of a Financial System

Financial Services

Financial Markets
Unorganized
Primary / Secondary

Financial Instruments

Financial Intermediaries

Organized

Primary / Secondary
Regulat ory Short Term Medium Term BANKING
Intermediari es Non-Inter mediaries

Primary / Secondary

Others

Capital Markets

Money Markets

Long Term

NONBANKING

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Financial Services
Acceptance Of Deposits Credit functions

Leasing

Stock Holding Financial Services

Refinancing

Financial Performance Guarantees

Hire Purchase

Discounting Rediscounting

Merchant Banking Factoring

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Financial Instruments
Enable movement of funds from surplus units to deficit units There are instruments for savers such as deposits, equities, mutual fund units, etc. There are instruments for borrowers such as loans, overdrafts, etc. Like businesses, governments too raise funds through issuing of bonds, Treasury bills, etc. Instruments like PPF, KVP, etc. are available to savers who wish to park money with safe government avenues.
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Financial Instruments contd.

Equity Shares KVPs Preference Shares

Relief Bonds

Financial Instruments

Capital Gains Bonds

National Savings Certificate Debt Equity Swaps

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Deposits With Companies

Financial Markets
Money Marketfor short-term funds (less than a year) Organised (Banks) Unorganised (money lenders, chit funds, etc.) Capital Marketfor long-term funds Primary Issues Market Stock Market Bond Market
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Organised Money Market

Call money market Bill Market
Treasury bills Commercial bills

Bank loans (short-term) Organised money market comprises RBI, banks (commercial and cooperative)
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Money Market Instruments

Money market instruments are those which have maturity period of less than one year. The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions Call money/ repo are very short-term money market products
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Money Market Instruments contd

Certificates of Deposit Commercial Paper Inter-bank participation certificates Inter-bank term money Treasury Bills Bill rediscounting Call/notice/term money Market Repo
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Commercial Papers
Short-term borrowings by corporates, financial institutions, primary dealers from the money market Can be issued in the physical form (Usance Promissory Note) or demat form Introduced in 1990 When issued in physical form are negotiable by endorsement and delivery and hence, highly flexible Issued subject to minimum of Rs. 5 lacs and in the multiple of Rs. 5 lacs after that Maturity is 7 days to 1 year Unsecured and backed by credit rating of the issuing company
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Market Repos
Repo (repurchase agreement) instruments enable collateralised short-term borrowing through the selling of debt instruments A security is sold with an agreement to repurchase it at a pre-determined date and rate Reverse repo is a mirror image of repo and reflects the acquisition of a security with a simultaneous commitment to resell These are transactions, other than those routed through Reserve Bank

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Capital Market
Market for long-term capital. Demand comes from the industrial, service sector and government Supply comes from individuals, corporates, banks, financial institutions, etc. Can be classified into:
Gilt-edged market Securities market (new issues and stock market)
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Securities Market
It refers to the market for shares and debentures of old and new companies New Issues Market- also known as the primary market- refers to raising of new capital in the form of shares and debentures Stock Market- also known as the secondary market deals with securities already issued by companies
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Types of Financial Intermediaries

Depository institutions and Non-depository institutions.

DEPOSITORY INSTITUTIONS
1. Commercial Banks. 2. Saving and Loans Institutions. 3. Credit Unions.
1. Finance Companies. 2. Mutual Funds. 3. Security Firms, Investment Bankers, Brokers, and Dealers. 4. Pension Funds. 5. Insurance Companies.

Depository institutions provide

Funds to serve the interests of the society

Safeguard their monies and

Act as an important source for the investment community.

FINANCE COMPANIES
The consumer finance companies (for example, GE Countrywide) provide finance to individuals for purchase of consumer goods.

CONSUMER

SALES

Sales finance companies make direct loans to consumersby purchasing installment paper from dealers selling automobiles and other consumer durables.

MUTUAL FUNDS
Portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors.

When an individual invests in a mutual fund: Becomes a part owner of a large investment portfolio

INSURANCE COMPANIES
There are two types of insurance companies life insurance companies, and Non-life insurance companies. The principal business of life insurance companies is to insure the policyholder against death

Non-life insurance do Automobile insurance Fire insurance, Home insurance, Engineering insurance Liability Insurance etc.

INVESTMENT BANKING
Assist companies in raising capital, through a private placement or public offering of company stock.

They market large amounts of new securities on behalf of governments, government agencies and companies.

LEASING COMPANIES
Leasing :Provides access to productive assets.
A lessor :Gives assets on lease : Gets regular inflow of lease rentals.

A lessee: Gets the asset at a lower cost without borrowing or owning it.

MORTGAGE BANKS
Mortgage bankers :Fund the construction of homes, offices, buildings and other structures.

They sell their assets to a long-term lender such as an insurance company to get back liquidity

PENSION FUNDS
Dedicated to protecting individuals and families against loss of income Allow investors to invest a portion of their current income as pension funds.

Importance of pension funds : Due to increased life expectancy

Types of Financial Institutions

Financial System and Economic Development Linkage

Financial Sector Regulators

Regulators

Reserve Bank of India (RBI)

Insurance Regulatory Securities Exchange and Development Board of India Authority (SEBI) (IRDA)

Banks

Capital Markets/ Mutual Funds

Insurance Companies

A Glimpse of Indian Financial System

Regulatory Bodies
Reserve Bank of India as a regulator SEBI BIFR IRDA DICGC ECGC SHCI FMC

Financial Intermediaries
Reserve Bank of India as a banker Commercial Bnaks Cooperative banks and Societies Post Office Savings Banks PF Organization Pension Funds Small savings organizations LIC of India GIC UTI Mutual Funds Investment Trusts

Developme nt Institutions
EXIM Bank NABARD SCICI IDBI SIDBI TFCI

Financial Services
Hire Purchase Deposit Insurance Insurance Guarantees Solvencies Acceptances Bill Discounting Merchant Banking Factoring Credit rating Credit information Economic consultancy Stock holding Refinancing Underwriting Leasing

Financial Instruments
Equity Shares Preference shares Debentures Bonds Government Securities KVP NSS NSC Bank Deposits Deposit with Companies

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Thanks for your attention

Dr. S. C. Bihari
Tell:08417-236660 to 65(Extn: 6214) Mail:[email protected]