Indian Financial System

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Indian Financial System

Indian financial system consists of formal

and informal financial system.
Based on the financial system financial
market, financial instruments and financial
intermediation can be categorized
depending upon functionality.

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 Indian
Financial
System

Formal Informal
(organized (Unorganized
Financial financial
system) system)

Regulators; Financial Money lenders,

Financial Financial Financial
MoF, SEBI, Institutions Local bankers,
Markets Instrument Services
RBI, IRDA (Intermediaries) Traders

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Formal and Informal Financial
System
The financial systems of most developing
countries are characterized by co-existence and
co-operation between the formal and informal
financial sectors.
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.
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Component of Formal Financial
System
Regulators
Financial Institutions
Financial Markets
Financial Instruments
Financial Services

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Regulators

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.
The RBI regulates the money market and
the SEBI regulates the capital market.

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Financial Institutions

Financial
Institutions
(Intermediaries)

Insurance
Banking Non-Banking and
Mutual Funds
Institutions Institutions Housing
Finance companies

Public sector Private Sector

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Financial Instruments

Financial
Instruments

Primary Secondary
Securities Securities

Equity, Time deposits,

Preference MF units
shares, Debt Insurance policies
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Financial Markets
Financial
Markets

Capital Market Money Market

Treasury Bills, Call money

Market,
Commercial Bills,,
Commercial Papers
Certificates of deposit, Term
money

Primary Segment

Secondary Segment

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Indian Financial System An Overview

PHASES
* Upto 1951 Pvt. Sector
* 1951 to 1990 Public Sector
* Early Nineties Privatisation
* Present Status Globalisation

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Indian Financial System An Overview

Orderly mechanism & structure in economy.

Mobilises the monetary resources/capital from
surplus sectors.
Distributes resources to needy sectors.
Transformation of savings into investment &
consumption.
Financial Markets Places where the
above activities take place

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Pre 1951

1. Control of Money Lenders

2. No Laws / Total Private Sector
3. No Regulatory Bodies
4. Hardly any industrialization
5. Banks Traditional lenders for Trade and that too
short term
6. Main concentration on Traditional Agriculture
7. Narrow industrial securities market (i.e.
Gold/Bullion/Metal but largely linked to London Market)
8. Absence of intermediatary institutions in long-term
financing of industry
9. Industry had limited access to outside
saving/resources.

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1951 to 1990
Moneylenders ruled till 1951. No worth-while Banks at
that time. Industries depended upon their own money.
1951 onwards 5 years PLAN commenced.
PVT. SECTORS TO PUBLIC SECTOR MIXED
ECONOMY
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 13

v. Organisational Deficiencies.
1951-1990

Nationalization
RBI 1948
SBI 1956 (take-over of Imperial Bank of India)
LIC 1956 (Merges of over 250 Life Insurance Companies)
Banks 1969 (14 major banks with Deposits of over Rs. 50
Crs.nationalised)
1980 (6 more Banks)
Insurance 1972 (General Insurance Corp. GIC by New India,
Oriental, united and National.

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1951-1990
Development
Directing the Capital in conformity with Planning priorities
Encouragement to new entrepreneurs and small set-ups
Development of Backward Region
IFCI (1948)
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.
SIDCs & 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

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POST 1990s

IMPORTANT DEVELOPMENTS

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 Moodys
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.,
ICICI Ltd.
Conversion into Banking / Merger into Banking Companies IDBI Bank &
ICICI 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

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POST 1990
INDUSTRIES
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.
Professional Management.

NBFC
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.

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POST 1990

Commercial Bank
Mutual Funds
Capital Market
Secondary Market
Money Market

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GLOBAL FINANCIAL SYSTEMS
IBRD (World Bank) Long-Term Capital Assistance

IFCI To finance PRIVATE enterprises in the form of loans & equity

IDA 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.

MIGA Multilateral Investment Guarantee Agency an affiliate of World

(1988) Bank Provides guarantee for investment in needy countries.

ECAFE (Economic Commission for Asia & Far East)

promote investment in Asia & Far East and also finance priority
area. Also co-ordinates with U.N. agencies.

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Global Financial System An Overview
Functions of Financial Market
Price Discovery
Liquidity
Cost of Transactions (saver search & information costs)
Transfer of savings from one sector to other
Reflects as Barometer for economic growth

Financial Assets
Treasury Bonds
Debt
Equity
Commercial Paper/Debentures etc.
Euro Bonds.
Gold/Silver
Cross Border Bonds /instruments.
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 STRUCTURE OF FINANCIAL MARKETS IN INDIA

Financial Markets in India

Debt Market Forex Capital Market Insurance Banks (including Mutual Funds,
Primary / Market Primary / Life/General RRBs, co-op etc) Venture Funds,
Secondary Secondary & Investment
Depository Bonds

RBI RBI SEBI IRDA RBI RBI/SEBI

REGULATORY AUTHORITY

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 Financial Instruments

A financial instrument is a claim against a

person or an institution for payment, at a future
date, of a sum of money and/or a periodic
payment in the form of interest or dividend. The
term and/or implies that either of the payments
will be sufficient but both of them may be
promised. Financial instruments represent paper
wealth shares, debentures, like bonds and
notes. Many financial instruments are
marketable as they are denominated in small
amounts and traded in organised markets
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 Financial Services

These are those that help with borrowing

and funding, lending and investing, buying
and selling securities, making and
enabling payments and settlements, and
managing risk exposures in financial
markets. The major categories of financial
services are funds intermediation,
payments mechanism, provision of
liquidity, risk management, and financial
engineering. 23