Indian Financial System

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

Seekers of Flow of Funds

(Savings)
Funds (mainly
Suppliers of Funds
Business firms (mainly Households)
and Flow of Financial
Services, incomes
government And financial claims
 Indian Financial System
Organized Un-Organized

Regulators Money lenders

Financial Institutions Local bankers
Financial Markets Traders
Financial Instruments Landlords
Financial services Pawn brokers

•
 Organized Indian Financial System

Regulators Financial
Instruments
• Money MarketInstrumentCapital
MarketInstrumentForexMarketCapitalMarketMo
neyMarketCreditMarketPrimary
MarketFinancialMarketsFinancialIntermediaries
Secondary Market1.MoF2.SEBI3.RBI4.IRDA
Indian Capital MarketMarket Instruments
IntermediariesPrimary Secondary
• Equity DebtHybrid
• Regulator Brokers
Investment Bankers
• Stock Exchanges
• Underwriters
• SEBI Players Corporate Intermediaries CRA
Banks/FI FDI /FII Individual
• Financial Markets
• Mechanism which allows people to trade
• Affected by forces of supply and demand
• Process used
• In Finance, Financial markets facilitates
Why Capital Markets Exist
• 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
betransferred without loss of value.
• A side benefit of capital markets is that
thetransaction price provides a measure of the
value ofthe asset.
Role of Capital Markets
• Mobilization of Savings & acceleration of
• Capital Formation
• Promotion of Industrial Growth
• Raising of long term Capital
• Ready & Continuous Markets
• Proper Canalization of Funds
• Provision of a variety of Services
Capital Market Instruments
• Derivative Market
• 1.ExchangeTraded2.Future & Option a. Index b. Stock
• Equity Debt
• Primary Market
• 1. Public Issue
• 2. Private Placement
• a. Domestic Market
• b. International Market
• Secondary Market
• 1.NSE2.BSE3.OTCEI4.ISE5.RSE
• Private Corporate Dept.
• PSU Bond Market Govt.Securities Market
• Primary Segment Secondary Segment
•
Factors contributing to growth of Indian Capital
Market
• 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
Indian Capital Market deficiencies
• Lack of transparency
• Physical settlement
• Variety of manipulative practices
• Institutional deficiencies
• Insider trading
Money Market
• Market for short-term money and financial
assets that are near substitutes for money.
• Short-Term means generally period up to 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
• It is 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
Money Market Instruments
• Treasury Bills
• Commercial Paper
• Certificate of Deposit
• Commercial Bills
• Term Money1. Primary Segment2.Secondary
Segment
• Call Money Market
FINANCIAL INSTRUMENTS
Money Market Instruments
The money market can be defined as a market for short-
term money and financial assets that are near
substitutes for money. The term short-term means
generally a period up to 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. Some of the important money market
instruments are briefly discussed below;1.Call/Notice
Money 2.Treasury Bills3.Term Money 4.Certificate of
Deposit5.Commercial Papers
•
1. Call Money Market
• Loan disbursed by commercial banks
• 1 day ± 7 days
• Bank can recall the loan at its maturity
• Usually advanced to bill brokers &
• stock exchange brokers
2. Term Money
• Term Money market for deposits of maturity
beyond 14 days is referred to as the term
money market. The entry restrictions are the
same as those for Call/Notice Money except
that, as per existing regulations, the specified
entities are not allowed to lend beyond 14 days.
3. Treasury Bills.
• Government
• Paper Securities
• Duration of 91 days
• Promissory note of the government to pay a
specified sum after a specified period
4. Certificate of Deposits
• Certificates of Deposit (CDs) is a negotiable money market
instrument and issued in dematerialized form or as a Usance
Promissory Note, for funds deposited at a bank or other eligible
financial institution for a specified time period.
• Guidelines for issue of CDs are presently governed by various
directives issued by the Reserve Bank of India, as amended
from time to time.
• CDs can be issued by
(i) scheduled commercial banks excluding Regional Rural Banks
(RRBs) and local Area Banks
(ABs); and
(ii) select all-India Financial Institutions that have been permitted
by RBI to raise short-term resources with in the umbrella limit
fixed by RBI. Banks have the freedom to issue CDs depending
on their requirements.
• An FI may issue CDs with in the overall umbrella limit fixed by
RBI, i.e., issue of CD together with other instruments viz., term
money, term deposits, commercial papers and interoperate
deposits should not exceed 100 per cent of its net owned funds,
as per the latest audited balance sheet.
5. Commercial Paper
CP is a note in evidence of the debt obligation of the
issuer. On issuing commercial paper the debt
obligation is transformed into an instrument.
CP is thus an unsecured promissory note privately
placed with investors at a discount rate to face value
determined by market forces.
CP is freely negotiable by endorsement and delivery. A
company shall be eligible to issue CP provided –
(a) the tangible net worth of The company, as per the
latest audited balance sheet, is not less than Rs.
4crore;
(b) the working capital (fund-based) limit of the company
from the banking system is not less than Rs.4 crore
and
(c) the borrower account of the company is classified as
a Standard Asset by the financing bank/s. The
minimum maturity period of CP is 7 days.
Capital Market Instruments
Capital Market Instruments
• The capital market generally consists of the
following long-term period i.e., more than one
year period, financial instruments; In the equity
segment
• Equity shares, preference shares, convertible
preference shares, non-convertible preference
shares etc and in the debt segment debentures,
zero coupon bonds, deep discount bonds etc.
Equity Market
1.Primary Markets
• Helps companies in raising funds through issue
of securities like shares and debentures.
• Governed by SEBI (Securities and Exchange
Board of India).
• Methods of issuing securities in Primary Market:
• Public Issue
• Rights Issue
• Bonus Issue
• Private Placement
• Bought-out Deals
International Capital Market
International Capital Markets
Development attributed to following factors:
• Investors need to avoid taxes in their own
country and to ensure protection against
depreciating Home currencies.
• emergence of new technologies in the area
of financial services, development and
deregulation of financial markets
Equity Instruments
• GDR: instruments which possess a number of
underlying shares held by the custodian
domestic bank of the company.
The GDRs are traded on a foreign stock
exchange, issued to the non-resident investors.
• The GDRs are denominated in the foreign
currency and the underlying shares are
denominated in the local currency of the issuer.
• The GDRs are considered as common equity of
the company and are entitled to dividends and
voting rights.
ADR
Is a dollar denominated negotiable certificate traded in
the US-markets whose underlying securities are of
non-US companies.
• ADR Level-I :
first step for an issuer to enter the US market,
minimum disclosure required, need not comply with
the American GAAP. Can trade only on the OTC
market and not on any national stock exchange.
• ADR Level-II:
significant disclosures to be made to the SEC,
company allowed to list on AMEX, NYSE.
• ADR Level-III :
Fresh capital can be raised company to be registered
with the SEC and shall even follow US GAAP
Euro Bonds
These are the bonds that are issued outside the
country of the currency in which it is
denominated
• Features:
No with holding of tax on interest payments
These are in bearer form with coupon interest
attached
Listed on stock exchanges though traded on
the OTC market
Foreign Bonds
Bonds floated in the domestic markets
denominated in the domestic currency by the
non-resident.

• Yankee Bonds
• Samurai Bonds
• Bulldog Bonds
• Shibosai Bonds
Yankee bonds
These are US dollar denominated issues by the
foreign borrowers in the US markets.
Features:
• Regulated by the SEC. Requires more
disclosure than that given by the prospectus.
• Foreign borrower to adopt US accounting
policies
• Bonds sponsored by the underwriting syndicate
• Requires SEC registration before the sale.
• To be rated by the US credit rating agencies
Samurai Bonds
• Yen denominated bonds issued in the
Japanese markets by the non-Japanese
companies.
Features:
• Maturity: 3-20 years
• Borrowers in order of priority sovereigns,
supranational and their entities, high quality
private corporations having some kind of
Japanese trade links.
Bull Dog Bonds
• Sterling denominated foreign bonds floated in
the UK market.
Features:
• Maturity 5 for short maturities 25 for long
maturities.
• Subscribed by the long-term institutional
investors-pension funds, life insurance Co’s
• Bonds offered by placing or offer for sale
process will have to be listed on the London SE
Shibosai Bonds
Privately placed bonds issued in the Japanese
market
Features:
• Offered to institutional investors, including
banks the issues eligibility, coupon rate, etc
governed by the Japans MOF guidelines.
• Pricing done based on base rate and spread
which depends on the rating of Co or country.
Forex Markets
Foreign Exchange Market: Deals with
transactions in currencies other than ones own
currency.
• Exchange rate: The rate at which one currency
can be Converted into another currency.
• Participants:
Exporters
Importers
Commercial Banks
Central Banks
Authorized Dealers and Money Changers
Brokers
Equity Market
2. Secondary Market
Securities already issued in the primary market
are traded in the secondary market.
• Provides liquidity to the securities held by the
investors.
• Operates through stock exchanges that
regulate the trading activities in this market.
Equity Market
3. Derivatives Market
Financial derivative is a product derived from
the market of an underlying asset.
• Participants:
Hedgers
Speculators
Arbitrators
• Types of Derivatives:
Futures
Options
Caps
floors and Collars
Debt. Market
Government of India, public sector units and
corporationstogether comprise as dominant issuer of
debt markets inIndia. Local governments, mutual
funds and internationalfinancial institution issue debt
instruments as well but very infrequently. The Central
Government mobilizes funds mainly through issue of
dated securities and T-bills. Bonds arealso issued by
government sponsored institutions like the
development financial institutions (DFIs) like IFCI and
IDBI,banks and public sector units. Some, but not all,
of the PSU bonds are tax-exempt. The corporate
bond market comprise of commercial papers and
bonds. In recent years, there has been an increase in
issuance of
 Financial Institution
• Industrial Development Bank of India (IDBI)
• Industrial Finance Corporation of India (IFCI)
• Industrial Investment Bank of India (IIBI)
• Export and Import Bank of India
• State Financial Corporations
• State Industrial Development Corporations
Non-banking financial institution
• Non-Banking Financial Companies
Investment Trusts or Investment Companies:
Close end organizations, having fixed amount
of authorized capital provides services through
conserving and managing property for those
who cannot manage their own funds.
• Mutual Benefit Funds or Nidis: Sources of their
funds are share capital, deposits.
• Merchant Banks : Offers financial advice &
services for fees; Services offered are
management, marketing, underwriting of new
issue, project promotion & finance, corporate
advice, BOD, venture capital etc.
• Hire Purchase Finance Companies
• Lease Finance Companies
• Housing Finance Companies
• National Housing Bank : Wholly owned by
subsidiary of RBI, Aim is to promote housing
finance Institution at local & regional levels, It
refinance housing loans to scheduled
commercial & co operative banks,
housing finance companies etc.
• Venture Capital Funding Companies
DEVELOPMENT FINANCE INSTITUTION
• All India Financial Institutions
• IFCI: Industrial Finance Corporation of India
The IFCI, India’s first DFL, was established on
1 July 1948
• IFCI principal activities can be categorized into
• - Financing
• -Promotional activities
FINANCING ACTIVITIES
• Project Activities
• Financial Services
• Corporate advisory Services
• Corporate advisory Services to Foreign
Investors
• PROMOTIONAL ACTIVITIES
• Played a key role in the development of cooperatives
in the sugar and textile sector
• It has promoted technical consultancy organization
primarily in less developed state, to provide necessary
services to the promoters of small and medium- sized
industries in collaboration with other banks and
institutions.

• It has developed many institutions like

• Management Development institute
• Investment and credit rating agency
• Tourism finance corporation of India
• Rashtriya Gramin Vikas Nidhi
DISADVANTAGES
• The reasons to this dismal state of affairs of the
company are as follows
• Operational Inefficiency
• Political Interference
• Traditional sector financing
• Higher provisioning for Non-performing assets
The steps taken for the revival of IFCI are as follows:
IFCI constituted an expert committee in 2001
• To formulate a medium-to long term strategic plan for
IFCI in the emerging new business environment
• The committee has laid down the road map plan for
the next five years
• It has made recommendations covering a wide range
of structural and operational areas
• It has strengthened its risk management techniques
and is putting in efforts to bring down the NPAs to a
manageable level, through corporate debt structuring
• It has initiated action against defaulters and has filed
suits against defaulter companies
INDUSTRIALDEVELOPMENT BANK OF INDIA
• Established in 1964 by Parliament as a wholly owned
subsidiary of the RBI In 1976, the banks ownership
was transferred to the Government of India IDBI has
engineered the development of capital market through
helping in setting up of the
• -Securities Exchange Board of India (SEBI)
• -National Stock Exchange of India Limited (NSE)
• -Credit Analysis and Research Limited (CARE)
• -Stock Holding corporation of India Limited (SHCIL)
• -Investors Services of India Limited (ISIL)
• -National Securities Depository Limited (NSDL)
• -Clearing Corporation of India Limited (CCIL)
IDBI has undertaken several initiatives to reposition itself
as a universal Bank:
• - In April 2001, IDBI appointed Boston consulting
Group India Private Limited (BCG) as consultant to
draw up a road map for conversion into a universal
bank
• Formation of high level risk management committee
to develop overall risk management policy
• The bank has constituted a credit risk management
group to evaluate credit risk both at the transaction
level and also at the portfolio level
• It has pioneered the setting up of Asset
Reconstruction Company (India) Limited (ARCIL) in
2002 in association with select banks and financial
institutions
• IDBI-SERVICES
• IDBI provides Merchant banking and wide array of
corporate advisory services as part of its fee based
activities
• This includes professional advice and services for
- issue management
- private placement of equity/debt instruments
- project evaluation
- credit syndication
- share valuation
- corporate restructuring including mergers and
acquisitions and divestment of equity
• the bank also offers a number of Forex related
services on a commission basis including opening of
letters of credit and remittance of foreign currency on
behalf of its assisted companies for import of its goods
and services
 IIBI
• Established in 1985 under the IRBI Act 1984
• It is a principal credit & reconstruction agency for re-
habilitation of sick & closed industrial units.
• The range of its services include provision of
infrastructure facilities, consultancies, managerial &
merchant banking facilities & making available
machinery & other equipment on a lease or hire
purchase bases It was renamed as industrial
investment bank of India & brought under companies
act 1956 since March 17 1997.
• It finances new projects, modernization work,
balancing equipment needs, correcting imbalance in
current Assets, relieving strains on cash resources,
repayment of pressing liabilities and other activities.
IDFC
• Conceived as an institution to facilitate the flow of
private finance to commercially viable infrastructure
projects & help mitigate commercial & structural risk
contain therein, by designing innovative products &
processes.
• It operates in areas such as energy,
telecommunication & IT, integrated transportation,
Urban infrastructure & food & agri-business
infrastructure.
• It offers the variety of services to projects in the
infrastructure & advisory services.
• It helps promoters raise resources from international
markets
• It intends offering advisory services to these funds to
facilitate & strengthen their connectivity with
infrastructure projects.
•
NABARD
• Established in July 1982 under an act of parliament ,
is an apex dvpt. Bank for promotion & dvpt. of
agriculture, small-scale industries, cottage & village
industries & other allied economic activities in rural
areas.
• Objective is to promote integrated rural development
for overall prosperity of rural areas.
• Provides long term investment credit to the Farm
sector for various approved agricultural & allied
activities such as minor irrigation ,plantation etc.
• It also extends refinance to banks for financing
government sponsored programmes like prime
minister Rojgar Yojna, Swarna Jayanti Gram
Swarozgar Yojna etc.
• Other important development includes setting up of
micro finance development fund by NABARD.
SIDCS
• Established under the companies act 1956, as wholly
owned undertakings of the state governments with the
specific objective of promoting and developing
medium and large industries in the respective states.
• It undertakes a range of promotional activities
including:
-repression of preparation of feasibility reports.
-conducting industrial potential surveys.
-entrepreneurship training and development
programs.-developing industrial estates.
• It also offer package of developmental services that
include technical guidance, assistance in plant
location and coordination with other agencies.
EXIM BANK
• Established in 1982, is a wholly government owned
financial institution setup for the purpose of financing,
facilitating and promoting India’s foreign trade.
• Its financing services include a range of fund and non-
fund based programs to enhance the exports,
competitiveness of Indian companies.
• Its major operations presently comprise
-financing of projects
-products and service exports
-building export competitiveness
-promotional programs
-Financing of research and development activities of
exporting companies.
SFC
• It is a state level development bank setup under
the SFC’s act, 1951, for the development of
small and medium scale industries in their
respective states.
• It aims at bringing about balanced regional
development by wider dispersal of industries
and generating larger employment
opportunities.
• It includes composite loan scheme, scheme for
women entrepreneurs, modernization scheme,
equipment finance scheme etc.
SIDBI
• It offer a chain of financial product covering
microfinance, business, incubation, venture
capital etc.
• It also provides support services such as
training, market information and advise for
enhancing the inherent strength of small scale
units.
Products And Services of SIDBI
• Direct finance scheme.
• Bills finance scheme.
• Re-finance scheme.
• International finance scheme.
• Marketing finance and development schemes.
• SIDBI foundation for micro-credit.
• Other schemes.
• Promotional and development activities.
• Fixed deposit/bond.
 Financial Regulators

Securities and Exchange Board of India (SEBI)

Reserve Bank of India

Ministry of Finance

IRDA
Security Exchange Board of India(SEBI)
• Securities and Exchange Board of India(SEBI)
was first established in the year1988
• Its a non-statutory body for regulating the
securities market
• It became an autonomous body in 1992
Functions Of SEBI
• Regulates Capital Market.
• Checks Trading of securities
• Checks the malpractices in securities market.
• It enhances investor's knowledge on market by
providing education.
• It regulates the stockbrokers and sub-brokers.
• To promote Research and Investigation
Objectives of SEBI
• It tries to develop the securities market.
• Promotes Investors Interest.
• Makes rules and regulations for the securities
market.
The Recent Initiatives Undertaken
• Sole Control on Brokers
• For Underwriters
• For Share Prices
• For Mutual Funds
Reserve Bank of India
• 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.
• It acts as the apex monetary authority of the
country.
Functions Of RBI
• 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.
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.
Developmental role:
• Performs a wide range of promotional functions
tosupport national objectives.
Related Functions:
• Banker to the Government: performs merchant
bankingfunction for the central and the state
governments.
• Maintains banking accounts of all scheduled
banks.
Monetary Measures
• (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.
Objectives Of MoF
• 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
Recommendations
• Reduce the level of state ownership in banking
• Lift restrictions on foreign ownership of banks
• Spur the development of the corporate-bond
market
• Strengthen legal protections
• Deregulate the insurance industry
• Drop proposed limits on pension reforms
• Increase consumer ownership of mutual-fund
products
• Introduce a gold deposit scheme
Recommendations
• Speed up 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
IRDA Function:
Data Correction Approval (License)
• Shows list of data correction requests by DPs
• IRDA can approve these requests
Cancellation Approval (License/Certificate)
• Shows list of license cancellation requests
• IRDA can approve or reject
• IRDA can cancel with or without refund
Recall Cancellation Approval
• Shows list of license recall cancellation requests
• IRDA can approve or reject
Termination Approval
• Shows list of license termination requests by
corporate DP
• IRDA can approve or reject termination requests
Terminate License
• IRDA can terminate individual/corporate license