INDIAN FINANCIAL SYSTEM

FINANCIAL INSTITUTIONSFINANCIAL INSTITUTIONS

• Includes institutions and mechanisms whichIncludes institutions and mechanisms which• Affect generation of savings by the communityAffect generation of savings by the community• Mobilisation of savingsMobilisation of savings• Effective distribution of savingsEffective distribution of savings

• Institutions are banks, insurance companies, mutual Institutions are banks, insurance companies, mutual funds- promote/mobilise savingsfunds- promote/mobilise savings

• Individual investors, industrial and trading companies- Individual investors, industrial and trading companies- borrowersborrowers

Formal financial system – organized, institutional and regulated

Informal financial system Advantages

Low transaction costsMinimum default riskTransparency of procedures

DisadvantagesWide range of interest ratesHigher rates of interestUnregulated

Types of Financial System

FUNCTIONS OF FINANCIAL FUNCTIONS OF FINANCIAL SYSTEMSYSTEM

• The financial system transfer resources across time, sectors, The financial system transfer resources across time, sectors, and regions.and regions.

• The financial system manages risks for the economy-(Fire The financial system manages risks for the economy-(Fire Insurance)Insurance)

• The financial system pools and subdivides funds depending The financial system pools and subdivides funds depending upon the need of the individual saver or investor.upon the need of the individual saver or investor.

• Performs an important clearinghouse function, which facilitates Performs an important clearinghouse function, which facilitates transactions between payers and payees.transactions between payers and payees.

MAJOR FINANCIAL MAJOR FINANCIAL INSTRUMENTSINSTRUMENTS

• MoneyMoney• Savings accountSavings account• Credit market Instruments-bonds, mortgagesCredit market Instruments-bonds, mortgages• Common StocksCommon Stocks• Money market funds and mutual fundsMoney market funds and mutual funds• Pension fundsPension funds• Financial DerivativesFinancial Derivatives

Savers

Financial marketsFinancial markets

Savers

Financial Intermediaries

Investors

Financial flows in the economy

Mutual funds buys diversified portfolio of stocks

Purchase of Govt. Bonds

Save salary

Business borrows

Bonds, IPO

FINANCIAL MARKETSFINANCIAL MARKETS

• Money Market- for short-term funds (less than a year)Money Market- for short-term funds (less than a year)• Organised (Banks)Organised (Banks)• Unorganised (money lenders, chit funds, etc.)Unorganised (money lenders, chit funds, etc.)

• Capital Market- for long-term fundsCapital Market- for long-term funds• Primary Issues MarketPrimary Issues Market• Stock MarketStock Market• Bond MarketBond Market

INDIAN ‘MODERN BANKING’ INDIAN ‘MODERN BANKING’

Alexander & Company a leading agency house started managing the Alexander & Company a leading agency house started managing the Bank of Hindustan in 1770’s. Bank of Hindustan in 1770’s.

The Bank of Calcutta was established by the East India Company in The Bank of Calcutta was established by the East India Company in 1806 1806

Commercial Bank – in 1819 Commercial Bank – in 1819 The concept of limited liability was not known – hence, till 1860 The concept of limited liability was not known – hence, till 1860

banks had to either obtain a special charter from the crown or had banks had to either obtain a special charter from the crown or had to operate under ‘unlimited liability’ to operate under ‘unlimited liability’

1921 – three Presidency Banks at Calcutta, Bombay and Madras were 1921 – three Presidency Banks at Calcutta, Bombay and Madras were merged into the Imperial Bank (vide Imperial Bank of India Act, merged into the Imperial Bank (vide Imperial Bank of India Act, 1920) 1920)

• Reserve Bank of India was established in 1934 Reserve Bank of India was established in 1934 • It was given the right of note issue; It was given the right of note issue; • Was also to act as ‘bankers bank’; Was also to act as ‘bankers bank’; • However, Imperial Bank was allowed to operate as However, Imperial Bank was allowed to operate as

the agent of RBI, especially in those places where RBI the agent of RBI, especially in those places where RBI had no branches. had no branches.

• The RBI was initially a shareholder’s bank –but was The RBI was initially a shareholder’s bank –but was nationalized in 1948 [vide Reserve Bank nationalized in 1948 [vide Reserve Bank (Amendment) Act, 1948] State Bank of India Act, (Amendment) Act, 1948] State Bank of India Act, 1955 1955

• Imperial Bank was taken over by SBIImperial Bank was taken over by SBI

TYPES OF BANKING SERVICES TYPES OF BANKING SERVICES IN INDIA IN INDIA

• CENTRAL BANK CENTRAL BANK • NON-BANKING FI’’S NON-BANKING FI’’S • INSTITUTIONAL BANKS INSTITUTIONAL BANKS • COMMERCIAL BANK COMMERCIAL BANK • SPECIALIZED BANKS SPECIALIZED BANKS

CALL MONEY MARKETCALL MONEY MARKET

• Is an integral part of the Indian money market where Is an integral part of the Indian money market where day-to-day surplus funds (mostly of banks) are traded.day-to-day surplus funds (mostly of banks) are traded.

• The loans are of short-term duration (1 to 14 days). The loans are of short-term duration (1 to 14 days). Money lent for one day is called ‘call money’; if it Money lent for one day is called ‘call money’; if it exceeds 1 day but is less than 15 days it is called ‘notice exceeds 1 day but is less than 15 days it is called ‘notice money’. Money lent for more than 15 days is ‘term money’. Money lent for more than 15 days is ‘term money’money’

• The borrowing is exclusively limited to banks, who are The borrowing is exclusively limited to banks, who are temporarily short of funds.temporarily short of funds.

BILL MARKETBILL MARKET• Treasury Bill market- Also called the T-Bill Treasury Bill market- Also called the T-Bill

marketmarket• These bills are short-term liabilities (91-day, These bills are short-term liabilities (91-day,

182-day, 364-day) of the Government of India182-day, 364-day) of the Government of India• It is an IOU of the government, a promise to pay It is an IOU of the government, a promise to pay

the stated amount after expiry of the stated the stated amount after expiry of the stated period from the date of issueperiod from the date of issue

• They are issued at discount to the face value They are issued at discount to the face value and at the end of maturity the face value is paidand at the end of maturity the face value is paid

• The rate of discount and the corresponding The rate of discount and the corresponding issue price are determined at each auctionissue price are determined at each auction

• RBI auctions 91-day T-Bills on a weekly basis, RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills and 364-day T-Bills on a 182-day T-Bills and 364-day T-Bills on a fortnightly basis on behalf of the central fortnightly basis on behalf of the central governmentgovernment

Growth Pattern of the Indian Stock MarketSl.No.

As on 31stDecember

1946

1961

1971

1975

1980

1985 1991 1995

1 No. ofStock Exchanges

7 7 8 8 9 14 20 22

2 No. of Listed Cos.

1125

1203

1599

1552

2265

4344 6229 8593

3 No. of StockIssues of Listed Cos.

1506

2111

2838

3230

3697

6174 8967 11784

4 Capital of ListedCos. (Cr. Rs.)

270 753 1812

2614

3973

9723 32041 59583

5 Market value ofCapital of ListedCos. (Cr. Rs.)

971 1292

2675

3273

6750

25302

110279

478121

6 Capital perListed Cos. (4/2)(Lakh Rs.)

24 63 113 168 175 224 514 693

7

Market Value ofCapital per ListedCos. (Lakh Rs.)(5/2)

86 107 167 211 298 582 1770 5564

8

Appreciated value of Capital perListed Cos. (Lak Rs.)

358 170 148 126 170 260 344 803

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