Indian Financial Indian Financial SystemSystem

Dilipraj Dongre

Financial SystemFinancial 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 SystemFinancial System

Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products

Suppliers of funds(Mainly households)Flow of financial services

Incomes , and financial claims

Seekers of funds (Mainly business firms

and government)

Flow of funds (savings)

Indian Financial System Indian Financial System

Non- Organized Organize

d Money lenders

Local bankers

Traders

Landlords

Pawn brokers

Chit Funds

Regulators

Financial Institutions

Financial Markets

Financial services

Barter

Money Lender

Nidhi's/Chit Funds

Indigenous Banking

Cooperative Movement

Societies Banks

Joint-Stock Banks

Evolution of Financial Evolution of Financial SystemSystem

Consolidation

Commercial Banks

Nationalization

Investment Banks

Development Financial Institutions

Investment/Insurance Companies

Stock Exchanges

Market Operations

Specialized Financial Institutions

Merchant Banking

Universal Banking

Financial System

Savers Lenders Households Foreign Sectors

Investors Borrowers

Corporate Sector Govt.Sector

Un-organized Sector

Economy

Interrelation--Financial system & Economy

Organized Indian Financial System

Money Market Instrument

Capital Market Instrument

Forex Market

Capital Market

Money Market

Credit Market

Primary Market

Financial Instruments

FinancialMarkets

FinancialIntermediarie

s

Secondary Market

Regulators

Financial MarketsFinancial Markets

Mechanism which allows people to trade

Affected by forces of supply and demand

Process used

In Finance, Financial markets facilitates

Why Capital Markets ExistWhy 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 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.

Role of Capital MarketsRole of Capital Markets

Mobilization of Savings & acceleration of Capital Formation

Promotion of Industrial GrowthRaising of long term CapitalReady & Continuous MarketsProper Channelisation of Funds Provision of a variety of Services

Indian Capital Market - Historical Indian Capital Market - Historical perspectiveperspective

Stock Market was for a privileged fewArchaic systems - Out cry methodLack of Transparency - High tones costsNo use of TechnologyOutdated banking systemVolumes - less than Rs. 300 cr per dayNo settlement guarantee mechanism -

High risks

Indian Capital markets - Indian Capital markets - ChronologyChronology

1994-Equity Trading commences on NSE

1995-All Trading goes Electronic1996- Depository comes in to existence1999- FIIs Participation- Globalisation2000- over 80% trades in Demat form2001- Major Stocks move to Rolling Sett2003- T+2 settlements in all stocks2003 - Demutualisation of Exchanges

Capital Markets - ReformsCapital Markets - Reforms

Each scam has brought in reforms - 1992 / 2001

Screen based Trading through NSECapital adequacy norms stipulatedDematerialization of Shares - risks of

fraudulent paper eliminatedEntry of Foreign InvestorsInvestor awareness programsRolling settlementsInter-action between banking and

exchanges

Reforms / Initiatives post 2000Reforms / Initiatives post 2000

Corporatisation of exchange membershipsBanning of Badla / ALBM Introduction of Derivative products -

Index / Stock Futures & OptionsReforms/Changes in the margining systemSTP - electronic contractsMargin LendingSecurities Lending

MARKET STRUCTURE MARKET STRUCTURE (JULY 31, 2005)(JULY 31, 2005)

• 22 Stock Exchanges, 22 Stock Exchanges,

• Over 10000 Electronic Terminals at over 400 Over 10000 Electronic Terminals at over 400

locations all over India.locations all over India.

• 9108 Stock Brokers and 14582 Sub brokers 9108 Stock Brokers and 14582 Sub brokers

• 9644 Listed Companies9644 Listed Companies

• 2 Depositories and 483 Depository Participants2 Depositories and 483 Depository Participants

• 128 Merchant Bankers, 59 Underwriters128 Merchant Bankers, 59 Underwriters

• 34 Debenture Trustees, 96 Portfolio Managers34 Debenture Trustees, 96 Portfolio Managers

• 83 Registrars & Transfer Agents, 59 Bankers to 83 Registrars & Transfer Agents, 59 Bankers to

IssueIssue

• 4 Credit Rating Agencies4 Credit Rating Agencies

Indian Capital Market

Market Instruments Intermediaries

Primary Secondary

Equity DebtHybrid

Regulator

•Brokers •Investment Bankers •Stock Exchanges•Underwriters

SEBI

Players

Corporate IntermediariesCRABanks/FI FDI /FIIIndividual

Stock Exchanges in INDIA Stock Exchanges in INDIA

Mangalore Stock Exchange

Hyderabad Stock Exchange

Uttar Pradesh Stock Exchange

Coimbatore Stock Exchange

Cochin Stock Exchange Bangalore Stock Exchange Saurashtra Kutch Stock

Exchange Pune Stock Exchange National Stock Exchange OTC Exchange of India Calcutta Stock Exchange Inter-connected Stock

Exchange (NEW) Madras Stock Exchange

Bombay Stock Exchange Madhya Pradesh Stock

Exchange Vadodara Stock Exchange The Ahmedabad Stock

Exchange Magadh Stock Exchange Gauhati Stock Exchange Bhubaneswar Stock

Exchange Jaipur Stock Exchange Delhi Stock Exchange

Assoc Ludhiana Stock Exchange

The role of the stock The role of the stock exchange exchange

Raising capital for businesses

Mobilizing savings for investment

Facilitate company growth

Redistribution of wealth

The role of the stock The role of the stock exchange exchange

Corporate governance

Creates investment opportunities for small investors

Government raises capital for development projects

Barometer of the economy

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

2No. 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

Capital Market Capital Market InstrumentsInstruments

ADR / GDR

Equity Debt

EquityShares

PreferenceShares

Debentures Zero coupon bonds

Deep DiscountBonds

Hybrid

Factors contributing to Factors contributing to growth of Indian Capital growth of Indian Capital Market Market

Establishment of Development banks & Industrial financial institution.

Legislative measuresGrowing public confidence Increasing awareness of investment

opportunities

Factors contributing to Factors contributing to growth of Indian Capital growth of Indian Capital Market Market

Growth of underwriting businessSetting up of SEBIMutual Funds Credit Rating Agencies

Indian Capital Market Indian Capital Market deficiencies deficiencies

Lack of transparency Physical settlement Variety of manipulative practices Institutional deficiencies Insider trading

Money MarketMoney Market

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 MarketMoney 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 MarketDefects 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 InstrumentsMoney Market Instruments

Treasury Bills

Commercial Paper

Certificate of Deposit

Money Market Mutual Funds

Repo Market

Segment

Issuer Instruments

Government

Central Government

Zero Coupon Bonds, Coupon Bearing Bonds, Capital Index Bonds, Treasury Bills.

Public Sector

Government Agencies / Statutory Bodies

Govt. Guaranteed Bonds, Debentures

Public Sector Units

PSU Bonds, Debenture, Commercial Paper

Private Corporate Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits

Banks Certificate of Deposits, Bonds

Financial Institutions

Certificate of Deposits, Bonds

Financial Financial RegulatorsRegulators

Financial RegulatorsFinancial Regulators

Securities and Exchange Board of India (SEBI)

Reserve Bank of India

Ministry of Finance

Security Exchange Board of Security Exchange Board of IndiaIndia(SEBI)(SEBI)

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

Functions Of SEBI Functions Of SEBI

Regulates Capital Market.

Checks Trading of securities.

Checks the malpractices in securities market.

Functions Of SEBI Functions Of SEBI 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 Objectives of SEBI

It tries to develop the securities market.

Promotes Investors Interest.

Makes rules and regulations for the securities market.

The Recent Initiatives The Recent Initiatives UndertakenUndertaken

Sole Control on Brokers

For Underwriters

For Share Prices

For Mutual Funds

Reserve Bank of IndiaReserve 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 RBIFunctions 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 operationsMaintain 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.

Functions Of RBI

Monetary Measures 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.

Reforms in the Financial Reforms in the Financial SystemSystem

Pre-reforms period

Steps taken

Objectives

Conclusion

Pre-Reforms Period Pre-Reforms Period

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 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.

Steps TakenSteps Taken

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.

ObjectivesObjectives

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

RecommendationsRecommendations

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

RecommendationsRecommendations

Deregulate the insurance industry

Drop proposed limits on pension reforms

Increase consumer ownership of mutual-fund products

Introduce a gold deposit scheme

RecommendationsRecommendations

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

ConclusionConclusion

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.

Thank you