msop project2003

8/2/2019 msop project2003

1/28

A Project Report On

Role of Financial Institutions in

Indian Financial Market

By

THE INVINCIBLES

Compiled By:

Swati Srivastava

Saumayo Jyoti Seal

Neha Srivastava

Bhanu Bhargava


2/28

INDEX OF CONTENTS

Sl.No Particulars Page

No.1. Introduction to the Financial Markets

2. Basic Functions of the Indian Financial Market

3. Major Players In Indian Financial Markets.

4. Components of Financial Market.

5. Brief history of the Indian Financial Market

6. Financial Institutions

7. Growth of FIIs in India

8. State Level Institutions

9. National Level Institutions

10. Role of Financial Institutions

11. Financial Regulations

12. Problems and Challenges

13. What are the Solutions

14. Trends and Updates

15. Summary


3/28

INTRODUCTION

FINANCIAL SYSTEM

Economic development of a nation is reflected by the progress of the variouseconomic units, broadly classified into corporate sector, government andhousehold sector. While performing their activities, these units will be placed in a

surplus/deficit/balanced budgetary situations. There are areas or people with

surplus funds and there are those with a deficit. A financial system or financial

sector functions as an intermediary and facilitates the flow of funds from the areas

of surplus to the areas of deficit. A Financial System is a composition of various

institutions, markets, regulations and laws, practices, money manager, analysts,

transactions and claims and liabilities.

FINANCIAL MARKET

Financial Market, in very crude terms, is a place where the savings from varioussources like households, government, firms and corporates are mobilized towards

those who need it. Alternatively put, financial market is an intermediary which

directs funds from the savers (lenders) to the borrowers.

In other words, financial market is the place where assets like equities, bonds,

currencies, derivatives and stocks are traded.

FINANCIAL INSTITUTIONS

Financial Institution are establishment that focuses on dealing with financialtransactions, such as investments, loans and deposits. Conventionally, financial

institutions are composed of organizations such as banks, trust companies,

insurance companies and investment dealers. Almost everyone has deal with a

financial institution on a regular basis. Everything from depositing money to taking

out loans and exchange currencies must be done through financial institutions.


4/28

Basic Functions of the Indian Financial Market:

Financial markets have emerged as one of the biggest markets in the world. It is

engaged in a wide range of activities that cater to a large group of people with

diverse needs.

The Six Functions of the Financial Markets are:

1. Borrowing & Lending : Financial market transfers fund from one economic

agent (saver/lender) to another (borrower) for the purpose of either

consumption or investment. Financial markets channel funds from

households, firms, governments and foreigners that have saved surplus funds

to those who encounter a shortage of funds.

2. Determination of Prices : Prices of the new assets as well as the existing

stocks of financial assets are set in financial markets.

3. Assimilation and Co-ordination of Information : It gathers and co-ordinates

information regarding the value of financial assets and flow of funds in the

economy.

4. Liquidity : The asset holders can sell or liquidate their assets in financial

market.

5. Risk Sharing : It distributes the risk associated in any transaction among

several participants in an enterprise. Trade in financial markets is partly

motivated by the transfer of risk from lenders to borrowers who use the

obtained funds to invest.

6. Efficiency : It reduces the cost of transaction and acquiring information.

A financial market is a mechanism that allows people to easily buy and sell (trade)

financial securities (such as stocks and bonds), commodities(such as precious

metals or agricultural goods), and other fungible items of value at low traction cost

and at prices that reflect the efficient-market hypothesis. There function is to

facilitate people economy in one way or the other exist.


5/28

Major Players In Indian Financial Markets.

The Main participants in the Indian financial markets are as Follows:

BANKS: Largest provider of funds to business houses and corporates

through accepting deposits.

INSURANCE COMPANIES: Issue contracts to individuals or firms with a

promise to refund them in future in case of any event and thereby invest

these funds in debt, equities, properties, etc.

FINANCE COMPANIES: Engages in short to medium term financing for

businesses by collecting funds by issuing debentures and borrowing from

general public.

MERCHANT BANKS : Funded by short term borrowings; lend mainly to

corporations for foreign currency and commercial bills financing.

COMPANIES: The surplus funds generated from business operations are

majorly invested in money market instruments, commercial bills and stocks

of other companies.

MUTUAL FUNDS: Acquire funds mainly from the general public and

invest them in money market, commercial bills and shares.

GOVERNMENT : Authorized dealers basically look after the demand-

supply operations in financial market. Also works to fill in the gap between

the demand and supply of funds.

FOREIGN INSTITUTIONAL INVESTORS: An investor or investment fund that

is from or registered in a country outside of the one in which it is currently

investing. Institutional investors include hedge funds, insurance companies,

pension funds and mutual funds.

DEPOSITORY PARTICIPANT: They are intermediaries between the depositoryand the investors. The relationship between the DPs and the depository is governed

by an agreement made under the Depositories Act. A DP can offer depository-

related services only after obtaining a certificate of registration from SEBI.

STOCK EXCHANGES : A stock exchange is a form ofexchange which provides

services forstock brokers and traders to trade stocks,bonds, and othersecurities.
http://finance.mapsofworld.com/banks/http://finance.mapsofworld.com/insurance/insurance-company/http://finance.mapsofworld.com/finance/company/http://finance.mapsofworld.com/company/http://finance.mapsofworld.com/finance/company/http://en.wikipedia.org/wiki/Exchange_(organized_market)http://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Trader_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://finance.mapsofworld.com/banks/http://finance.mapsofworld.com/insurance/insurance-company/http://finance.mapsofworld.com/finance/company/http://finance.mapsofworld.com/company/http://finance.mapsofworld.com/finance/company/http://en.wikipedia.org/wiki/Exchange_(organized_market)http://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Trader_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Security_(finance)


6/28

Stock exchanges also provide facilities for issue and redemption of securities and

other financial instruments, and capital events including the payment of income

and dividends. Securities traded on a stock exchange include shares issued by

companies,unit trusts, derivatives, pooled investment products andbonds.

Components of Financial Market.
http://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Bond_(finance)


7/28

The Financial Market can be classified into several categories:

1. CAPITAL MARKET .A market where both government and companies

raise long term funds to trade securities on the bond and the stock market. It

consists of both the primary market where new issues are distributed amonginvestors, and the secondary markets where already existent securities are

traded.

2. COMMODITY MARKET: India commodity market consists of both the

retail and the wholesale market in the country. The commodity market in

India facilitates multi commodity exchange within and outside the country

based on requirements. Commodity trading is one facility that investors can

explore for investing their money.

3. MONEY MARKET: The money market is a component of the financial

markets for assets involved in short-term borrowing and lending with

original maturities of one year or shorter time frames. Trading in the money

markets involves Treasury bills, commercial paper,bankers' acceptances,

certificates of deposit, federal funds, and short-lived mortgage-and asset-

backed securities. It provides liquidity funding for the global financial

system. Money markets and capital markets are parts offinancial markets.

4. DERIVATIVES MARKET: A derivative is a contract between two partiesthat specifies conditions (especially the dates, resulting values of the

underlying variables, and notional amounts) under which payments, or

payoffs, are to be made between the parties.

5. INSURANCE MARKET:. The Indian insurance market conventionally

focused around life insurance until recently, a various range of other

insurance policies covering sectors like medical, automobile, health and

other classes falling under general insurance came up, generally provided by

the private companies.

6. FOREIGN EXCHANGE MARKET: Specializes in trading of foreign

exchange and international currencies.

BRIEF HISTORY OF INDIAN FINANCIAL MARKET
http://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Treasury_security#Treasury_billhttp://en.wikipedia.org/wiki/Commercial_paperhttp://en.wikipedia.org/wiki/Bankers'_acceptancehttp://en.wikipedia.org/wiki/Mortgage-backed_securityhttp://en.wikipedia.org/wiki/Asset-backed_securityhttp://en.wikipedia.org/wiki/Asset-backed_securityhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Global_financial_systemhttp://en.wikipedia.org/wiki/Global_financial_systemhttp://en.wikipedia.org/wiki/Capital_marketshttp://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Treasury_security#Treasury_billhttp://en.wikipedia.org/wiki/Commercial_paperhttp://en.wikipedia.org/wiki/Bankers'_acceptancehttp://en.wikipedia.org/wiki/Mortgage-backed_securityhttp://en.wikipedia.org/wiki/Asset-backed_securityhttp://en.wikipedia.org/wiki/Asset-backed_securityhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Global_financial_systemhttp://en.wikipedia.org/wiki/Global_financial_systemhttp://en.wikipedia.org/wiki/Capital_marketshttp://en.wikipedia.org/wiki/Financial_markets


8/28

Indian Financial marketis one of the oldest in the world and is considered to bethe fastest growing and best among all the markets of the emerging economies.

The history of Indian capital markets dates back 200 years toward the end of the

18th century when India was under the rule of the East India Company. Thedevelopment of the capital market in India concentrated around Mumbai where no

less than 200 to 250 securities brokers were active during the second half of the

19th century.

The economic reform process that began in 1991 took place amidst acute

crises involving the financial sector:

The balance of payments crisis that threatened the international credibility of the

country and pushed it to the brink of default; and The grave threat of insolvency confronting the banking system which had for

years concealed its problems with the help of defective accounting policies.

Large scale pre-emption of resources from the banking system by the government

to finance its fiscal deficit;

Excessive structural and micro regulation that inhibited financial innovation and

increased transaction costs;

The financial market in India today is more developed than many other sectors

because it was organized long before with the securities exchanges of Mumbai,

Ahmadabad and Kolkata were established as early as the 19th century

A remarkable feature of the growth of the Indian economy in recent years has been

the role played by its securities markets in assisting and fuelling that growth with

money rose within the economy. This was in marked contrast to the initial phase of

growth in many of the fast growing economies of East Asia that witnessed huge

doses of FDI (Foreign Direct Investment) spurring growth in their initial days of

market decontrol. During this phase in India much of the organized sector has been

affected by high growth as the financial markets played an all-inclusive role insustaining financial resource mobilization. Many PSUs (Public Sector

Undertakings) that decided to offload part of their equity were also helped by the

well-organized securities market in India.

FINANCIAL INSTITUTIONS


9/28

Financial Institution are establishment that focuses on dealing with financialtransactions, such as investments, loans and deposits. Conventionally, financial

institutions are composed of organizations such as banks, trust companies,

insurance companies and investment dealers. Almost everyone has deal with a

financial institution on a regular basis. Everything from depositing money to taking

out loans and exchange currencies must be done through financial institutions.

Probably the most important financial service provided by financial institutions is

acting as financial intermediaries. Most financial institutions are regulated by the

government. Broadly speaking, there are three major types of financial institutions:

1. Deposit-taking institutions that accept and manage deposits and make loans,

includingbanks,building societies, credit unions, trust companies, and

mortgage loan companies

2. Insurance companies andpension funds; and

3. Brokers, underwriters and investment funds

Financial institutions provide service as intermediaries of financial markets. They

are responsible for transferring funds from investors to companies in need of those

funds. Financial institutions facilitate the flow of money through the economy. To

do so, savings a risk brought to provide funds for loans. Such is the primary means

for depository institutions to develop revenue. Should the yield curve becomeinverse, firms in this arena will offer additional fee-generating services including

securities underwriting. Financial institutions can be categorized as follows:

Deposit Taking Institutions

Finance and Insurance Institutions

Investment Institutions

Pension Providing Institutions

Risk Management Institutions

GROWTH OF FIIs IN INDIA
http://en.wikipedia.org/wiki/Financial_intermediaryhttp://en.wikipedia.org/wiki/Financial_regulationhttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Deposit_accounthttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Building_societyhttp://en.wikipedia.org/wiki/Credit_unionhttp://en.wikipedia.org/wiki/Trust_companyhttp://en.wikipedia.org/wiki/Mortgage_loanhttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Pension_fundhttp://en.wikipedia.org/wiki/Brokerhttp://en.wikipedia.org/wiki/Underwritinghttp://en.wikipedia.org/wiki/Collective_investment_schemehttp://en.wikipedia.org/wiki/Yield_curvehttp://en.wikipedia.org/wiki/Financial_intermediaryhttp://en.wikipedia.org/wiki/Financial_regulationhttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Deposit_accounthttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Building_societyhttp://en.wikipedia.org/wiki/Credit_unionhttp://en.wikipedia.org/wiki/Trust_companyhttp://en.wikipedia.org/wiki/Mortgage_loanhttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Pension_fundhttp://en.wikipedia.org/wiki/Brokerhttp://en.wikipedia.org/wiki/Underwritinghttp://en.wikipedia.org/wiki/Collective_investment_schemehttp://en.wikipedia.org/wiki/Yield_curve


10/28

At the time of independence in 1947, India's capital market was relatively under-

developed. Although there was significant demand for new capital, there was a

dearth of providers. Merchant bankers and underwriting firms were almost non-existent and commercial banks were not equipped to provide long-term industrial

finance in any significant manner. It was difficult for industry in general to procure

sufficient longterm funds in the capital markets. There were no other institutions to

supply long-term finance to industry. Traditionally, only short term finance could

be availed from commercial banks. SFIs were established to ensure that industry

get sufficient long-term funds and in the desired sectors in accordance with

planned priorities. Certain particular sections of the industry faced greater

difficulties than others in procuring long-term finance. These included

(a) Small and medium sized concerns,

(b) New concerns set up by new entrepreneurial groups,

(c) Specific industries, such as cotton and jute, which required funds for

modernization,

(d) Concerns involved in innovation and new technological developments,

(e) Concerns requiring extra-ordinarily large amounts of finance with a longgestation period,

(f) Concerns in backward regions.

SFIs were established to meet the long-term financial requirement of such

concerns, on economic and social ground. In general it can be said that the gap

between the demand for and supply of industrial finance is sought to be filled

through term loans by development financial institutions. Due to this role, they

have been called gap-fillers.

It is against this backdrop that the government established The Industrial Finance

Corporation of India (IFCI) on July 1, 1948, as the first Development Financial

Institution in the country to cater to the long-term finance needs of the industrial

sector. The newly-established DFI was provided access to low-cost funds through


11/28

the central bank's Statutory Liquidity Ratio or SLR which in turn enabled it to

provide loans and advances to corporate borrowers at concessional rates.

By the early 1990s, it was recognized that there was need for greater flexibility to

respond to the changing financial system. It was also felt that IFCI should directlyaccess the capital markets for its funds needs. It is with this objective that the

constitution of IFCI was changed in 1993 from a statutory corporation to a

company under the Indian Companies Act, 1956. Subsequently, the name of the

company was also changed to "IFCI Limited" with effect from October 1999..

The Government of India, in order to provide adequate supply of credit to various

sectors of the economy, has evolved a well developed structure of financial

institutions in the country. These financial institutions can be broadly categorised

into All India institutions and State level institutions, depending upon thegeographical coverage of their operations. At the national level, they provide long

and medium term loans at reasonable rates of interest. They subscribe to the

debenture issues of companies, underwrite public issue of shares, guarantee loans

and deferred payments, etc. Though, the State level institutions are mainly

concerned with the development of medium and small scale enterprises, but they

provide the same type of financial assistance as the national level institutions.

The revolution of the equity market

The equity and income scandal of 1992, and the desire of policy makers to

encourage foreign investors in the Indian equity market, in the early

1990s, helped in reopening long-standing policy questions about the equity

market. From 1993 to 2001, the Ministry of Finance and SEBI led a strong

reforms report aiming at a fundamental transformation of the equity market.

The changes on the equity market from December 1993 to June 2001

were quite dramatic.

India's starting condition, in the early 1990s, was one with an almost entirely

government-owned banking system, where entry by foreign or private banks

was blocked. In this environment, an important experiment in easing entry

barriers took place from 1994 to 2004, where a total of 12 `new private banks'

were permitted to come into being.

National Level Institutions


12/28

A wide variety of financial institutions have been set up at the national level. They

cater to the diverse financial requirements of the entrepreneurs. They include all

India development banks like IDBI, SIDBI, IFCI Ltd, IIBI; specialised financial

institutions like IVCF, ICICI Venture Funds Ltd, TFCI ; investment institutions

like LIC, GIC, UTI; etc.

1. All-India Development Banks (AIDBs):- Includes those development

banks which provide institutional credit to not only large and medium

enterprises but also help in promotion and development of small scale

industrial units.

Industrial Development Bank of India (IDBI):- was established in

July 1964 as an apex financial institution for industrial development in

the country. It caters to the diversified needs of medium and largescale industries in the form of financial assistance, both direct and

indirect. Direct assistance is provided by way of project loans,

underwriting of and direct subscription to industrial securities, soft

loans, technical refund loans, etc. While, indirect assistance is in the

form of refinance facilities to industrial concerns.

Industrial Finance Corporation of India Ltd (IFCI Ltd):- was the

first development finance institution set up in 1948 under the IFCI Act

in order to pioneer long-term institutional credit to medium and large

industries. It aims to provide financial assistance to industry by way of

rupee and foreign currency loans, underwrites/subscribes the issue of

stocks, shares, bonds and debentures of industrial concerns, etc. It has

also diversified its activities in the field of merchant banking,

syndication of loans, formulation of rehabilitation programmes,

assignments relating to amalgamations and mergers, etc.

Small Industries Development Bank of India (SIDBI):- was set up

by the Government of India in April 1990, as a wholly owned

subsidiary of IDBI. It is the principal financial institution for

promotion, financing and development of small scale industries in the

economy. It aims to empower the Micro, Small and Medium

Enterprises (MSME) sector with a view to contributing to the process
http://business.gov.in/outerwin.php?id=http://www.idbibank.com/http://business.gov.in/outerwin.php?id=http://www.ifciltd.com/http://business.gov.in/outerwin.php?id=http://www.sidbi.in/index.asphttp://business.gov.in/outerwin.php?id=http://www.idbibank.com/http://business.gov.in/outerwin.php?id=http://www.ifciltd.com/http://business.gov.in/outerwin.php?id=http://www.sidbi.in/index.asp


13/28

of economic growth, employment generation and balanced regional

development.

Industrial Investment Bank of India Ltd (IIBI):- was set up in

1985 under the Industrial reconstruction Bank of India Act, 1984, asthe principal credit and reconstruction agency for sick industrial units.

It was converted into IIBI on March 17, 1997, as a full-fledged

development financial institution. It assists industry mainly in medium

and large sector through wide ranging products and services. Besides

project finance, IIBI also provides short duration non-project asset-

backed financing in the form of underwriting/direct subscription,

deferred payment guarantees and working capital/other short-term

loans to companies to meet their fund requirements.

2. Specialised Financial Institutions (SFIs):- are the institutions which have

been set up to serve the increasing financial needs of commerce and trade in

the area of venture capital, credit rating and leasing, etc.

IFCI Venture Capital Funds Ltd (IVCF) :- formerly known as Risk

Capital & Technology Finance Corporation Ltd (RCTC), is a

subsidiary of IFCI Ltd. It was promoted with the objective of

broadening entrepreneurial base in the country by facilitating funding

to ventures involving innovative product/process/technology. Initially,

it started providing financial assistance by way of soft loans to

promoters under its 'Risk Capital Scheme' . Since 1988, it also

started providing finance under 'Technology Finance and

Development Scheme' to projects for commercialisation of

indigenous technology for new processes, products, market or

services. Over the years, it has acquired great deal of experience in

investing in technology-oriented projects.

ICICI Venture Funds Ltd:- formerly known as Technology

Development & Information Company of India Limited (TDICI), was

founded in 1988 as a joint venture with the Unit Trust of India.

Subsequently, it became a fully owned subsidiary of ICICI. It is a

technology venture finance company, set up to sanction project


14/28

finance for new technology ventures. The industrial units assisted by

it are in the fields of computer, chemicals/polymers, drugs,

diagnostics and vaccines, biotechnology, environmental engineering,

etc.

Tourism Finance Corporation of India Ltd. (TFCI):- A specialised

financial institution set up by the Government of India for promotion

and growth of tourist industry in the country. Apart from conventional

tourism projects, it provides financial assistance for non-conventional

tourism projects like amusement parks, ropeways, car rental services,

ferries for inland water transport, etc.

3. Investment Institutions:- are the most popular form of financial

intermediaries, which particularly catering to the needs of small savers andinvestors. They deploy their assets largely in marketable securities.

Life Insurance Corporation of India (LIC ):- was established in

1956 as a wholly-owned corporation of the Government of India. It

was formed by the Life Insurance Corporation Act,1956 , with the

objective of spreading life insurance much more widely and in

particular to the rural area. It also extends assistance for development

of infrastructure facilities like housing, rural electrification, water

supply, sewerage, etc. In addition, it extends resource support to other

financial institutions through subscription to their shares and bonds,

etc. The Life Insurance Corporation of India also transacts business

abroad and has offices in Fiji, Mauritius and United Kingdom .

Besides the branch operations, the Corporation has established

overseas subsidiaries jointly with reputed local partners in Bahrain,

Nepal and Sri Lanka.

Unit Trust of India (UTI):- It was set up as a body corporate under

the UTI Act, 1963, with a view to encourage savings and investment.

It mobilises savings of small investors through sale of units and

channelises them into corporate investments mainly by way of

secondary capital market operations. Thus, its primary objective is to

stimulate and pool the savings of the middle and low income groups


15/28

and enable them to share the benefits of the rapidly growing

industrialisation in the country. In December 2002, the UTI Act, 1963

was repealed with the passage ofUnit Trust of India (Transfer of

Undertaking and Repeal) Act, 2002, paving the way for the

bifurcation of UTI into 2 entities, UTI-I and UTI-II with effect from1st February 2003.

General Insurance Corporation of India (GIC) :- was formed in

pursuance of the General Insurance Business (Nationalisation) Act,

1972(GIBNA ), for the purpose of superintending, controlling and

carrying on the business of general insurance or non-life insurance.

Initially, GIC had four subsidiary branches, namely, National

Insurance Company Ltd ,The New India Assurance Company

Ltd , The Oriental Insurance Company Ltd and United India

Insurance Company Ltd . But these branches were delinked from

GIC in 2000 to form an association known as 'GIPSA' (General

Insurance Public Sector Association).


16/28

State Level Institutions

Several financial institutions have been set up at the State level which supplement

the financial assistance provided by the all India institutions. They act as a catalystfor promotion of investment and industrial development in the respective States.

They broadly consist of 'State financial corporations' and 'State industrial

development corporations'.

State Financial Corporations (SFCs) :- are the State-level financial

institutions which play a crucial role in the development of small and

medium enterprises in the concerned States. They provide financial

assistance in the form of term loans, direct subscription to equity/debentures,

guarantees, discounting of bills of exchange and seed/ special capital, etc.

SFCs have been set up with the objective of catalysing higher investment,

generating greater employment and widening the ownership base of

industries. They have also started providing assistance to newer types of

business activities like floriculture, tissue culture, poultry farming,

commercial complexes and services related to engineering, marketing, etc.

There are 18 State Financial Corporations (SFCs) in the country:-

State Industrial Development Corporations (SIDCs) :- have been

established under the Companies Act, 1956, as wholly-owned undertakings

of State Governments. They have been set up with the aim of promoting

industrial development in the respective States and providing financial

assistance to small entrepreneurs. They are also involved in setting up of

medium and large industrial projects in the joint sector/assisted sector in

collaboration with private entrepreneurs or wholly-owned subsidiaries. They

are undertaking a variety of promotional activities such as preparation offeasibility reports; conducting industrial potential surveys; entrepreneurship

training and development programmes; as well as developing industrial

areas/estates.


17/28

ROLE OF FINANCIAL INSTITUTIONS

Financial institutions play an extremely important role in economic development.Financial institutions cater to important needs of society such as taking care of

small savings at reasonable rates. Everyday working men and women have the

option of putting their savings into a number of alternatives such as Government

small saving schemes, deposits into a saving account provided by their bank,

recurring, deposits, time deposits and also the alternative option of investing in

mutual funds or stocks.

Financial institutions also undertake modern functions that could not have beendone 20 years or so ago. The relatively new invention of Internet banking allows

customers to access their saving and current accounts, manage their money and

even make payments without ever having to set foot in the banks building. This

and ATMs have completely revolutionized the way that people can access their

money. Online payments can also be made which saves the customers time and

energy. In the modern day economy when people with hectic lifestyles dont have

the time to stand in payment queues all day, financial institutions can only be

commended for providing this convenient way of payment.

Financial institutions must also offer an extremely efficient service by developing

themselves to make the best use of the credit in their systems. A decent financial

institution must make sure that they cater to the all the needs of investors by

making high amounts of capital for the big and expensive projects that are being

undertaken by the industrial and service sectors. Although it is not just the big

people that the financial institutions need to be backing. The small companies and

independent businesses must also have credit backing them if they are to expand

and grow for the good of the countrys economy. This makes the subject of creditavailability by financial institutions an extremely important issue.


18/28

The Role of Financial Institutions can be categorized as:

As Risk Management Institutions:

There are number of reasons which motivate management to concern itself

with risk and embark upon a careful assessment of both the level of risk

associated with any financial product and potential risk mitigation

techniques. Due to managerial self-interest, tax effects, the cost of financial

distress, capital market imperfections. In each case, the volatility of profit

leads to a lower value to at least some of the firms stakeholders.

As a Pension Fund Provider

Pension funds may be defined as forms of institutional investor, which

collect, pool and invest funds contributed by sponsors and beneficiaries to

provide for the future pension entitlements of beneficiaries. The financial

institutions can form long-term relationships with borrowers, which reduce

information asymmetry and hence moral hazard. Apart from economies of

scale (which apply equally to institutional investors) these considerations

have arisen in the literature mainly for debt finance and for banks. Whereas

the importance of information asymmetries and incomplete contracts isequally recognized for equity finance.

As Investment Institutions

The main role of the financial institutions in India in respect to foreign

investments is to aid foreign investors in investment activities in India. The

funds from overseas countries come in two forms: Foreign direct

Investments and Joint Ventures of the foreign companies with Indian

companies. SFIs are institutions set up mainly by the government for

providing medium and long-term financial assistance to industry. As these

institutions provide developmental finance, that is, finance for investment in

fixed assets, they are also known as development banks or development

financial institutions.


19/28

Finance and Insurance Institutions

When purchasing insurance from an insurance company, taking out an

installment loan on your new car from a finance company, buying a share of

common stock with the help of a broker, or contributing to the pension fundwith FNPF, you are dealing with NBFIs.

In our economy, NBFIs also play an important role in mobilizing financial

savings. However, such institutions differ from commercial banks in that

they are not authorized to accept or demand deposits from the public that can

be withdrawn by cheques.


20/28

Financial Regulations

Financial regulation is a form ofregulation or supervision, which subjects financialinstitutions to certain requirements, restrictions and guidelines, aiming to maintain

the integrity of the financial system. This may be handled by either a government

or non-government organization. The aims of financial regulators are usually:

To prevent cases ofmarket manipulation, such as insider trading.

To ensure competence of providers of financial services.

To protect clients, and investigate complaints.

To maintain confidence in the financial system.

To reduce violations under laws.

REGULATORY AUTHORITIES IN INDIA

In most cases, financial regulatory authorities regulate all financial activities. But

in some cases, there are specific authorities to regulate each sector of the financeindustry, mainlybanking, securities, insurance andpensions markets, but in some

cases also commodities, futures, forwards, etc:

1. RESERVE BANK OF INDIA

The Reserve Bank of India is the main regulator for the money market. It

controls and regulates the G-Secs market. RBI also fulfills several other

important objectives such as managing the borrowing programme for theGovernment of India, controlling inflation, ensuring adequate credit at

reasonable costs to various sectors of the economy, managing the foreign

exchange reserves of the country and ensuring a stable currency

environment. RBI controls the issuance of new banking licences to banks. It

controls the manner in which various scheduled banks raise money from
http://en.wikipedia.org/wiki/Regulationhttp://en.wikipedia.org/wiki/Financial_institutionhttp://en.wikipedia.org/wiki/Financial_institutionhttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Market_manipulationhttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Pensionshttp://en.wikipedia.org/wiki/Regulationhttp://en.wikipedia.org/wiki/Financial_institutionhttp://en.wikipedia.org/wiki/Financial_institutionhttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Market_manipulationhttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Pensions


21/28

depositors. Further, it controls the deployment of money through its policies

on CRR, SLR, priority sector lending, export refinancing, guidelines on

investment assets, etc. RBI also administers the interest rate policy. Its

regulatory involvement in the Indian Capital Markets is primarily of debt

management through primary dealers, foreign exchange control and liquiditysupport to market participants. The RBI regulates participants in the

securities markets when a foreign transaction is involved. Transactions

which include Indian issuers issuing of security outside India, such as GDRs

and ADRs, and Financial Institutional Investors (FIIs) or Foreign Brokers

selling, buying or dealing in Indian Securities need the permission of RBI.

Over the years, RBI has moved slowly towards a regime of market-

determined controls.

2. SECURITIES EXCHANGE BOARD OF INDIA

The regulator for the Indian corporate debt market is the Securities and

Exchange Board of India (SEBI). SEBI controls the bond market in cases

where entities, especially corporates, raise money from public through

public issues. It regulates the manner in which money is raised and to ensure

a fair play for the retail investor. It forces the issuer to make the retail

investor aware of the risks inherent in the investment and its disclosure

norms. SEBI is also a regulator for the mutual funds and regulates the entry

of new mutual funds in the industry. It also regulates the instruments in

which these mutual funds can invest. SEBI also regulates the investments of

Foreign Institutional Investors.

Functions of SEBI:

Regulates Capital Market


22/28

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

3. Forward Markets Commission (FMC)

The Forward Markets Commission (FMC) is the chief regulator offorwards

and futures markets in India. It is headquartered in Mumbai and unusually

for a financial regulatory agency is overseen by the Ministry of Consumer

Affairs. The functions of the Forward Markets Commission are as follows:

To advise the Central Government in respect of the recognition or the

withdrawal of recognition from any association or in respect of any other

matter arising out of the administration of the Forward Contracts

(Regulation) Act 1952.

To keep forward markets under observation and to take such action in

relation to them, as it may consider necessary, in exercise of the powers

assigned to it by or under the Act.

To collect and whenever the Commission thinks it necessary, to publish

information regarding the trading conditions in respect of goods to which

any of the provisions of the act is made applicable, including information

regarding supply, demand and prices, and to submit to the CentralGovernment, periodical reports on the working of forward markets relating

to such goods;

To make recommendations generally with a view to improving the

organization and working of forward markets;
http://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Financial_regulationhttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Financial_regulation


23/28

To undertake the inspection of the accounts and other documents of any

recognized association or registered association or any member of such

association whenever it considers it necessary.

4. Insurance Regulatory and Development Authority (IRDA)

The Insurance Regulatory and Development Authority (IRDA) is a

national agency of the Government of India, based in Hyderabad.

Mission of IRDA as stated in the act is "to protect the interests of the

Policyholders, to regulate, promote and ensure orderly growth of the

Insurance industry and for matters connected therewith or incidental

thereto." The regulating function of IRDA includes regulating investment

of funds by insurance companies; regulating maintenance of margin of

solvency; adjudication of disputes between insurers and intermediaries or

insurance intermediaries; supervising the functioning of the Tariff

Advisory Committee; specifying the percentage of premium income of

the insurer to finance schemes for promoting and regulating professional

organizations referred to in clause, specifying the percentage of life

insurance business and general insurance business to be undertaken by

the insurer in the rural or social sector; and exercising such other powers

as may be prescribed from time to time.

5. Pension Fund Regulatory and Development Authority (PFRDA)

Pension Fund Regulatory and Development Authority was established bythe Government of India on 23rd August 2003 to promote old age income

security by establishing, developing and regulating pension funds, to protect

the interests of subscribers to schemes of pension funds and for matters

connected therewith or incidental thereto.
http://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Hyderabad_(India)http://en.wikipedia.org/wiki/Policyholderhttp://en.wikipedia.org/wiki/Insurance_industryhttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Hyderabad_(India)http://en.wikipedia.org/wiki/Policyholderhttp://en.wikipedia.org/wiki/Insurance_industry


24/28

6. Foreign Exchange Management Act (FEMA)

The Foreign Exchange Management Act was passed in 1999 by the

parliament of India. The Foreign Exchange Management Act applies to all

residents of the country of India and is regulated by the Reserve Bank of

India. It also applies to residents of India who live outside of the country

conducting relevant transactions under the law's purview.

The Foreign Exchange Management Act regulates (through the Reserve

Bank of India) actions ranging from the transfer of foreign securities by

residents of India to borrowing or lending done on a foreign exchange to

deposits between citizens of India and outside residents. Penalties for

misconduct under the Foreign Exchange Management Act can be up to three

times the monetary value of the offending transaction.

PROBLEMS AND CHALLANGES

The major problems and challenges concerning the financial sector are:

The level ofNon-performing assets of public sector banks in March 2012,

as a proportion of advances, was estimated at 14.3 per cent gross and 7.4 per

cent net which was very high as compared with other countries. The

magnitude of the problem can be identified from the fact that there are more

than 1,50,000 Crore nonperforming assets in the entire banking sector and is

increasing.


25/28

Education and lack of awareness has boosted up the problem for the

financial institutions. Moreover more than 41% of the Indians do not have

bank accounts which is a live example about the Lack of awareness amongthe masses.

A recent report by Crisilhas highlighted that while Indian banks are takingsteps towards improved disclosures which meet the RBI regulatory

requirements, Indian banks have a long way to go to come up to

International Best Practices. A few banks are attempting to achieve

international disclosure standards in the context of their plans to raise capital

from international markets.

Since the government is not willing to provide capital to some banks, only

the relatively strong banks will be able to raise capital from the market and,

therefore, those banks will grow at a faster pace than the weaker banks and

the banking system would eventually become stronger.

Public ownership- Roughly 80% of banking, 95% of insurance and 100%

of pensions is held in public sector .Within insurance, it is possible to

establish a private insurance company with no more than 26% of foreign

ownership.

What are the Solutions ?

Critical financial infrastructure is a special middle zone between governmentand ordinary private competitive financials. It includes exchanges, depositories,

clearing corporations, and the payments system. These require a combination


26/28

of top end management capabilities to achieve high technology and innovation,

alongside a very high mission criticality both in terms of technological

and in terms of governance failures.

The traditional implementation by government monopolies yields poor results,

both because governments lack the operational capabilities for effectively running

these complex organisations, because there is a conflict of interest between service

provision by the government and Private Bodies.

This suggests that the primary focus in banking should be upon improving

competition by removing entry barriers. This requires addressing six dimensions of

entry barriers in banking:

1. Barriers against dedicated ATM network companies,

2. Barriers against formation of new private banks,

3.Barriers against branch expansion of private and foreign banks,

4.Barriers against a greater role for new technologies of mobile phones and

the Internet in retail payments,

5. Barriers against money market mutual funds,

6. Barriers against securitisation.

Trends and Reports

There is a general economic decline during recession. The economy has a

tremendous setback. The purchase of the people comes down due to low salaries or


27/28

lack of sufficient income. This results in slump in market with goods and services

not being availed of by people. Production slows down and in turn prices go up. In

fact during recession, many firms are forced to sell their products at throw-away

prices and suffer from losses as a result.

Recession is something to be dreaded by producers as well as consumers. Both

suffer during these hard times. Both need each other. In case, consumers do not

have the purchasing power, then production suffers. Less production means less

profits for producers who will find it difficult to run their business houses.

The economic scenario during recession is pathetic. It is interesting to note how the

economy suffers during such traumatic times as it affects us all.

Recession impact on the economy

Slump in the market Goods and services are difficult to be sold as the

purchasing power of the people comes down.

Stock prices come down Investment suffers. The industrial production is

badly affected as investors avoid investing in companies that might suffer

losses during recession. Bigger companies are able to withstand the setbacks

but smaller companies have a tough time and some may end up closing

down. Increase in unemployment People are thrown out of jobs. They are left in

the lurch. They are unable to meet both ends. Many goods and services are

not within their reach.

Depression Recession causes depression if it persists for a long time.

Negative trends are visible in the stock market and rapid unemployment is

there. Companies need to be bailed out by the government. Public spending

suffers a setback.

National debts on the rise Increase in national debts means less money

can be spent by the government on development. Money gets diverted inbailing out companies. The recent recession in the U.S. indicates how banks

have to depend upon federal aid for their survival. Taxpayers money is being

spent in giving these banks a boost.

Recession is definitely bad for economic growth and development. It slows down

the economy. Investors hesitate to invest, and producers are unable to churn out


28/28

products. Consumer lack the necessary money due to unemployment and cannot

therefore buy goods available in the market.

Documents

msop project2003