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

Flow of funds (savings)

Seekers of funds (Mainly business firms and government) Flow of financial services
Incomes , and financial claims

Suppliers of funds (Mainly households)

Indian Financial System

Organized Regulators

Non- Organized Money lenders Local bankers Traders Landlords Pawn brokers

Financial Institutions
Financial Markets Financial services

Chit Funds

Evolution of Financial System

Barter Money Lender Nidhi's/Chit Funds Indigenous Banking Cooperative Movement Banks

Societies

Joint-Stock Banks

Consolidation Commercial Banks Nationalization

Investment Banks Development Financial Institutions

Investment/Insurance Companies Stock Exchanges Market Operations Specialized Financial Institutions

Merchant Banking
Universal Banking

Interrelation--Financial system & Economy

Financial System

Savers Lenders

Households Foreign Sectors

Investors Borrowers

Corporate Sector Govt.Sector

Un-organized Sector

Economy

Organized Indian Financial System

Regulators

Financial Instruments

Financial Markets

Financial Intermediaries

Forex Market

Capital Market

Money Market

Credit Market

Primary Market Secondary Market

Money Market Instrument

Capital Market Instrument

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 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 Markets

Mobilization of Savings & acceleration of Capital Formation

Promotion of Industrial Growth

Raising of long term Capital Ready & Continuous Markets Proper Channelisation of Funds Provision of a variety of Services

Indian Capital Market Historical perspective

Stock Market was for a privileged few

Archaic systems - Out cry method

Lack of Transparency - High tones costs No use of Technology Outdated banking system Volumes - less than Rs. 300 cr per day No settlement guarantee mechanism - High risks

Indian Capital markets Chronology

1994-Equity Trading commences on NSE 1995-All Trading goes Electronic 1996- Depository comes in to existence 1999- FIIs Participation- Globalisation 2000- over 80% trades in Demat form 2001- Major Stocks move to Rolling Sett

2003- T+2 settlements in all stocks

2003 - Demutualisation of Exchanges

Capital Markets - Reforms

Each scam has brought in reforms - 1992 / 2001 Screen based Trading through NSE Capital adequacy norms stipulated Dematerialization of Shares - risks of fraudulent paper eliminated Entry of Foreign Investors Investor awareness programs

Rolling settlements
Inter-action between banking and exchanges

Reforms / Initiatives post 2000

Corporatisation of exchange memberships Banning of Badla / ALBM Introduction of Derivative products - Index / Stock Futures & Options Reforms/Changes in the margining system STP - electronic contracts Margin Lending Securities Lending

MARKET STRUCTURE (JULY 31, 2005)

22 Stock Exchanges, Over 10000 Electronic Terminals at over 400 locations all over India. 9108 Stock Brokers and 14582 Sub brokers 9644 Listed Companies 2 Depositories and 483 Depository Participants 128 Merchant Bankers, 59 Underwriters 34 Debenture Trustees, 96 Portfolio Managers 83 Registrars & Transfer Agents, 59 Bankers to Issue 4 Credit Rating Agencies

Indian Capital Market

Market

Instruments

Intermediaries Regulator
SEBI

Primary

Secondary

Brokers Investment Bankers Stock Exchanges Underwriters Hybrid Debt

Equity

Players

CRA

Corporate Intermediaries

Individual

Banks/FI

FDI /FII

Stock Exchanges in INDIA

Bombay Stock Exchange (BSE) National Stock Exchange of India (NSE) United Stock Exchange of India (USE) Multi Commodity Exchange (MCX) MCX Stock Exchange (MCXSX) Over the Counter Exchange of India (OTCEI) Inter-connected Stock Exchange of India (ISE) Madras Stock Exchange (MSE)

Hyderabad Stock Exchange (HSE) Calcutta Stock Exchange (CSE) Delhi Stock Exchange (DSE) Bangalore Stock Exchange Madhya Pradesh Stock Exchange, Indore Jaipur Stock Exchange (JSE) Patna stock Exchange (PSE) UP Stock Exchange (UPSE Ahmedabad Stock Exchange (ASE) Cochin Stock Exchange (CSE)

The role of the stock exchange

Raising capital for businesses

Mobilizing savings for investment

Facilitate company growth

Redistribution of wealth

The role of the stock 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 Market

Sl.No . 1 2 3 4 5 As on 31st December No. of Stock Exchanges No. of Listed Cos. No. of Stock Issues of Listed Cos. Capital of Listed Cos. (Cr. Rs.) 1946 7 1125 1506 1961 7 1203 2111 1971 8 1599 2838 1975 8 1552 3230 1980 9 2265 3697 1985 14 4344 6174 1991 20 6229 8967 1995 22 8593 11784

270

753

1812

2614

3973

9723

32041

59583

Market value of Capital of Listed Cos. (Cr. Rs.)

Capital per Listed Cos. (4/2) (Lakh Rs.)

971

1292

2675

3273

6750

25302

110279

478121

24

63

113

168

175

224

514

693

Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2)

Appreciated value of Capital per Listed Cos. (Lak Rs.)

86

107

167

211

298

582

1770

5564

358

170

148

126

170

260

344

803

Capital Market Instruments

Equity

Hybrid

Debt

Equity Shares

Preference Shares

ADR / GDR

Debentures Zero coupon bonds

Deep Discount Bonds

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 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 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 Money Market Mutual Funds Repo Market

Segment

Issuer

Instruments

Governm ent

Central Government

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

Public Sector

Government Agencies / Statutory Bodies Public Sector Units

Govt. Guaranteed Bonds, Debentures

PSU Bonds, Debenture, Commercial Paper Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits Certificate of Deposits, Bonds Certificate of Deposits, Bonds

Private

Corporate Banks Financial Institutions

Financial Regulators

Financial Regulators

Securities and Exchange Board of India (SEBI) Reserve Bank of India Ministry of Finance

Security Exchange Board of India (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

Regulates Capital Market.

Checks Trading of securities.

Checks the malpractices in securities market.

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

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.

Functions Of RBI

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.

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.

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 8.50 per cent and Reverse repo rate is around 7.50 per cent. (c) Cash Reserve Ratio: The cash reserve ratio (CRR) of scheduled banks is currently at 6.00 per cent.

Reforms in the Financial System

Pre-reforms period

Steps taken
Objectives Conclusion

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
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 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.

Objectives

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

Conclusion

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