“A STUDY ON ANALYSIS OF FINANCIAL INTERMEDIARIES AND EFFICIENCY OF

INDIAN FINANCIAL MARKETS”

Submitted in the partial fulfilment of the requirements for the award of the
degree of

Master of Business Administration

Submitted by

HAMEED ALI

Reg. No. - 09ACCMA015

Under the Guidance of

Mrs. RIZWANA KHANUM

FACULTY

Al-Amen Institute of Management Studies

Hour Road, Near Allah Main gate

Bangalore – 560 027

 TABLE OF CONTENTS

CHAPTER NO. CONTENTS PAGE NO.

CHAPTER NO. I INTRODUCTION 1-13

CHAPTER NO. II RESEARCH DESIGN & 14-15

METHODOLOGY

CHAPTER NO.III COMPANY PROFILE 16-50

CHAPTER NO. IV DATA ANALYSIS AND 51-64

INTERPRETATION

CHAPTER NO. V FINDINGS, SUGGESTIONS & 65-72

CONCLUSION

BIBLIOGRAPHY

LIST OF TABLES
SL NO. CONTENTS PAGE NO.

1. Credit flow from scheduled Commercial 54

Banks 2008-09

2. Flow of institutional credit to agriculture 56

and allied activities

3. Progress under SHG-Bank Linkage 58

4. Financial assistance sanctioned and 60

disbursed by financial institutions

5. Number of NBFCs Registered with the RBI 62

6. Resource mobilization through the 64

primary market

7. Trends in resource mobilization (net) by 66

MFs

8. Cumulative change in movement of global 68

indices

9. Equity returns, volatility, market 70

capitalization & P/E ratio

10. Volatility of weekly returns on the equity 72

markets (standard deviation)

11. Transactions of FIIs 74

12. India’s Place in World Market 76

13. Turnover on commodity futures markets 77

TABLE OF CHARTS
SL NO. CONTENTS PAGE NO.

1. Credit flow from scheduled Commercial 55

Banks 2008-09

2. Flow of institutional credit to agriculture 56

and allied activities

3. Progress under SHG-Bank Linkage 58

4. Financial assistance sanctioned and 61

disbursed by financial institutions

5. Number of NBFCs Registered with the RBI 62

6. Resource mobilization through the 64

primary market

7. Trends in resource mobilization (net) by 67

MFs

8. Cumulative change in movement of global 69

indices

9. Equity returns, volatility, market 71

capitalization & P/E ratio

10. Volatility of weekly returns on the equity 72

markets (standard deviation)

11. Transactions of FIIs 75

12. Turnover on commodity futures markets 77

 CHAPTER 1

INTRODUCUTION
 CHAPTER 1

INTRODUCTION

INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of various economic units,
broadly classified into the corporate sector, government and household sector. While performing
the activities, these units will be placed in surplus/deficit/balanced budgetary situations.

These 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 areas of surplus to
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 SYSTEM

Seekers of funds Flow of funds (savings)

Suppliers of funds
(mainly business firms Flow of financial services (mainly households)
and government)
I Incomes and financial claims

The word “system”, in the term “financial system”, implies a set of complex and closely connected or
interlined institutions, agents, practices, markets, transactions, claims and liabilities in the economy.
The financial system is concerned about money, credit and finance- the three terms are intimately
related yet are somewhat different from each other. Indian financial system consists of financial
markets, financial instruments and financial intermediation.

FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets are created or transferred.
As against a real transaction that involves exchange of money for real goods or services, a financial
transaction involves creation or transfer of financial assets.

Money Market

The money market is a wholesale debt market for low-risk, highly-liquid, short term instruments.
Funds are available in the market for periods ranging from a single day up to a year. The market is
dominated mostly by government, banks and financial institutions.

Capital Market

The capital market is designed to finance the long-term investments. The transactions taking place in
this market will be periods over a year.
Forex Market

The Forex market deals with the multicurrency requirements, which are met by the exchange of
currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in
this market. This is of the most developed and integrated market across the globe.

Credit Market

Credit Market is a place where banks, Financial institutions and NBFCs provide short, medium and
long-term loans to corporate and individuals.

FINANCIAL INTERMEDIARIES

A financial intermediary is typically an institution that facilitates the channeling of funds between
lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution
(such as bank), and that institution gives those funds to spenders (borrowers). This may be in the
form of loans, mortgages etc.

A financial intermediary is an entity that connects surplus and deficit agents. The classic example of a
financial intermediary is a banks that transforms bank deposits into bank loans.

Through the process of financial intermediation, certain assets or liabilities are transformed
into different assets or liabilities.

As such, financial intermediaries channel funds from people who have extra money (savers)
to those who do not have enough money to carry out a desired activity (borrowers).

While some investors make their own investment decisions and invest while many others
seek financial and investment advice from an investment professional or financial
intermediary.

Financial intermediaries may include banks, broker-dealers, investment advisers and financial
planners. Because of the important role these parties play in the process of investment decision
making by investor, regulatory authorities may regulate these financial intermediaries in a number
of ways. Regulation may encompass requirements that financial intermediaries meet certain
competency standards such as qualification and training criteria. These criteria may include a
specified level of education, financial or investment experience, professional examinations,
membership of professional or other organizations, and continuing education requirements.

The financial markets today encompass not only traditional banking institutions, but also many other
financial entities such as insurance companies, pension funds, mutual funds, venture capital funds
and stock and commodity exchanges that perform the function of financial intermediation. This
development has been accompanied by the advent of market-based instruments of the stock and
bond markets, financial products such as asset-backed securities, financial futures and derivative
instruments. While reducing the dependence of investors on bank credit to fund their investments,
these have also contributed to reallocation of risks and putting of capital to more efficient use.
Financial markets also serve the need for greater financial inclusion. The recent experience from the
global financial crisis, has however, shown that, despite the variety of instruments and the
sophistication of the markets, they may not remain immune to crisis, if the investors/institutions do
not pay adequate attention to the fundamentals or if the pricing of risk and the ratings for these
instruments are not transparent, and if the regulatory oversight is poor. An efficient and healthy
financial market, should therefore avoid the shortcomings as gleaned from the experience of the
global financial market in the last couple of years. The deepening and broadening of financial
markets also underscores the importance of institutional safeguards for monitoring and analyzing
the domestic as well as external developments to ensure that the regulatory system is efficient and
effective. This chapter summarizes the developments in the financial sector in India in the last year,
which has remained relatively immune to the global financial turbulence through a proactive
response to the challenges.

Households wish to have a secure method of saving. Those households and companies that wish to
borrow or invest need a secure source of funds. In general, it is suggested that households wish to
lend short (that is, keep their funds liquid) so that they have access to their funds, although this may
be true for only part of a household’s portfolio. Firms need to finance their activities through longer-
term borrowing and they do so through bank loans, bonds and equity. Hicks described the feature of
an “unintermediated” financial system, where households wish to have access to their funds but
where firms wish to borrow over long periods, as a “constitutional weakness”.

Financial intermediaries resolve this weakness by creating liquidity for savers: that is they create a
financial liability of the form a saver wishes to hold (bank deposit, mutual fund units etc). Financial
intermediaries then take the funds invest them in financial assets which form the liabilities of firms
(e.g. bank loans to firms or equities and bonds issued by firms). We will ignore here borrowing by the
government sector although many of the same issues regarding term of borrowing and lending still
apply. The financial liability created by firms enables them to borrow long term. As noted above,
these liabilities include bank loans and securities. Securities provide liquidity for the ultimate saver
because they can be traded on secondary markets (household who needs funds can sell their claims
on a company’s capital to another householder). Bank lending creates liquidity as a result of the
intermediation function of banks in managing liquidity, based on the assumption that not all
households will want to liquidate their savings at the same time: an application of the “law of large
numbers” principle. Firms use these funds to invest in capital which, ultimately leads to returns that
provides interest to debt holders and bank lenders or profits for equity holders.

Thus financial intermediation can be seen as the process through which the savings of households are
transformed into physical capital. It can be understood as a chain. At one end of the chain, you have
households giving up consumption and saving. They then save these funds through financial
institutions or intermediaries such as banks, pension funds and insurance companies. The investment
normally takes through the purchase of financial products. These institutions then either lend directly
to corporations (generally banks) or purchase securities in corporations (normally done by pension
funds, insurance companies or mutual funds): thus buying assets which offer a financial return.
Corporations then use the money raised from the issue of securities to invest in capital to run their
business. The returns from capital are then passed back down the chain, through paying returns to
the holders of securities (or interest on bank loans) and the institutions which hold securities then pay
returns to their savers on their saving products.

Functions of financial intermediaries

All intermediaries, such as banks, insurance companies and pension funds hold financial assets
(lending to firms) to meet financial liabilities (issued to households). However, this basic function of
financial intermediaries has a number of facets discussed below. Financial intermediaries must “add
value” or in a market economy, they would not exist. They “add value” in the following ways:
1. Transform risk by risk spreading and pooling: households can spread risk across a range of
institutions. Institutions can pool risk by investing in a range of firms or projects. An individual
household investing his own savings, on the other hand, could only invest in a few investment
projects.

2. Enable risk to be screened efficiently. It is more efficient for investment projects to be

screened on behalf of individuals by institutions than all individuals screen the risk and return
prospects of projects independently. If you invest through institutions, all the investor has to do is
analyse the soundness of the institution and not the underlying investments.

3. Transform liquidity i.e. to allow assets which are ultimately invested in illiquid projects to be
transferred to other savers in exchange for liquid assets.

4. Reduce transaction costs by providing convenient and safe places to store funds and by creating
standardized and sometimes tax-efficient forms of securities.

5. Banks also perform money transmission functions (that is, one can purchase goods and services by
transferring money from one person to another by the means of a bank instruction).

6. Insurance companies and pension funds and sometimes banks are involved in “asset
transformation”, whereby the financial liability held by the institution is of a different financial form
from the asset held (for example, insurance company liabilities are contingent due to the insurance
services they provide yet the assets are not subject to the same type of contingency).

Actuaries tend to exist in these sorts of institutions. In fact, their skills are useful in any financial
intermediary which is managing financial assets to meet financial liabilities. Historically, they have
tended to work in institutions which sell contingent products, although that is changing.
7. Financial institutions provide a mechanism for transferring economic resources across time and
across geographic regions. This point is so fundamental to all financial intermediation, it does not, in
fact, distinguish financial institutions. It will therefore not be considered further, despite its
importance. Without financial institutions households with cash to save would have to seek
households/firms who needed cash to invest – this would be an extraordinarily inefficient process

There are significant practical differences between the functions banks and non-banks which explains
their separate development hitherto. It is helpful to understand more about their specific functions,
in order to help us understand how the functions of financial intermediaries are becoming closer.

Intermediating functions of banks

The traditional commercial and retail functions of a bank tend to involve intermediating functions 1 to
3, 5 and 7: they spread risk, screen risk efficiently and monitor loans on a continual basis, transform
liquidity and provide money transmission services, as well as facilitating the transfer of resources over
time. There is no asset transformation unless lending and borrowing is undertaken on different terms
(for example floating-rate borrowing financing fixed-rate lending). However, it should be said that, in
recent years, banks have become more complex so this explanation pertains to the traditional
functions of a retail bank that takes deposits and makes personal and business loans.

Intermediating functions of life insurers

The primary role of life insurers is asset transformation (function 6). The assets held by life insurers
are fundamentally different from the liabilities created by the life insurer; furthermore, the insurer
cannot generally match the liability with a corresponding asset. The insured’s asset becomes
activated on the occurrence of a certain contingency. Insurers will often also perform an investment
risk pooling and risk screening functions (functions 1 and 2).

Intermediating functions of mutual funds

Mutual funds (broadly equivalent to unit trusts in the UK) generally perform pure investment
functions and hold securities (some mutual funds invest directly in property); defined contribution
pension schemes have similar functions. As such, they perform risk screening and spreading and risk
pooling functions (functions 1 and 2), as well as the basic intermediation function of transferring
economic resources across time (function 7). In markets for non-securitized investments, mutual
funds also provide liquidity. They allow large numbers of investors to pool funds with the
intermediary who can allow buyers and sellers to trade units without having to deal in the underlying
investments. There are limits to the extent to which this function can be performed: if there are not
equal number of buyers and sellers of the units, the investments underlying the units have to be sold
by the fund’s manager; in some mutual funds there are redemption clauses which allow a
moratorium before units can be redeemed.

Money-market mutual funds also provide money transmission services (function 5). They will
normally invest in securitized loans which form a portfolio in which investors buy units. In some cases,
such funds are simply used as a savings vehicle (providing risk screening, spreading and pooling
functions) but, in some cases, such funds are used for money transmission functions, with unit
holders making payments by transferring units across to those receiving payment using a cheque
book.

In general, mutual funds pass risks back to unit holder s, although there will be a reputational risk
from not performing intermediating functions well. Defined contribution schemes do not provide
asset transformation, unlike defined benefit pension funds (see below). They are generally just
savings vehicles providing no insurance function. However, they may sometimes provide insurance
functions, for example, guaranteeing investment returns, annuity rates or expenses.

Intermediating functions of pension funds

A defined benefit pension fund is a trust fund and is therefore an independent intermediary in its own
right. There is no formal contract between the pension fund and the member, which guarantees the
benefits the latter can expect to get if he remains an active member of the fund: rather the contract is
between the fund sponsor and the member with the former, in practice, meeting the risks of
underfunding.
Banks, Insurance Companies and Pension Funds: the Fundamental Similarities
and Differences

The money transmission function can be regarded as distinct from the other functions as it does not
involve the mobilisation of capital as a factor of production. In an economy with no savings or
investment and no borrowing or lending, money transmission would still be required. It is perhaps
this function which makes banks intrinsically different from other financial institutions, although, as
will be discussed below, other intermediaries are also beginning to perform money transmission
functions.

The feature that makes insurance companies and pension funds different from banks is that they face
insurance risks due to the difficulty of estimating the amount and timing of liabilities and because of
the contingent nature of the liabilities. Banks do not face these types of risks on the liability side but
banks do face similar risks to other financial institutions in estimating their asset cash flows and face
risks from the contingent nature of their asset cash flows. There are similarities, in principle, between
credit risks in banks and insurance risks in non-banks.

In principle, there is a prima facie case for assuming that many of the same solvency and risk
management techniques could be used for both banks and non-banks. If we classify the institutions
by the intermediation risks that they undertake rather than by whether they are banks or non-banks,
we see many similarities which may otherwise be obscured. Nevertheless, there are practical
differences between banks and non-banks which lead to the use of different risk management
techniques. These are in relation to the fundamental differences relating to the money transmission
functions of banks and the insurance functions of non-banks.

The Needs of Investors

From this analysis we should be able to see that the functions of financial institutions are driven by
the needs of the end savers – households. End savers themselves will have different motivations for
investment and different risk profiles. Households will generally want a certain proportion of their
savings in the form of liquid assets (perhaps held in banks) but will also use other financial institutions
for long-term investment and savings as well as for insurance-based products. Different households
will have different preferences for the shape of their savings portfolio. In turn, the investment policy
of institutions will be driven by the sort of savings, investment and insurance products they are
providing households as the liabilities of financial institutions will depend on the type of policies that
they have written. In turn, that will depend on the needs of the households that have bought the
policies. Thus, institutional investors differ in terms of their time horizons. A pension fund, for
example, may have a very long investment time horizon and be attracted to less liquid investments
that give rise to long-term certainty of return. A short-term investor, such as a non-life insurance
company, will be attracted to investments with greater capital value security and that are more liquid
(this was covered last term).

The Role of Investment Banking Firms

So far, we have considered intermediation as a chain that transforms household saving into physical
capital. Banks have been considered as institutions that lend money thereby providing risk monitoring
services, diversification and so on. However, other institutions are connected with this chain of
intermediation that do not necessarily hold financial assets and liabilities. For example, consulting
actuaries advise pension funds on their risk management and investment policy. Investment banks
are also important (though for various reasons investment banks will also perform other functions –
perhaps through subsidiaries – such as retail and wholesale banking, mutual fund management etc).
Broadly, investment banks perform the following functions:

• When a firm makes a new issue of securities, that will be bought by households (directly) and
institutions, an investment bank will advise on the price at which the issue should take place.

• An investment bank can handle the marketing of the new issue to the public and to other
institutions.

• An investment bank can check and certify the quality of the information offered when the new issue
takes place.

• An investment bank can design the “package” of securities that will be most attractive to potential
investors. Different investors have different appetites for risk, different liabilities, different tax
positions etc. When a business requires capital, it can use the services of an investment bank to
design securities in such a way that maximizes the value of the issue to the business. This, of course,
involves making the issues as attractive as possible to investors. Businesses will want to raise capital
to finance the business at the lowest possible cost. The efficient structuring of securities issues by
investment banks can lower the cost of capital to businesses.

• The research, broking and dealing part of an investment bank can provide advice to institutions on
securities as well as provide market-making functions to facilitate the purchase and sale of large
amounts of securities.

Intermediary Market Role

Stock Exchange Capital Market Secondary Market to securities

Investment Bankers Capital Market, Credit Market Corporate advisory services,

Issue of securities

Underwriters Capital Market, Money Market Subscribe to unsubscribed

portion of securities

FINANCIAL INSTRUMENTS

Call/notice-Money Market

Call/notice money borrowed or lent on demand for a very short period. When money is borrowed or
lent for a day, it is known as call (overnight) money. Thus money, borrowed on a day and repaid on
the next working day, is “call money”. When money is borrowed or lent for more than a day and up
to 14 days , it is “notice money”
Inter-Bank Term Money

Inter bank market for deposits of maturity beyond 14 days is referred to as the term money market.
The entities are not allowed to lend beyond 14 days.

Treasury Bills

Treasury bills r short term (upto 1 year) borrowing instruments of the union government. It is a
promised by the government to pay a stated sum after expiry of the stated period from the date of
issue. They are issued at a discount to the face value, and on maturity the face value is paid to the
holder.

Certificate of Deposits

Certificate of deposit is a negotiable money market instrument issued in a dematerialized form for
funds deposited at a bank or other eligible financial institution for a specified time period. Guideline
for issue of certificate of deposits r presently governed by various directives issued by the reserve
bank of India, as amended from time to time.

Commercial Papers

Commercial paper is a note in evidence of the debt obligation of the issuer. On issuing commercial
paper the debt obligation is transformed into an instrument. Commercial paper is thus an unsecure
promissory note privately placed with investors at a discount rate to face value determined by
market forces. Commercial paper is freely negotiable by endorsement and delivery.

Capital Market Instruments

The capital market generally consist 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.

Hybrid Instruments

Hybrid instruments have both the features of equity and debenture. This kind of instrument is called
as hybrid instruments. Examples are: convertible debentures, warrants etc.

Classification of Financial Markets

Markets can be classified into different categories depending on the characteristic of the market or
instrument used to create categories. Securities created by institutions in the markets normally pay
an interest on the nominal amount ( the amount shown on the certificate or contract ). The interest
bearing securities market is split into the money market and the capital market, based on the term
to maturity of the securities.

1) The capital market is a market for the issue and trade of long term securities

2) The money market is that of short term securities.

When goods such as financial instruments are traded in the market, there are certain differences
between transactions done in these markets. The differences in transactions in the financial markets
can be categorized in different categories, 2 of which are the following;

1) The timing difference between the closing of the transaction and the delivering of the goods or
settlement of the transaction

2) The difference in certainty that the other party will honour the transaction.

In the spot market, the closing of the transaction and the delivery of the goods take place
simultaneously or within a short term time span prescribed by the specific market. Uncertainty
about the delivery from the other party is very limited, otherwise no transaction would take place.
The forward market is the market where a transaction is closed in the present, and the settlement of
the transaction and the delivery of goods are in the future. The delivery date and the price are
determined at the closing of the transaction.

The future market is similar to the forward market, except that in the futures market , the risk of
settlement and quality of the product are addressed.
 CHAPTER 2

RESEARCH DESIGN

CHAPTER 2

RESEARCH DESIGN

STATEMENT OF THE PROBLEM:

The project deals with the study on “Analysis of Financial Intermediaries and Efficiency of Indian
Financial Markets”
OBJECTIVES OF THE STUDY:

1. To study the Indian financial market

2. To study the management and control of those markets and assets.
3. To study the industry that delivers financial services.

SCOPE OF THE STUDY:

The study focuses on the financial markets, functioning of different financial intermediaries and
financial instruments. It also focuses on various money market instruments.

METHODOLOGY:

METHOD OF RESEARCH DESIGN USED UNDER STUDY IS DESCRIPTIVE

RESEARCH

Descriptive research is the study of existing facts to come to a conclusion.

The data will be collected on the basis of Primary as well as Secondary sources.

Primary data

Primary data is collected by the investigator himself for a specific inquiry or study. Such data is
original in character.

Primary data will be collected by interacting with the players involved in financial markets & financial
intermediaries.

Secondary data
Secondary data is data which has already been collected by others. It can be obtained from journals,
reports, publications etc.

The sources of secondary data will be from published materials such as Company records, textbooks,
Internet, Magazines and annual reports.

LIMITATIONS OF THE STUDY

 The study concentrates only on financial markets and intermediaries.

 The project period is short due to lack of time.
 The study is based on the available data.

PLAN OF ANALYSIS:

A research design is a method and procedure for acquiring information needed to solve the problem
and basic plan that helps in the data collection or analysis. It specifies the type of information to be
collected and sources of data collection procedure.
 CHAPTER 3

COMPANY PROFILE
COMPANY PROFILE

Banking operations started in India as early as 1870 with the establishment of the Bank of
Hindustan, considered as the first bank in India.

The second development in the banking sector happened with the incorporation of the Bank of
Calcutta, the Bank of Bombay and the Bank of Bombay in accordance with the Presidency Bank's Act,
1876. All these banks joined hands to form the Imperial Bank of India. The reserve Bank of India was
engaged in the performance of central banking activities before the establishment of the Reserve
Bank of India.

Definition of Commercial Banks:-

An institution which accepts deposits, makes business loans, and offers related services. Commercial
banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These
institutions are run to make a profit and owned by a group of individuals, yet some may be members
of the Federal Reserve System. While commercial banks offer services to individuals, they are
primarily concerned with receiving deposits and lending to businesses.

This sub sector can broadly be classified into:

1.Public sector
2 Private sector
3.Foreign banks

Public sector is the part of economic and administrative life that deals with the delivery of goods and
services by and for the government, whether national, regional or local/municipal.

Private banks are banks that are not incorporated. A non-incorporated bank is owned by either an
individual or a general partner(s) with limited partner(s). In any such case, the creditors can look to
both the "entirety of the bank's assets" as well as the entirety of the sole-proprietor's/general-
partners' assets.

Foreign banks organized under foreign laws and located outside the United States.

STRUCTURE OF COMERCIAL BANKS:-

The commercial banking structure in India consists of:

 Scheduled Commercial Banks in India

 Unscheduled Banks in India.

Scheduled Banks in India constitute those banks which have been included in the Second Schedule
of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which
satisfy the criteria laid down vide section 42 (6) (a) of the Act.

As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches.
The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalized
banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks.
"Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955
(23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of
1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second
Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank".

"Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

Activities of Commercial Banks:

The modern Commercial Banks in India cater to the financial needs of different sectors. The main functions
of the commercial banks comprise of transfer of funds, acceptance of deposits and then offering those
deposits as loans for the establishment of industries, purchase of houses, equipments, capital investment
purposes etc. The banks are allowed to act as trustees. On account of the knowledge of the financial market
of India the financial companies are attracted towards them to act as trustees to take the responsibility of
the security for the financial instrument like a debenture. The Indian Government presently hires the
commercial banks for various purposes like tax collection and refunds, payment of pensions etc.

Modern Banking Techniques:-

The immense growth of the IT sector is reflected in the banking operation of the Commercial Banks in India.
Presently, the IT companies are engaged in the creating software packages to facilitate, accelerate, and
organize the banking operations. The Rangarajan Committee and the Reserve Bank of India has played a
major role in the popularizing the concept of computer application in banking activities. The computerization
process has reached its peak in the present scenario with the use of Total Branch Automation Packages

Products and Services offered by Commercial Banks in India:-

The Commercial Banks in India offer variety of products and services like Investment Advisory Services, Tax
Advisory services, Cash Management services, debit cards, ATM cards, credit cards, personal loans,
education loans, housing loans, car loans, Investment Advisory Services, and consumer durable loans.
Functions of Commercial Banks:-

The functions of a commercial banks are divided into two categories:

i) Primary functions, and

ii) Secondary functions including agency functions.

i) Primary functions:

The primary functions of a commercial bank include:

a) accepting deposits; and

b) granting loans and advances;

a) Accepting deposits-The most important activity of a commercial bank is to mobilize deposits from
the public. People who have surplus income and savings find it convenient to deposit the amounts with
banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits
with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to
deposit more funds with the bank. There is also safety of funds deposited with the bank.

b) Grant of loans and advances-The second important function of a commercial bank is to grant
loans and advances. Such loans and advances are given to members of the public and to the business
community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of
interest charged on loans and advances varies depending upon the purpose, period and the mode of
repayment. The difference between the rate of interest allowed on deposits and the rate charged on the
Loans is the main source of a bank’s income.

c) Loans-A loan is granted for a specific time period. Generally, commercial banks grant short-term loans.
But term loans, that is, loan for more than a year, may also be granted.The borrower may withdraw the
entire amount in lump sum or in installments. However, interest is charged on the full amount of loan. Loans
are generally granted against the security of certain assets. A loan may be repaid either in lumpsum or in
installments.

ii) Advances-An advance is a credit facility provided by the bank to its customers. It differs from loan in
the sense that loans may be granted for longer period, but advances are normally granted for a short period
of time. Further the purpose of granting advances is to meet the day to day requirements of business. The
rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount
withdrawn and not on the sanctioned amount.

c) Discounting of Bills-Banks provide short-term finance by discounting bills, that is, making payment of
the amount before the due date of the bills after deducting a certain rate of discount. The party gets the
funds without waiting for the date of maturity of the bills. In case any bill is dishonored on the due date, the
bank can recover the amount from the customer.

ii) Secondary functions:-Besides the primary functions of accepting deposits and lending money, banks
perform a number of other functions which are called secondary functions. These are as follows –

a) Issuing letters of credit, traveler’s cheques, circular notes etc.

b) Undertaking safe custody of valuables, important documents, and securities by providing safe deposit
vaults or lockers;

c) Providing customers with facilities of foreign exchange.

d) Transferring money from one place to another; and from one branch to another branch of the bank.

e) Standing guarantee on behalf of its customers, for making payments for purchase of goods, Machinery,
vehicles etc.

f) Collecting and supplying business information;

g) Issuing demand drafts and pay orders; and,

h) Providing reports on the credit worthiness of customers.

Historically, banks have played the role of intermediaries between the savers and the investors.
However, in the last few decades, the importance and nature of financial intermediation has
undergone a dramatic transformation the world over. The dependence on bank credit to fund
investments is giving way to raising resources through a range of market based instruments such as
the stock and bond markets, new financial products and instruments like mortgage and other assets
backed securities, financial futures and derivative instruments like swaps and complex options.
Besides transferring resources from savers to investors, these instruments enable allocation of risks
and re-allocation of capital to more efficient use. The increase in the breadth and depth of financial
markets has also coincided with a pronounced shift among the ultimate lenders who have moved
away from direct participation in the financial markets to participation through a range of
intermediaries. These developments in international financial markets have been mirrored in the
financial market in India. This chapter summarizes the main developments in this sector in India in
the last year and highlights the various policy challenges.

Bank credit to productive sectors of the economy has a critical role in sustaining the growth process.
While the spread of banking network is a continuous process, the effectiveness of the banking
network also depends on the expansion in the scale of operations and the deepening of the credit
facilities. The total assets of the scheduled commercial banks (SCBs) have increased from a level of
Rs. 3.46 million on March 31, 2007 to Rs.4.33 million on March 31, 2008. All categories, namely,
public sector banks, old private sector banks, new private sector banks and foreign banks have
increased their asset base.

A noticeable trend in the recent years is the growing importance of the competition emerging
between the different categories of banks. This is reflected in the changes in the share of assets of
different categories of SCBs. Though the share of public sector banks in total assets of SCBs has
declined to 69.9 per cent at the end of 2007-08from 70.5 per cent in 2006-07, they continue to play
an important role in the current economic environment. The share of old private sector banks also
marginally declined in 2007-08; correspondingly the share of assets of foreign banks and new private
sector banks increased.

The first six months of the financial year 2008-09 witnessed inflationary pressures in the Indian
economy with RBI continuing to address monetary expansion through revisions in policy rates. The
second half of 2008-09 was however a period when the RBI initially took steps to ease the liquidity
crunch in the money market in September /October 2008, followed up with steps to facilitate
continued credit flows to the productive sectors of the economy. Reduction in policy rates were also
announced to enhance the liquidity in the system and for reducing the cost of credit to business and
industry.
NON-BANKING FINANCIAL INSTITUTIONS (NBFIs)

While banks account for a major share of the Indian financial system, NBFIs also play an important
role in providing a wide range of financial services. While banks have an edge in providing payment-
and liquidity-related services, NBFIs tend to offer enhanced equity and risk-based products. The
major intermediaries that are included in the NBFI group are development finance institutions (DFIs),
insurance companies, non-banking financial companies (NBFCs), primary dealers (PDs) and capital
market intermediaries such as mutual funds. The NBFIs provide medium- to long-term finance to
different sectors of the economy.

Financial Institutions (FIs)

Based on the major activity undertaken by FIs, they could be classified into three broad categories,
namely (i) term-lending institutions whose main activity is direct lending by way of term loans and
investments (e.g. EXIM Bank); (ii) refinance institutions which mainly extend refinance to banks as
well as NBFIs (e.g. NABARD, the Small Industries Development Bank of India [SIDBI] and National
Housing Bank [NHB]); (iii) investment institutions which deploy their assets largely in marketable
securities (e.g. the Life Insurance Corporation of India [LIC]). During 2009-10, though there was
increase in financial assistance both sanctioned and disbursed by FIs, the increase in disbursements
(93.3 per cent)was more pronounced than that in sanctions (70.2per cent). Resources raised by the
FIs during 2009-10were considerably higher than those during the previous year

NON-BANKING FINANCIAL COMPANIES (NBFC’s)

A non banking financial company (NBFC) is a company registered under the Companies Act, 1956
and is engaged in the business of loans and advances, acquisition of
shares/stock/bonds/debentures/securities issued by government or local authorities or other
securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but
does not include any institution whose principal business is that of agriculture activity, industrial
activity, sale/purchase/construction of immovable property.

A non-banking institution which is a company and which has its principal business of receiving
deposits under any scheme or arrangement or any other manner, or lending in any manner is also a
non-banking financial company.

In the recent times, the non-banking finance companies emerged as substantial contributors to the
Indian economic growth by supplementing the efforts of banks and other development financial
institutions. They play a key role in direction of saving and investments. They offer a wide variety of
financial services and play an important role in providing credit to the unorganized sector and small
borrowers. In this context, the key financial institutions and professionals have promoted financial
institutions to create a diversified and competitive financial system.

Classifications of Non Banking Financial Companies

The NBFCs fall under different categories on the basis of their activities. They are:

1. Equipment Leasing Companies

2. Hire Purchase Companies
3. Investment, Consultancy and Advice
4. Portfolio Management Services
5. Corporate Asset Management Services
6. New Issue Housing Services
7. Merchant Banking
8. Depositories
9. Venture Capital Funds
10. Lease and Hire Purchase Financing
11. Investment Companies
12. Loan Companies
13. Mutual Benefit Financial Companies like Nidhis
 14. Mutual Funds
15. Other Non-Banking Companies like Chit Funds
16. Housing Finance Companies

Regulations for Non Banking Financial Companies

In view of the important role played by NBFCs, the need to integrate their activities into the financial
system, the scope of regulations to control the activities of NBFCs was expanded from time to time
in the recent past and several policy measure initiated to monitor their activities.

1. Entry norms: It is mandatory for NBFCs to register with RBI and comply with minimum
capital requirements. Prior to the amendment of the RBI Act 1997, there were no entry
norms for NBFCs.
2. Prudential norms: RBI has prescribed prudential norms on income recognitions, accounting
standards, asset classification, provision for bad and doubtful debts.
3. Credit Ratings: It is mandatory for NBFCs accepting deposits from the public to get
themselves rated from credit rating agencies authorized by RBI.
4. Exposure norms: To prevent deployment of public deposits in high risk and speculative
ventures, RBI has issued a ceiling for exposure to real estate, investment in capital markets.
5. Capital Adequacy Requirements: RBI has prescribed the capital adequacy norms by shifting
the focus of regulations from the liability side to the asset side.
6. Acceptance of Deposits: The ceiling for the public deposits has been different at different
times. The general approach has been to allow a higher ceiling for equipment leasing and
hire purchase companies whose assets are secure while lower ceiling for loan and
investment companies.

Difference between Banks and Non Banking Financial Companies

1. A NBFC cannot accept demand deposits

 2. It is not part of the payment and settlement system and as such cannot issue cheques to its
customers
3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is
not available for NBFC depositors unlike in case of banks.

Salient features of Non Banking Financial Companies

Some of the important regulations relating to acceptance of deposits by NBFCs are as under:

1. The NBFCs are allowed to accept/renew public deposits for a minimum period of
12 months and maximum period of 60 months. They cannot accept deposits repayable on
demand.

2. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to
time.
3. NBFCs cannot offer gifts/incentives or any other additional benefits to the depositors.
4. NBFCs should have minimum investment grade credit rating.
5. The deposits with NBFCs are not insured.
6. The repayment of deposits by NBFCs is not guaranteed by RBI.
7. There are certain mandatory disclosures about the company in the Application Form issued
by the company soliciting department.

The NBFCs as a whole account for 9.1 percent of the assets of the total financial system. In the wake
of the recent global financial crisis and its fallout for FIs, the RBI undertook measures to preserve
financial stability and arrest the moderation in the growth momentum. As a measure aimed at
expanding rupee liquidity, the Reserve Bank provided a special repo window under its LAF for NBFCs.
In addition, an existing special purpose vehicle (SPV) was used as a platform to provide liquidity
support to NBFCs. In December 2008, systemically important non-deposit taking NBFCs (NBFCs-ND)
were permitted, as a temporary measure, to raise foreign currency short-term borrowings under the
approval route subject to certain conditions.

The total number of NBFCs registered with the Reserve Bank, consisting of deposit-taking NBFCs
(NBFCs-D), residuary non-banking companies (RNBCs), mutual benefit companies (MBCs),
miscellaneous non-banking companies(MNBCs) and Nidhi companies, declined from12,809 in end-
June 2008 to 12,740 in end-June 2009.The number of NBFCs-D also declined from 364 in end-June
2008 to 336 in end-June 2009, mainly due to the exit of many NBFCs from deposit-taking activity

The ratio of deposits of reporting NBFCs to the aggregate deposits of SCBs dropped to 0.53 percent
in end-March 2009 from a level of 0.73 percent in end- March 2008, mainly due to the decline in
deposits of reporting NBFCs.

LITERATURE REVIEW

Bank credit and investment

The continued boom in the economic activity which had for the third year in succession led to
significant expansion of credit by SCBs, moderated during 2008-09. Though bank credit to the
commercial sector witnessed strong growth in the first half of the year, it decelerated particularly in
the second half of the year. For the full year 2008-09, bank credit to the commercial sector
expanded by 16.9 per cent only, as compared to a growth of 21.0 per cent in 2007-08. And in the
year 2010 it is 35 percent.

During 2008-09 (March 27, 2009 over March28, 2008), there was a moderation in the credit growth
of SCBs to 17.3 per cent from a level of 22.3 percent in the corresponding period of the previous
year. In terms of absolute values also, the slowdown was noticeable, in as much as the expansion in
bank credit during 2007-08 was of the order of Rs. 4,30,724 crore which decelerated to Rs. 4,08,099
crore in 2008-09. Non-food credit growth as at end-March 2009 grew by 17.5 per cent as compared
to 23.0 per cent growth as at end-March2008.

Though the growth in the different sources of funds for the SCBs during 2008-09 was lower than for
2007-08, the growth in deposits with the banking system in 2008-09 was higher than the growth of
credit. This reflected in the decline in the incremental credit-deposit ratio of SCBs from 73.6 percent
in end-March 2008 to a level of 64.4 per cent in end-March 2009.

The behavior of the credit-deposit ratio also reflected the changes in the monetary sector; credit
deposit ratio which was at 73.9 as of March 31, 2007, marginally declined to 73.8 as of March 31,
2008. In2008-09, it peaked to 75.2 as of October 10, 2008, but declined thereafter. It stood at 72.3
as of March27, 2009.

Scheduled commercial banks’ investments

Investment by SCBs in statutory liquidity ratio (SLR) securities as per cent of their net demand and
time liabilities (NDTL) continued to be higher than the stipulated level. As compared to the level of
27.8 per cent at end-March 2008, it increased to a level of 28.1 per cent at end-March 2009. As per
information from RBI, after adjusting for Liquidity Adjustment Facility (LAF) collateral securities on an
outstanding basis, the scheduled commercial banks’ holding of SLR securities amounted to26.7 per
cent of NDTL, at end-March 2009, which was higher than the prescribed 24.0 percent level.
Non-SLR investment by SCBs during 2008-09 (March 27, 2009 over March 28, 2008) expanded by
Rs.8,615 crore (an increase of 9.0 per cent)compared to Rs. 11,961 crore (an increase of 14.3per
cent) during 2007-08 (March 28, 2008 over March30, 2007) indicating comfortable liquidity situation
with SCBs.

The investment-deposit ratio at 34.02 as of March 31, 2006 decreased to 30.3 as of March 31, 2007
and marginally increased to 30.4 on March 31, 2008. During 2008-09, the investment-deposit ratio
peaked to 31.8 on February 13, 2009 and declined thereafter to 30.4 as of March 27, 2009.

Sectoral deployment of bank credit

SCBs’ lower overall gross non-food credit growth during 2008-09 (at 18.1 per cent as compared to
22.3 per cent in 2007-08) reflected itself in the sectoral deployment of bank credit. Data available as
on March 27, 2009 is given in Table 5.2. While loans to agriculture & allied activities grew at the rate
of 23.0 per cent during 2008-09 (as on March 27, 2009) compared to 19.5 per cent (as on March 28,
2008), credit to industry (comprising of large, medium and small scale sector) grew at 21.6 percent
during 2008-09 (as of March 27, 2009) compared to 24.3 per cent (as of March 28, 2008). Within
industry group, the deceleration was noticeable in credit to food processing, textiles, vehicles,
vehicle parts and transport equipments. Personal loans during 2008-09 (as of March 27, 2009) grew
at a lower rate of 10.8 per cent compared to 12.1 percent (as of March 28, 2008); advances under
personal loans for housing and consumer durables have witnessed deceleration. Loans to
commercial real estate and non-banking financial companies remained high in 2008-09, posting a
growth of 44.6 per cent and 25.1 per cent respectively.

Priority sector lending

A target of 40 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-
Balance Sheet Exposures (OBE), whichever is higher, had been stipulated for lending to the priority
sector by domestic SCBs (both public and private sector). Within this, sub-targets of 18 per cent
and10 per cent of ANBC or credit equivalent amount of OBE, whichever is higher, had been
stipulated for lending to agriculture and the weaker sections respectively. However, to ensure that
the focus of the banks on the direct category of agricultural advances does not get diluted, the
indirect lending in excess of 4.5 per cent of ANBC or credit equivalent amount of OBE, whichever is
higher, are not reckoned for computing performance under the 18 per cent sub-target. All
agricultural advances under the ‘direct’ and ‘indirect’ categories are reckoned in computing the
performance under the overall priority sector target of 40 per cent of ANBC or Credit Equivalent
amount of OBE, whichever is higher.

A target of 32 per cent of ANBC or credit equivalent amount of OBE, whichever is higher, had been
stipulated for lending to the priority sector by foreign banks having offices in India. Within the
overall target of 32 per cent to be achieved by foreign banks, the advances to micro & small
enterprises and export sectors were not to be less than 10 per cent and 12per cent of ANBC or credit
equivalent amount of OBE, whichever is higher, respectively.

Deployment of gross bank credit by major sectors 2008-09

The public, private sector and foreign banks, had achieved the overall priority sector lending targets.
As non-achievement of priority sector targets could be a matter of concern, suitable initiatives in the
banking sector have also been taken. In order to improve and enhance the flow of credit to the
priority sector, the following policy initiatives were taken.

In order to augment the resources of Regional Rural Banks (RRBs) for the purposes of lending, all
loans granted by commercial banks/sponsor banks to RRBs for on-lending to agriculture and allied
activities sector were made eligible to be classified as indirect finance to agriculture in the books of
commercial banks/sponsor banks. Consequently, the amount lent by RRBs out of funds borrowed
from commercial banks/sponsor banks, would not be classified by RRBs as part of their priority
sector advances. The RRBs need not also include such lending as part of their bank credit for the
purpose of computing achievement level under priority sector lending.
Banks were allowed to classify 100 per cent of the credit outstanding under general credit
card(GCCs) and overdrafts up to Rs. 25,000 (per account) granted against ‘no-frills’ accounts in rural
and semi-urban areas as indirect finance to agriculture sector under the priority sector.

RRBs were allowed to sell loan assets held by them under priority sector categories in excess of the
prescribed priority sector lending target of 60 per cent; and􀁺 In order to ensure that the sub-target
of lending to the weaker sections is achieved, the domestic scheduled commercial banks were
advised that the shortfall in achievement of sub target of lending to weaker sections will also be
taken into account for the purpose of allocating amounts for contribution to the Rural Infrastructure
Development Fund (RIDF) maintained with NABARD or funds with other financial institutions, as
specified by the Reserve Bank of India, with effect from April2009.

RURAL INFRASTRUCTURE DEVELOPMENT FUND

The scope of RIDF established with NABARD in April 1995 to assist State Governments/State-owned
corporations for quick completion of projects relating to minor and medium irrigation, soil
conservation, watershed management and other forms of rural infrastructure (such as rural roads
and bridges, market yards, etc.) was widened to include gram panchayats, self-help groups (SHGs),
projects in social sector covering primary education, health and drinking water, and other eligible
organizations for implementing village level infrastructure projects. Starting RIDF-X, other activities,
such as minor irrigation projects/micro irrigation, flood protection, watershed development/
reclamation of water logged areas, drainage, forest development, market yard/ godown, Apna
Mandi, rural haats and other marketing infrastructure, cold storage, seed/agriculture/horticulture
farms, plantation and horticulture, grading and certifying mechanisms such as testing and certifying
laboratories, etc., community wells for irrigation purposes for the village as a whole, fishing
harbour/jetties, riverine fisheries, animal husbandry, modern abattoir, etc., have been added to the
list of eligible activities. Some more activities such as mini hydel projects; construction of toilet
blocks in existing schools, where necessary, specially for girl students; “pay & use” toilets in rural
areas; major irrigation projects (only those projects already sanctioned and under execution); village
knowledge centres; desalination plants in coastal areas; small hydel projects (up to 10 MW);
infrastructure for information technology in rural areas; and construction of anganwadi centres have
been added to the list of eligible activities. The domestic SCBs, both in the public and private sector,
which fail to achieve the priority sector and / or agriculture lending targets, are required to deposit
into RIDF such amounts as may be allocated to them by the Reserve Bank of India.

As a follow-up on the announcement made several funds were setup such as:

 STCRC (Refinance) Fund with the NABARD with a corpus of Rs. 5,000 crore
 MSME (Refinance) Fund and MSME (Risk Capital) Fund with SIDBI with corpus of Rs.1,600
crore and Rs.1,000 crore
 Rural Housing Fund with the National Housing Bank (NHB) with corpus of Rs.1,000 crore.

The Interim Budget 2009-10 announced the continuation of financing of rural infrastructure projects
for 2009-10 by way of RIDF-XV to be set up with NABARD with a corpus of Rs. 14,000 crore, and a
separate window under RIDF-XV for rural roads component of Bharat Nirman Programme with a
corpus of Rs. 4,000 crore. The aggregate allocations have reached Rs 1,00,000 crore.

CREDIT TO AGRICULTURE

Rural credit delivery system:

With a view to strengthen the rural credit delivery system for facilitating smooth credit flow to the
rural sector in general and to agriculture in particular, a number of steps were taken by the Reserve
Bank and the Government of India.

Special Agricultural Credit Plan

The public sector banks have been formulating Special Agricultural Credit Plans (SACP)since 1994-95
with a view to achieving distinct and marked improvement in the flow of credit to agriculture. Under
SACP, the banks are required to fix self-set targets for achievement during the financial year. The
targets fixed by banks show an increase of about 20 to 25 per cent over the disbursements made in
the previous year.

Agricultural debt waiver and debt relief scheme

A scheme of agricultural debt waiver and debt relief for farmers with the total value of overdue
loans being waived estimated at Rs. 50,000 crore and a one-time settlement (OTS) relief on the
overdue loans at Rs. 10,000 crore was announced in the Union Budget, 2008-09, for implementation
by all scheduled commercial banks, besides RRBs and cooperative credit institutions. The modalities
of the scheme were finalized by the Government of India in consultation with RBI and NABARD, and
the same was notified on May 23, 2008. The scheme covered direct agricultural loans extended to
“marginal and small farmers” and “other farmers” by SCBs, RRBs, cooperative credit institutions
(including urban cooperative banks) and local area banks. Accordingly, the Reserve Bank advised all
the concerned banks to take necessary action towards implementation of the scheme at the earliest.
NABARD had issued similar guidelines to RRBs and rural cooperatives.

RBI is the nodal agency for the implementation of the scheme in respect of SCBs, urban cooperative
banks and local area banks, the nodal agency in respect of RRBs and rural cooperative credit
institutions is NABARD.

MICRO FINANCE

In an effort to mainstream micro credit and increase its outreach, the RBI had issued comprehensive
guidelines in February 2000 stipulating that micro credit extended by banks to individual borrowers
directly or through any intermediary would henceforth be reckoned part of their priority-sector
lending. Banks were given the freedom to formulate their own model[s] or choose any
conduit/intermediary for extending micro credit. The SHG-Bank Linkage Programme implemented by
commercial banks, RRBs and cooperative banks has emerged as the major micro-finance programme
in the country.
Self Help Groups or SHGs represent a unique approach to financial intermediation. The approach
combines access to low-cost financial services with a process of self management and development
for the women who are SHG members. SHGs are formed and supported usually by NGOs or
(increasingly) by Government agencies. Linked not only to banks but also to wider development
programmes, SHGs are seen to confer many benefits, both economic and social. SHGs enable
women to grow their savings and to access the credit which banks are increasingly willing to lend.
SHGs can also be community platforms from which women become active in village affairs, stand for
local election or take action to address social or community issues (the abuse of women, alcohol, the
dowry system, schools,

water supply).

As on March 31, 2009, 61,21,147 SHGs held savings bank accounts with total savings of Rs 5,545.62
crore as against 50,09,794 SHGs with savings of Rs 3,785.39 crore as on March 31, 2008. Thus more
than 8.06 crore poor households were associated with banking agencies under the SHG- Bank
Linkage Programme.

As on March 31, 2009, commercial banks had the maximum share of SHG savings with savings of
35,49,509 SHGs (58 per cent) amounting to Rs2,772.99 crore (50 per cent); this was followed by
RRBs with savings bank accounts of 16,28,588SHGs (26.6 per cent) and savings amount ofRs1,989.75
crore (35.9 per cent) and cooperative banks with savings bank accounts of 9,43,050 SHGs(15.4per
cent) and savings amount of Rs 782.88 crore(14.1 per cent).

During 2008-09, the average savings per SHG with all banks increased from Rs 7,556 as on March 31,
2008 to Rs 9,060 as on March 31, 2009, varying between a high of Rs 12,218 per SHG with RRBs and
a low of Rs 7,812 per SHG with commercial banks.

During 2008-09, banks financed 16,09,586 SHGs, including repeat loans to existing SHGs, as against
12,27,770 SHGs during 2007-08—a growth of 31.1 per cent (number of SHGs). As on March31, 2009,
42,24,338 SHGs had outstanding (cumulative) bank loans of Rs 22,679.85 crore as against 36,25,941
SHGs with outstanding bank loans of Rs16,999.90 crore as on March 31, 2008. This included 9,76,887
SHGs (6.5 per cent) with outstanding bank loans of Rs 5,861.72crore (21.7per cent) as
against9,16,978 SHGs with outstanding bank loans of Rs4,816.87 crore as on March 31, 2008.
Commercial banks had the maximum share of around 70 percent of outstanding bank loans to SHGs
followed by RRBs with a share of 23 per cent and cooperative banks with the balance. As on March
31, 2009, the average bank loan outstanding per SHG was Rs. 53,689 as against Rs 46,884 as on
March 31, 2008. It varied from high of Rs 57,037 per SHG in the case of commercial banks to a low of
Rs 31,460 per SHG in the case of cooperative banks.

Capital Adequacy Ratio

One of the major indicators suggesting that the Indian banking system has withstood the pressure of
global financial turmoil is the improvement in the CRAR. The overall CRAR of all SCBs improved
to13.2 per cent by end-March 2009 from 13.0 percent a year earlier, thus remaining significantly
above the stipulated minimum of 9.0 per cent. While the CRAR of as many as 78 banks was above 10
per cent, that of only one bank was in the range of 9 to 10 percent.

Non-performing Assets (NPAs) of the Banking Sector

Indian banks recovered a higher amount from NPAs during 2008-09 as compared to the previous
year, pointing towards efforts for improvement in the asset quality of banks. The total amount
recovered and written-off in 2008-09 was Rs 38,828 crore. However, though this was higher than the
Rs 28,283crore written off in 2007-08, it was lower than the fresh NPAs added (Rs 52,382 crore)
during the year. Though some slippage was to be expected in the current global context, it has been
moderate as compared to the problems faced by banks all over the world. Among the various
channels of recovery available to banks for dealing with bad loans, the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interests Act In India (SARFAESI Act)
and the Debt Recovery Tribunals (DRTs) have been the most effective.

Among NBFC groups, asset finance companies (AFCs) held the largest share in total assets/liabilities
(70.3 per cent), followed by loan companies (28.9 per cent), hire purchase companies (0.6 per cent)
and equipment leasing (0.3 per cent).The increase in assets/liabilities of AFCs was mainly on account
of reclassification of NBFCs, which was initiated in December 2006.Of the total deposits held by all
NBFCs, AFCs held the largest share in total deposits of NBFCs (70.5 per cent).
The asset-holding pattern remained skewed in 2008-09, with 12 NBFCs with asset size of “above Rs
500crore” holding 95.8 per cent of the total assets of all NBFCs, while the remaining 263 NBFCs held
only about 4.2 per cent in end-March 2009.

Financial performance of NBFCs in terms of income and net profit improved during 2008-09. While
growth in expenditure decelerated over the previous year, it, however, witnessed higher growth
than income, resulting in a decline in operating profit by 2.2 per cent. Net profit registered a
moderate growth mainly due to lower provisioning for tax. The cost to income ratio deteriorated
from 68.9 per cent in 2007-08 to 74.1 per cent in 2008-09. Non-interest cost at 97.6 per cent
continued to constitute the dominant share in the total cost of NBFCs during 2008-09.

Gross NPAs (as percentage of gross advances) of asset finance, equipment leasing,

investment and hire purchase companies declined during 2008-09. Net NPAs (as percentage of net
advances) increased marginally in the case of asset finance companies and hire purchase companies,
while those of equipment leasing and investment companies decreased. Asset quality of various
types of NBFCs as reflected in various categories of NPAs (substandard, doubtful and loss)showed
that there was sharp improvement in the asset quality of equipment leasing companies and
deterioration in the asset quality of hire purchase companies during 2008-09 over the previous year.

Regulation of non-banking entities is being progressively strengthened and the process had started
before the onset of the global financial crisis. Issues relating to the level playing field between bank
sponsored NBFCs and non-bank associated NBFCs and other issues of regulatory convergence and
regulatory arbitrage were examined with respect to systemic implications. NBFCs-ND with asset size
of Rs100 crore and above are defined as systemically important and an elaborate prudential
framework has been put in place to regulate these entities.

Initially, with a view to protecting the interests of depositors, regulatory attention was mostly
focused on NBFCs accepting public deposits (NBFCs-D). Over the years, however, this regulatory
framework has been widened to include issues of systemic significance. The sector is being
consolidated and while deposit-taking NBFCs have decreased both in size as well as in terms of the
quantum of deposits held by them, NBFCs-ND have increased in terms of number and asset size.

In July 2008, the Reserve Bank revised the approach towards monitoring of frauds in NBFCs which
was earlier issued in March 2008. NBFCs have been advised to report frauds in their subsidiaries and
affiliates/joint ventures, and directions were also issued in January 2009, requiring them to adopt an
interest rate model which precludes high interest rates and at the same time be transparent to the
customers.

The final guidelines regarding non-deposit taking systemically important NBFCs (NBFC-NDSI) were
issued on August 1, 2008. According to these guidelines, the minimum CRAR for each NBFCs-ND-SI
was raised from the existing 10 per cent to 12per cent to be reached by March 31, 2009 and 15per
cent to be reached by March 31, 2010. In view of the economic downturn and based on several
requests received, this requirement has been postponed for one year. The NBFCs-ND-SI were
required to make additional disclosures relating to CRAR, exposure to the real estate sector and the
maturity pattern of assets and liabilities in their balance sheet from the year ending March 31, 2009.

In December 2008, systemically important NBFCs-ND-SIs were permitted, as a temporary measure,

to raise foreign currency short-term borrowings under the approval route subject to certain
conditions. In this connection, all the NBFCs-ND-SI that have availed of short-term foreign currency
loans were advised to furnish a monthly return as per the prescribed format within ten days from
the end of the month to which it pertains.

To enable the RBI to verify that “fit and proper” management of NBFCs is continuously maintained, it
has been decided that any takeover/acquisition of shares or merger/ amalgamation of an NBFC-D
with another entity or any merger/amalgamation of an entity with an NBFC-D that would give the
acquirer/another entity control of the NBFC-D, would require prior permission of the RBI with effect
from September 17, 2009.

To hedge the underlying exposures of NBFCs, directions were issued covering the framework for
trading of interest rate futures by NBFCs in exchanges in India recognized by the Securities Exchange
Board of India (SEBI) subject to RBI/SEBI guidelines.

The NBFC sector has been witnessing a consolidation process in recent years, wherein the weaker
NBFCs are gradually exiting, paving the way for a stronger NBFC sector.

Capital Market
The Indian equity markets, which had declined sharply during 2008, reflecting the volatility in
international financial markets and foreign institutional investment outflows, began the year 2009
on a subdued note. The market remained range bound during April-March 2009 but exhibited signs
of recovery from April 2009. With the revival of foreign institutional investors’ (FIIs) interest in
emerging market economies including India, the equity markets gained strength during May-July
2009. There was a fresh spell of bullish sentiment in September2009, with the Bombay Stock
Exchange (BSE) Sensex recording a high of 17,126.84 during the month. The Indian equity markets
closed lower at

15,896.28 in end-October 2009, before showing an improvement during November-December 2009.

The movement in equity indices in the Indian capital market was in line with trends in major
international equity markets, a sign of increasing integration.

Against the backdrop of these trends in Indian equity markets, the regulatory measures initiated
during the year were clearly in the direction of introducing greater transparency, protecting
investors’ interests and improving efficiency in the working of Indian equity markets, while also
ensuring the soundness and stability of the Indian capital market.

MUTUAL FUNDS

According to SEBI, Mutual fund is a mechanism for pooling the resources by issuing units to the
investors and investing funds in securities in accordance with the objectives as disclosed in offer
document.

A mutual fund is a portfolio of stocks, bonds or other securities that is collectively owned by
hundreds or thousands of investors and managed by a professional investment company.

During 2009, total net resources mobilized by MFs increased to Rs 1,43,775 crore as compared to
net redemptions amounting to Rs 624 crore in2008. Private-sector mutual funds, which had
witnessed heavy redemption pressure in 2008,recorded a turnaround with total net resource
mobilization of Rs 1,14,095 crore in 2009 as against a net redemption of Rs12,506 crore in 2008.
Total funds mobilized by public-sector mutual funds were marginally higher at Rs 17,624 crore in
2009 (Rs14,587 crore in 2008). The Unit Trust of India (UTI), which had recorded net redemptions of
Rs 2,704crore in 2008, mobilized Rs12,056 crore in 2009.

Secondary market

Indian equity markets witnessed a revival in the secondary market segment, which had recorded a
sharp decline in the wake of the global financial crisis during the later half of 2008.The secondary
market staged a handsome recovery in 2009 following stimulus measures implemented by the
Government and resurgence of foreign portfolio flows displaying renewed interest by foreign
investors. The subdued global commodity prices in the beginning of 2009 also lifted the sentiments
in the Indian capital market. Furthermore, election results announced in May 2009 removed
uncertainty on economic policies and as such boosted Indian equity markets and both benchmark
and sectoral indices rallied. The equity markets gained further till September 2009 on positive cues
from the global markets, before declining during October 2009. Market sentiments improved during
November-December 2009, leading to gains in equity prices and an uptrend in equity market indices.

Amongst the National Stock Exchange (NSE) indices, both Nifty and Nifty Junior recorded positive
annual equity returns (current year-end index divided by previous year-end index multiplied by 100)
of 75.8per cent and 128.6 per cent in 2009 as against negative annual equity returns of 51.8 per cent
and 63.5 percent respectively during the calendar year 2008.

In terms of month-to-month movement, the NSE S&P CNX Nifty index showed improvements during
March-May, July-September and November–December 2009. The S&P CNX Nifty index moved up
from its previous year’s closing level of 2,959 to5,201 on December 31, 2009, recording an increase
of 75.8 percent over the year. Nifty junior was on an uptrend in terms of month-end values from
March to December 2009, except a marginal decline in its value in end-October 2009. The rise in the
Nifty Junior index, on a point-to-point basis, was 128.6per cent in end-December 2009. The
movement in the BSE Sensex and BSE 500 indices was more or less in the same direction as in the
case of Nifty indices during the year 2009.
Debt Market

The Indian debt market has two segments, namely Government securities and corporate debt.

Government Securities

The fresh issues of Government of India dated securities in 2009 amounted to Rs4,89,000 crore as
against Rs 2,04,317 crore[including securities issued under the Market Stabilization Scheme (MSS)] in
2008.Yields on securities showed relatively lower intra-year variations in 2009 as compared to the
previous year. The cut-off yield-to-maturity (YTM) range on fresh issuances during the year
narrowed from 6.24-10.03 per cent in 2008 to 4.86-8.43 per cent in 2009.

The volume of secondary market transactions in government securities marginally improved during
the year, with the turnover ratio(volume of transactions as a ratio of end-period stock)

increasing to 1.7 in the calendar year 2009 from 1.5 in 2008.

In the secondary market, the yields on dated government securities hardened during the year,
particularly after July 2009, reflecting the impact of the announcement of a relatively large
government borrowing programme for the year 2009-10.Yields gradually moved up during the
course of the year. Yields on dated securities of five and 10-yearmaturities increased to 7.30 per cent
and 7.59 percent respectively in end-December 2009 from 5.41 percent and 5.25 percent
respectively in end-December 2008.

Corporate debt

In pursuance of the guidelines of the High Level Expert Committee on Corporate Bonds and

Securitization (December 2005) and the subsequent announcement made in the Union Budget 2006-
07,SEBI authorized the BSE (January 2007), NSE(March 2007) and Fixed Income Money Market and
Derivatives Association of India (FIMMDA) (August2007) to set up and maintain corporate bond
reporting platforms for capturing all information related to trading in corporate bonds as accurately
as possible. In the second phase of development, the BSE and NSE put in place corporate bonds
trading platforms in July 2007 to enable efficient price discovery in the market. This was followed by
operationalization of a DvP-I(trade-by-trade)- based clearing and settlement system for over-the-
counter trades incorporate bonds by the clearing houses of the exchanges. In view of these market
developments, the Reserve Bank of India announced in its Second Quarter Review of the Annual
Policy Statement for2009-10 in October 2009 that the repo in corporate bonds can now be
introduced. In pursuance of the same, the RBI issued ‘Repo in Corporate Debt Securities (Reserve
Bank of India) Directions, 2010’on January 8, 2010 which will come into force with effect from March
1, 2010

Total traded volume in corporate bonds during April-December 2009 was Rs 2,42,686 crore, that is
higher by 173.4 per cent over the Rs 88,750 crore during April-December 2008.

During 2009-10 up to December 2009, the yield on corporate debt paper (with AAA rating) for five-
year maturity moved in the range of 7.71-8.94 percent. The yield on corporate debt paper softened
till mid-May 2009 but remained above the 8.0 percent level thereafter.

Currency derivatives

Exchange Traded Currency Futures were introduced in the Indian market following guidelines

issued by the Standing Technical Committee set up jointly by the RBI and SEBI on August 6, 2008.
The underlying idea was to facilitate transparency and efficiency in price discovery, eliminate
counter party credit risk, provide access to all types of market participants, standardize products and
provide a transparent trading platform. Trading in the currency futures segment commenced at the
NSE in August2008. Later, the BSE and the Multi Commodity Exchange of India Ltd. (MCX) were also
given permission to trade in currency derivatives. Trading in Currency Futures (INR/US$ contract)
started on the NSE, the BSE and the Multi Commodity Exchange- Stock Exchange (MCX-SX) on
August29, 2008, October 1, 2008 and October 7, 2008 respectively.

The total number of contracts traded and traded value at the NSE were 2,263.62 lakh and Rs
10,82,258 crore in 2009, while the MCX-SX recorded 2,242.74 lakh contracts with traded value of Rs
10,71,583 crore during 2009. The month-to-month average daily traded value at both the exchanges
increased—from Rs 1,199 crore in January 2009 to Rs 9,115 crore in December 2009at the NSE and
from Rs 1,221 crore to Rs 9,452crore at the MCX-SX for the same period. Trading volumes at the BSE
were not significant during the year under consideration.

COMMODITY FUTURES MARKET

Commodity markets are markets where raw or primary products are exchanged. These raw
commodities are traded on regulated commodities exchanges, in which they are bought and sold in
standardized Contracts.

This article focuses on the history and current debates regarding global commodity markets. It
covers physical product (food, metals, electricity) markets but not the ways that services, including
those of governments, nor investment, nor debt, can be seen as a commodity. Articles on
reinsurance markets, stock markets, bond markets and currency markets cover those concerns
separately and in more depth. One focus of this article is the relationship between simple
commodity money and the more complex instruments offered in the commodity markets.

History

The modern commodity markets have their roots in the trading of agricultural products. While
wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century
in the United States, other basic foodstuffs such as soybeans were only added quite recently in most
markets. For a commodity market to be established, there must be very broad consensus on the
variations in the product that make it acceptable for one purpose or another.

The economic impact of the development of commodity markets is hard to over-estimate. Through
the 19th century "the exchanges became effective spokesmen for, and innovators of, improvements
in transportation, warehousing, and financing, which paved the way to expanded interstate and
international trade."

Early history of commodity markets

Historically, dating from ancient Sumerian use of sheep or goats, or other peoples using pigs, rare
seashells, or other items as commodity money, people have sought ways to standardize and trade
contracts in the delivery of such items, to render trade itself more smooth and predictable.
Commodity money and commodity markets in a crude early form are believed to have originated in
Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Sealed in
clay vessels with a certain number of such tokens, with that number written on the outside, they
represented a promise to deliver that number. This made them a form of commodity money - more
than an "I.O.U." but less than a guarantee by a nation-state or bank. However, they were also known
to contain promises of time and date of delivery - this made them like a modern futures contract.
Regardless of the details, it was only possible to verify the number of tokens inside by shaking the
vessel or by breaking it, at which point the number or terms written on the outside became subject
to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This
represented the first system of commodity accounting.

However, the Commodity status of living things is always subject to doubt - it was hard to validate
the health or existence of sheep or goats. Excuses for non-delivery were not unknown, and there are
recovered Sumerian letters that complain of sickly goats, sheep that had already been fleeced, etc.

If a seller's reputation was good, individual "backers" or "bankers" could decide to take the risk of
"clearing" a trade. The observation that trust is always required between market participants later
led to credit money. But until relatively modern times, communication and credit were primitive.

Classical civilizations built complex global markets trading gold or silver for spices, cloth, wood and
weapons, most of which had standards of quality and timeliness. Considering the many hazards of
climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the trade routes, it was a
major focus of these civilizations to keep markets open and trading in these scarce commodities.
Reputation and clearing became central concerns, and the states which could handle them most

effectively became very powerful empires, trusted by many peoples to manage and
mediate trade and commerce.

Forward contracts

Commodity and Futures contracts are based on what’s termed "Forward" Contracts. Early on these
"forward" contracts (agreements to buy now, pay and deliver later) were used as a way of getting
products from producer to the consumer. These typically were only for food and agricultural
Products. Forward contracts have evolved and have been standardized into what we know today as
futures contracts. Although more complex today, early “Forward” contracts for example, were used
for rice in seventeenth century Japan. Modern "forward", or futures agreements, began in Chicago
in the 1840s, with the appearance of the railroads. Chicago, being centrally located, emerged as the
hub between Midwestern farmers and producers and the east coast consumer population centers.

Benefits:

 Price discovery for commodity players

 A farmer can plan his crop by looking at prices prevailing in the futures market
 Hedging against price risk
 A farmers can sell in futures to ensure remunerative prices
 A processor/ manufacturing firm can buy in futures to hedge against volatile raw
material costs
 An exporter can commit to a price to his foreign clients
 A stockist can hedge his carrying risk to ensure smooth prices of the seasonal
commodities round the year
 Easy availability of finance
 Based on hedged positions commodity market players (farmers, processors,
manufacturers, exporters) may get easy financing from the banks

Hedging

"Hedging", a common (and sometimes mandatory) practice of farming cooperatives, insures against
a poor harvest by purchasing futures contracts in the same commodity. If the cooperative has
significantly less of its product to sell due to weather or insects, it makes up for that loss with a profit
on the markets, since the overall supply of the crop is short everywhere that suffered the same
conditions.

Whole developing nations may be especially vulnerable, and even their currency tends to be tied to
the price of those particular commodity items until it manages to be a fully developed nation. For
example, one could see the nominally fiat money of Cuba as being tied to sugar prices, since a lack of
hard currency paying for sugar means less foreign goods per peso in Cuba itself. In effect, Cuba
needs a hedge against a drop in sugar prices, if it wishes to maintain a stable quality of life for its
citizens.

Commodity Exchange
A commodities exchange is an exchange where various commodities and derivatives products are
traded. Most commodity markets across the world trade in agricultural products and other raw
materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil,
metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures
and options on futures. Other sophisticated products may include interest rates, environmental
instruments, swaps, or ocean freight contracts.

Commodities Trading

Commodities exchanges, usually trade futures contracts on commodities. Such as trading contracts
to receive something, say corn, in a certain month. A farmer raising corn can sell a future contract on
his corn, which will not be harvested for several months, and guarantee the price he will be paid
when he delivers; a breakfast cereal producer buys the contract now and guarantees the price will
not go up when it is delivered. This protects the farmer from price drops and the buyer from price
rises. Speculators also buy and sell the futures contracts to make a profit and provide liquidity to the
system.

Multi Commodity Exchange (MCX) is an independent commodity exchange based in India. It was
established in 2003 and is based in Mumbai. It has an average daily turnover of around US$1.55
billion. MCX offers futures trading in Agricultural Commodities, Bullion, Ferrous & Non-ferrous
metals, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other soft commodities.

MCX has also setup in joint venture the National Spot Exchange a purely agricultural commodity
exchange and National Bulk Handling Corporation (NBHC) which provides bulk storage and handling
of agricultural products.

The commodities market in India is vast, with over 30 major markets in operation alongside 7,500
small localized markets (known as ‘Mandies'). As a result, the Indian Gross Domestic Product (GDP) is
hugely dependent on agrarian commodities.

Two years ago, the Government of India identified the agricultural sector as a thrust area for
modernization and began an initiative to commission an effective nationwide commodity trading
infrastructure. As a key element of this strategy, the Ministry of Consumer Affairs, Food and Public
Distribution envisioned a state-of-the-art nationwide commodities exchange, that by adopting global
‘best practices' and technology standards, would ensure the efficiency of its members.

Commodity futures market in India is one of the oldest in the world. We institutionalized futures
trading at the Bombay Cotton Trade Association in 1875, with contracts. Futures trading in many
other commodities like oilseeds, foodgrains and bullion were doing well during the pre-independent
days and in the 50s led to banning of futures trading in most of the commodities. The revival started
in the mid 90s with liberalization of the economy and agricultural sector in particular.

Multi Commodity Exchange of India (MCX), an independent and demutualized multi-commodity

exchange, was amongst the first organizations to receive a mandate to commission a nationwide
multi-commodity trading platform in February 2003. They faced a challenging deadline, wherein
Exchange operations had to go live within 10 months.

Headquartered in Mumbai, MCX is led by a team of senior industry professionals, with extensive
business and operations expertise. MCX needed an infrastructure with an optimal Total Cost of
Ownership (TCO) and the potential to scale up seamlessly, with growing transaction intensity. MCX
was aware that its long term profitability depended on bringing the platform to market quickly and
cost effectively.

With Exchange operations being technology centric, the MCX Management Team had intensive
discussions on the best alternative to fulfill its business objectives and at the same time successfully
comply with the requirements of the Ministry. It was therefore decided to entrust the roll-out of the
technology framework to the market leader in mission-critical Straight Through Processing (STP)
technologies and Microsoft® partner, Financial Technologies (India) Ltd. (FTIL).

The Government of India has taken several measures to revive and accelerate futures in the past few
years.

 Between August 2002 and April 2003 prohibition on futures trading in 81 commodities was
removed. From April 1st 2003 therefore all commodities are permitted for futures trading.
This was a major decision of the Government considering the fact that we had only 6
commodities, and that too low volume once, allowed for futures trading in 1997.

 In our endeavor to reach the benefits of commodity futures treading to all parts of the
country trading facilities have been extended to the State of Jammu & Kashmir for the first
time in September, 2003.

 In its efforts to remove restrictions on physical trade in commodities the Government

removed party-to-party forward contracts in commodities ( NTSD contracts) from the
purview of the Forward Contracts ( Regulation) Act.
  Following the announcement of the Honorable Prime Minister on 15 th August, 2002 four
nationwide multi commodity exchanges have been approved by the Government during
January-February 2003. One of them (National Multi-Commodity Exchange of India,
Ahmedabad) is today commencing futures trading in wheat and rice, the most voluminous
basic consumption goods of the masses.
Participants in Futures Commodities

 Farmers/ Producers
 Merchandisers/ Traders
 Importers
 Exporters
 Consumers/ Industry
 Commodity Financers
 Agriculture Credit providing agencies
 Corporate having price risk exposure in commodities

Nationwide Multi-Exchanges vs Regional Exchange

• Better Reach in all parts of the country

• Wider base for speculators from other markets including securities market
• Broad basing of the underlying commodity
• Industry diffused in several parts of the country may also directly participate
• Few commodities can be projected viable for an international futures Contract, with
participation from global player
• Novation of all open positions in the market by the exchange
• Best management practices, end of day mark to market, online margining and surveillance,
daily pay-in & pay-out are some of the features to woo the players

INSURANCE AND PENSION FUNDS

Insurance
The insurance sector was opened for private participation with the enactment of the Insurance
Regulatory and Development Authority Act 1999.While permitting foreign participation in ventures
setup by the private sector, the Government restricted participation of the foreign joint venture
partner through the foreign direct investment (FDI) route to 26 percent of the paid-up equity of the
insurance company.

New entrants in the insurance sector

Since the opening up of the sector, the number of participants has gone up from six insurers
(including LIC of India, four public-sector general insurers and the General Insurance Corporation as
the national reinsurer) in the year 2000 to 44 insurers operating in the life, non-life and reinsurance
segments (including specialized insurers, namely the Export Credit Guarantee Corporation [ECGC]
and Agricultural Insurance Company [AIC]). Two of the general insurance companies, namely Star
Health and Alliance Insurance Company and Apollo DKV function as standalone health insurance
companies. Of the 21 insurance companies that have set up operations in the life segment post
opening up of the sector, 19 are in joint venture with foreign partners. Of the 15 insurers who have
commenced operations in the non-life segment, 14 are in collaboration with foreign partners. The
two standalone health insurance companies have been set up in collaboration with foreign joint
venture partners. Thus, as of date, 33insurance companies in the private sector are operating in the
country in collaboration with established.

Life insurance
The post-liberalization period has been witness to tremendous growth in the insurance industry,
more particularly so in the life segment. However, in 2008-09, on account of the financial meltdown,
the life insurance segment saw a downward trend. The first-year premium, which is a measure of
new business secured, underwritten by the life insurers during 2008-09 was Rs 87,006 crore as
compared to Rs 93,713 crore in 2007-08, registering a negative growth of 7.2 per cent. In terms of
linked and non-linked business during the year 2008-09, 50.9 per cent of the first-year premium was
underwritten in the linked segment while 49.1per cent was in the non-linked segment as
against75:25 in the previous year. The shift towards the traditional segment is significant during the
year2008-09.

Non-life insurance

The non-life insurers (excluding specialized institutions like the Export Credit Guarantee Corporation
and Agriculture Insurance Corporation and the standalone health insurance companies) underwrote
premium of Rs 30,352 crore in 2008-09in India, as against Rs 27,824 crore in 2007-08.

Insurance Penetration

Insurance penetration is defined as the ratio of premium underwritten in a given year to GDP.

Insurance penetration in the year 2000 when the sector was opened up to the private sector
was2.32 (life 1.77 and non-life 0.55), and it has increased to 4.60 in 2008 (life 4.00 and non-life 0.6).
The increase in levels of insurance penetration has to be assessed against the average growth of
over 8.2 percent in the GDP in the last five years.
PENSION

Pension-sector reforms were initiated in India to establish a robust and sustainable social security
arrangement in the country seeing that only about12-13 per cent of the total workforce was covered
by any formal social security system. The New Pension System (NPS) was introduced by the
Government from January 1, 2004 for new entrants to the Central Government service, except the
Armed Forces, and was extended to the general public from May 1,2009 on a voluntary basis. The
features of the NPS design are self-sustainability, portability and scalability. Based on individual
choice, it is envisaged as a low-cost and efficient pension system backed by sound regulation. As a
pure “defined contribution” product with no defined benefit element, returns would be totally
market related. The NPS provides various investment options and choices to individuals to switch
over from one option to another or from one fund manager to another, subject to certain regulatory
restrictions.

The Pension Fund Regulatory & Development Authority (PFRDA), set up as a regulatory body for the
pension sector, is engaged in consolidating the initiatives taken so far regarding the full NPS
architecture and expanding the reach of the NPS distribution network. The full NPS architecture
comprising a Central Record keeping Agency (CRA), pension fund managers (PFMs), trustee bank,
custodian and NPS Trust has been put in place and is fully operational. The National Securities
Depository Limited (NSDL) has been selected as the CRA. The PFRDA has also appointed six Pension
Fund Managers (PFM) for the unorganized sector, namely UTI Retirement Solutions Limited, SBI
Pension Funds Pvt. Ltd., ICICI Prudential Life Insurance Company Ltd., IDFC Asset Management
Company Ltd., Reliance Capital Asset Management Ltd. and Kotak Mahindra Asset Management
Company Ltd., as pension fund sponsors under the NPS.
 CHAPTER 4

DATA ANALYSIS AND

INTERPRETATION
DATA ANALYSIS AND INTERPRETATION

Table 1. Credit flow from scheduled Commercial Banks 2009-10

Credit flow March 2009 March 2009 March 2010 March 2010 Outstanding
on 27 March
Amount Percent Amount Percent
2010

Public Sector 3,07,310 22.5 3,41,442 20.4 20,11,591

Banks

Foreign Banks 36,116 28.5 6,483 4.0 1,69,350

Private Banks 78,301 19.9 51,559 10.9 5,23,038

All Scheduled 4,30,724 22.3 4,08,099 17.3 27,70,012

Commercial
Banks*
Figure. 1
Interpretation:

Bank credit to the commercial sector witnessed strong growth in the first half of the year, it
decelerated particularly in the second half of the year. For the full year 2009-10, bank credit to the
commercial sector expanded by 16.9 per cent only, as compared to a growth of 21.0 per cent in
2008-09.

During 2009-10 (March 27, 2010 over March28, 2009), there was a moderation in the credit growth
of SCBs to 17.3 per cent from a level of 22.3 percent in the corresponding period of the previous
year. In terms of absolute values also, the slowdown was noticeable, in as much as the expansion in
bank credit during 2007-08 was of the order of Rs. 4,30,724 crore which decelerated to Rs. 4,08,099
crore in 2008-09. Non-food credit growth as at end-March 2010 grew by 17.5 per cent as compared
to 23.0 per cent growth as at end-March2009.

Table 2. Flow of institutional credit to agriculture and allied activities

Sl. No. Agency 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10*

1. Cooperative 31,424 39,786 42,480 48,258 36,762 32,925

Banks

% share 25 22 18 19 13 20

2. RRBs 12,404 15,223 20,435 25,312 26,724 20,065

% share 10 8 9 10 9 12

3. Commercial 81,421 1,25,477 1,66,486 1,81,088 2,28,951 1,12,449

Banks

% share 65 70 73 71 78 68
 Total 1,25,309 1,80,486 2,29,401 2,54,658 2,92,437 1,65,439

Figure . 2

Interpretation:

The public, private sector and foreign banks, had achieved the overall priority sector lending targets.
Loans to agriculture & allied activities grew at the rate of 23.0 per cent during 2008-09 (as on March
27, 2009) compared to 19.5 per cent (as on March 28, 2008), credit to industry (comprising of large,
medium and small scale sector) grew at 21.6 percent during 2008-09 (as of March 27, 2009)
compared to 24.3 per cent (as of March 28, 2008). Personal loans during 2008-09 (as of March 27,
2009) grew at a lower rate of 10.8 per cent compared to 12.1 percent (as of March 28, 2008);
advances under personal loans for housing and consumer durables have witnessed deceleration.
Loans to commercial real estate and non-banking financial companies remained high in 2008-09,
posting a growth of 44.6 per cent and 25.1 per cent respectively.
Table 3. Progress under Self Help Group-Bank Linkage

New Self Help Groups financed by banks

Year During the During the Cumulative Cumulative Cumulative Bank loan
 year year during the during the during the cumulative
year year year amount(cr)

--------- No. Growth (%) No. Amount (cr) Growth (%) Amount (cr)

2003-04 2,55,882 29 7,17,360 1,022.34 87 2,048.68

2004-05 3,61,731 49 10,79,091 1,855.53 81 3,904.21

2005-06 5,39,365 41 16,18,456 2,994.25 62 6,898.46

2006-07 6,20,109 15 22,38,565 4,499.09 50 11,397.55

2007-08 11,05,749 --- 28,94,505 6,570.39 --- 12,366.49*

2008-09 12,27,770 11 36,25,941 8,849.26 35 16,999.90*

2009-10 16,09,586 31.1 42,24,338 12,256.51 38.5 22,679.85*

* Outstanding

Figure. 3
Interpretation:

As on March 31, 2009, 61,21,147 SHGs held savings bank accounts with total savings of Rs 5,545.62
crore as against 50,09,794 SHGs with savings of Rs 3,785.39 crore as on March 31, 2008. Thus more
than 8.06 crore poor households were associated with banking agencies under the SHG- Bank
Linkage Programme. During 2008-09, banks financed 16,09,586 SHGs, including repeat loans to
existing SHGs, as against 12,27,770 SHGs during 2008-09—a growth of 31.1 per cent (number of
SHGs). As on March 31, 2009, 42,24,338 SHGs had outstanding (cumulative) bank loans of Rs
22,679.85 crore as against 36,25,941 SHGs with outstanding bank loans of Rs16,999.90 crore as on
March 31, 2008. This included 9,76,887 SHGs (6.5 per cent) with outstanding bank loans of Rs
5,861.72crore (21.7per cent) as against9,16,978 SHGs with outstanding bank loans of Rs4,816.87
crore as on March 31, 2008. Commercial banks had the maximum share of around 70 percent of
outstanding bank loans to SHGs followed by RRBs with a share of 23 per cent and cooperative banks
with the balance. As on March 31, 2010, the average bank loan outstanding per SHG was Rs. 53,689
as against Rs 46,884 as on March 31, 2009. It varied from high of Rs 57,037 per SHG in the case of
commercial banks to a low of Rs 31,460 per SHG in the case of cooperative banks.
Table 4. Financial assistance sanctioned and disbursed by financial
institutions

Category Amount Amount Amount Amount Percentage Percentage

variation variation

------------ 2008-09 2008-09 2009-10 2009-10 2008-09 2009-10

------------ S D S D S D

All-India 18,696 17,379 33,660 31,604 80.0 81.9

Term-
Lending
Institutions*

Specialised 366 189 597 283 63.1 49.7

Financial
Institutions#

Investment 39,670 28,460 65,731 57,086 65.7 100.6

Institutions@

Total 58,732 46,028 99,988 88,973 70.2 93.3

assistance by
FIs

Note: S=Sanctions, * Relating to SIDBI and Industrial Investment Bank of India, D =Disbursements #
Relating to IVCF and ICICI Venture. @ Relating to LIC and GIC & erstwhile subsidiaries
Figure. 4

Interpretation:

During 2009-10, there was increase in financial assistance both sanctioned and disbursed by FIs, the
increase in disbursements (93.3 per cent)was more pronounced than that in sanctions (70.2per
cent). A major part of the increase in financial sanctions and disbursements was accounted for
mainly by investment institutions (especially the LIC) followed by term-lending institutions.
Table 5. Number of Non Banking Financial Companies Registered with the RBI

Years Number of registered NBFCs Number of NBFCs-D

2004-05 13764 604

2005-06 13261 507

2006-07 13014 428

2007-08 12968 401

2008-09 12809 364

2009-10 12704 336

Figure.5
Interpretation:

The NBFCs as a whole account for 9.1 percent of the assets of the total financial system. The total
number of NBFCs registered with the Reserve Bank, consisting of deposit-taking NBFCs (NBFCs-D),
residuary non-banking companies (RNBCs), mutual benefit companies (MBCs), miscellaneous non-
banking companies (MNBCs) and Nidhi companies, declined from12,809 in end-June 2009 to 12,740
in end-June 2010.The number of NBFCs-D also declined from 364 in end-June 2009 to 336 in end-
June 2010, mainly due to the exit of many NBFCs from deposit-taking activity
Table 6. Resource mobilization through the primary market

(Rs Crore)

Mode 2007* 2008* 2009* 2010* (P)

1. Debt 389 594 0 3,500

 2. Equity 32,672 58,722 49,485 23,098

of which, IPOs 24,779 33,912 18,393 19,296

Number of IPOs 75 100 37 20

Mean IPO size 330 339 497 965

3. Private 1,17,407 1,84,855 1,55,743 2,38,226

placement

4. Euro 11,301 33,136 6,271 15,266

issues
Total 1,61,769 2,77,307 2,11,499 2,80,090

* Calendar year

P Provisional
Figure.6

Interpretation:

Though resource mobilization from the primary market through equity investments was sluggish in
2010 both in terms of number of issues and amount raised through public rights issues and follow-
on public offerings, there was an increase in debt market activity and private placements. The
amount raised through IPOs, increased slightly in 2008 to Rs 19,296 crore from Rs 18,393crore in
2009. The mean IPO size increased to Rs 965 crore in 2010 from Rs 497 crore in 2009. The total
amount mobilized through three debt issues during 2009 was Rs 3,500 crore. The total amount
raised through private placement of debt in 2009 at Rs 2,38,226crore was higher by 53.0 per cent
than its previous year’s level of Rs 1,55,743 crore. Total resources mobilized through the primary
market at Rs 2,80,090 crore recorded an increase of 32.4 per cent in 2010.

Table 7. Trends in resource mobilization (net) by Mutual funds

(Rs Crore)

Sector 2007* 2008* 2009* 2010*

UTI 6,426 9,245 -2,704 12,056

Public Sector 12,229 8,259 14,587 17,624

Private Sector 86,295 1,20766 -12,506 1,14,095

Total 1,04,950 1,38,270 -624 1,43,775

*Calendar year
Figure.7

Interpretation:
During 2010, total net resources mobilized by MFs increased to Rs 1,43,775 crore as compared to
net redemptions amounting to Rs 624 crore in 2009. Private-sector mutual funds, which had
witnessed heavy redemption pressure in 2009,recorded a turnaround with total net resource
mobilization of Rs 1,14,095 crore in 2010 as against a net redemption of Rs12,506 crore in
2009.Total funds mobilized by public-sector mutual funds were marginally higher at Rs 17,624 crore
in 2010 (Rs 14,587 crore in 2009). The Unit Trust of India (UTI), which had recorded net redemptions
of Rs 2,704 crore in 2009, mobilized Rs12,056 crore in 2010.

Table 8. Cumulative change in movement of global indices

Index 2005 2006 2007 2008 2009 2010

BSE Sensex, 13.1 61.0 136.1 247.4 65.2 199.1

India

Hang Seng 13.2 18.3 58.8 121.2 1.1 74.2

Index, Hong
Kong

Jakarta 44.5 68.1 161.0 296.8 35.5 264.1

Composite
Index,
Indonesia

Nikkei 225, 7.6 50.9 61.3 43.4 -22.9 -5.3

Japan
Kospi Index, 10.5 69.7 76.8 133.9 25.6 104.4
South Korea

Kuala 14.2 13.4 38 82.0 -3.3 58.7

Lumpur
Comp.
Index,
Malaysia

TSEC 4.2 11.2 32.8 44.4 -25.2 32.3

weighted
Index,
Taiwan

SSE -15.4 -22.4 78.7 251.5 43.7 116.9

Composite
Index, China

Figure.8
Interpretation:

Market capitalization of shares traded on the BSE increased sharply in 2009. Market capitalization,
which had reached record levels in 2007, recovered in the case of Nifty, Nifty junior, the BSE Sensex
and BSE 500 by end-December 2010.It surpassed the 2007 level in the case of Nifty junior, while for
other indices it remained lower than 2007 levels.

The Asian stock markets were on a recovery path. The cumulative change in global indices in
end-December 2010 over the end-December 2004 level revealed a significant rise in these indices
across countries. The Jakarta Composite index (Indonesia) registered a rise of 264.1 per cent to
2,510 at end-December 2009, while the BSE Sensex was up by 199.1 percent to 17,465 in end-
December 2010.

Table 9. Equity returns, volatility, market capitalization & Profit Earning ratio

NNifty : 2008-09 2009-10

Returns (per cent) -51.79 75.76

End-year Market Capitalization 18,32,610 33,14,447

(Rs cr.)

Daily volatility * 2.81 2.14

End-year P/E 12.97 23.17

Nifty Junior :

Returns (per cent) -63.52 127.91

End-year Market Capitalization 2,95,471 6,55,899

(Rs cr.)

Daily volatility * 3.15 2.23

End-year P/E 8.99 16.28

BSE Sensex :

Returns (per cent) -52.48 76.35

End-year Market Capitalization 14,63,165 26,49,482

(Rs cr.)

Daily Volatility * 2.85 2.19

End-year P/E 12.36 22.36

BSE 500 :

Returns (per cent) -58.74 85.34

End-year Market Capitalization 29,40,741 56,87,505

(Rs cr.)

Daily Volatility * 2.75 2.05

End-year P/E 12.4 21.9

* Standard deviation values.

P/E—profit earning ratio.

Figure.9
Interpretation:

Market capitalization of shares traded on the BSE and NSE increased sharply in 2010. Market
capitalization, which had reached record levels in 2008, recovered in the case of Nifty, Nifty junior,
the BSE Sensex and BSE 500 by end-December 2009. It surpassed the 2008 level in the case of Nifty
junior, while for other indices it remained lower than 2008 levels
Table 10. Volatility of weekly returns on the equity markets (standard
deviation)

Class of stock 2008-09 2009-10

India

Top fifty Nifty 4.30 3.89

Next fifty (nifty junior) 4.89 4.39

Sensex 4.57 5.12

BSE 500 4.68 5.29

Figure.10
Interpretation:

Market volatility, as measured by the standard deviation of daily volatility of the Indian indices,
declined significantly in 2009-10. However, the volatility of weekly returns of Indian indices, namely
Sensex and BSE 500, in 2009 was even higher than that in 2008, while Nifty indices, namely Nifty and
Nifty junior, recorded lower volatility in 2010
Table 11. Transactions of Foreign Institutional investors

Transactions 2007-08 2008-09 2009-10

End-year Number of 1,219 1,594 1,706

FIIs (in numbers)

End-year Number of 3,664 4,872 5,331

Sub-accounts (in
numbers)

1. Equity Market
Activity

Spot

Gross Buy 8,14,877 7,21,606 6,24,238

Gross Sell 7,43,391 7,74,593 5,40,814

 Net (Gross Buy- 71,486 -52,987 83,424
Gross sell)

2. Debt

Gross Buy 31,418 48,019 1,11,772

Gross Sell 21,990 36,248 1,07,209

Net (Gross Buy-Gross 9,428 11,772 4,563

Sell)

3. Total FII Investment

(1+2)

Gross Buy 8,46,295 7,69,625 7,36,010

Gross Sell 7,65,380 8,10,841 6,48,023

Net (Gross Buy-Gross 80,915 -41,216 87,987

Sell)
Figure.11

Interpretation:

The number of registered FIIs rose to 1,706 at the end of 2009 from 1,594 in 2008. The number of
sub-accounts also increased to 5,331 from 4,872during the same period. The FII in the spot market
increased to Rs 83,424 crore in 2009-10 as compared to withdrawals of Rs 52,987 crore in 2008.
Further, net investment in debt was lower at Rs 4,563 crore in 2009 as compared to Rs 11,772 crore
in 2008.Total net investment by FIIs in equity and debt markets taken together, increased
considerably to Rs 87,987 crore in 2009-10 compared to a net decline of Rs 41,216 crore in 2008-09.
Table 12. India’s Rank in World Market of Agricultural commodities

Commodity India World Share Rank

RICE (PADDY) 240 2049 11.71 THIRD
WHEAT 74 599 12.35 SECOND
PULSES 13 55 23.64 FIRST
GROUNDNUT 6 35 17.14 SECOND
RAPESSED 6 40 15.00 THIRD
SUGARCANE 315 1278 24.65 SECOND
TEA 0.75 2.99 25.08 FIRST
COFFEE 0.38 7.28 3.85 EIGHT
JUTE and JUTE 1.74 4.02 43.30 SECOND
FIBERS
COTTON 2.06 18.84 10.09 THIRD

Interpretation:

Commodities traded in the commodity futures market during 2009-10 included a variety of
agricultural commodities, bullion, crude oil, energy and metal products. Several new commodities
were introduced for futures trading in 2009-10, such as almond, imported thermal coal, carbon
credits and platinum. The total value of trades in the commodity futures market rose from Rs 50.34
lakh crore in 2008 to Rs 70.90 lakh crore during 2009. The average daily value of trades in the
commodity exchanges improved from Rs 16,400 crore during 2008 to Rs 23,200 crore in 2009-10.
Agricultural commodities, bullion and energy accounted for a large share of the commodities traded
in the commodity futures market.
Table 13. Turnover on commodity futures markets

Name of the Exchange 2007-08 2008-09 2009-10

Multi Commodity 27,30,415 42,84,653 59,56,656

Exchange (MCX),
Mumbai

National Commodity 7,74,965 6,28,074 8,05,720

and Derivatives
Exchange (NCDEX)

National Multi 25,056 37,272 1,95,907

Commodity Exchange,
(NMCE)

Others 1,24,051 83,885 1,32,173

Total 36,54,487 50,33,884 70,90,456

Figure.13
Interpretation:

The MCX, Mumbai, recorded the highest turnover in terms of value of trade during 2009, followed
by the National Commodity & Derivatives Exchange Ltd.(NCDEX) and National Multi Commodity
Exchange of India Ltd.(NMCE) respectively.
 CHAPTER 5

SUMMARY OF FINDINGS, SUGGESTIONS

AND CONCLUSIONS

FINDINGS

1. During 2008-09, bank credit to the commercial sector expanded by 16.9 per cent only,
as compared to a growth of 21.0 per cent in 2007-08.
2. The public, private sector and foreign banks, have achieved the overall priority sector
lending target.

3. Loans to agriculture & allied activities grew at the rate of 23.0 per cent during 2008-
09 (as on March 27, 2009) compared to 19.5 per cent (as on March 28, 2008), credit
to industry (comprising of large, medium and small scale sector) grew at 21.6 percent
during 2008-09 (as of March 27, 2009) compared to 24.3 per cent (as of March 28,
2008).

4. As on March 31, 2009, 61,21,147 SHGs held savings bank accounts with total savings
of Rs 5,545.62 crore as against 50,09,794 SHGs with savings of Rs 3,785.39 crore as
on March 31, 2008. Thus more than 8.06 crore poor households were associated with
banking agencies under the SHG- Bank Linkage Programme.

5. The consolidated balance sheets of SCBs, expanded by 21.2 per cent as in end-March
2009.

6. There was increase in financial assistance both sanctioned and disbursed by FIs, the
increase in disbursements (93.3 percent) was more pronounced than that in sanctions
(70.2 percent).

7. Total number of NBFCs have declined marginally.

8. The amount raised through IPOs has increased slightly in 2010.

9. Total resources mobilized through the primary market at Rs 2,80,090 crore recorded
an increase of 32.4 percent in 2009-10.

10. Net resources mobilized by Mutual Funds has increased.

11. Market capitalization of shares traded on the BSE increased sharply in 2009. It
surpassed the 2007 level in the case of Nifty junior, while for other indices it
remained lower than 2007 levels.
 12. Market volatility, as measured by the standard deviation of daily volatility of the
Indian indices, declined significantly in 2009. However, the volatility of weekly
returns of Indian indices, namely Sensex and BSE 500, in 2009 was even higher than
that in 2008, while Nifty indices, namely Nifty and Nifty junior, recorded lower
volatility in 2009.

13. .Total numbers of Foreign Institutional Investors (FIIs) has increased.

14. The average daily value of trades in the commodity exchanges have improved.
Agricultural commodities, bullion and energy accounted for a large share of the
commodities traded in the commodity futures market.

15. The MCX, Mumbai, recorded the highest turnover in terms of value of trade during
2009 followed by the National Commodity & Derivatives Exchange Ltd.(NCDEX)
and National Multi Commodity Exchange of India Ltd.(NMCE) respectively.

SUGGESTIONS

1. Institutional players and corporate constitute major players in the Indian capital market. The
retail investor participation remains limited in the corporate debt market and mutual funds.
The interdependence between corporate and mutual funds has recently raised concerns
relating to volatility in financial markets.
2. The recent global financial turmoil raised many issues about governance of financial
intermediaries and awareness of investors. Investor awareness is a prerequisite for investor
protection. In fact, investor protection and education are two sides of the same coin. Neither
will have the desired impact in isolation. A simultaneous and coordinated effort on both
fronts would help investors take well informed financial decisions besides protecting their
interests and ensuring orderly conditions in markets. Greater effort therefore is needed for
investor education and promoting investors’ protection.

3. The consolidated balance sheets of SCBs expanded by 21.2 per cent as in end-March 2009 as
compared to 25.0 per cent in the previous year. While the balance sheets of PSBs
maintained their growth momentum, private-sector and foreign banks registered a
deceleration in growth.

4. The growth rate of banks’ lending to industries, personal loans and services witnessed a
deceleration, while the growth rate of banks’ lending to agriculture and allied activities
increased substantially.

5. One of the major indicators suggesting that the Indian banking system has withstood the
pressure of global financial turmoil is the improvement in the CRAR. The overall CRAR of all
SCBs improved to13.2 per cent by end-March 2009 from 13.0 percent a year earlier, thus
remaining significantly above the stipulated minimum of 9.0 percent.
6. Among the various channels of recovery available to banks for dealing with bad loans, The
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests
(SARFAESI) Act and the Debt Recovery Tribunals (DRTs) have been the most effective.

7. Pension reforms in India have generated widespread interest internationally. The PFRDA
faces the challenge of expanding the distribution network of the NPS to cover the entire
unorganized sector in the country, educate citizens to take appropriate investment
decisions, based on their risk and return profile, and contribute to improved financial
literacy levels. Provision of a statutory status to the pension regulator would help the PFRDA
perform its regulatory and developmental roles effectively. The success of pension reforms
 will not only facilitate the flow of long-term savings for development, but also help establish
a credible and sustainable social security system in the country.

8. Capital market solutions for catastrophe risk insurance are another area that needs focus.
This essentially transfers insurance risk of natural calamities like earthquakes, hurricanes and
floods to the capital markets through issue of catastrophe bonds. The instrument is widely
used in advanced countries and there is scope for introducing it in countries like India to
provide insurance against contingencies.

9. It is also a matter of satisfaction that the performance of the capital market has lately shown
signs of revival of investor interest and confidence –both domestic and foreign institutional
investors. Net investment by FIIs in equity instruments amounted to US$ 5.4 billion during
April-May 2009.

10. Mutual fund investments (net) in equity markets turned positive in March 2009 and were Rs.
2,320 crore during April-May 2009, while they invested Rs. 36,791 crore in debt instruments
during the same period.

11. There is scope for expansion of mutual fund industry as only 7.7 per cent of total financial
saving was allocated to mutual funds in 2007-08.

12. The retail investor participation, which is presently estimated at15 percent, is expected to
increase in the years to come as availability of products and investor education improve and
the industry takes steps towards transparency and sound corporate governance practices to
generate investor confidence.

13. The insurance sector penetration, both in life and non-life segments, has improved since the
time the sector has been opened for private participation.

14. The IRDA has been entrusted with the responsibility of development of the industry through
monitoring of consumer-related aspects like market conduct, consumer education and
 creation of an integrated platform for redressal of customer grievances. An important
initiative in this area is the announcement of draft corporate governance guidelines for
insurance companies to ensure that appropriate governance practices are in place in the
insurance companies for maintenance of solvency, sound long-term investment policy and
assumption of underwriting risks on a prudential basis as the insurance companies are yet to
be listed.

15. The development of corporate bond and securitization markets in India has been an
important area, which has received policy attention in the recent past. A reasonably well
developed bond market is required to supplement the banking system in meeting the
requirements of the corporate sector for long-term capital investment besides raising
resources for infrastructure development in the country.

16. Pension Fund Regulatory and Development Authority (PFRDA) faces the challenge of
covering the unorganized sector under the New Pension Scheme (NPS),empowering the
subscribers to take appropriate investment decisions based on their risk and return profile,
provide safety and optimum returns, and to improve financial literacy levels. The success of
pension reforms will not only help in facilitating the flow of long-term savings for
investments and funds for infrastructure development, but would also help the government
to fund its pension liabilities.

17. Pursuant of the announcement made in the Reserve Bank’s Annual Policy Statement for the
year 2007-08, all regional offices (ROs) of the Reserve Bank were advised to undertake an
evaluation of the SHG-Bank Linkage Programme. This was intended to ascertain the degree
of transparency in maintaining accounts by SHGs and their adherence to best practices. The
evaluation of SHGs carried out by the ROs revealed that there was scope for improvement in
the area of maintenance of books of accounts.

18. The momentum of growth in the micro-finance sector has brought into focus the importance
of regulating the sector to function in an efficient and orderly manner. There would be need
for greater transparency in their functioning and for facilitating their reach to un-banked
population of the country.
19. The price of a security depends largely on demand and supply conditions and is influenced
by the impact cost, which represents the cost of executing a transaction in a given security,
for a predefined order size, at any given point of time. Market liquidity and impact cost are
inversely related.

20. India is the largest consumer, producer, exporter and importer of raw materials. Lately,
there have been large size intermediaries penetrating the commodities market. This helps in
bringing in more finance to the market. The major banks are also financing commodities.
This makes the futures a secured route for hedging investments and against risks.

21. The RBI permits banks to hedge their bullion risk through Futures Exchanges. The other
commodities will also soon follow.

22. More and more international players are being attracted towards the Indian shores as the
trade interest and BPO increases.

23. Wider base for speculators from other markets including securities market will give more
opportunities for investor and will help in increasing the efficiency of capital market as well.

24. Best management practices, end of day mark to market, online margining and surveillance,
daily pay-in & pay-out are some of the features to woo the players.

25. Capital market solutions for catastrophe risk insurance are another area that needs focus.
This essentially transfers insurance risk of natural calamities like earthquakes, hurricanes and
floods to the capital markets through issue of catastrophe bonds. The instrument is widely
used in advanced countries and there is scope for introducing it in countries like India to
provide insurance against contingencies.

26. In order to facilitate direct hedging of risk in major currency pairs by market participants, the
Reserve Bank of India proposed in October 2009 that the recognized stock exchanges be
permitted to offer currency futures contracts in currency pairs of euro-INR, Japanese yen-
INR and pound sterling-INR, in addition to US dollar-rupee contracts which are already
permitted.
 CONCLUSIONS

The financial markets today encompass not only traditional banking institutions, but also many other
financial entities such as insurance companies, pension funds, mutual funds, venture capital funds
and stock and commodity exchanges that perform the function of financial intermediation. This
development has been accompanied by the advent of market-based instruments of the stock and
bond markets, financial products such as asset-backed securities, financial futures and derivative
instruments. While reducing the dependence of investors on bank credit to fund their investments,
these have also contributed to reallocation of risks and putting of capital to more efficient use.
Financial markets also serve the need for greater financial inclusion. The recent experience from the
global financial crisis, has however, shown that, despite the variety of instruments and the
sophistication of the markets, they may not remain immune to crisis, if the investors/institutions do
not pay adequate attention to the fundamentals or if the pricing of risk and the ratings for these
instruments are not transparent, and if the regulatory oversight is poor. An efficient and healthy
financial market, should therefore avoid the shortcomings as gleaned from the experience of the
global financial market in the last couple of years. The deepening and broadening of financial
markets also underscores the importance of institutional safeguards for monitoring and analyzing
the domestic as well as external developments to ensure that the regulatory system is efficient and
effective. This chapter summarizes the developments in the financial sector in India in the last year,
which has remained relatively immune to the global financial turbulence through a proactive
response to the challenges.

BIBLIOGRAPHY

News papers & magazines:

 Business Standard
 Economic Times
 Business line
 Business world

Text books/reference books

 “Financial Markets and Intermediaries” – Mohammed Arif Pasha
 “Security Analysis and Portfolio Management -Punithavathy Pandian
 “Investment Analysis and Portfolio Management -Prasanna Chandra
 “Laws and Practice of Banking”- Maheshwari and Maheshwari
 “Financial Management” – Reddy and Apannaiah

Annual Reports:
 Annual reports issued by financial intermediaries, financial institutions
like Nifty, Sensex .
Web sites:
 www.rbi.org.in
 www.sebi.gov.in
 www.nseindia.com
 www.bseindia.com
 www.irdaindia .org
 www.investopedia.com
 www.rediffmoney.com
 www.moneycontrol.com
 www.sharekhan .com
 www.google.com