REPORT

ON
RECENT TREND OF INDIAN
FINANCIAL SYSTEM

Submitted to:

DR. SABOOHI NASIM

Submitted by:-

Shahbaz hasan
Roll No.-14 MBA-11

Meaning Of Finance:-

The term finance in our

simple understanding it is perceived as equivalent to money. But
finance is not exactly to money,it is the source of providing funds for a
particular activity. Thus public finance does not means the money with
the government , but it refers to source of raising revenue for the
activities and function of a government.

Meaning of Financial System:-

Financial System is
an information system, comprised of one or more applications, that is
used for any of the following: collecting, processing, maintaining,
transmitting, and reporting data about financial events; supporting
financial planning or budgeting activities; accumulating and reporting
cost information; or supporting the preparation of financial statement
financial system of any country consists of financial market ,financial
intermediation and financial instrument or financial product.

Financial System is the interaction of various financial intermediaries ,

market instrument , policy maker , and various regulation to laid the
flow of saving from savers to investor and checking various abuses
faced in the proper functioning of the system

INDIAN FINANCIAL SYSTEH

POLICY MAKER
1 .Parliament for laws
2 .Ministry of Finance for
over all supervision and
policy policy framing

BASIC REQUIREMENT
Monetary System Saving and
investment process Financial Market

3. Central bank i.e., RBI for

regulate
FOREIGN FINANCIAL SYSTEM

Depository Institution
Cooperative Bank
Saving and institution
Mortgage Banks
Primary and credit societies
fund
State and Central gov.
Estate Investment

Flow of foreign short and long-term

FINANCIAL
INTERMEDIARIES
funds through
money and capital
markets Regulation of foreign
Commercial Bank
investment Foreign bank
Post Saving Banks
Insurance companies
Mutual fund

pension
Real

DEVELOPMENT OF FINANCIAL INSTITUTIONS

IN INDIA :The need of financial institution in India was felt very strongly
immediately after the attainment of independence to fill the gaps in the
capital market . The Indian capital market at that time was ill-equipped
to provide for the need of long term industrial finance ,the existing
financial arrangement were incapable of coping with the burgeoning
financial requirement of up and coming enterprises .
Although the country had a network of strong and developed
commercial banks , these institution ,working on the British banking
model, confined themselves to short term financing activity and
abstained from supplying long term financial assistance .
The managing agency houses , which had served as important adjunct
to capital market , were not able to cope with the requirement of
planned industrial development owing to their apathy to investment in
risky ventures and their keenness to finance only interested concern .
Furthermore , several malpractice ,the most important among which
were the misuse of fund , excess speculation and manipulation , the
high cost of promotion and financial and marginal managerial
concentration that had emerged , were often detrimental to the interest
of the investing public.
Not only did existing industries require substantially large amount of
capital to meet their reconstruction , modernisation , expansion and

diversification programmes , the establishment of new project on a

gigantic scale in the capital goods sector for the building of a strong and
balanced structure of industrial development , called for enormous
investment .
But only very small part of the total requirement could be meet by the
existing financial institution for other it become necessary to devise
new institutional machinery with ample financial resource and with
relatively more comprehensive function.
This was not the first time that the urgency for the creation of special
financial institution was realised. The idea for such agencies was
contemplated as far back as 1918, when the industrial commission
recommended the establishment of an institution analogues to the
industrial bank of Japan .
The Central Banking Inquiry Committee of 1929 also pinpointed the gap
in the capital market and strongly emphasised the need for the
establishment of provincial industrial corporation which would increase
the facilities for industrial investment.

INDUSTRIAL FINANCE CORPOTATION (IFC) :-

Government of
India set up the Industrial Finance Corporation of India (IFCI) in July
1948 under a special Act. This is the first financial institution set up in
India with the main object of making medium and long term credit to
industrial needs.
The Industrial Development Bank of India, Scheduled banks, insurance
companies, investment trusts and co-operative banks are the
shareholders of IFCI. The Union Government has guaranteed the
repayment of capital and the payment of a minimum annual dividend.
The corporation is authorised to issue bonds and debentures in the
open market, to borrow foreign currency from the World Bank and other
organisations, accept deposits from the public and also borrow from the
Reserve Bank.
The authorised share capital of the IFCI was Rs. 10 crore at the initial
stage, According to the Industrial Finance Corporation (Amendment)
Act, 1986, the authorised capital of the corporation has been raised
from Rs. 100 crore to Rs. 250 crore (the authorised capital may be fixed
by the government of India by notification from time to time).

STATE FINANCIAL CPRPORATION :-

At the time of setting

up IFC, the necessity for the establishment of similar institution , which
would assist smaller industries in different state , had been recognised
because it was not possible for a single institution to satisfy the capital
need of the smaller concerns sprawling all over country.
According , the State Financial Corporation Act was passed 1951, which
empowered State Government to set up financial institution in their
territories.
Punjab gov. Took to the lead to organising financial corporation , set up
first SFI in 1953.

INDUSTRIAL CREDIT AND INVESTMENT

CORPORATION OF INDIA (ICICI):- For encouragement of
industrial development in the private sector, a substantial provision for
underwriting facilities is always necessary. In order to fill the gap
another institution called ICICI was set up in 1955. Unlike the above two
financial corporation which are set up as gov. owned institution , the
ICICI was organised as wholly privately owned institution . In fact it was
one of the development bank which the World Bank had actively
sponsored in number of underdeveloped countries in collaboration with
their respective government.
The ownership of the corporation was entirely in private hand ; but
certain safeguard were built against the acquisition of the control by
interest group. The institution started its operation as an issuing cum
lending institution.

LIFE INSURANCE CORPORETION :-

Another milestone in
the field of institutionalisation of the capital market was the formation
of LIC following the nationalisation of the life insurance business in
1956. The institution was meant to provide refinancing facilities to
commercial bank and other financial institution giving medium-term
loans. The role of this corporation was different from that of the other

specialised institution in that it was not designed to provides direct

financial support to industrial enterprises but to refinance medium-term
loan ranging between 3 to 7 years. The corporation merged with IDBI in
1964 .

UNIT TRUST OF INDIAL:-

The UTI was established in 1964

with a view to pooling the saving of the people by the sales of its unit
,the purchase of which ensures to their buyers the combined benefit of
safety , liquidity and profitability and directing the resource thus
mobilised into newer as well as older industrial enterprises by
subscribing directly to their shares and debentures and by loaning to
them . UTI, thus began to act as a link between saving and investment.

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

:- Industrial Development Bank of India (IDBI) was established in 1964
by the Government of India (GoI) under an Act of Parliament, the
Industrial Development Bank of India Act, 1964 (the IDBI Act), as a
wholly-owned subsidiary of Reserve Bank of India (RBI) to provide credit
and extend other facilities for the development of industry. In 1976, the
ownership of IDBI was transferred to the GoI and it was entrusted with
the additional responsibility of acting as the principal financial
institution for coordinating the activities of institutions engaged in
financing, promotion or development of industry.

INDUSTRIAL RECONSTRUCTION BANK OF INDIA :The Industrial Reconstruction Corporation of India was established as a
public limited company in April, 1971 under the control of Reserve Bank
of India and the Central Government.
The basic objective of this corporation is to assist rehabilitation of sick
industrial units or rehabilitation of units likely to face closure, but
showing promise of viability. The down fall of the units may be due to
frequent strikes, mismanagement, shortage of raw materials, general

recession etc. Their closure will result in unemployment and dislocation

of productive activities.
So, in order to protect them, the IRCI has been set up. This corporation
aims at providing FINANCIAL, technical or managerial assistance so that
they can be put up again as viable units.

GENERAL INSURENCE CORPORATION:-

General
Insurance Corporation (GIC) of India is the sole reinsurance company in
the Indian insurance market with over four decades of experience.
The entire general insurance BUSINESS in India was nationalized by
General Insurance Business (Nationalization) Act, 1972 (GIBNA).
General Insurance Corporation of India (GIC) was formed in pursuance
of Section 9(1) of GIBNA.
It was incorporated on 22 November 1972 under the Companies Act,
1956 as a private company limited by shares.
GIC was formed for the purpose of superintending, controlling and
carrying on the business of general insurance. As soon as GIC was
formed, GOI transferred all the shares it held of the general insurance
companies to GIC. Simultaneously, the nationalized undertakings were
transferred to Indian insurance companies.
After a process of mergers among Indian insurance companies, four
companies were left as fully owned subsidiary companies of GIC
1.National Insurance Company Limited
2.The New India Assurance Company Limited
3.The Oriental Insurance Company Limited
4.United India Insurance Company Limited

SMALL INDUSTRY DEVELOPNENT BANK OF

INDIAL :- Small Industries Development Bank of India (SIDBI) was
established in October 1989 and commenced its operation from April
1990 with its Head Office at Lucknow as a development bank,

exclusively for the small scale industries. It is a central government

undertaking. The prime aim of SIDBI is to promote and develop small
industries by providing them the valuable factor of production finance.
Many institutions and commercial banks supply finance, both long-term
and short-term, to small entrepreneurs. SIDBI coordinate the work of all
of them.

Apart from specialised financial institution in the industrial sector.a

number of financial were also set up in the export- import , agriculture
and rural sector and housing sector.

NATIONAL BANK FOR AGRICULTURE AND RURAL

DEVELOPMENT (NABARD):- National Bank for Agriculture
and Rural Development (NABARD) was established on 12 July 1982 by
an Act of the Parliament to promote sustainable and equitable
agriculture and rural prosperity through effective credit support, related
services, institutional development and other innovative initiatives.

FUNCTIONS AND DUTIES1.Refinance support to Rural Financial Institutions (RFIs), mainly to

Cooperative Banks and Regional Rural Banks, for Seasonal Agricultural
Operations, handloom weavers, marketing operations, etc
2.Refinance support to Rural Financial Institutions for increasing flow of
long term credit to create assets and capital formation in agriculture
and allied sector
3.Direct refinance assistance to Cooperative Banks for providing short
term multipurpose credit
4.Credit facility to Marketing Federations, Corporations and
Cooperatives
5. Loans to State Governments for creating rural infrastructure from
Rural Infrastructure 6. Development Fund (RIDF)
7. Loans for creation of warehousing infrastructure to State
Governments, State and 8.Central Government owned entities,

Cooperatives and Federation of Cooperatives, Corporates/ Companies,

individual entrepreneurs, etc., from Warehousing Infrastructure Fund
(WIF)
9.Direct lending to state owned institutions /corporations, Cooperatives,
Producers Organizations, etc., under NABARD Infrastructure
Development Assistance (NIDA).

EXIM BANK:-

Export-Import Bank of India (EXIM Bank) is a

specialized financial institution, wholly owned by Government of India,
set up in 1982, for financing, facilitating and promoting foreign trade of
India. Including the share capital of Rs.700 crore received during the
year from Government of India, the paid up capital as on March 31,
2014, stood at Rs.3,759 crore and the Net Worth stood at Rs.8,310
crore. Profit after tax of the Bank for the year 2013-14 amounted to
Rs.710 crore.

EXIM Bank extends Lines of Credit (LOCs) to overseas financial

institutions, regional development banks, sovereign governments and
other entities overseas, to enable buyers in those countries to import
developmental and infrastructure projects, equipments, goods and
services from India, on deferred credit terms. EXIM Bank has laid strong
emphasis on enhancing project exports, the funding options for which
have been enhanced with introduction of the Buyer's Credit-National
Export Insurance Account (BC-NEIA) program. The Bank facilitates twoway technology transfer by financing import of technology into India,
and investment abroad by Indian companies for setting up joint
ventures, subsidiaries or undertaking overseas acquisitions. To promote
hi-tech exports from India, the Bank has a lending programme to
finance research and development (R&D) activities of export-oriented
companies. During the year ended 31st March, 2014, EXIM Bank
sanctioned loans of Rs.48,264 crore, while disbursements amounted to
Rs.43,262 crore. Loan Assets stood at Rs.75,873 crore as on March 31,
2014.

#NON-BANKING FINANCE
COMPANIES#
Meaning of NBFC :- According to the Reserve Bank of India (Amendment
Act) 1997, A Non-Banking Finance Company means:
(i) A FINANCIAL Institution which is a company;
(ii) A non-banking institution which is a company and which has as its
principal business the receiving of deposits under any scheme or
arrangement or in any other MANNER or lending in any manner;
(iii) Such other non-banking institution or class of such institutions as
the bank may with the previous approval of the Central Government
specify.
The definition excludes FINANCIAL institutions besides institutions which
carry on agricultural operations as their principal business. Non-banking
finance companies consist mainly of finance companies which carry on
hire purchase finance, housing finance, investment, loan, equipment
leasing or mutual benefit financial companies but do not include
insurance companies or stock exchanges or stock-broking companies.
Types of NBFCs:
The Non-Banking Finance Companies operating in India fall in the
following broad categories.
(1) Equipment Leasing Company is a company which carries on as its
principal business, the business of leasing of equipments or the
financing of such activity. Apart from their Net Owned Funds (NOF), the
leasing companies raise finds in the form of deposits from other
companies, banks and the FINANCIAL institutions.
Public deposits and inter-corporate deposits ACCOUNT for 74 percent of
their total funds. Leasing is a form of rental system. A lease is a
contractual arrangement whereby the lessor grants the lessee the right
to use an asset in return for periodical lease-rent payments.
There are two types of leasses (i) operating lease, and (ii) FINANCIAL or
capital lease. The operating lease is a short-term lease which can be
cancelled. FINANCIAL lease is a non-concealable contractual
commitment.

(2) Hire Purchase Finance Company is a company which carries on as its

principle business, hire purchase transactions or the financing of such
transactions. The sources of hire-purchase finance are
(i) Hire purchase Finance Companies.
(ii) Retails and Wholesale Traders.
(iii) Bank and FINANCIAL Institutions.
Hire-purchase finance or credit is a system under which term loans for
purchase of goods, producer goods or consumer goods and services are
advanced which have to be liquidated under an INSTALLMENT plan. The
period of credit is generally one to three years. The hire purchase
credits available for a wide range of products and services. Hirepurchase finance companies are the public or private limited companies
or partnership firms engaged in giving credit for acquiring durable
goods.
(3) Housing Finance Company is a company which carries on as its
principle BUSINESS, the financing of the acquisition or construction of
houses including the acquisition or development of plots of lands for
construction of houses. These companies are supervised by National
Housing Bank, which refinances housing loans by scheduled commercial
banks, co-operative banks, housing finance companies and the apex cooperative housing finance societies.
(4) Investment Company means any company which carries on as its
principle business the acquisition of securities. These types of
companies are investment holding companies formed by business
houses. As such they provide finance mainly to companies associated
with these business houses.
As compare to open-end investment companies or mutual FUNDS/units
trust, these investment companies are close end companies having a
fixed amount of share capital. Almost all prominent industrial groups
have their own investment companies.
(5) Loan Company is a company which carries on as its principle
business, the providing of finance whether by making loans or advances
or otherwise for any activity other than its own.
These types of companies are generally small partnership concerns
which obtain funds in the form of deposits from the public and give
loans to wholesale and RETAIL TRADERS, small scale industries and selfemployed persons. These companies collect fixed deposits from the

public by offering higher rates of interest and give loans to others at

relatively higher rates of interest.
(6) Mutual Benefit Finance Company (i.e. Nidhi Company) means any
company which is notified by the Central Government under section
620A of the Companies Act, 1956. The main sources of FUNDS for nidhis
are share capital, deposits from their members and deposits from the
public.

Nidhis give, loans to their members-for several purposes like marriages,

redemption of old debts, construction and etc. The nidhis normally
follow the easy procedures and OFFER saving schemes and make
credits available to those whose credit needs remain unmet by his
commercial banks.
(7) Chit Fund Company is a company which collects subscriptions from
specified number of subscribers periodically and in turn distributes the
same as PRIZES amongst them. Any other form of chit or kuri is also
included in this category. The chit fund companies operations are
governed by the Chit Fund Act, 1982, which is administered by State
Governments. Their deposit taking activities are regulated by the
Reserve Bank.
The chit FUND companies enter into an agreement with the subscribers
that everyone of them shall subscribe a certain amount in installments
over a definite period and that every one of such subscriber shall in his
turn, as determined by lot or by auction or by tender, be entitled to a
PRIZE amount.
(8) Residuary Non-Banking Company is a company which receives
deposits under any scheme by way of subscriptions/contributions and
does not fall in any of the above categories.
There are few unhealthy features of the operations of these companies;
(i) Negative NOF (Net Owned Fund), (ii) Understatement of their deposit
liability, (iii) Forfeiture of deposits, (iv) Levy of service charges on the
depositors (v) Payment of high rates of commission, etc.
To remove these features, RBI has extended prudential norms to these
companies, introduced compulsory REGISTRATION requirement,
specified minimum rates of interest payable on their deposits under
different schemes. Under the RBI (Amendment) Act, 1997, the RBI
directly inspects and monitoring the activities of these companies.

Registration:
The Reserve Bank of India (Amendment) Act, 1997 provides for
compulsory registration with the Reserve Bank of all NBFCs, irrespective
of their holding of public deposits, for commencing and carrying on
BUSINESS, minimum entry point norms, maintenance of a portion of
deposits in liquid assets, creation of Reserve Fund and transfer of 20
percent of profit after tax annually to the fund.
The act provides for an entry point norm of Rs. 25 lakh as the minimum
Net Owned Fund (NOF). Subsequently, for new NBFCs seeking
REGISTRATION with the Reserve Bank to commence business on or after
April 21, 1999, the requirement of minimum level of NOF was revised
upwards to Rs. 2 crore.
No NBFC can commence or carry on business of a FINANCIAL institution
including acceptance of public deposit without obtaining a Certificate of
Registration (COR) from the Reserve Bank.,

Stock Exchange in India!

The stock exchange or market is a place where stocks, shares and other
long-term commitments or investment are bought and sold.
The economic significance of a stock market results from the increased
marketability resulting from a stock exchange share quotation. The
stock exchange is an essential institution for the existence of the
capitalist system of the economy and for the smooth functioning of the
corporate form of organisation.
The Securities Contracts (Regulation) Act of 1-956 defines, a stock
exchange as an association, organisation or body of individuals,
whether incorporated or not, established for the purpose of assisting,
regulating and controlling, business in buying, selling and dealing in
securities.

Stock Exchanges are noted as an essential concomitant of the

Capitalistic System of economy. It is indispensable for the proper
functioning of corporate enterprise. It brings together large amounts of
capital necessary for the economic progress of a country. It is a citadel
of capital and pivot of money market. It provides necessary mobility to
capital and indirect the flow of capital into profitable and successful
enterprises. It is the barometer of general economic progress in a
country and exerts a powerful and significant influence as a depressant
or stimulant of business activity.

History of Stock Exchange in

India:
The first organised stock exchange in India was started in 1875 at
Bombay and it is stated to be the oldest in Asia. In 1894 the
Ahmedabad Stock Exchange was started to facilitate dealings in the
shares of textile mills there. The Calcutta stock exchange was started in
1908 to provide a market for shares of plantations and jute mills.
Then the madras stock exchange was started in 1920. At present there
are 24 stock exchanges in the country, 21 of them being regional ones
with allotted areas. Two others set up in the reform era, viz., the
National Stock Exchange (NSE) and Over the Counter Exchange of India
(OICEI), have mandate to have nation-wise trading.
They are located at Ahmedabad, Vadodara, Bangalore, Bhubaneswar,
Mumbai, Kolkata, Kochi, Coimbatore, Delhi, Guwahati, Hyderabad,
Indore, Jaipur Kanpur, Ludhiana, Chennai Mangalore, Meerut, Patna,
Pune, Rajkot.
The Stock Exchanges are being administered by their governing boards
and executive chiefs. Policies relating to their regulation and control are
laid down by the Ministry of Finance. Government also Constituted
Securities and Exchange Board of India (SEBI) in April 1988 for orderly
development and regulation of securities industry and stock exchanges.

Five trends in the financial sector

REFOR
M

CRISI
S

CONVERGE
NCE

ENGINEERI
NG

INCLUSI
ON

REFORM:- Indian financial reforms started with the Narasimham

Committee recommendations. The Committee proposed a wide range
of proposals which laid the strong foundation for the strength and the
resilience of the financial system today. Reforms were focused on the
banking sector, financial institutions (FIs), capital market, and money
market.
As a result of the Committees recommendations, SEBI (Securities and
Exchange Board of India) was made a statutory body, and the Capital
Issues Control Act was repealed to pave the way for an era of free
pricing, he reminisces. SEBI issued guidelines for each of the market
intermediaries and made the market micro-structures ready for a more
transparent and orderly growth of the market. Global depository
receipts (GDRs) were launched in 1992, and investment norms for NRIs
(non-resident Indians) and OCBs (overseas corporate bodies) were also
prescribed. FIIs (foreign institutional investors) were permitted to invest
in the Indian capital market.

FINANCIAL CRISIS:-, the second trend listed in the book, is a topic

that is fresh in the minds of most of us. Through a timeline, therefore,
Shanmugham plots the happenings of recent times, beginning with the
surfacing of the US sub-prime crisis in mid 2007, followed by the
collapse of Bear Stearns, and the avalanche of failures thereafter.
The spill-over to other economies, or the contagion effect, manifested
as reverse capital flows and non-availability of credit, leading to
financial turbulence, he rues. The crisis has affected the real economy.
Growth prospects of emerging economies have been affected by the
financial crisis.

FINANCIAL CONVERGENCE, universal banking, whereby all

financial services are made available to customers under one roof. For
example, a bank, apart from its ordinary business of accepting deposits
and lending money, may also offer investment banking, credit card
services, or sell insurance policies.
Commercial banks in india also market the mutual fund schemes.
India Post sells a whole range of saving schemes, gold coins, etc. in

addition to its postal services. Subtle differences in the lines of

business of different entities in the system have narrowed down, he
notes.

FINANCIAL ENGINEERING, the next trend, is about the

development and creative application of financial technology for solving
financial problems, exploiting financial opportunities, and for otherwise
adding value. The phrase, however, came under a cloud when
derivative securities such as CDS (credit default swap) and CDO
(collateralised debt obligation) were behind the excessively speculative
positions that caused the downfall of many FIs. Hence the caution
sounded by Warren Buffett, that these instruments could be financial
weapons of mass destruction!

FINANCIAL INCLUSION :-

is what has repeatedly been

mentioned in policy pronouncements of many nations. Financial
inclusion is the process of ensuring access to financial services and
timely and adequate credit where needed by vulnerable groups such as
weaker sections and low-income groups at an affordable cost, reads a
quote from the report of the Rangarajan Committee (2008)