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UNIT-I
Introduction
Introduction to Financial Services
Unit I (Syllabus)
Introduction to Financial System and Financial
Markets, Instruments
Evolution of Indian Financial System
Financial Services: concepts, features,
constituents and types
Regulatory Framework for Financial
Services(NBFC)
Stock Exchanges of India; SEBI
PHASE - I
Indian Financial System (IFS) on the eve of
Planning (Up to 1951)
PHASE - I
Banking Sector
Indigenous Bankers
Dominated the banking sector till 1910
Acted as bankers to the Govt./ companies
till 1860 (collected revenues, transferred
funds, mint-masters, money changers.)
Scope of their function declined with the
emergence of modern banks
RBI
IBI
Co-operative
Banks
Exchange
Banks
Indian Joint
stock Banks
Small Savings
Oldest medium for community savings
Govt. run savings bank- attached with
presidency banks, district treasuries/ Post
office savings bank (POSB)
By 1896 POSB- monopolized the small
saving business; variety in saving schemes
introduced only since 1915.
Stock Market
First Stock Exchange established in Bombay in 1887
Volume of funds raised increased significantly in
first half of 20th century
Capital raised primarily through issuance of
ordinary shares
Debentures not popular before 1960s
Public Deposits
Wide spread practice of using public
deposits by Deposit Companies in financing
of fixed assets (cause of serious concern for
the monetary authorities)
Deposits accounted for 11% & 39 % of total
funding of Bombay & Ahmedabad Mills1930.
Interest rates on deposits were less than the
average lending rates of common banks
Insurance Funds
Life Insurance business began with the
enactment of Life Insurance Companies Act1912
Carried by various Indian Co.s, Foreign Co.s,
Provident Societies, Post & Telegraph Dept.
1928
No. of Life insurance Co.s
70
No. of Non Life insurance Co.s 128
1950
244
174
PHASE - II
IFS in the Post Independence Period (1951late 1980s)
Public
Ownership of
Financial
Institutions
Fortification
of
Institutional
Structure
Protection
to
Investors
Participation
of Financial
Institutions in
Corporate
Management
Mechanism
Adopted
NATIONALIZATION
NEW
INSTITUTIONS
Nationalization Timeline
1948
1956
1969
1972
Marked
the
beginning
1980
New Institutions
Battery of new institutions established in the
public sector
Wide range of special purpose financial institutions
(development banks, term lending institutions)
established at national, regional and state levels
Creation of an investment trust organization in the
public sector-UTI financial innovation
Entire industrial financing system owned, controlled
and led by the govt.
(B)Fortification
Fortification of Institutional Structure
Strengthening of
institutional
structure
Development
Banks
Changes in structure
& policies
Commercial
Banks
UTI
LIC
2
Tightening of
the listing
requirements
of Stock
3
Control of
Capital issues
& industrial
licensing
1973
1969
1956
Foreign Exchange
Regulation Act
Monopolies & Restrictive
Trade Practices Act
Companies Act
Securities Contract (Regulation) Act
1947
Reasons
Weakness in the
Institutional
Structure
WEAKNESSES
Problems of
Small & new
Enterprises
Lack of
Institutional
Arrangement
in New Issue
Market
PHASE - III
Financial Sector Reforms since early 1990s
Planned
Economic
Development
Free Market
Economics
Liberalization
Deregulation
Globalization
-State controlled FS
Major Economic Policy Changes
Delicensing of industries
Trade liberalization
Currency reforms
privatization
Disinvestments..etc
Integration
of the Financial
Structure with the
Savings pool
Privatization
of
Financial
Institutions
Re-Organization
of
Institutional
Structure
Mutual
Funds
DFIs
Commercial
Banks
NBFCs
Changes
Across
Securities
Market
Money
Market
Re-organization of
Development Financial Institutions (DFIs)
Newer forms of financing - direct
financing, lease financing, underwriting,
loans for working capital..
Growing focus on non-fund based
financial services- project counseling,
portfolio mgt. , trusteeship, merchant
banking..
Re-organization of
Development Financial Institutions (DFIs)
Changes in the pattern of financing of DFIs
Lesser dependence on government, RBI.
Funds sourced from capital market- issue of stocks, bonds,
etc..
Govt. guaranteed bonds only for SIDBI, NABARD, NHB..
SPONSORED ORGANIZATION
Development Finance
Re-organization of
Commercial Banks
Major transformation in structure,
policies, and accounting norms and
standards..
Prudential Banking Norms introduced
(Narsinham Committee, 1991)- income
recognition, asset classification, capital
adequacy norms.
Re-organization of
Commercial Banks
Important policy initiatives to increase the
profitability of the banks
Reduction in SLR, CRR
Investment limit in shares /debentures increased
from 1.5% to 5%
Leasing, Factoring, H/P business upto 10% of total
advances
Closure of unprofitable branches, mergers of banks..
Greater operational flexibility, deregulation of
interest rates.
Re-organization of
NBFCs (Non-Banking Finance Cos,)
Emerged as a significant element of IFS; broadened
the range of financial services
Fund based NBFCs--- equipment leasing, Bill
Discounting, Hire Purchase financing, VCF.
Fees based / Advisory NBFCs---Issue Management,
Portfolio Mgt., M&A advisory..
Increase in number, deposits, and innovation in
functioning of NBFCs in recent years.
Regulatory
framework
evolved
(Khanna
Committee, 1996; Vasudev Committee, 1998; )
CHANGES
IN THE
FINANCIAL
MARKET
INADEQUACY
OF THE OLD
LEGISLATIVE
FRAMEWORK
INTEGRATED
REGULATORY
FRAMEWORK
REQUIRED
SEBI ACT
1992
LANDMARK
LEGISLATION
DEPOSITORIES
ACT
1996