Nagindas

Khandwa
la
College
Comparison
between
Indian &
Chinese
Financial
system
 CREDITS
• ASHUTOSH ACHARYA -501
• VIRAL AVLANI -502
• JAINAM CHHEDA -506
• SHIVANGI CHOKSY -507
• HEENA NAIK -522
• PRASHANT VERMA -5
• VINIT SHAH -
547
• SONAM SHINDE -549
• SOURABH TIBREWALA -5

ACKNOWLEDGEMENT
Both India and China rank among the front runners
of global economy and are among the world's most
diverse nations.
Making an in depth study and analysis of
Comparisons between Indian and Chinese financial
system seems to be a very hard task. But the
guidance given by our Prof.Kinjal helped us
throughout our presentation.
I would like to thank wholeheartedly, my parents
and all the people concerned who have helped me
continuously and gave moral support while
preparing for this presentation.
It would be rather unfair on my part for not
thanking my college Nagindas Khandwala College.
I look forward of having a favorable feedback from
the readers.
 INTRODUCTION
The financial system plays an important role in promoting economic growth
not only by channeling savings into investments but also by improving
allocative efficiency of resources. The recent empirical evidence, in fact,
suggests that financial system contributes to economic growth more by
improving the allocative efficiency of resources than by channeling of
resources from savers to investors. An efficient financial system is now
regarded as a necessary pre-condition for growth. This shift in the emphasis
along with opening up of domestic economies to international competition
has encouraged Emerging Market Economies (EMEs) such as India and
China to introduce financial sector reforms. In the wake of the financial
crises of the 1990’s however, the role of the financial system in growth has
been subjected to a critical reassessment. Increased financial integration
has exposed the countries to the risk of contagion. It is now widely
recognised that stability of the financial system is critical for a sustainable
growth.

Both India and China have introduced significant financial sector reforms
with a view to improving efficiency and enhancing stability of their financial
systems. Although the financial systems in both the countries continue to be
dominated by the public sector banks, there were significant differences in
the initial conditions. At the time of initiation of reforms, while India had a
reasonably well developed financial system, China had to start virtually
from nothing. Not surprisingly, the nature of financial sector reforms
undertaken in the two countries has been different in many respects.
Initiation of various financial sector reforms has helped over the years in
making the Indian financial system quite robust. The financial system of
China has also witnessed some improvement, although several challenges
remain. The future challenge for the Chinese authorities is to strengthen the
banking system and further reform the capital market. The major challenge
for the Indian financial system is to bring down the intermediation cost of
the banking system.
The Indian and Chinese financial system can be compared as follows:
 FINANCIAL INSTITUTIONS
Financial institutions are the intermediaries who facilitate smooth
functioning of the financial system by making investors and borrowers
meet. They mobilize savings of the surplus units and allocate them in
productive activities promising a better rate of return. Financial institutions
also provide services to entities seeking advice on various issues ranging
from restructuring to diversification plans. They provide whole range of
services to the entities who want to raise funds from the markets elsewhere.
Financial institutions act as financial intermediaries because they act as
middlemen between savers and borrowers. Financial institutions may be of
Banking or Non-Banking institutions.

FINANCIAL INSTITUTIONS IN INDIA

• Central bank - Central bank is a nation's principal monetary
authority which regulates the money supply and credit, issues
currency, and manages the rate of exchange. The Reserve Bank of
India (RBI) is the central bank of India. Its primary function is to
ensure the country's monetary stability. The bank creates monetary
policy and assists in regulating its financial system. The central
board of directors, appointed by the government, leads the bank.
The Reserve Bank of India was founded as a privately owned bank in
1935; it became government-owned following nationalization in
1949. The bank is headquartered in Mumbai and has 22 regional
offices. Its subsidiaries include the National Housing Bank, Deposit
 Insurance and Credit Guarantee Corporation of India, and the
National Bank for Agriculture and Rural Development.
• Commercial bank - 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 RBI. While
commercial banks offer services to individuals, they are primarily
concerned with receiving deposits and lending to businesses.
The commercial banking structure in India consists of Scheduled
Commercial Banks in India and 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".

• Credit Rating Agencies - The credit rating agencies in

India mainly include ICRA and CRISIL. ICRA was formerly referred to
the Investment Information and Credit Rating Agency of India
Limited. Their main function is to grade the different sector and
companies in terms of performance and offer solutions for up
gradation. The credit rating agencies in India offer varied services
 like mutual consulting services, which comprises of operation up
gradation, risk management.
The have special sections to carry on research and development
work of the industries. They provide training to the employees and
executives of the companies for better management. They examine
the risk involved in a new project, chalk out plans to fight with the
problem successfully and thus ameliorate the percentage of risk to a
great extent. For this they carry on thorough research into the
respective industry. They have started offering services to the
mutual fund sector through the application of fund utilization
services. The major industries currently graded by the credit rating
agencies include agriculture, health care industry, infrastructure,
and maritime industry.

• Insurance companies - Insurance Companies in India mainly deals

in life insurance for the general public. The other two significant
insurance segments are marine insurance segment and the fire
insurance segment. Insurance involves guaranteed coverage of risk
in the event of destruction of the insured item or entity. The
insurance sector in India initially took off with the establishment of
the two public sector insurance companies known by the names, Life
Insurance Corporation of India and the General Insurance
Corporation of India.

The insurance sector in India has grown in leaps and bounds to

become the most significant financial players in the Indian financial
market. The popularity of the insurance sector has mainly evolved
on account of the large investments flow from this sector that
facilitates the growth of the overall economy of the country. Their
success has attracted the attention of the insurance companies
hailing from foreign countries. The foreign insurance companies
have stated forming pacts and collaborations with the Indian
insurance companies to influence the Indian Insurance sector. The
insurance companies offer protection to their clients, collect the
small savings of the clients to turn into a huge capital to reinvest in
priority sectors of the economy that requires huge investments like
 infrastructure industry and so on.

• Merchant banks - The notification of Ministry Of Finance in India

defines Merchant Banker as “any person who is engaged in the
business of issue management either by making arrangements
regarding selling, buying, or subscribing to the securities as
manager, consultant, adviser in relation to such an issue
management”. In general the merchant banks are the financial
institution which provides financial services, solutions, & advice to
corporate houses. Some of the world famous merchant banks are
Goldman Sachs, Credit Suisse & Morgan Stanley etc. In India there
are many banks which are into the field of merchant banking some
of the banks are ICICI, State Bank Of India, Punjab National Bank etc.
he Merchant Bank got more importance in the year 1983 when there
was a huge boom in the primary market where the companies were
going for new issue. Merchant banking activities are organized and
undertaken in several forms. Commercial banks and
foreign development finance institutions have organized them
through formation divisions, nationalized banks have formed
subsidiary companies, share brokers and consultancies constituted
themselves into public limited companies or registered themselves
as private limited Companies. Some merchant banking companies
have entered into collaboration with merchant bankers of foreign
countries abroad with several branches. Below mentioned are the
major services offered by Merchant Bankers;

a) Project Counseling
b) Management of debt and equity offerings
c) Issue Management
d) Managers, Consultants or Advisers to the Issue
e) Underwriting of Public Issue
f) Portfolio Management
g) Restructuring strategies
h) Off Shore Finance
i) Non-resident Investment
j) Loan Syndication
k) Corporate Counseling and advisory services
l) Placement and distribution
• Mutual funds - Mutual funds can be defined as the money-
managing systems that are introduced to professionally invest
money collected from the public. The Asset Management Companies
(AMCs) manage different types of mutual fund schemes. The AMCs
are supported by various financial institutions or companies.
 Investment in mutual funds in India means pooling money in bonds,
short-term money market, financial institutions, stocks and
securities and dishing out returns as dividends. In India, Fund
Managers manage the mutual funds. They are also referred to as
portfolio managers. The mutual funds in India are regulated by the
Securities Exchange Board of India. Mutual funds have different
structure and aims, which in turn enable us to classify them into
various major categories. These categories are:

a) Closed-end mutual funds

b) Open end funds
c) Equity mutual funds
d) Mid cap funds
e) Large cap funds
f) Growth funds
g) Balanced funds
h) Exchange Traded Funds (ETFs)
i) Load mutual funds and No-Load mutual funds
j) Value funds
k) International mutual funds
l) Money market funds
m) Sector mutual funds
n) Fund of funds (FoF)
o) Index funds
p) Regional mutual funds
• Specialised financial institutions - The list of specialized
financial institutions in India mainly includes, Export-Import
Bank Of India, Board for Industrial & Financial Reconstruction, Small
Industries Development Bank of India, National Housing Bank. They
are government undertakings established with a view to offer
financial as well as technical assistance to the Indian industries.

• Venture capitalists - The venture capital investment helps for the

growth of innovative entrepreneurships in India. Venture capital has
developed as a result of the need to provide non-conventional, risky
finance to new ventures based on innovative entrepreneurship.
Venture capital is an investment in the form of equity, quasi-equity
and sometimes debt - straight or conditional, made in new or untried
concepts, promoted by a technically or professionally qualified
entrepreneur. Venture capital means risk capital. It refers to capital
investment, both equity and debt, which carries substantial risk and
uncertainties. The risk envisaged may be very high may be so high
as to result in total loss or very less so as to result in high gains
Venture capital means many things to many people. It is in fact
nearly impossible to come across one single definition of the
concept. According to SEBI a Venture Capital Undertaking means
a domestic company (i) whose shares are not listed on a recognised
stock exchange in India and (ii) which is engaged in the business of
providing services/production/manufacture of articles/things but
does not include such activities/sectors as are specified in the
negative list by SEBI with government approval-namely, real estate,
non-banking financial companies (NBFCs), gold financing, activities
not permitted under the industrial policy of the Government and any
other activity which may be specified by SEBI in consultation with
the Government from time to time. n India the Venture Capital plays
a vital role in the development and growth of innovative
entrepreneurships. Venture Capital activity in the past was possibly
done by the developmental financial institutions like IDBI, ICICI and
State Financial Corporations. These institutions promoted entities in
the private sector with debt as an instrument of funding. For a long
time funds raised from public were used as a source of Venture
Capital. This source however depended a lot on the market vagaries.
And with the minimum paid up capital requirements being raised for
listing at the stock exchanges, it became difficult for smaller firms
with viable projects to raise funds from public. In India, the need for
Venture Capital was recognised in the 7th five year plan and long
term fiscal policy of GOI. In 1973 a committee on Development of
small and medium enterprises highlighted the need to faster VC as a
source of funding new entrepreneurs and technology. VC financing
really started in India in 1988 with the formation of Technology
Development and Information Company of India Ltd. (TDICI) -
promoted by ICICI and UTI. The first private VC fund was sponsored
by Credit Capital Finance Corporation (CFC) and promoted by Bank
of India, Asian Development Bank and the Commonwealth
Development Corporation viz. Credit Capital Venture Fund. At the
same time Gujarat Venture Finance Ltd. and APIDC Venture Capital
Ltd. were started by state level financial institutions. Sources of
these funds were the financial institutions, foreign institutional
investors or pension funds and high net-worth individuals.
FINANCIAL INSTITUTIONS IN CHINA
FIVE MAIN TYPE OF FINANCIAL INSTITUTIONS ARE AS FOLLOWS

I. Wholly state-owned banks include state-owned commercial banks and

policy banks, some of which have become publically listed.
a. State-owned commercial banks: There are four state-owned
commercial banks, commonly referred to as the "big four":

1. Agricultural Bank of China (ABC) was established in 1979,

headquartered in Beijing. The ABC has service outlets and an
electronic banking network reaching every county seat in China. The
ABC has a special credit unit dedicated to giving micro-entreprise
credit in pilot regions. This bank is under a lot of pressure to start
providing more services to farmers at the sub-county level.
2. Bank of China (BOC), is mainly engaged in commercial banking,
including corporate and retail banking, treasury business and financial
institutions banking. It is the main bank permitted to accept foreign
currency transactions.
3. China Construction Bank (CCB), specializes in medium to long-term
credit for long term specialized projects, such as infrastructure projects
and urban housing development. This bank is increasingly becoming
interested in expanding its clientele to smaller companies and
individuals.
4. Industrial & Commercial Bank of China (ICBC), has a special credit unit
dedicated to giving micro-enterprise credit in pilot regions.

b. Policy banks: The government established three policy banks in

1994 which currently play a key role in the support of the rural sector. They
are:
 1. Agricultural Development Bank of China is mandated by the CBRC as
the key to providing policy-related financial services for agriculture,
rural areas, and farmers (collectively referred to as the SanNong.)
2. China Development Bank, previously a state bank with responsibility
for financing infrastructure development in China, is now charged with
many other kinds of social and commercial tasks, among which it has
been asked by the China Banking Regulatory Commission to explore
new ways to deliver financial services to the SanNong. CDB via its
nationwide branches has taken positions in several of the new village
banks.
3. Export-Import Bank of China is responsible for supporting agricultural
businesses to “go global” under the guidance of the CBRC.

II. The China Postal Savings Bank (CPSB) was inaugurated on March
20, 2007, becoming the country’s fifth largest bank. This marked a huge
step in China’s financial reform, as well as opportunities for the
development of rural finance, as approximately 60% of the bank’s potential
clients are located in rural areas. While officially, loan product design is
supposed to be driven from ongoing work at pilot branches in the provinces,
in fact, recent reports point to the start a lot of activity at the county level in
places as various as Jiangxi and Hunan provinces.

III. Non-fully state-owned commercial banks are divided into 2 sub-

groups:
a. Shareholding or joint-stock commercial banks are incorporated
as joint-stock limited companies under the People's Republic of China's
Company Law. Most of them have state-owned concentrated shareholders.
b. City commercial banks have evolved from urban credit co-
operatives (see section on Microfinance Service Providers). Due to their
history, mandate and capital strength, the scope of city commercial banks’
business tends to be concentrated in the city where they are located. There
is a widely varying degree of interest in participating in the small loans
market, with city commercial bank entities in Taizhou, Baotou and Harbin
being currently acknowledged as the most ambitious in this area.

IV. Foreign Banks: After China’s banking sector opened completely on

December 11, 2006, the number of foreign banks and the scope of their
operations has greatly expanded. As of the end of December 2006, there
were a total of 274 foreign banks operating in China, including 14 locally
incorporated foreign-funded banks, 74 with branches in China, and 186 with
representative offices.
V. Credit co-operatives (MicroCredit Service Providers) - A
microfinance institution (MFI) is an organization that provides financial
services to the poor. It includes a wide range of providers that vary in their
legal structure, mission, and methodology. However, all share the common
characteristic of providing financial services to clients who are poorer and
more vulnerable than traditional bank clients. Specialized microfinance
institutions have proven that the poor are “bankable”. Today, formal
institutions are rapidly absorbing the lessons learned about how to do small-
transaction banking. Many of the newer players in microfinance, such as
commercial banks, have large existing branch networks, vast distribution
outlets like automatic teller machines, and the ability to make significant
investments in technology that could bring financial services closer to poor
clients. Increasingly, links among different types of service providers are
emerging to offer considerable scope for extending access. Microcredit
lenders, once the quaint peripheral players in China's mammoth financial
system, are emerging from the shadows of the State-owned banks as white
knights to thousands of small, cash-strapped manufacturers around the
nation. In mid-August, it introduced new incentives to encourage
microcredit lenders to provide more loans to small companies engaging in
labor-intensive manufacturing activities and to retrenched workers to
finance start-up businesses. In addition, the central bank has allowed
qualified microcredit lenders to source funds in the inter-bank money
market for on-lending to their customers.
The projected growth of the microcredit business will have a far reaching
impact on China's financial markets by channeling part of the huge deposit
base of the banking system to finance the growth of the vibrant private
sector, which, unlike the staid State-owned sector, is made up primarily of
many highly competitive and adaptable enterprises. Lenders will have to
learn to assess the credit worthiness of this class of borrowers by their cash
flow and growth potential rather than by asset value and government
guarantee. Microcredit is nothing new in China. In 2005, the People's Bank
of China, the central bank, initiated a pilot scheme to develop microcredit
firms in different provinces, with the original intention of financing
agricultural production and supporting the livelihoods of the rural poor
rather than the manufacturing industry. In recent months, microcredit loans
have been directed toward small businesses that have taken a hit under the
tightening monetary policy adopted to battle inflation.
The establishment of the first two microcredit firms, Shanxi Rishenglong
Microcredit Co and Shanxi Jinyuantai Microcredit Co was widely seen as the
beginning of justification for private financing, whose development had
been for a long time stifled as its status was not recognized. Since then,
both decision makers and businesses have gradually accepted private
financing as an alternative source of funding to substitute traditional bank
loans.
Non-banking financial institutions in China - Non-bank
financial institutions represent approximately 1.8% of China’s total assets, a
decrease of about 50% in the last five years. They include, but are not
limited to the following:

I. Credit guarantee companies - There remain more than 4,000 credit

guarantee companies in China, some of which informally provide direct
micro and small business lending.

II. Lending companies - There are approximately 2,400 lending

companies with a combined business volume of RMB 100 billion per year, a
significant portion of which is directed towards micro entrepreneurs . The
government recently acknowledged the legal status of these companies by
issuing regulations which mandate them to direct their services to
developing the rural economy.

FINANCIAL MARKET
Finance is a prerequisite for modern business and financial institutions play
a vital role in economic system. It's through financial markets the financial
system of an economy works. The main functions of financial markets are

a) to facilitate creation and allocation of credit and liquidity;

b) to serve as intermediaries for mobilization of savings;

c) to assist process of balanced economic growth;

d) to provide financial convenience

 FINANCIAL INSTRUMENTS
Another important constituent of financial system is financial instruments.
They represent a claim against the future income and wealth of others. It
will be a claim against a person or an institution, for the payment of the
some of the money at a specified future date.

Financial instruments in india

• Government Securities( G-Sec ) - In India G- Secs are issued by the

Central Government , State Governments and Semi Government
Authorities such as municipalities, port trusts, state electricity boards
and public sector corporations. The Central and State Governments
raise money through these securities to finance the creation of new
infrastructure as well as to meet their current cash needs. Since these
are issued by the government, the risk of default is minimal. Therefore,
interest rates on these securities often serve as a benchmark for the
level of interest rates in the economy. Other issuers may price their
offerings by `marking up’ this benchmark rate to reflect the credit risk
specific to them. These securities may have maturities ranging from
five to twenty years. These are fixed income securities, which pay
interest every six months. The Reserve Bank of India manages the
issues of the securities. These securities are sold in the primary market
mainly through the auction mechanism. The RBI notifies issue of a
new tranche of securities. Prospective buyers submit their bids. The
RBI decides to accept bids based on a cut off price. The G -secs are
primarily bought by the institutional investors. The biggest investors
are commercial banks who invest in G-secs to meet the regulatory
requirement to maintain a certain percentage of Statutory Liquidity
Ratio (SLR) as well as an investment vehicle. Insurance companies,
provident funds, and mutual funds are the other large investors. The
Primary Dealers perform the function of market makers through buying
and selling activities. The Government of India also borrows short term
funds for up to one year. This is through the issue of Treasury Bills
which are sold at a discount to the face value and redeemed at the full
face value.
 • Industrial Securities - These are securities issued by the corporate
sector to finance their long term and working capital requirements.
The Major Instruments that fall under Industrial Securities are:
Debentures - Debentures have a fixed maturity and pay a fixed or a
floating rate of interest during their lifetime. The company has an
obligation to pay interest and the principal amount on the due dates
regardless of its profitability position. The debenture holders are not
members of the company and do not have any say in the management of
the company. Since these carry a predefined rate of return, there is no
scope for any major capital appreciation. However, in case of fixed rate
debentures, their market price moves inversely with the direction of interest
rates. The debenture issues are rated by the professional credit rating
agencies regarding the payment of interest and the repayment of the
capital amount. Apart from the `plain vanilla’ variety of debentures (periodic
payment of interest during their currency and repayment of capital on
maturity), a number of variations have been devised. For example, zero
coupon bonds are issued at a discount to their face value and redeemed at
the full face value. The difference constitutes return for the investor.
Preference Shares - Preference Shares carry a fixed rate of dividends.
These carry a preferential right to dividends over the equity shareholders.
This means that equity share holders cannot be paid any dividends unless
the preference dividend has been paid in full. Similarly on the winding up of
the company, the preference share holders get back their capital before
the equity share holders. In case of cumulative preference shares, any
dividend unpaid in past years accumulates and is paid later when the
company has sufficient profits. Now all preference shares in India are
`redeemable’, i.e. they have a fixed maturity period. Thus, preference
shares are sometimes called a `hybrid variety’ – incorporating features of
debt as well as equity.
Equity Shares - Equity Shares are regarded as high return high risk
instruments. These do not carry any fixed rate of return and there is no
maturity period. The company may or may not declare dividend on equity
shares. Equity shares of major companies are traded on the stock
exchanges. The major component of return to equity holders usually
consists of market appreciation.
Call Money Market
The loans made in this market are of a short term nature – overnight to a
fortnight . This is mostly inter-bank market. Those banks which are
facing a short term cash deficit, borrow funds from the cash surplus banks.
The rate of interest is market driven and depends on the liquidity position
in the banking system.
Commercial Paper (CP) and Certificate of Deposits (CD)
CPs are issued by the corporates to finance their working capital needs.
These are issued for short term maturities. These are issued at a discount
and redeemed at face value. These are unsecured and therefore only those
companies who have a good credit standing are able to access funds
through this instrument. The rate of interest is market driven and depends
on the current liquidity position and the creditworthiness of the issuing
company.
The characteristics of CDs are similar to those of CPs except that CDs are
issued by the commercial banks.

• Financial Services - Efficiency of emerging financial system largely

depends upon the quality and variety of financial services provided by
financial intermediaries. The term financial services can be defined as
"activites, benefits and satisfaction connected with sale of money, that
offers to users and customers, financial related value".