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INDIAN FINANACIAL

SYSTEM AND ECONOMY

PRESENTED BY:
Aakash Raval(151401)
Aashish Janardan(151402)
Abhishek Gulyani(151403)
Akshat Narayan Singh(151404)

Financial System

Financial System is a set of institutional arrangements through


which financial surpluses in the economy are mobilised from
surplus units and transferred to deficit spenders.
The institutional arrangements include all conditions and
mechanisms governing the production, distribution, exchange and
holding of financial assets or instruments of all kinds and the
organisations as well as the manner of operations of financial
markets and institutions of all descriptions.

Function of Financial
System
The financial system helps production,
capital accumulation, and growth by:(i) encouraging savings
(ii) mobilising them and
(iii) allocating them among alternative uses
and users.
Each of these functions is important and the
efficiency of a given financial system
depends on how well it performs each of
these functions.

HISTORY OF INDIAN
FINANCIAL SYSTEM

The title of Sone Ki Chidiya" (golden bird), given to India, has


been misunderstood by many. A lot of us sometimes link it to
either India's excellent climatic conditions, our great agricultural
heritage or the mineral and energy reserves that India has. Few of
us understand that India had a very long history of being the
richest country in the world in terms of wealth i.e. gold and
other precious metals.
During the British Rule and after that too, we have been exposed
to ideas like Poverty is Divine and Being Rich is Evil. These
ideas have led many of us to believe that it is OK to lack
resources. Ironically, India has been the only country where every
year The Goddess of Wealth Laxmi is worshipped. There is
no other country where such a tradition of worshipping Wealth
through religion exists. And the fact that we worship wealth
through "Laxmi" means that creating and earning wealth is not
really a bad thing after all

HISTORY Cont.
The question that comes to our mind is If we had such a glorious
history of being materially wealthy and prosperous, then what was
the reason for that?
Well, the question may have many answers. One very possible answer is
the socio-economic architecture installed during the time of Emperor Ashoka,
that made it possible for the Indian civilization to generate enormous wealth.
If we explore the creation of this socio-economic architecture, we would
discover that it was the knowledge of the Arthashastra, written by Chanakya
(Kautilya) around 2300 years ago, that formed the foundation of Emperor
Ashokas rule. The Arthashastra is knowledge of Material Wealth it is a
science of liberation from poverty and of entering the much-deserving world
of well-being and prosperity.
Interestingly, todays education system is bereft of this practical science of
being wealthy and prosperous. Hence, there is a dire need for financial
literacy - having a fusion of modern finance and the ancient wisdom of
Chanakyas Arthashastra. The Game Chanakyas Chakkravyuh addresses this
very need. This game is conceptualized on books Corporate Chanakya and
Kautilya's Arthashastra and helps its players throughout the world realize
their full potential to earn abundantly.

Indian Financial System


The

Indian financial system is the system that enables


lenders and borrowers to exchange funds. It is a composition
of various institutions, markets, regulations and laws,
practices, transactions and claims & liabilities.
Indian 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:(a) Financial Assets
(b) Financial Markets
(c) Financial Institutions
(d) Financial Instruments

STRUCTURE

Financial assets

Enable channelizing funds from surplus units to deficit units

These are divided into 2 sub-categories:(a) Primary securities are financial claims against real-sector
units, for example, bills, bonds, equities etc. They are
created by real-sector units as ultimate borrowers for
raising funds to finance their deficit spending.
(b) The secondary securities are financial claims issued by
financial institutions or intermediaries against themselves
to raise funds from public. For examples, bank deposits, life
insurance policies, UTI units, IDBI bonds etc.

Financial Markets
The Indian Financial system (financial markets) is broadly
divided under four heads:
(i)The Indian money market is the market in which short-term
funds are borrowed and lent. The money market does not deal in
cash, or money but in bills of exchange, grade bills and treasury
bills and other instruments. Trading in money markets is done
over the counter and is wholesale.
(ii)The capital market in India on the other hand is the market for
the medium term and long term funds.
(iii)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 one of the most
developed and integrated market across the globe.

(iv)Credit Market- Credit market is a place where banks, FIs and


NBFCs purvey short, medium and long-term loans to corporate
and individuals.

Money Market
The money market is divided into two:
1. Unorganized Market
Unorganized market consists of:
Money

Lenders: Money Lenders lend money to individuals at a high rate of

interest.
Indigenous Bankers: They operate like money lenders. They also accept
deposits from public.
Chit Funds: These collect funds from members and provide loans to
members and others.
2. Organized Money Market
Organized Markets work as per the rules and regulations of the RBI. RBI
keeps a strict control over the Organized Financial Market in India.
Organized Market consists of: Treasury Bills, Commercial Paper (CP),
Certificate Of Deposit(CD), Call Money Market, Commercial Bill Market.

Capital Market

A capital market is an organized market. It provides long term finance for


business.
Capital Market is divided into three groups:

1. Industrial / Corporate Securities Market

It is a market for industrial securities. Corporate securities are equity and


preference shares, debentures and bonds of companies. Industrial
security's market is very Sensitive and Active Financial Market.
2. Government Securities Market

In this market, government securities are bought and sold. The securities
are issued in the form of bonds and credit notes. The buyers of such
securities are Banks, Insurance Companies, Provident funds, RBI and
Individuals. These securities may be of short-term or long term.
3. Long-Term Loans Market

Banks and Financial institutions provide long-term loans to firms, for


modernization, expansion and diversification of business

Financial Institutions

The Financial Institutions in India mainly comprises of the Central


Bank which is better known as the Reserve Bank of India, the commercial
banks, the credit rating agencies, the securities and exchange board of
India, insurance companies and the specialized financial institutions in
India.
Reserve Bank of India:
The Reserve Bank of India was established in the year 1935 with a view to
organize the financial frame work and facilitate fiscal stability in India.
The bank acts as the regulatory authority with regard to the functioning of
the various commercial bank and the other financial institutions in India.
Commercial Banks in India:
The commercial banks in India are categorized into foreign banks, private
banks and the public sector banks. The commercial banks indulge in varied
activities such as acceptance of deposits, acting as trustees, offering loans
for the different purposes and are even allowed to collect taxes on behalf
of the institutions and central government.

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
institutions, for the payment of some of the money at a specified
future date.
(i)The Money market can be defined as a market for short-term
money and financial assets that are near substitutes for money.
The term short-term means generally a period upto one year and
near substitutes to money,is used to denote any financial asset
which can be quickly converted into money with minimum
transaction cost.
(ii)The Capital market generally consists 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.

Financial Instruments Cont.

Some of the important money market


instruments are briefly discussed below;

1.
2.
3.
4.
5.

Call/Notice Money
Treasury Bills
Term Money
Certificate of Deposit
Commercial Papers

Call money market

Is an integral part of the Indian money market where day-to-day surplus


funds (mostly of banks) are traded.

The loans are of short-term duration (1 to 14 days). Money lent for one day
is called call money; if it exceeds 1 day but is less than 15 days it is
called notice money. Money lent for more than 15 days is term money

The borrowing is exclusively limited to banks, who are temporarily short


of funds.

The main function of the call money market is to redistribute the pool of
day-to-day surplus funds of banks among other banks in temporary deficit
of funds.

It acts as a good indicator of the liquidity position

Treasury Bill Market

Treasury Bill market- Also called the T-Bill market

These bills are short-term liabilities (91-day, 182-day, 364day) of the Government of India
It is a promise of the government to pay the stated amount
after expiry of the stated period from the date of issue
They are issued at discount to the face value and at the end
of maturity the face value is paid
The rate of discount and the corresponding issue price are
determined at each auction
RBI auctions 91-day T-Bills on a weekly basis, 182-day TBills and 364-day T-Bills on a fortnightly basis on behalf of
the central government

Term Money Market

Inter-Bank Term Money


Inter-bank market for deposits of maturity
beyond 14 days is referred to as the term
money market. The entry restrictions are
the same as those for Call/Notice Money
except that, as per existing regulations,
the specified entities are not allowed to
lend beyond 14 days.

Certificates of Deposit

CDs are short-term borrowings issued by all scheduled banks and are
freely transferable by endorsement and delivery.

Introduced in 1989.

Maturity of not less than 7 days and maximum up to a year. FIs are allowed
to issue CDs for a period between 1 year and up to 3 years.

Subject to payment of stamp duty under the Indian Stamp Act, 1899.

Issued to individuals, corporations, trusts, funds and associations.

They are issued at a discount rate freely determined by the


market/investors.

Commercial Papers

Short-term borrowings by corporates, financial institutions,


primary dealers from the money market
Can be issued in the physical form (Usance Promissory Note)
or demat form
Introduced in 1990
When issued in physical form are negotiable by endorsement
and delivery and hence, highly flexible
Issued subject to minimum of Rs. 5 lacs and in the multiple of
Rs. 5 lacs after that
Maturity is 7 days to 1 year
Unsecured and backed by credit rating of the issuing company
Issued at discount to the face value

Financial Intermediation

Having designed the instrument, the issuer should then ensure


that these financial assets reach the ultimate investor in order to
garner the requisite amount. When the borrower of funds
approaches the financial market to raise funds, mere issue of
securities will not suffice. Adequate information of the issue,
issuer and the security should be passed on to take place. There
should be a proper channel within the financial system to ensure
such transfer. To serve this purpose, Financial intermediaries
came into existence. Intermediar Market
Role
y

Secondary
Market to
securities
Corporate
Investment Capital Market, advisory
Bankers
Credit Market
services, Issue
of securities
Subscribe to
Underwriter Capital Market, unsubscribed
s
Money Market portion of
securities
Issue securities
Registrars,
to the investors
Depositorie
on behalf of the
Capital Market
s,
company and
Stock
Exchange

Capital Market

Financial Disintermediation

Disintermediation refers to:

(1) the investing of funds that would normally have been placed in a
bank or other financial institution (financial intermediaries)
directly into investment instruments issued by the ultimate users
of the funds. Investors and borrowers transact business directly
and thereby bypass banks or other financial intermediaries.
(2) The elimination of intermediaries between the first case providers
of capital and the ultimate users of capital, withdrawal of funds
from financial intermediaries such as banks, thrifts, and life
insurance companies in order to invest directly with ultimate
users.

As a result of financial disintermediation, financial innovation,


deregulation, etc. there has been a decline of traditional banking.

Indian Banking System


Central Bank (Reserve Bank of India)
Commercial banks
Co-operative banks
Banks can be classified as:
Scheduled (Second Schedule of RBI Act, 1934) - 217
Non-Scheduled - 4
Scheduled banks can be classified as:
Public Sector Banks (28)
Private Sector Banks (Old and New) (27)
Foreign Banks (29)
Regional Rural Banks (133)
Diversification in banking: Banking has moved from deposit and lending to
Merchant banking and underwriting
Mutual funds
Retail banking
ATMs
Internet banking

Conclusion
Indias

financial system is quite huge and


caters to every kind of demand for funds
Banks

are at the core of our financial


system and therefore, there is greater
expectation from them in terms of
reaching out to the vast populace as well
as being competitive.

THANK YOU

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