Indian Financial System -An Overview

FUNCTIONS

Collection of SAVINGS & Distribution for INDUSTRIAL INVESTMENT. Stimulating CAPITAL FORMATION & ACCELERATING THE ECONNOMIC GROWTH

STRUCTURES

1. Regulatory Bodies (RBI/SEBI/IRDA/PFRDA)

2. Financial Intermediotories 3. Financial Markets 4. Financial Assets / Instruments

PHASES
* Upto 1951 Pvt. Sector * 1951 to 1990 Public Sector * Early Ninties Privatisation * Present Status Globalisation

Process of Capital Formation Involves three distinct, although inter-related activities. (i) Savings: The ability by which resources are set aside and become available for other purpose. (ii) Finance: The activity by which claims to resources are either assembled from those released by domestic savings, obtained from abroad, or specially created usually as bank deposits or notes and then placed in the hands of the investor. (iii) Investments: The activity by which resources are actually committed to production. The financial system is a link between the savers (savings surplus economic units) and the investors (savings deficit economic units). It is made up of all those channels through which savings become available for investment.

ORGANISATION Financial System consists of

What they do Financial Intermediotories (a) Collect Savings (b) Issue claim against themselves (c) Use Funds, thus raised, to purchase ownership or debt-claims Who They Are

etc. (ii) Financial Markets

Banks, NBFC, MF insurance organisations

(a) Not a Source of funds (b) Act as a facilitating organisation and link saver & investor (c) Based on nature of work they are classified as (1) Money Market (2) Capital/Security Markets. (a) Financial Product innovation (b) Three broad categories (1) Direct/Primary e.g. Share, Debt., Pref. Share etc. (2) Indirect MF, Security Receipts, Securitized Debt Investment. (3) Derivatives Forward, Future, Options.

Call Market T-Bill Market CP-Market Report Market Stock Exchange

(iii) Financial Asset/Instrument/ Security

Shares, Debt Instruments Debentures etc.

Pre 1951
1. 2. 3. 4. 5. 6. 7. 8. 9.

Control of Money Lenders No Laws / Total Private Sector No Regulatory Bodies Hardly any industrialization Banks Traditional lenders for Trade and that too short term Main concentration on Traditional Agriculture Narrow industrial securities market (i.e. Gold/Bullion/Metal but largely linked to London Market) Absence of intermediatory institutions in long-term financing of industry Industry had limited access to outside saving/resources

1951 to 1990
Moneylenders ruled till 1951. No worth-while Banks at that time. Industries depended upon their own money. 1951 onwards 5 years PLAN commenced. PVT. SECTORS TO PUBLIC SECTOR MIXED ECONOMY 1st 5 year PLAN in 1951 Planned Economic Process. As part of Alignment of Financial Systems Priorities laid down by Govt. Policies.

MAIN Elements of Fin. Organisations

i. ii. iii. iv. v. Public ownership of Financial Institution Strengthening of Institutional Structure Protection to Investors Participation in Corporate Management Organisational Deficiencies.

Indian Financial System An Overview 1951-1990

i. Pu blic ownership of Financial Institution
ii. Strengthening of Institutional Structure iii. Protection to Investors iv. Participation of Corporate Management v. Organisational Deficiencies.

Nationalisation
RBI 1948 SBI 1956 (take-over of Imperial Bank of India) LIC 1956 (Merges of over 250 Life Insurance Companies) Banks 1969 (14 major banks with Deposits of over Rs. 50 Crs.nationalised) 1980 (6 more Banks) Insurance 1972 (General Insurance Corp. GIC by New India, Oriental, united and National
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Indian Financial System An Overview 1951-1990

Development

Directing the Capital in confirmity with Planning priorities Encouragement to new entrepreneurs and small set-ups Development of Backward Region IFCI (1948) State Finance Corporation (1951) Purely Mortgage institution IDBI (1964) As subsidiary of RBI to provide Project / Term Finance ICICI (1966) Channellising of Foreign Currency Loan from World Bank to Pvt. Sector and underwriting of Capital issues. SIDCs & SIIC State Level Corporations for SME sector UTI (1964) to enable small investors to share Industrial Growth IRCI (1971) to take care of rehabilitation of sick-mills promoted by IDBI, Banks & LIC-Name changed to IIBI in 1997.

Indian Financial System An Overview

NCC (1968) National Credit Council to assess the demand of Credit & determine priorities for grant of Loans, advances, investment & requirements of priority sector (presently 40%) Credit Guarantee Scheme (1960) for SSI Finance upto 75% of defaulted amount or guarantee amount whichever is lower with ceiling of Rs. 7.5 Lacs for W/Cap & Rs. 2.5 Lacs for T/L per borrower. Agriculture Finance Corp. (AFC) for financing agriculture projects and help Banks. Lead Districts (580) Service Area Approach. Scrapped in 2006. ARC (1963) Agriculture Refinance Corp. for refinance of medium & long term loans. ECGC (1964) FOR Export Performance

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Indian Financial System An Overview

Commercial Banks

Continued old way of Deposit Banking & short term credit to trade Selective Credit Control (Control through quantum, rate of interest margin etc). Extensive Branch Expansion. (4000 in 1969 now over 5,00,000) Refinance Facility to share risk & also cost of Banks funds (Nationalisation. Objectives of Madame Indira Gandhi)
Better needs of Economic development Create job opportunities Fulfilment of Plan objectives Servicing maximum population by Branch expansion Setting up Committees. Tandon (1974) to regulate Bank Credit & follow-up Bank Credit to Priority Sector. (substantial increase)

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Indian Financial System An Overview

LIC Mobilised massive long term funds & single largest organisation with large long term savings. Dominant role in underwriting issues and direct push of industrial activities. LIC helped in price stabilization during downswing (e.g. mid 2008 when market faced crisis due to turmoil in global finance market). Premium Amount (Rs. in Crs.) Rs. 87108 Crs.* Life Insurance Policies Nos. 5.09 Crs. Nos. of Agents/Selling fore 10,00,000+ Rent Income Rs. 7000 Crs. p.a. * The largest Pvt. Sector ICICI prudential is Rs. 6813 Crs. (less than 10%)

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i. Pu blic ownership of Financial Institution ii. Strengthening of Institutional Structure

iii. Protection to Investors

iv. Participation of Corporate Management v. Organisational Deficiencies.

PROTECTION TO INVESTORS

Building up confidence of investors shattered due to distrust in Pvt. Ltd. Redesigning Legal & Administrative set up of Companies. * Ban on Forward Trading * Abolition of Managing Agency System STEPS TAKEN (LEGAL/ADMINISRTATIVE) Companies Act 1956 to regulate Companies, Capital Structure. Capital Issues (Control) Act, 1947 implemented through CCI in MOF to regulate Capital Issues & Foreign Investment (repealled in 1992) Securities Contract (Regulation) Act, 1956 enforced through Directorate of Stock Exchange under MOF to regulate Capital Market. MRTPA (1970) to avoid (a) concentration of economic power and (b) Control monopolistic and restrictive trade practices. FERA (1973) to regulate foreign investment & foreign business.

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Indian Financial System An Overview

i. Pu blic ownership of Financial Institution ii. Strengthening of Institutional Structure iii. Protection to Investors

iv. Participation of Corporate Management

v. Organisational Deficiencies.

Participation of Corporate Management

By Financial Institutions (IDBI, IFCI, ICICI, IRBI, SFC, SIIC etc. By LIC By GIC Through conversion of Loans into Equity. (NOMINEE DIRECTORS enjoy protection)

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i. Pu blic ownership of Financial Institution ii. Strengthening of Institutional Structure iii. Protection to Investors iv. Participation of Corporate Management

v. Organisational Deficiencies.

Organisational Deficiencies
(i) Institutional Structure * Banks, LIC, UTI, Collected Savings directly from investors * DFI/PFI like IDBI, IFCI, ICICI, SFCs etc. got funds from sponsers like RBI/GOVT. * Term Finance moved to Big Industries (ii) Distributive Mechanism FIs were incapable of handling growing needs of industries

(iii) Form of Financing * Term Loan (Debt) was main part of financial structure with little part of equity Capital * Sometimes Institution became more sympathetic & permitted more than desired finance in case of strain / default. * Position of IFCI, IDBI, ICICI, & most of the SFCs became precarious.

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i. Pu blic ownership of Financial Institution ii. Strengthening of Institutional Structure iii. Protection to Investors iv. Participation of Corporate Management v. Organisational Deficiencies.

Small & New Enterprises

* System was unable to meet the financial requirements. * Very costly to raise funds from the market.

New Issues Marketing / Management

Absence of right type Merchant Banking Institutions.

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POST 1990s
IMPORTANT DEVELOPMENTS Development Financial Institutions : (DFIs) Started providing Working Capital also Set up CREDIT RATING AGENCIES CRISIL(IPO IN 1993-94; standard & poor acquires 9.68% in 1996-97 S & P acquires shares / holding upto 58.46%) ICRA Set up in 1991 by leading FIs/Banks/Fin. Ser. Cos. And Moodys CARE Set-up by IFCI/Banks. FITCH a 100% subsidiary of FITCH Group.

Privatisation of DFI Reduction in Govt. holding & Public Participation e.g. IFCI Ltd., IDBI Ltd., ICICI Ltd. Conversion into Banking / Merger into Banking Companies IDBI Bank & ICICI Bank Issuance of Bond by DFIs without Govt.s Guarantees to mobilise resources. Reduction in holding of Govt. in Banks, i.e. Public Participation / Listing
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Commercial Bank

Govt. holding reduced even by upto 40% Setting up of Universal Banks (from CASA to Corp. Finance) One-stop Banking. Capital Adequacy. (Basel II accepted) 9% Assets classification (Regular, Problem, Anxiety, Causing, NonPerforming) and Provisioning norms identified/reviewed & revised. NPA classification substandard, Doubtful & Loss Assets. Focus on Non-Fund Business like L/C, Guarantees, Acceptance, FOREX etc. Promoting Signature-based and consultancy services like Project Counselling, Merchant Banking, New Issues Management, Capital Market related activities, Merger & Acquisitions, debt syndication, trusteeship of debts, sponsoring Mutual Funds, Wealth Management, Sales & Services of insurance (both life & non-life) products etc. New Private Sector Banks (AXIS, YES, HDFC, KOTAK MAHINDRA etc.) CAMELS Rating (C-Capital Adequacy, A-Asset Quality, MManagement, E-Earning, L-Liquidity, & S-Systems & controls).
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NBFC

NBFC under RBI governance to finance retail assets and mobilise small/medium sized savings. Very large NBFCs are emerging (Shri Ram Transport Finance, Birla, Tata Finance, Sundaram Finance, Reliance Finance, DLF, Religare etc.

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Indian Financial System An Overview POST 1990

Mutual Funds

Bifurcation of UTI and UTI (AMC) put under SEBI. Banks, Broking Houses, Finance Companies Insurance Companies, Pvt. Sector in Foreign collaboration, FII and Merchant Banks set up Mutual Funds with a varieties of schemes. Helps small investors in big way Backbone of Capital Markets Mutual Funds, AIG, Baroda Pioneer, Birla Sunlife, Canara Robeco, DBS Chola, Edelweiss, Fidelity, Fortis, Franklin, HSBC, HDFC, ICICI Prudential, IDFC, ING, JM, Kotak, LIC, Magnum, Mirae, Morgan, Quantum, Reliance, Religare, Sahara, Sundaram BNP, Tata Tourus, UTI etc. Mutual Funds Investment Schemes (over 1000 in Nos.) Equity Equity Diversified Equity Index Equity Tax Planning Equity Banking Equity FMCG Equity Pharma Equity Technology Equity Speciality Cash Funds Balanced Funds Hybrid Equity Oriented Hybrid Debt Oriented Hybrid Asset Allocation Hybrid Arbitrage Bond Funds Debt Medium Term/Short Term Debt Medium Term/Short Term Institutional Hybrid Monthly Income Gilt Medium & Long Term Debt Liquid Plus

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INDUSTRIES

Rise & Growth of Service Sector industries. Reliance & Dependance on technology. E-mail & mobile made sea-change in communication, data collection etc. Computerisation a catch phrase and inevitable need of an hour. Dependent on Capital Market rather than only Debts dependancy. Scalability of operations through globally competitive size. Broad basing of Board. Professional Management.
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Securities/Capital Market
Primary Market - Phenominal increase in number of investors.
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New intermediatories i.e. Merchant Bankers, Lead Manager & Book-Builders, Underwriters, Bankers to Issue, Registrar to Issue, Share Transfer Agents, Portfolio Managers, Depositories, FIIs, Custodians, Rating Agencies, etc. are playing important role. FIIs are allowed to invest & participate in public issues of Debt & Equities within sectoral limits fixed by the Govt.
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Secondary Market
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Over 90% Securities Dematerialised. Depository Act 1996; 2 Depositories NSDC & CDSL. Settlement Cycle reduced from 15 days to T + 2. Clearing & Settlement by Clearing Corp. Securities related derivatives introduced. Future, Option, Arbitrage, Hedging permitted.

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Money Market
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Primary Dealers Money Market Mutual Funds came up Call/Notice Market Treasury Bills Market Commercial Paper Market (CP) Certificate of Deposit Market (CD) Repo Market FOREX Market

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Organisational Structure

Boards of PSU Banks reorganised. Regulation / guidelines for Statutory Auditors. Most of the Banks entrusted Business Plan / Restructure of Organisations to Globally acclaimed Consultants like KPMG, PWC, E & Y etc.

CAPITAL MARKET

NSE set up as FIRST automated Exchange.(turnover now is Rs. 65000 Crs. p.d.) Total 2500 + V-SATs in 191 cities; 1242 Members (1096 Corporates) Depositories Promoters Participants Centers No. of Clients NSSDL IDBI, UTI, NSE, SBI etc. 282 1015 1 Cr. CDSL BSE, HDFC, SBI, BOI, BOB etc. 483 6469 60.37 Lacs

Custodian * Stock Holding Corp. of India. OTC Regional Stock Exchanges

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STRUCTURE OF FINANCIAL MARKETS IN INDIA Financial Markets in India

Debt Market Primary / Secondary

Forex Market

Capital Market Primary / Secondary & Depository

Insurance Life/General

Banks (including RRBs, co-op etc)

Mutual Funds, Venture Funds, Investment Bonds

RBI

RBI

SEBI

IRDA

RBI

RBI/SEBI

REGULATORY AUTHORITY

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Financial inclusion Capital enhancement Liquidity management IFRS implementation Beyond Core Banking Solutions (CBS) Risk management Risks and rewards