Indian Financial System

Existence of a well organized financial system Promotes the well being and standard of living of the people of a country Money and monetary assets Mobilize the saving Promotes investment

Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products Flow of funds (savings)

Seekers of funds (Mainly business firms Flow of financial services and government) Incomes , and financial claims

Suppliers of funds (Mainly households)

Organized Regulators Financial Institutions Financial Markets Financial services

Non- Organized Money lenders Local bankers Traders Landlords Pawn brokers Chit Funds

Barter Money Lender Nidhi's/Chit Funds Indigenous Banking Cooperative Movement Societies

Banks

Joint-Stock Banks

Consolidation Commercial Banks Nationalization Investment Banks Development Financial Institutions Investment/Insurance Companies Stock Exchanges Market Operations Specialized Financial Institutions Merchant Banking Universal Banking

Interrelation--Financial system & Economy Financial System Households Foreign Sectors

Savers Lenders

Investors Borrowers

Corporate Sector Govt.Sector

Economy

Un-organized Sector

Organized Indian Financial System Regulators

Financial Instruments

Forex Market

Financial Markets Capital Market

Money Market

Primary Market Secondary Market

Money Market Instrument

Capital Market Instrument

Financial Intermediaries Credit Market

Mechanism which allows people to trade Affected by forces of supply and demand Process used In Finance, Financial markets facilitates

Capital markets facilitate the transfer of capital (i.e. financial) assets from one owner to another. They provide liquidity.  Liquidity refers to how easily an asset can be transferred without loss of value. A side benefit of capital markets is that the transaction price provides a measure of the value of the asset.

Mobilization of Savings & acceleration of Capital Formation Promotion of Industrial Growth Raising of long term Capital Ready & Continuous Markets Proper Channelisation of Funds Provision of a variety of Services

Stock Market was for a privileged few Archaic systems - Out cry method Lack of Transparency - High tones costs No use of Technology Outdated banking system Volumes - less than Rs. 300 cr per day No settlement guarantee mechanism - High risks

1994-Equity Trading commences on NSE 1995-All Trading goes Electronic 1996- Depository comes in to existence 1999- FIIs Participation- Globalisation 2000- over 80% trades in Demat form 2001- Major Stocks move to Rolling Sett 2003- T+2 settlements in all stocks 2003 - Demutualisation of Exchanges

Each scam has brought in reforms - 1992 / 2001 Screen based Trading through NSE Capital adequacy norms stipulated Dematerialization of Shares - risks of fraudulent paper eliminated Entry of Foreign Investors Investor awareness programs Rolling settlements Inter-action between banking and exchanges

Corporatisation of exchange memberships Banning of Badla / ALBM Introduction of Derivative products - Index / Stock Futures & Options Reforms/Changes in the margining system STP - electronic contracts Margin Lending Securities Lending

• 22 Stock Exchanges, • Over 10000 Electronic Terminals at over 400 locations all over India. • 9108 Stock Brokers and 14582 Sub brokers • 9644 Listed Companies • 2 Depositories and 483 Depository Participants • 128 Merchant Bankers, 59 Underwriters • 34 Debenture Trustees, 96 Portfolio Managers • 83 Registrars & Transfer Agents, 59 Bankers to Issue • 4 Credit Rating Agencies

Indian Capital Market

Market

Primary

Instruments

•Brokers •Investment Bankers •Stock Exchanges •Underwriters

Secondary

Equity

CRA

Intermediaries Regulator

Hybrid

Corporate Intermediaries

Individual

SEBI

Debt

Banks/FI

Players

FDI /FII

Mangalore Stock Exchange Hyderabad Stock Exchange Uttar Pradesh Stock Exchange Coimbatore Stock Exchange Cochin Stock Exchange Bangalore Stock Exchange Saurashtra Kutch Stock Exchange Pune Stock Exchange National Stock Exchange OTC Exchange of India Calcutta Stock Exchange Inter-connected Stock Exchange (NEW) Madras Stock Exchange

Bombay Stock Exchange Madhya Pradesh Stock Exchange Vadodara Stock Exchange The Ahmedabad Stock Exchange Magadh Stock Exchange Gauhati Stock Exchange Bhubaneswar Stock Exchange Jaipur Stock Exchange Delhi Stock Exchange Assoc Ludhiana Stock Exchange

Raising capital for businesses Mobilizing savings for investment Facilitate company growth Redistribution of wealth

Corporate governance Creates investment opportunities for small investors Government raises capital for development projects Barometer of the economy

Growth Pattern of the Indian Stock Market

Sl.N o.

As on 31st December

1

No. of Stock Exchanges

2

1946

1961

1971

1975

1980

1985

1991

1995

7

7

8

8

9

14

20

22

No. of Listed Cos.

1125

1203

1599

1552

2265

4344

6229

8593

3

No. of Stock Issues of Listed Cos.

1506

2111

2838

3230

3697

6174

8967

11784

4

Capital of Listed Cos. (Cr. Rs.)

270

753

1812

2614

3973

9723

32041

59583

5

Market value of Capital of Listed Cos. (Cr. Rs.)

971

1292

2675

3273

6750

25302

11027 9

47812 1

6

Capital per Listed Cos. (4/2) (Lakh Rs.)

24

63

113

168

175

224

514

693

86

107

167

211

298

582

1770

5564

7

Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value of Capital per

358

170

148

126

170

260

344

803

8

Hybrid

Equity

Equity Shares

Preference Shares

ADR / GDR

Debentures Zero coupon bonds

Debt

Deep Discount Bonds

Establishment of Development banks & Industrial financial institution. Legislative measures Growing public confidence Increasing awareness of investment opportunities

Growth of underwriting business Setting up of SEBI Mutual Funds Credit Rating Agencies

Lack of transparency Physical settlement Variety of manipulative practices Institutional deficiencies Insider trading

Market for short-term money and financial assets that are near substitutes for money. Short-Term means generally 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

It is a place for Large Institutions and government to manage their short-term cash needs It is a subsection of the Fixed Income Market It specializes in very short-term debt securities They are also called as Cash Investments

Lack of Integration Lack of Rational Interest Rates structure Absence of an organized bill market Shortage of funds in the Money Market Seasonal Stringency of funds and fluctuations in Interest rates Inadequate banking facilities

Treasury Bills Commercial Paper Certificate of Deposit Money Market Mutual Funds Repo Market

Segment Issuer

Instruments

Govern ment

Central Government

Zero Coupon Bonds, Coupon Bearing Bonds, Capital Index Bonds, Treasury Bills.

Public Sector

Government Agencies / Statutory Bodies

Govt. Guaranteed Bonds, Debentures

Public Sector Units

PSU Bonds, Debenture, Commercial Paper

Corporate

Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, InterCorporate Deposits

Banks

Certificate of Deposits, Bonds

Financial Institutions

Certificate of Deposits, Bonds

Private

Securities and Exchange Board of India (SEBI) Reserve Bank of India Ministry of Finance

Securities and Exchange Board of India (SEBI) was first established in the year 1988 Its a non-statutory body for regulating the securities market It became an autonomous body in 1992

Regulates Capital Market. Checks Trading of securities. Checks the malpractices in securities market.

It enhances investor's knowledge on market by providing education. It regulates the stockbrokers and sub-brokers. To promote Research and Investigation

It tries to develop the securities market. Promotes Investors Interest. Makes rules and regulations for the securities market.

Sole Control on Brokers For Underwriters For Share Prices For Mutual Funds

Established on April 1, 1935 in accordance with the provisions of the RBI Act, 1934. The Central Office of the Reserve Bank has been in Mumbai. It acts as the apex monetary authority of the country.

Monetary Authority: Formulation and Implementation of monetary policies. Maintaining price stability and ensuring adequate flow of credit to the Productive sectors. Issuer of currency: Issues and exchanges or destroys currency and coins. Provide the public adequate quantity of supplies of currency notes and coins.

Functions Of RBI Regulator and supervisor of the financial system: Prescribes broad parameters of banking operations Maintain public confidence, protect depositors' interest and provide cost-effective banking services. Authority On Foreign Exchange: Manages the Foreign Exchange Management Act, 1999. Facilitate external trade, payment, promote orderly development and maintenance of foreign exchange market.

Functions Of RBI Developmental role: Performs a wide range of promotional functions to support national objectives. Related Functions: Banker to the Government: performs merchant banking function for the central and the state governments. Maintains banking accounts of all scheduled banks.

(a) Bank Rate: The Bank Rate was kept unchanged at 6.0 per cent. (b) Reverse Repo Rate: The Repo rate is around 7 per cent and Reverse repo rate is around 6.10 per cent. (c) Cash Reserve Ratio: The cash reserve ratio (CRR) of scheduled banks is currently at 5.0 per cent.

Pre-reforms period Steps taken Objectives Conclusion

The period from the mid 1960s to the early 1990s. Characterized by:     

Administered interest rates Industrial licensing and controls Dominant public sector Limited competition High capital-output ratio

Banks and financial institutions acted as a deposit agencies. Price discovery process was prevented. Government failed to generate resources for investment and public services. Till 90s it was closed, highly regulated, and segmented system.

Economic reforms initiated in June 1991. The committee appointed under the chairmanship of M Narasimham. He submitted report with all the recommendations Government liberalized the various sectors in the economy. Reform of the public sector and tax system.

Reorientation of the economy Macro economic stability To Increase competitive efficiency in the operations To remove structural rigidities and inefficiencies To attain a balance between the goals of financial stability & integrated & efficient markets

Reduce the level of state ownership in banking Lift restrictions on foreign ownership of banks Spur the development of the corporate-bond market Strengthen legal protections

Deregulate the insurance industry Drop proposed limits on pension reforms Increase consumer ownership of mutual-fund products Introduce a gold deposit scheme

Speed up the development of electronic payments. Separate the RBI's regulatory and centralbank functions Lift the remaining capital account controls Phase out statutory priority lending and restrictions on asset allocation

The financial system is fairly integrated, stable, efficient. Weaknesses need to be addressed. The reforms have been more capital centric in nature. Foreign capital flows and foreign exchange reserves have increased but absorption of foreign capital is low.

Thank you