Indian Financial Systems

INDIAN FINANCIAL SYSTEMS

NEED FOR A FINANCIAL SYSTEM To

mobilise and monitor SAVINGS Monitor corporate performance Provide payment and settlement systems Optimum allocation of risk and reduction Disseminate price-impacting information Offer portfolio-adjustment facility Lower transaction costs Promote the process of financial

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WHAT MAKES UP THE SYSTEM     

Regulators Financial institutions Financial instruments Financial markets Financial services

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CRITICAL SUCCESS FACTORS FOR ANY FINANCIAL SYSTEM Strong

legal and regulatory environment Stable money Sound public finances and public debt mgt Competent central bankers Sound banking system Efficient information systems Well-functioning securities markets

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SYSTEMS BASIS – TWO TYPES BANK-BASED MARKET-BASED

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TRANSFORMATIONS PROVIDED BY INSTITUTIONS Three types of transformations are offered by institutions: 3.Size

transformation 4.Maturity transformation 5.Risk transformation

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FINANCIAL SYSTEM Formal Informal

Traders Landlords Pawnbrokers Moneylenders Local bankers

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REGULATORS Ministry

of Finance

RBI SEBI IRDA PFRDA

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INSTITUTIONS BANKING NON-BANKING MUTUAL

FUNDS INSURANCE AND HOUSING FINANCE

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BANKING Scheduled

◦ ◦ ◦ ◦

Commercial Banks

Public sector Private sector Foreign banks Regional Rural banks

Scheduled

Cooperative Banks Non-Scheduled Cooperative Banks 10

NON-BANKING INSTITUTIONS NBFCs DFIs:

◦ All-India Financial Institutions (AIFIs): NHB, SIDBI, NABARD, EXIM Bank, IDFC, IL&FS, TDCI, HUDCO, SCICI, NSIC, IFCI, IIBI ◦ State-level institutions: SFCs, SIDCs, SIICs ◦ Other institutions: ECGC, DICGC 11

MUTUAL FUNDS

Public

sector Private sector

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INSURANCE COMPANIES Started

off in India as private companies Life insurance nationalised in 1956, general insurance in 1972, after nationalisation of banks Private firms entered after the dawn of liberalisation in both life and general business Many non-banks are participants Less stringent regulation/ entry barries than banks 13

HOUSING FINANCE COMPANIES Pioneered

by HDFC Operate under the control of NHB In close competition with Banks for loans Mainly private companies Most banks have HF subsidiaries, but have transferred back the business to bank itself due to need for less management and cross-selling possibilities

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FINANCIAL MARKETS CAPITAL MARKET MONEY MARKET COMMODITIES MARKET

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CAPITAL MARKETS – I EQUITY

MARKET

Primary Public issue Private placement Domestic International

Secondary (BSE, NSE, OTCEI, ISE, Regional Stock Exchanges) 16

CAPITAL MARKETS – II •

DEBT MARKETS: Government Securities market • Primary • Secondary

PSU Bond Market Private Debt Market

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MONEY MARKET – I TYPES OF MARKETS: Primary

segment

Secondary

segment

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MONEY MARKET – II TYPES OF INSTRUMENTS:  T-bills  Call money market  Certificates of Deposit  Commercial bills  Commercial paper  Term money

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FINANCIAL INSTRUMENTS CLASSIFIED BY: Type:  Primary Securities: Shares (Equity/ Preference/ Debt and various combinations)  Secondary Securities: MF Units, Insurance policies, Time Deposits Term:  Short  Long  Medium

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FINANCIAL SERVICES  Guaranteeing  Underwriting  Hire-purchase  Leasing  Merchant

banking

 Factoring  Forfaiting  Portfolio

management  Credit rating  Custodial  Depository 21

NON-BANKING INSTITUTIONS NBFCs

◦ ◦ ◦ ◦ ◦ ◦

NBFC-D NBFC-ND NBFC-ND-SI MBC MFBC RNBC

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NBFC REGULATION Under

the RBI Act Chapter IIIB gives the powers to RBI to regulate NBFCs Defined as companies with principal business of receiving deposits or that or a financial institution such as lending, investment in securities, hire purchase finance or equipment leasing Chapter IIIC bans finance business by non-corporate entities 23

NBFC SERVICES Provide

many services similar to banks, such as HP, equipment lease finance, loans, discounting and investments Accept deposits Prohibited from accepting demand deposits e.g. savings/current accounts, issuing cheques Hence freed from some risks of

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TYPES OF NBFCs AND THEIR REGULATORS TYPE

REGULATOR

Equipment Leasing Cos. [EL]

RBI

Hire Purchase Finance Cos. [HP] Loan Cos.

RBI

Investment Cos.

RBI

Residuary Non-banking Cos. [RNBCs] Misc. NBCs [Chit Funds]

RBI

Mutual Benefit Finance Cos. [Nidhis and potential Nidhis]

DoCA of GoI

Micro Finance Cos. [MFIs]

DoCA of GoI

Housing Finance Cos. [HFs]

NHB

Insurance Cos.

IRDA

Stockbroking Cos.

SEBI

Merchant Banking Cos.

SEBI

RBI

RBI + state Registrar of Chits

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REGULATORY NORMS Principal

classification of NBFCs depending on whether they take public deposits or not Categories: NBFC-ND NBFC-D NBFC-ND-SI

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REGULATORY NORMS BASIC REQUIREMENTS b) DIRECTIONS c) DEPOSIT REGULATIONS a)

ALM  SUPERVISION  BFS  DIRECTIONS TO AUDITORS 

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BASIC REQUIREMENTS Certificate

of Registration from RBI [pre-approval must if newly incorporate] Maintenance of liquid assets Creation of Reserve Fund at more than 20% of net profits every year

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DIRECTIONS

Prudential norms for all NBFCs 4. Provisions for NBFC-D 5. Deposit regulations 3.

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PRUDENTIAL NORMS – I Income

recognition norms: when income can be recognised NPA norms Restrictive norms – for loans against own shares Co. to have policy on Demand/Call loans Accounting standards Accounting for investment and policy

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PRUDENTIAL NORMS – II Asset

classification [STD/SUB/DBT/LOSS] Provision for NPA: ◦ For Loans and Advances ◦ Lease and HP Risk

weightage [convert off-BS items and their risks: special norms for infra. loans] Disclosure of NPAs 31