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Indian Financial

System
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
Suppliers of funds
(Mainly business firms
Flow of financial services (Mainly households)
and government)
Incomes , and financial
claims
Indian Financial System

Un-Organized
Organized
Money lenders
Regulators
Local bankers
Financial Institutions
Traders
Financial Markets
Landlords
Financial services
Pawn brokers
Financial Instruments
Organized Indian Financial System

Regulators Financial Financial Financial


Instruments Markets Intermediaries
1.MoF
2.SEBI
3.RBI Forex Capital Money Credit
Market Market Market Market
4.IRDA

Primary Market

Secondary Market

Money Market Capital Market


Instrument Instrument
Indian Capital Market

Market Instruments Intermediaries Regulator

SEBI
•Brokers
•Investment Bankers
Primary Secondary •Stock Exchanges
•Underwriters

Equity Hybrid Debt


Players

CRA Corporate Intermediaries Individual Banks/FI FDI /FII


Financial Markets

Mechanism which allows people to trade

Affected by forces of supply and demand

Process used

In Finance, Financial markets facilitates


Why Capital Markets Exist

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.
Role of Capital Markets
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
Capital Market Instruments

Equity Debt

Primary PSU Bond Govt.


Secondary Derivative Private
Market Market Securities
Market Market Corporate
1.Public Market
Issue
1.NSE 1.Exchange Dept.
2.BSE Traded
2. Private 3.OTCEI 2.Future & Option
Placement 4.ISE a.Index
a. Domestic Market 5.RSE
b.Stock Primary Segment Secondary Segment
b. International Market
Factors contributing to growth of Indian Capital Market

Establishment of Development banks &


Industrial financial institution.
Legislative measures
Growing public confidence
Increasing awareness of investment
opportunities
Factors contributing to growth of Indian Capital Market

Growth of underwriting business


Setting up of SEBI
Mutual Funds
Credit Rating Agencies
Indian Capital Market deficiencies

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

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
Money Market
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


Defects of Money Market

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
Money Market Instruments

 Treasury Bills
 Commercial Paper
 Certificate of Deposit
 Commercial Bills
 Term Money
1. Primary Segment
2.Secondary Segment
 Call Money Market
FINANCIAL INSTRUMENTS

 Money Market Instruments


 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 up to
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.
Some of the important money market instruments are briefly
discussed below;
1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers
1. Call Money Market

 Loan disbursed by commercial banks


 1 day – 7 days
 Bank can recall the loan at its
 maturity
 Usually advanced to bill brokers &
 stock exchange brokers.

2. Term Money


Term Money 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.
3. Treasury Bills.
Government Paper Securities
Duration of 91 days
Promissory note of the government to pay a specified
sum after a specified period
4. Certificate of Deposits

 Certificates of Deposit (CDs) is a negotiable money market instrument


and issued in dematerialized form or as a Usance Promissory Note, for
funds deposited at a bank or other eligible financial institution for a
specified time period.
 Guidelines for issue of CDs are presently governed by various directives
issued by the Reserve Bank of India, as amended from time to time.
 CDs can be issued by
(i) scheduled commercial banks excluding Regional Rural Banks (RRBs)
and Local Area Banks (LABs); and
(ii) select all-India Financial Institutions that have been permitted by RBI
to raise short-term resources within the umbrella limit fixed by RBI.
Banks have the freedom to issue CDs depending on their requirements.
 An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e.,
issue of CD together with other instruments viz., term money, term
deposits, commercial papers and interoperate deposits should not
exceed 100 per cent of its net owned funds, as per the latest audited
balance sheet.
 5. Commercial Paper
 CP is a note in evidence of the debt obligation of the issuer. On issuing
commercial paper the debt obligation is transformed into an
instrument.
 CP is thus an unsecured promissory note privately placed with
investors at a discount rate to face value determined by market forces.
 CP is freely negotiable by endorsement and delivery. A company shall
be eligible to issue CP provided - (a) the tangible net worth of the
company, as per the latest audited balance sheet, is not less than Rs. 4
crore; (b) the working capital (fund-based) limit of the company from
the banking system is not less than Rs.4 crore and (c) the borrowal
account of the company is classified as a Standard Asset by the
financing bank/s. The minimum maturity period of CP is 7 days.
Capital Market Instruments

 Capital Market Instruments

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.
Equity Market

1 .Primary Markets
 Helps companies in raising funds through issue of
securities like shares and debentures.
 Governed by SEBI (Securities and Exchange Board of
India).
 Methods of issuing securities in Primary Market:
 – Public Issue
 – Rights Issue
 – Bonus Issue
 – Private Placement
 – Bought-out Deals
International Capital
Markets
Development attributed to following factors:
investors’ need to avoid taxes in their own country
and to ensure protection against depreciating home
currencies.
emergence of new technologies in the area of
financial services, development and deregulation of
financial markets
Equity Instruments

GDR:
 instruments which possess a number of underlying shares held by the
custodian domestic bank of the company.
 The GDRs are traded on a foreign stock exchange, issued to the non-resident
investors.
 The GDR’s are denominated in the foreign currency and the underlying shares
are denominated in the local currency of the issuer.
 The GDR’s are considered as common equity of the company and are entitled to
dividends and voting rights.
ADR

 Is a dollar denominated negotiable certificate traded in the US-markets


whose underlying securities are of non-US companies.
 ADR Level-I :first step for an issuer to enter the US market, minimum
disclosure required, need not comply with the American GAAP. Can
trade only on the OTC market and not on any national stock exchange.
 ADR Level-II: significant disclosures to be made to the SEC, company
allowed to list on AMEX, NYSE.
 ADR Level-III :fresh capital can be raised company to be registered
with the SEC and shall even follow US GAAP.
Euro Bonds

These are the bonds that are issued outside the


country of the currency in which it is denominated
Features:
No with holding of tax on interest payments
These are in bearer form with coupon interest
attached
Listed on stock exchanges though traded on the OTC
market
Foreign Bonds

Bonds floated in the domestic markets denominated


in the domestic currency by the non-resident.
Yankee Bonds
Samurai Bonds
Bulldog Bonds
Shibosai Bonds
Yankee bonds

These are US dollar denominated issues by the


foreign borrowers in the US markets.
Features
Regulated by the SEC. Requires more disclosure
than that given by the prospectus.
Foreign borrower to adopt US accounting policies
Bonds sponsored by the underwriting syndicate
Requires SEC registration before the sale.
To be rated by the US credit rating agencies
Samurai Bonds

Yen denominated bonds issued in the Japanese


markets by the non- Japanese companies.
Features
Maturity: 3-20 years
Borrowers in order of priority sovereigns,
supranational and their entities, high quality private
corporations having some kind of Japanese trade
links.
Bull Dog Bonds

Sterling denominated foreign bonds floated in the


UK market.
Features:
Maturity 5 for short maturities 25 for long
maturities.
Subscribed by the long-term institutional investors-
pension funds, life insurance Co’s
Bonds offered by placing or offer for sale process will
have to be listed on the London SE
Shibosai Bonds

Privately placed bonds issued in the Japanese


market
Features
Offered to institutional investors, including banks
the issue’s eligibility, coupon rate, etc governed by
the Japan’s MOF guidelines
Pricing done based on base rate and spread which
depends on the rating of Co or country.
Forex Markets

 Foreign Exchange Market: Deals with transactions in currencies


other than one’s own currency.
 Exchange rate: The rate at which one currency can be converted
into another currency
 Participants:
 – Exporters
 – Importers
 – Commercial Banks
 – Central Banks
 – Authorized Dealers and Money Changers
 – Brokers
Equity Market

2. Secondary Market
 Securities already issued in the primary market are traded
in the secondary market. Provides liquidity to the securities
held by the investors.
 Provides liquidity to the securities held by the
 investors.
 Operates through stock exchanges that regulate the trading
activities in this market.
Equity Market

3. Derivatives Market
 Financial derivative is a product derived from the market of an
underlying asset.
 Participants:
 – Hedgers
 – Speculators
 – Arbitrators
 Types of Derivatives:
 – Futures
 – Options
 - Caps
 - floors and Collars
Debt. Market
 Government of India, public sector units and corporations
together comprise as dominant issuer of debt markets in
India. Local governments, mutual funds and international
financial institution issue debt instruments as well but very
infrequently. The Central Government mobilizes funds
mainly through issue of dated securities and T-bills. Bonds are
also issued by government sponsored institutions like the
development financial institutions (DFIs) like IFCI and IDBI,
banks and public sector units. Some, but not all, of the PSU
bonds are tax-exempt. The corporate bond market comprise of
commercial papers and bonds. In recent years, there has been
an increase in issuance of
Financial Institution
Financial Institution

 Financial Institutions
 Industrial Development Bank of India (IDBI)
 Industrial Finance Corporation of India (IFCI )
 Industrial Investment Bank of India (IIBI)
 Export and Import Bank of India
 State Financial Corporations
 State Industrial Development Corporations
Non-banking financial institution

 Non-Banking Financial Companies


 Investment Trusts or Investment Companies: Close end
organizations, having fixed amount of authorized capital
provides services through conserving and managing
property for those who cannot manage their own funds.
 Mutual Benefit Funds or Nidis: Sources of their funds are
share capital, deposits.
 Merchant Banks : Offers financial advice & services for
fees; Services offered are management, marketing,
underwriting of new issue, project promotion & finance,
corporate advice, BOD, venture capital etc.
 Hire Purchase Finance Companies
 Lease Finance Companies
 Housing Finance Companies
 National Housing Bank : Wholly owned by subsidiary of
RBI, Aim is to promote housing finance Institution at
local & regional levels, It refinance housing loans to
scheduled commercial & co operative banks, housing
finance companies etc.
 Venture Capital Funding Companies
DEVELOPMENT FINANCE INSTITUTION

All India Financial Institutions


 IFCI: Industrial Finance Corporation of India
The IFCI, India’s first DFL, was established on 1 July 1948
 IFCI principal activities can be categorised into
- Financing
- Promotional activities
FINANCING ACTIVITIES

Project Activities
Financial Services
Corporate advisory Services
Corporate advisory Services to Foreign Investors
PROMOTIONAL ACTIVITIES

 Played a key role in the development of cooperatives in the sugar and


textile sector
 It has promoted technical consultancy organisation
primarily in less developed state, to provide
necessary services to the promoters of small and
medium- sized industries in collaboration with other banks and
institutions.
 It has developed many institutions like

 Management Development institute


 Investment and credit rating agency
 Tourism finance corporation of India

 Rashtriya Gramin Vikas Nidhi


DISADVANTAGES

The reasons to this dismal state of affairs of the company are as follows
 Operational Inefficiency
 Political Interference
 Traditional sector financing
 Higher provisioning for Non –performing assets
The steps taken for the revival of IFCI are as follows:
IFCI constituted an expert committee in 2001
 To formulate a medium-to long term strategic plan for IFCI in the
emerging new business environment
 The committee has laid down the road map plan for the next five years
 It has made recommendations covering a wide range of structural and
operational areas
 It has strengthened its risk management techniques and is putting in
efforts to bring down the NPAs to a manageable level, through
corporate debt structuring
 It has initiated action against defaulters and has filed suits against
defaulter companies
INDUSTRIAL DEVELOPMENT BANK OF INDIA

 Established in 1964 by Parliament as a wholly owned subsidiary of the


RBI
 In 1976, the banks ownership was transferred to the Government of
India
 IDBI has engineered the development of capital market through
helping in setting up of the
- Securities Exchange Board of India (SEBI)
- National Stock Exchange of India Limited (NSE)
- Credit Analysis and Research Limited (CARE)
- Stock Holding corporation of India Limited (SHCIL)
- Investors Services of India Limited (ISIL)
- National Securities Depository Limited (NSDL)
- Clearing Corporation of India Limited (CCIL)
IDBI has undertaken several initiatives to reposition itself as a universal
Bank:-
 In April 2001, IDBI appointed Boston consulting Group India Private
Limited (BCG) as consultant to draw up a road map for conversion into
a universal bank
 Formation of high level risk management committee to develop overall
risk management policy
 The bank has constituted a credit risk management group to evaluate
credit risk both at the transaction level and also at the portfolio level
 It has pioneered the setting up of Asset Reconstruction Company
(India) Limited (ARCIL) in 2002 in association with select banks and
financial institutions
IDBI-SERVICES

 IDBI provides Merchant banking and wide array of corporate advisory


services as part of its fee based activities
 This includes professional advice and services for
- issue management
- private placement of equity/debt instruments
- project evaluation
- credit syndication
- share valuation
- corporate restructuring including mergers and acqusitions and
divestment of equity
 the bank also offers a number of Forex related services on a
commission basis including opening of letters of credit and remittance
of foreign currency on behalf of its assisted companies for import of
its goods and services
IIBI

 Established in 1985 under the IRBI Act 1984


 It is a principal credit & reconstruction agency for re-habilitation of sick
& closed industrial units.
 The range of its services include provision of infrastructure facilities ,
consultancies , managerial & merchant banking facilities & making
available machinery & other equipment on a lease or hire purchase
bases
 It was renamed as industrial investment bank of India & brought
under companies act 1956 since March 17 1997.
 It finances new projects , modernization work , balancing equipment
needs , correcting imbalance in current Assets , relieving strains on
cash resources , repayment of pressing liabilities and other activities.
IDFC

 Conceived as an institution to facilitate the flow of private finance to


commercially viable infrastructure projects & help mitigate commercial
& structural risk contain therein , by designing innovative products &
processes.
 It operates in areas such as energy , telecommunication & IT ,
integrated transportation , Urban infrastructure & food & agri-business
infrastructure.
 It offers the variety of services to projects in the infrastructure &
advisory services.
 It helps promoters raise resources from international markets
 It intends offering advisory services to these funds to facilitate &
strengthen their connectivity with infrastructure projects.
NABARD

 Established in July 1982 under an act of parliament , is an apex dvpt.


Bank for promotion & dvpt. Of agriculture , small-scale industries ,
cottage & village industries & other allied economic activities in rural
areas.
 Objective is to promote integrated rural development for overall
prosperity of rural areas.
 Provides long term investment credit to the Farm sector for various
approved agricultural & allied activities such as minor irrigation ,
plantation etc.
 It also extends refinance to banks for financing government sponsered
programmes like prime minister Rojgar Yojna , Swarna Jayanti Gram
Swarozgar Yojna etc.
 Other important development includes setting up of micro finance
development fund by NABARD.
SIDCS

 Established under the companies act 1956, as wholly owned


undertakings of the state governments with the specific objective of
promoting and developing medium and large industries in the
respective states.
 It undertakes a range of promotional activities including:
-repression of preparation of feasibility reports .
-conducting industrial potential surveys.
-entrepreneurship training and development programs.
-developing industrial estates.
 It also offer package of developmental services that include
Technical guidance, assistance in plant location and coordination with
other agencies.
EXIM BANK

 Established in 1982, is a wholly government owned financial institution


setup for the purpose of financing, facilitating and promoting India’s
foreign trade.
 Its financing services include a range of fund and non-fund based
programs to enhance the exports, competitiveness of Indian
companies.
 Its major operations presently comprise
-financing of projects
-products and service exports
-building export competitiveness
-promotional programs
-Financing of research and development activities of exporting
companies.
SFC

It is a state level development bank setup under the


SFCs act, 1951, for the development of small and
medium scale industries in their respective states.
It aims at bringing about balanced regional
development by wider dispersal of industries and
generating larger employment opportunities.
It includes composite loan scheme, scheme for
women entrepreneurs, modernization scheme,
equipment finance scheme etc.
SIDBI

It offer a chain of financial product covering micro


finance, business,incubation, venture capital etc.
It also provides support services such as training,
market information and advise for enhancing the
inherent strength of small scale units.
Products And Services of SIDBI

Direct finance scheme.


Bills finance scheme.
Re-finance scheme.
International finance scheme.
Marketing finance and development schemes.
SIDBI foundation for micro-credit.
Other schemes.
Promotional and development activities.
Fixed deposit/bond.
Financial Regulators
Financial Regulators

Securities and Exchange Board of India (SEBI)

Reserve Bank of India

Ministry of Finance
IRDA
Security Exchange Board of India
(SEBI)

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
Functions Of SEBI

Regulates Capital Market.

Checks Trading of securities.

Checks the malpractices in securities market.


Functions Of SEBI

It enhances investor's knowledge on market by


providing education.

It regulates the stockbrokers and sub-brokers.

To promote Research and Investigation


Objectives of SEBI
It tries to develop the securities market.

Promotes Investors Interest.

Makes rules and regulations for the securities


market.
The Recent Initiatives
Undertaken
Sole Control on Brokers

For Underwriters

For Share Prices

For Mutual Funds


Reserve Bank of India

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.


Functions Of RBI
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.
Monetary Measures

(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.
Objectives Of MoF
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
Recommendations

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
Recommendations

Deregulate the insurance industry

Drop proposed limits on pension reforms

Increase consumer ownership of mutual-fund


products

Introduce a gold deposit scheme


Recommendations

Speed up the development of electronic payments.

Separate the RBI's regulatory and central-bank


functions
Lift the remaining capital account controls

Phase out statutory priority lending and


restrictions on asset allocation
IRDA

IRDA Service Provider


-----------------------
1.Care-Site
2.Tech Support
Designated
III
Person
(Ins. Co.)

Agent Training
Institute EXAM Agent Registration Agents
Portal

Ins. Co.
(Development
Officer)
IRDA Function….
 Data Correction Approval (License)
• Shows list of data correction requests by DPs
• IRDA can approve these requests
 Cancellation Approval (License/Certificate)
• Shows list of license cancellation requests
• IRDA can approve or reject
• IRDA can cancel with or without refund
 Recall Cancellation Approval
• Shows list of license recall cancellation requests
• IRDA can approve or reject
 Termination Approval
• Shows list of license termination requests by Corporate DP
• IRDA can approve or reject termination requests
 Terminate License
• IRDA can terminate individual/corporate license
Thank you

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