Indian Financial System and Economy

7/24/2019 Indian Financial System and Economy

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INDIAN FINANACIALSYSTEM AND ECONOMY

PRESENTED BY:

Aakash Raval(151401)

Aashish Janardan(151402)

Abhishk !"l#ani(15140$)

Aksha% Nara#an Sin&h(151404)


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Financial System Financial System is a set of institutional arrangements through

which financial surpluses in the economy are mobilised fromsurplus units and transferred to deficit spenders.

The institutional arrangements include all conditions andmechanisms governing the production, distribution, exchange and

holding of financial assets or instruments of all kinds and theorganisations as well as the manner of operations of financialmarkets and institutions of all descriptions.


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Function of FinancialSystem

The financial system helps production,capital accumulation, and growth by:-

i! encouraging savings

ii! mobilising them and

iii! allocating them among alternative usesand users.

"ach of these functions is important and theefficiency of a given financial systemdepends on how well it performs each ofthese functions.


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HISTORY OF INDIANFINANCIAL SYSTEM The title of #Sone $i %hidiya& golden bird!, given to 'ndia, has

been misunderstood by many. ( lot of us sometimes link it toeither 'ndia)s excellent climatic conditions, our great agriculturalheritage or the mineral and energy reserves that 'ndia has. Few ofus understand that 'ndia had a very long history of being the

richest country in the world in terms of wealth * i.e. gold andother precious metals.

+uring the ritish ule and after that too, we have been exposedto ideas like #overty is +ivine/ and #eing ich is "vil/. Theseideas have led many of us to believe that it is #0$/ to lackresources. 'ronically, 'ndia has been the only country where every

year #The 1oddess of 2ealth/ * #3axmi/ is worshipped. There isno other country where such a tradition of worshipping #2ealth/through religion exists. (nd the fact that we worship wealththrough &3axmi& means that creating and earning wealth is notreally a bad thing after all


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HISTORY Cont.The question that comes to our mind is If we had such a glorioushistory of being materially wealthy and prosperous, then what wasthe reason for that?

2ell, the 4uestion may have many answers. 0ne very possible answer isthe socio-economic architecture installed during the time of "mperor (shoka,that made it possible for the 'ndian civili5ation to generate enormous wealth.

'f we explore the creation of this socio-economic architecture, we woulddiscover that it was the knowledge of the #(rthashastra/, written by %hanakya$autilya! around 6788 years ago, that formed the foundation of "mperor(shoka9s rule. The (rthashastra is knowledge of aterial 2ealth * it is ascience of liberation from poverty and of entering the much-deserving worldof well-being and prosperity.

'nterestingly, today9s education system is bereft of this practical science ofbeing wealthy and prosperous. ;ence, there is a dire need for financialliteracy - having a fusion of modern finance and the ancient wisdom of%hanakya9s (rthashastra. The 1ame #%hanakya9s %hakkravyuh/ addresses thisvery need. This game is conceptuali5ed on books #%orporate %hanakya/ and#$autilya)s (rthashastra/ and helps its players throughout the world reali5etheir full potential to earn abundantly.


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Indian Financial System

The 'ndian financial system is the system that enableslenders and borrowers to exchange funds. 't is a compositionof various institutions, markets, regulations and laws,practices, transactions and claims < liabilities.

'ndian financial system is concerned about money, credit andfinance-the three terms are intimately related yet aresomewhat different from each other. 'ndian financial systemconsists of:-

a! Financial (ssets

b! Financial arkets

c! Financial 'nstitutions

d! Financial 'nstruments


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STRCTRE


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Financial assets

"nable channeli5ing funds from surplus units to deficit units

These are divided into 6 sub-categories:-a! rimary securities are financial claims against real-sector

units, for example, bills, bonds, e4uities etc. They arecreated by real-sector units as ultimate borrowers forraising funds to finance their deficit spending.

b! The secondary securities are financial claims issued by

financial institutions or intermediaries against themselvesto raise funds from public. For examples, bank deposits, lifeinsurance policies, =T' units, '+' bonds etc.


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Financial Markets The Indian Financial system (financial markets) is broadly

diided under four heads!

i!The Indian money market is the market in which short-termfunds are borrowed and lent. The money market does not deal incash, or money but in bills of exchange, grade bills and treasury

bills and other instruments. Trading in money markets is doneover the counter and is wholesale.

ii!The capital market in 'ndia on the other hand is the market forthe medium term and long term funds.

iii!Fore" #arket- The Forex market deals with the multicurrencyre4uirements, which are met by the exchange of currencies.+epending on the exchange rate that is applicable, the transfer offunds takes place in this market. This is one of the mostdeveloped and integrated market across the globe.

iv!$redit #arket- %redit market is a place where banks, F's and>F%s purvey short, medium and long-term loans to corporate

and individuals.


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Money Market

The money market is divided into two:

%& 'norganied #arket

=norgani5ed market consists of:

#oney enders: oney 3enders lend money to individuals at a high rate ofinterest.

Indigenous *ankers: They operate like money lenders. They also acceptdeposits from public.

$hit Funds: These collect funds from members and provide loans tomembers and others.

+& rganied #oney #arket0rgani5ed arkets work as per the rules and regulations of the '. 'keeps a strict control over the 0rgani5ed Financial arket in 'ndia.

0rgani5ed arket consists of: Treasury ills, %ommercial aper %!,%ertificate 0f +eposit%+!, %all oney arket, %ommercial ill arket.


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Ca!ital Ma"#et

( capital market is an organi5ed market. 't provides long term finance forbusiness.

%apital arket is divided into three groups:

%& Industrial - $orporate .ecurities #arket

't is a market for industrial securities. %orporate securities are e4uity andpreference shares, debentures and bonds of companies. 'ndustrialsecurity)s market is very Sensitive and (ctive Financial arket.

+& /oernment .ecurities #arket

'n this market, government securities are bought and sold. The securitiesare issued in the form of bonds and credit notes. The buyers of suchsecurities are anks, 'nsurance %ompanies, rovident funds, ' and'ndividuals. These securities may be of short-term or long term.

0& ong1Term oans #arket

anks and Financial institutions provide long-term loans to firms, formoderni5ation, expansion and diversification of business


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Financial Institutions

The Financial Institutions in Indiamainly comprises of the %entralank which is better known as the eserve ank of 'ndia, the commercialbanks, the credit rating agencies, the securities and exchange board of'ndia, insurance companies and the speciali5ed financial institutions in'ndia.

2esere *ank of India:The eserve ank of 'ndia was established in the year ?@7A with a view toorgani5e the financial frame work and facilitate fiscal stability in 'ndia.The bank acts as the regulatory authority with regard to the functioning ofthe various commercial bank and the other financial institutions in 'ndia.

$ommercial *anks in India:

The commercial banks in 'ndia are categori5ed into foreign banks, privatebanks and the public sector banks. The commercial banks indulge in variedactivities such as acceptance of deposits, acting as trustees, offering loansfor the different purposes and are even allowed to collect taxes on behalfof the institutions and central government.


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FINANCIALINSTRUMENTS

(nother important constituent of financial system is financialinstruments. They represent a claim against the future incomeand wealth of others. 't will be a claim against a person or aninstitutions, for the payment of some of the money at a specifiedfuture date.

i!The #oney market can be defined as a market for short-termmoney and financial assets that are near substitutes for money.The term short-term means generally a period upto one year andnear substitutes to money,is used to denote any financial assetwhich can be 4uickly converted into money with minimumtransaction cost.

ii!The $apital market generally consists of the following longterm period i.e., more than one year period, financial instrumentsB'n the e4uity segment "4uity shares, preference shares,convertible preference shares, non-convertible preference sharesetc and in the debt segment debentures, 5ero coupon bonds, deepdiscount bonds etc.


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Financial Inst"uments Cont.

Some of the important money marketinstruments are briefly discussed belowB

?. %allC>otice oney 6. Treasury ills

7. Term oney

D. %ertificate of +eposit A. %ommercial apers


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

funds (mostly of banks) are traded.

he loans are of short-term duration (! to !" days). Money lent for one day

is called 'all *n##$ if it e%ceeds ! day but is less than !& days it iscalled 'n*%i *n##. Money lent for more than !& days is '%r *n#+

he borrowing is e%clusi'ely limited to banks who are temporarily short

of funds.

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

It acts as a good indicator of the liuidity position


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reasury *ill Market

reasury *ill market- +lso called the -*ill market hese bills are short-term liabilities (,!-day !-day /0"-

day) of the 1o'ernment of India

It is a promise of the go'ernment to pay the stated amountafter e%piry of the stated period from the date of issue

hey are issued at discount to the face 'alue and at the endof maturity the face 'alue is paid

he rate of discount and the corresponding issue price are

determined at each auction 2*I auctions ,!-day -*ills on a weekly basis !-day -

*ills and /0"-day -*ills on a fortnightly basis on behalf ofthe central go'ernment


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ermMoneyMarket

Inter-Bank Term Money

'nter-bank market for deposits of maturity

beyond ?D days is referred to as the termmoney market. The entry restrictions arethe same as those for %allC>otice oneyexcept that, as per existing regulations,

the specified entities are not allowed tolend beyond ?D days.


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Certificates of 3eposit C3s are short-term borrowings issued by all scheduled banks and are

freely transferable by endorsement and deli'ery.

Introduced in !,,.

Maturity of not less than 4 days and ma%imum up to a year. FIs are allowedto issue C3s for a period between ! year and up to / years.

Sub5ect to payment of stamp duty under the Indian Stamp +ct !,,.

Issued to indi'iduals corporations trusts funds and associations.

hey are issued at a discount rate freely determined by themarket6in'estors.


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Commercial 7apers

Short-term borrowings by corporates financial institutionsprimary dealers from the money market

Can be issued in the physical form (8sance 7romissory 9ote)or demat form

Introduced in !,,: ;hen issued in physical form are negotiable by endorsement

and deli'ery and hence highly fle%ible Issued sub5ect to minimum of 2s. & lacs and in the multiple of

2s. & lacs after that Maturity is 4 days to ! year 8nsecured and backed by credit rating of the issuing company Issued at discount to the face 'alue


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Financial Inte"mediation ;aving designed the instrument, the issuer should then ensure

that these financial assets reach the ultimate investor in order togarner the re4uisite amount. 2hen the borrower of fundsapproaches the financial market to raise funds, mere issue ofsecurities will not suffice. (de4uate information of the issue,

issuer and the security should be passed on to take place. Thereshould be a proper channel within the financial system to ensuresuch transfer. To serve this purpose, Financial intermediariescame into existence. Intermediar

y#arket 2ole

.tock

3"change%apital arket

Secondary

arket to

securities

Inestment

*ankers

%apital arket,

%redit arket

%orporate

advisory

services, 'ssue

of securities

'nderwriter

s

%apital arket,

oney arket

Subscribe to

unsubscribed

portion of

securities

2egistrars,4epositorie

s%apital arket

'ssue securities

to the investorson behalf of the

com an and


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Financial Disinte"mediation +isintermediation refers to:

?! the investing of funds that would normally have been placed in abank or other financial institution financial intermediaries!directly into investment instruments issued by the ultimate users

of the funds. 'nvestors and borrowers transact business directlyand thereby bypass banks or other financial intermediaries.

6! The elimination of intermediaries between the first case providersof capital and the ultimate users of capital, withdrawal of fundsfrom financial intermediaries such as banks, thrifts, and life

insurance companies in order to invest directly with ultimateusers.

(s a result of financial disintermediation, financial innovation,deregulation, etc. there has been a decline of traditional banking.


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Indian *anking System ,n%ral Bank (Rsrv Bank *- .ndia)

,*rial banks

,*/*ra%iv banks

Banks an b lassi-id as:

Scheduled (Second Schedule of 2*I +ct !,/") - !4

9on-Scheduled - " Shd"ld banks an b lassi-id as:

7ublic Sector *anks () 7ri'ate Sector *anks (


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Conclusion

India#s financial system is uite huge and

caters to e'ery kind of demand for funds

*anks are at the core of our financial

system and therefore there is greater

e%pectation from them in terms of

reaching out to the 'ast populace as well

as being competiti'e.


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THAN$ YO

Documents

Indian Financial System and Economy