Introduction IFS

7/31/2019 Introduction IFS

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Indian Financial

System


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Financial System

Existence of a well organized financial system

Promotes the well being and standard of living of the people of acountry

Money and monetary assets

Mobilize the saving

Promotes investment


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Financial System

Financial System of any country consists of financialmarkets, financial intermediation and financial instrumentsor financial products

Suppliers of funds

(Mainly households)Flow of financial services

Incomes , and financialclaims

Seekers of funds(Mainly business firms

and government)

Flow of funds (savings)


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Indian Financial System

Non- OrganizedOrganized

Money lendersLocal bankers

Traders

Landlords

Pawn brokers

Chit Funds

Regulators

Financial Institutions

Financial Markets

Financial services


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Barter

Money Lender

Nidhi's/Chit Funds

Indigenous Banking

Cooperative Movement

SocietiesBanks

Joint-Stock Banks

Evolution of FinancialSystem


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Consolidation

Commercial Banks

Nationalization

Investment Banks

Development Financial Institutions

Investment/Insurance Companies

Stock Exchanges

Market Operations

Specialized Financial Institutions

Merchant Banking

Universal Banking


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Financial System

Savers Lenders Households Foreign Sectors

Investors BorrowersCorporate Sector

Govt.Sector

Un-organizedSector

Economy

Interrelation--Financial system &Economy


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Organized Indian Financial System

Money MarketInstrument

Capital MarketInstrument

ForexMarket

CapitalMarket

MoneyMarket

CreditMarket

Primary Market

Financial

InstrumentsFinancialMarkets

FinancialIntermediaries

Secondary Market

Regulators


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Financial Markets

Mechanism which allows people to trade

Affected by forces of supply and demand

Process used

In Finance, Financial markets facilitates


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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 priceprovides a measure of the value of the asset.


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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


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Indian Capital Market -Historical perspective 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


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Indian Capital markets -Chronology 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


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Capital Markets - Reforms

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


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Reforms / Initiatives post 2000 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


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MARKET STRUCTURE(JULY 31, 2005) 22 Stock Exchanges,

Over 10000 Electronic Terminals at over 400 locations all overIndia.

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


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Indian Capital Market

Market Instruments Intermediaries

Primary Secondary

Equity DebtHybrid

Regulator

BrokersInvestment BankersStock ExchangesUnderwriters

SEBI

Players

Corporate IntermediariesCRA Banks/FI FDI /FIIIndividual


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Stock Exchanges in INDIA Bombay Stock Exchange

(BSE)

National Stock Exchange ofIndia (NSE)

United Stock Exchange ofIndia (USE)

Multi Commodity Exchange

(MCX) MCX Stock Exchange (MCX-

SX)

Over the Counter Exchange ofIndia (OTCEI)

Inter-connected Stock

Exchange of India (ISE) Madras Stock Exchange (MSE)

Hyderabad Stock Exchange(HSE)

Calcutta Stock Exchange(CSE)

Delhi Stock Exchange (DSE)

Bangalore Stock Exchange

Madhya Pradesh Stock

Exchange, Indore Jaipur Stock Exchange (JSE)

Patna stock Exchange (PSE)

UP Stock Exchange (UPSE

Ahmedabad Stock Exchange(ASE)

Cochin Stock Exchange (CSE)


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The role of the stock exchange

Raising capital for businesses

Mobilizing savings for investment

Facilitate company growth

Redistribution of wealth


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The role of the stock exchange

Corporate governance

Creates investment opportunities for small investors

Government raises capital for development projects

Barometer of the economy


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Growth Pattern of the Indian Stock Market

Sl.No.

As on 31stDecember

1946 1961 1971 1975 1980 1985 1991 1995

1No. of

Stock Exchanges

7 7 8 8 9 14 20 22

2No. ofListed Cos.

1125 1203 1599 1552 2265 4344 6229 8593

3No. of StockIssues ofListed Cos.

1506 2111 2838 3230 3697 6174 8967 11784

4Capital of ListedCos. (Cr. Rs.)

270 753 1812 2614 3973 9723 32041 59583

5Market value ofCapital of ListedCos. (Cr. Rs.)

971 1292 2675 3273 6750 25302 110279 478121

6Capital perListed Cos. (4/2)

(Lakh Rs.)

24 63 113 168 175 224 514 693

7

Market Value ofCapital per ListedCos. (Lakh Rs.)(5/2)

86 107 167 211 298 582 1770 5564

8

Appreciated valueof Capital per

Listed Cos. (LakRs.)

358 170 148 126 170 260 344 803


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Capital Market Instruments

ADR / GDR

Equity Debt

Equity

SharesPreference

SharesDebentures Zero coupon

bonds

Deep

Discount

Bonds

Hybrid


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Factors contributing to growthof Indian Capital Market

Establishment of Development banks & Industrial financialinstitution.

Legislative measures

Growing public confidence

Increasing awareness of investment opportunities


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Factors contributing to growthof Indian Capital Market

Growth of underwriting business

Setting up of SEBI

Mutual Funds

Credit Rating Agencies


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Indian Capital Marketdeficiencies

Lack of transparency

Physical settlement

Variety of manipulative practices

Institutional deficiencies

Insider trading


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Money Market

Market for short-term money and financial assets that are nearsubstitutes for money.

Short-Term means generally period upto one year and nearsubstitutes to money is used to denote any financial asset which

can be quickly converted into money with minimum transactioncost


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Money Market

It is a place for Large Institutions and government to managetheir 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


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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


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Money Market Instruments

Treasury Bills

Commercial Paper

Certificate of Deposit

Money Market Mutual Funds

Repo Market


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Segment Issuer Instruments

Government CentralGovernment Zero Coupon Bonds, Coupon Bearing Bonds, CapitalIndex Bonds, Treasury Bills.

PublicSector

Government

Agencies /Statutory Bodies

Govt. Guaranteed Bonds, Debentures

Public SectorUnits

PSU Bonds, Debenture, Commercial Paper

Private Corporate Debentures, Bonds, Commercial Paper, Floating RateBonds, Zero Coupon Bonds, Inter-Corporate Deposits

Banks Certificate of Deposits, Bonds

Financial

InstitutionsCertificate of Deposits, Bonds


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Financial

Regulators


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Financial Regulators

Securities and Exchange Board of India (SEBI)

Reserve Bank of India

Ministry of Finance


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Security Exchange Board of India(SEBI)

Securities and Exchange Board of India (SEBI) was firstestablished in the year 1988

Its a non-statutory body for regulating the securities market

It became an autonomous body in 1992


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Functions Of SEBI

Regulates Capital Market.

Checks Trading of securities.

Checks the malpractices in securities market.


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Functions Of SEBI

It enhances investor's knowledge on market by providingeducation.

It regulates the stockbrokers and sub-brokers.

To promote Research and Investigation


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Objectives of SEBI

It tries to develop the securities market.

Promotes Investors Interest.

Makes rules and regulations for the securities market.


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The Recent InitiativesUndertaken

Sole Control on Brokers

For Underwriters

For Share Prices

For Mutual Funds


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Reserve Bank of India

Established on April 1, 1935 in accordance with the provisions ofthe RBI Act, 1934.

The Central Office of the Reserve Bank has been in Mumbai.

It acts as the apex monetary authority of the country.


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Functions Of RBI

Monetary Authority: Formulation and Implementation of monetary policies.

Maintaining price stability and ensuring adequate flow ofcredit to the Productive sectors.

Issuer of currency: Issues and exchanges or destroys currency and coins.

Provide the public adequate quantity of supplies of currencynotes and coins.


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Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations

Maintain public confidence, protect depositors' interest andprovide 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


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Developmental role:

Performs a wide range of promotional functions to supportnational objectives.

Related Functions:

Banker to the Government: performs merchant banking functionfor the central and the state governments.

Maintains banking accounts of all scheduled banks.

Functions Of RBI


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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 8.50 per cent and Reverse repo rateis around 7.50 per cent.

(c) Cash Reserve Ratio:

The cash reserve ratio (CRR) of scheduled banks iscurrently at 6.00 per cent.


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Reforms in the Financial System

Pre-reforms period

Steps taken

Objectives

Conclusion


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Pre-Reforms Period

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


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Pre-Reforms Period

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.


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Steps Taken

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.


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Objectives

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


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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

Deregulate the insurance industry

Drop proposed limits on pension reforms

Increase consumer ownership of mutual-fund products

Introduce a gold deposit scheme


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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 assetallocation


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Conclusion

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 haveincreased but absorption of foreign capital is low.


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Thank you

Documents

Introduction IFS