introduction to financial management system

8/3/2019 introduction to financial management system

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INDIAN FINANCIAL SYSTEM



FINANCIAL SYSTEMFINANCIAL SYSTEM

A financial system is a set of :

* markets

* institutions,

* instruments

which foster savings and channels them to their mostefficient use.

The major stakeholders:* savers

* intermediaries

* users



Role of Financial System in An Economy

Linking saving and investment

Accelerating the rate of savings & investment byoffering diversified financial services and

instruments

Assisting in larger production of goods and

services

Boosting Economic Growth



Indian Financial System

Formal / OrganizedFinancial

System

Informal / UnorganizedFinancial

System

Regulators

Financial Markets

Financial Intermediaries

Major Players

Financial Instruments

Financial Instruments



Extent of

Development

Bank Based Market Based

Developed Japan, Germany,

France, Italy

US, UK, Singapore, Korea

Developing India Brazil

Under

Developed

Argentina, Pakistan,

Sri Lanka,

Bangladesh

Mexico, Philippines, Turkey



FUNCTIONS OF FINANCIAL MARKETFUNCTIONS OF FINANCIAL MARKET

Mobilize and allocate savings

Provides payment and settlement system

Monitor corporate performance

Price discovery process

Provision of liquidity

Low cost of transactions and information.

Limits and reduces the risk



Asset Transformation activity is provided by

institutions issue claims against themselves whichdiffer from the assets they acquire.

size transformation

maturity transformation

risk transformation



FINANCIAL SYSTEM AND ECONOMYFINANCIAL SYSTEM AND ECONOMY

Economic activity and growth are greatly facilitated by the existence of afinancial system developed in terms of the efficiency of the market in mobilizing

savings and allocating them among competing users.

Basic elements of sound financial system -

* strong legal and regulatory environment

* stable money

* good integration between various market segments

It is essential that financial institutions are developed sufficiently and the marketoperations be -

** free

** fair

** competitive

** transparent

Market Efficiency would be reflected in :

* wide dissemination of information

* reduction of transaction cost

* allocation of capital to the most productive uses



I ntegration of financial markets is a process of unifying

markets and enabling convergence of risk-adjusted returns

on the assets of similar maturity across the markets.

The process of integration is facilitated by :

access of participants to various market segments

deregulation

capital has become more mobile

technological developments

changes in the operating framework

harmonization of prudential regulations



Importance of integrated financial markets

serve as a channel for authorities to transmit important price signals

constitute an important vehicle for promoting domestic savings,investment and consequently economic growth

fosters the necessary condition for a country¶s financial sector to emergeas an international or a regional financial centre

by enhancing competition and efficiency of intermediaries in their operationsand allocation of resources, contributes to financial stability

lead to innovations and cost effective intermediation, thereby improvingaccess to financial services for members of the public, institutions and

companies alike

induce market discipline and informational efficiency

promotes the adoption of modern technologyand payment systems toachieve cost effective financial intermediation services.



RECENT REFORMS IN THE INDIAN FINANCIALRECENT REFORMS IN THE INDIAN FINANCIAL

SYSTEMSYSTEM

Monetary

MarketCredit

MarketForex

Market

Capital

Market



THE REGULATORS IN THE INDIANTHE REGULATORS IN THE INDIAN

FINANCIAL SYSTEMFINANCIAL SYSTEM



RESERVE BANK OF INDIA

The RBI was established on April 1,1935 under the Reserve

Bank of India Act,1934.

Rationale :

safety of public money

ensure productive use of funds ensure sound and healthy banking system

stable monetary position

maintain value of rupee

ensure effective coordination and control among variousparticipants of Indian financial system

control overall credit and price level in the country



RBI acts as w atchdog of the entire financial system.

It is the sponsor bank for top ranking bank and financial

institutions like SBI,NABARD, NHB etc.

It counsels the Central and State Govt. and all public sector institutions on monetary matters.

Major role of RBI is to regulate and supervise financial

intermediaries

Regulates the quantity of money supply and availability of

credit for industry , business and trade .



The central bank¶s basic functions are :

Issue note

Banker¶s bank

Government bank

Promote the growth of economy

Controller of foreign exchange



RBI Regulates

Monetary

MarketCredit

MarketForex

Market

Capital

Market

* Efficiency of

resource

allocation

* Ensure priority

sector lending

* Act as debtmanager for

govt.

Stability of externalvalue of Rupee

Generate

confidence in

monetary and

exchange rate

policiesMaintain foreign

exchange liquidity

*Determine foreign

exchange rates

*Regulate inter

bank dealings

*Regulate capital

inflow and outflow

*Regulate liquidity

position

* Promote

liquidity

* Supervise

money

market

activities



Two Major Charters are:

Reserve Bank of India Act , 1934

Banking Regulation Act ,1949

Monetary Policy refers to the use of instruments of control to

regulate money supply and credit with a view to influence thelevel of aggregate demand for goods and services.

The objectives of monetary policy are: Price stability and growth

Maintain orderly conditions in foreign exchange market Curb destabilizing speculative activities

Check undue volatility in the exchange rates



RBI influences three intermediate targets to implement

monetary policy , they are :

broad money expansion in line with the expected

rate of growth of GDP

exchange rate

inflation

These takes into account :

* reserve money expansion

* movement in interest rates and availability of credit

* net foreign exchange reserves

* net RBI credit to government



The central bank makes use of two types of

instruments :

Direct Instruments

Reserve Requirements : CRR ; SLR

Administered Interest rates : changes in bank rates

Credit Control : priority sector lending

Indirect Instruments

Open Market Operation

Repos



SECURITIES AND EXCHANGE BOARD OF INDIA

The Securities and Exchange Act of 1992, providesfor the establishment of a board to protect the

interests of investors in securities and to promote the

development and regulation of the securities market.

The Board consists of : A Chairman

Two members from Government of India, Ministry of

Law and Finance

One member from RBI and

Two other members

The head office is at Bombay.



FUNCTIONS of the BoardFUNCTIONS of the Board

regulate business in stock exchanges and any other

securities market

register and regulate the working of stockbrokers,sub-brokers, share transfer agents, bankers to issue ,trustees of trust deeds , registrars to issue , merchant

bankers ,underwriters, portfolio managers, investmentadvisors and other intermediaries associated withsecurities market

register and regulate the working of depositories,

custodians of securities ,FIIs, credit rating agencies register and regulate the working of venture capital

funds and collective investment schemes, includingmutual funds



prohibit fraudulent and unfair trade practices

relating to securities market

promoting investor¶s education and trainingintermediaries of securities market

prohibiting insider trading in securities

regulating substantial acquisition of shares andtakeover of companies

calling for information from the corporates,

undertaking inspection ,

conducting inquiries and audits of stock exchanges,mutual funds, intermediaries and self regulatoryorganizations in the securities market



INSURANCE REGULATOR Y AND DEVELOPMENTINSURANCE REGULATOR Y AND DEVELOPMENT

AUTHORITY (IRDA) ACT, 1999AUTHORITY (IRDA) ACT, 1999

The IRDA Act was enacted in 1999 , to provide for the

establishment of the IRDA :

to protect the interests of policy holders,

to regulate , promote and

ensure orderly growth of the industry and for matters

connected therewith/incidental thereto and also to amend the Insurance Act 1938, the LIC Act 1956

and the GIC Act 1972.



The IRDA consists of :

A chairperson

Five full time members , to be appointed by the

government from amongst persons of ability, integrity

and standing who have knowledge/experience of life

insurance/general insurance/actuarial service,

finance/economics/law/accountancy/administration/

any other discipline which in the opinion of the

government would be useful to it. Four members to act between the chairperson and

the five full time directors .



Powers and Functions :

These powers and functions would enable the IRDA to

perform the role of an effective watchdog and

regulator for the insurance sector in India:

Issue certificate of registration; review; modify;

withdraw; suspend or cancel such registration.

Protection of interest of the policy holders by

controlling and regulating the terms and

conditions offered by insurer ; settlement of

insurance claim ; insurable interest etc



Specifying requisite qualifications and practicaltraining for insurance intermediaries and agents.

Specifying code of conduct for surveyors and lossassessors

Promoting efficiency in conduct of insurancebusiness

Regulating investment of funds by insurancecompanies; regulating maintenance of margin of solvency

Adjudication of disputes between insurers and

intermediaries



Specifying the percentage of life insurancebusiness and general insurance business to be

undertaken by the insurer in the rural or social sector; Specifying the form and manner in which books of

account shall be maintained and statement of accounts shall be rendered by insurers and other

insurance intermediaries Calling for information from, undertaking inspection

of, conducting enquiries

Bring about speedy and orderly growth of the

insurance industry To set, promote, monitor and enforce high standards

of integrity, transparency, financial soundness,fair dealing and competence of those it regulates;



To ensure speedy settlement of genuine

claims, to prevent insurance frauds and other

malpractices and put in place effective grievanceredressal machinery ;

To take action where such standards are

inadequate or ineffectively enforced.



Thank you

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introduction to financial management system