financial system of india

7/31/2019 Financial System of India

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Luxman sharma

11/PMB/022


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Financial system is a set of inter-relatedactivities/services working together to

achieve some predetermined purpose orgoal.

It includes different markets, the institutions,instruments, services and mechanisms whichinfluence the generation of savings,investment capital formation and growth.


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The primary function of the system is toprovide link between saving and investment

for the creation of new wealth and to permitportfolio adjustment in the composition of theexisting wealth.

(Robinson)


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To supply funds to various sectors and activitiesof the economy in ways that promote the

fullest possible utilization of resources without the destabilizing consequence of price level changes or unnecessary interference withindividual desires."


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FINANCIAL SYSTEMSAVINGS

FINANCEINVESTMENTCAPITAL FORMATIONECONOMIC GROWTH


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ORGANISED FINANCIAL SYSTEMThe organised financial system comprises of an

impressive network of banks, other financial andinvestment institutions and a range of financialinstruments, which together function in fairlydeveloped capital and money markets.

Short-term funds are mainly provided by thecommercial and cooperative banking structure.


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BankingCooperative system

Development banking systempublic sectorprivate sector

Money marketFinancial institutions


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ii) UNORGANISED FINANCIAL SYSTEM

Unorganised financial system comprises of relatively less controlled moneylenders,indigenous bankers, lending pawn brokers,landlords, traders etc.

This part of the financial system is not directlyamenable to control by the Reserve Bank of India (RBI).


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The Reserve Bank of India as the central bank of the country, is at the head of this group.

These regulations are basically of two types.First, regulations which result in the formation of new banks to meet the specific needs of a group

of economic activities. Secondly , legislation that affects the structure bymeans of nationalisation, mergers or liquidation


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The commercial banking system may bedistinguished into-

A. Public Sector Banksi) State Bank of IndiaB. Private Sector Banks

i) Other Private Banks;


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The cooperative banking sector has beendeveloped in the country to supplant the

village moneylender, the predominant sourceof rural finance, as the terms on which hemade finance available have generally beenusurious and detrimental to the developmentof Indian agriculture.


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Money market is concerned with the supplyand the demand for investible funds.

Money market provides a mechanism bywhich short-term funds are lent out andborrowed; it is through this market that alarge part of the financial transactions of acountry are cleared.


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The money market is generally expected to performfollowing three broad functions.

(i) To provide an equilibrating mechanism to even outdemand for and supply of short term funds.

(ii) To provide a focal point for Central bank interventionfor influencing liquidity and general level of interestrates in the economy.

(iii) To provide reasonable access to providers and usersof short-term funds to fulfill their borrowing andinvestment requirements at an efficient market

clearing price.


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The capital market is the place where themedium-term and long-term financial needs

of business and other undertakings are metby financial institutions which supply mediumand long-term resources to borrowers.


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liberalisation of policies relating to foreign directinvestment, public enterprise reforms, reformsof taxation system, trade liberalisation and

financial sector reforms have been initiated in1992-93.

In the area of capital market, the Securities andExchange Board of India (SEBI) was set up in1992 to protect the interests of investors insecurities and to promote development andregulation of the securities market.


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RBI is the apex financial institution of thecountry's financial system entrusted with the

task of control, supervision, promotion,development and planning.

The RBI influences the management of commercial banks through its variouspolicies, directions and regulations.


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The central bank relies on two types of instruments. the direct and the indirect.

The direct instruments of monetary controlare reserve requirements, administeredinterest rates and credit controls.

Indirect instrument of control is open marketoperation.


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Open market operations is mainly related to thesale of government securities.

When commercial banks sell the securities andwhen RBI purchases them, The reserve positionof the banks is improved and they can expandtheir credit to meet growing demands.

Cash Reserve Ratio

Statutory Liquidity Ratio


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Issuing currency notes,Serving as banker to the Government.Acting as bankers' bank and supervisor.

Monetary regulation and managementExchange management and control.Collection of data and their publication.Miscellaneous developmental and promotionalfunctions and activities.Agricultural Finance.Industrial FinanceExport Finance.


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Internal debt of the Government of Indiacomprises of market loans, treasury bills,

special securities issued to the Reserve Bank,and International financial institution andothers.


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External Debt

Under the Constitution, the CentralGovernment but not State Governments, hasaccess to external debt as IBRD, IDA etc.


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DEBT MARKET ISSUERS, INSTRUMENTS AND INVESTORSIssuer Instruments Issuance Maturity Major InvestorsGovernment of India Govt. Securities 2 to 10 years Banks, LIC, UTI, RBI

Government of India T- Bills 91 days and 364 days Banks, LIC, UTI, RBI

Government of India Zero Coupon Bonds 5 to 10 years Banks, LIC,UTI, RBI, MFs.State Government State Government Securities 5 to 10 years Banks,

LIC, PFs.Development Financial Institutions (DFIs), State Electricity Boards GovernmentGuaranteed Bonds 5 to 10 years Banks, LIC, PFsPublic Sector Undertakings PSU Bonds 5 to 10 years Banks, UTI,Corporates, MFsPrivate Sector Corporates Corporate Debentures 10 to 12 years UTI, OtherMFs, LIC, GIC, FlsPublic and Private Sector Corporates Commercial Papers 3 months to 1year Banks, MFs, FlsBanks and Financial Institutions Certificates of Deposit 3 months to 1 year(Banks) 1-3 years (fls) Banks, Corporates, MFs


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Financial intermediation in the organizedsector is conducted by a widerange of

institutions functioning under the overallsurveillance of the Reserve Bank of India.


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Intermediary Market Role

Stock Exchange Capital MarketSecondaryMarket tosecurities

Investment Bankers Capital Market,Credit Market

Corporateadvisoryservices, Issueof securities

Underwriters Capital Market,Money Market

Subscribe tounsubscribedportion of securities

Registrars, Depositories, Custodians Capital Market

Issue securitiesto the investorson behalf of thecompany and

handle sharetransfer activity

Primary Dealers Satellite Dealers Money MarketMarket makingin governmentsecurities

Forex Dealers Forex MarketEnsureexchange inkcurrencies


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financial system of india

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