my ifs notes
TRANSCRIPT
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INDIAN
FINANCIALSYSTEM
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FINANCE
The term "finance" in our simple understanding it is perceived as equivalent to 'Money'. We read
about Money and banking in Economics, about Monetary Theory and Practice and about "Public
Finance". But finance exactly is not money; it is the source of providing funds for a particular
activity. Thus public finance does not mean the money with the Government, but it refers to
sources of raising revenue for the activities and functions of a Government. Here some of the
definitions of the word finance both as a source and as an activity i.e. as a noun and a verb.
The American Heritage Dictionaryofthe EnglishLanguage, Fourth Edition definestheterm asunder-
1:"The science of the management of money and other assets.
2: "The management of money, banking, investments, and credit.
3: "finances monetary resources; funds, especially those of a government or
corporate body"
4: "The supplying of funds or capital."
Financeasafunction (i.e. verb)is defined bythesameDictionaryasunder-
1:"To provide or raise the funds or capital for": financed a new car2: "To supply funds to":
financing a daughter through law school.3: "To furnish credit to".
Another English Dictionary, "Word Net 1.6, 1997Princeton University definestheterm asunder-
1:"the commercial activity of providing funds and capital"2: "the branch of economics that
studies the management of money and otherAssets"3: "the management of money and credit and banking and investments"
Thesame dictionaryalso definestheterm asafunctioninSimilar wordsasunder-
1: "obtain or provide money for;" " Can we finance the addition to ourHome?"
2:"sell or provide on credit
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All definitions listed above refer to finance as a source of funding an activity. In this respect
providing or securing finance by itself is a distinct activity or function, which results in Financial
Management, Financial Services and Financial Institutions. Finance therefore represents there
sources by way funds needed for a particular activity. We thus speak of finance' only in relation
to a proposed activity. Finance goes with commerce, business, banking etc. Finance is also
referred to as "Funds" or Capital", when referring to the financial needs of a corporate body.
When we study finance as a subject for generalizing its profile and attributes, we distinguish
between 'personal finance" and "corporate finance" i.e. resources needed personally by an
individual for his family and individual needs and resources needed by a business organization to
carry on its functions intended for the achievement of its corporate goals
FinancialSystem
An institutional framework existing in a country to enable financial
transactions
Three main parts
Financialassets (loans, deposits,bonds,equities,etc.)
Financialinstitutions (banks, mutualfunds,insurancecompanies,etc.)
Financial markets (money market,capital market,forex market,etc.)
Regulationisanotheraspectofthefinancialsystem (RBI,SEBI, IRDA,
FMC)
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EVOLUTION, GROWTH & FUNCTIONS OF INDIAN FINANCIAL SYSTEM
INDIAN FINANCIAL SYSTEM WAS CHARACTERISED BY:
ABSENCE OF ORGANISED CAPITAL MARKET
DEPENDENCE OF INDUSTRIES & OTHER USERS ON INTERNAL
SOURCES.
RARE CASES OF PUBLIC ISSUES OF CAPITAL FOR EXPANSION &
MODERNISATION.
FEW FINANCIAL INSTITUTIONS & PLAYERS IN THE MARKET.
AWKWARD & VERY STRICT CONDITIONS FOR LOAN ASSISTANCE TO
COMPANIES.
NATIONALISATION OF BANKS IN 1969 WAS A MAJOR STEP TO ENSURE
THAT TIMELY AND ADEQUATE CREDIT SUPPORT WAS AVAILABLE.
GRANT OF CREDIT TO AGRICULTURAL & SMALL INDUSTRIES BY EXPANSION
OF RURAL BANKING PROVED TO BE A BOON OFFERED BY THE NEW POLICY.
THE INDIAN FINANCIAL SYSTEM HAS MADE COMMANDABLE PROGRESS IN
EXTENDING ITS GEOGRAPHIC SPREAD & FUNCTIONAL REACH. THE SUDDEN
BRST OF ACTIVITIES OF BANKING SYSTEM HAS BEEN A MAJOR FACTOR INPROMOTING FINANCIAL INTERMEDIATION IN THE ECONOMY & GROWTH OF
FINANCIAL SAVINGS.
INDIAN MONEY MARKET CONSISTS OF FORMAL & INFORMAL SEGMENTS.
THE FORMAL MARKET COMPRISES OF RBI, VARIOUS COMMERCIAL BANKS,
COOPERATIVE BANKS, UTI ETC. INFORMAL MARKET CONSISTS OF
CHITFUNDS, NIDHIS, INDEGENOUS BANKERS ETC. THE MONEY MARKET
INSTRUMENTS INCLUDES TREASURY BILLS, COMMERCIAL PAPERS ETC
MONEY MARKET HAS GAINED GREATER STRENGTH WITH THE RECENTWORLD WIDE LIBERISATION OF MONETARY & TRADE POLICIES. WITH THE
ARRIVAL OF WTO & REMOVAL OF ARTIFICIAL BARRIERS AMONG
COUNTRIES BOOSTING FREE FLOW OF GOODS & SERVICES, CAPITAL
MARKETS HAVE GROWN MULTIFOLD & THE POTENCIAL OF FUTURE IS EVEN
MORE LARGER. WITH THE INCREASING INDUSTRIAL & TRADE ACTIVITIES
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AFTER LIBERALISATION,THE DEMAND FOR CAPITAL MOBILISATION FROM
THE MARKET HAS CROSSED ALL ESTIMATES & GIVING RISE TO MANY
INNOVATIONS & REFORMS.
THE MARKET PLAYERS IN THE INDIAN CAPITAL MARKET ESSENTIALLY
CONSISTS OF VARIETY OF INVESTORS FROM DIFFERENT SECTORS, SUCH
AS: SMALL INVESTORS, BANKS, MUTUAL FUNDS, COMPANIES, And
FINANCIAL INSTITUTIONS & SO ON.
THE INVESTORS ARE EXPECTED TO ENQUIRE & INFORM THEMSELVES
ABOUT THE STRENGTHS & WEAKNESSES OF DIFFERENT INSTRUMENTS &
THE INSTITUTIONS IN WHICH THEY INVEST OR PLANNING TO INVEST.
THEY SHOULD ALSO BE FAMILIAR WITH THE PREVAILING RULES &
REGULATIONS OF THE COUNTRY APPLICABLE TO SUCH INVESTMENTS &
INSTITUTIONS .THE CONCEPT OF SAFETY, LIQUIDITY & PROFITABILITY OFTHE INVESTMENT SHOULD BE CLEAR BEFORE THE INVESTOR MAKES ANY
DECISSION TO INVEST.
Role/ Functions of Financial System
o Saving Functiono Liquidity Functiono Payment Functiono Risk Functiono Policy Function
A financial system performs the following functions:
* It serves as a link between savers and investors. It helps in
utilizing the mobilized savings of scattered savers in more
efficient and effective manner. It channelizes flow of saving intoproductive investment.
* It assists in the selection of the projects to be financed and also
reviews the performance of such projects periodically.
* It provides payment mechanism for exchange of goods and
services.
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* It provides a mechanism for the transfer of resources across
geographic boundaries.
* It provides a mechanism for managing and controlling the risk
involved in mobilizing savings and allocating credit.
* It promotes the process of capital formation by bringing
together the supply of saving and the demand for investible
funds.
* It helps in lowering the cost of transaction and increase returns.
Reduce cost motives people to save more.
* It provides you detailed information to the operators/ players in
the market such as individuals, business houses, Governments
etc.
EVERY MODERN ECONOMY IS BASED ON A SOUND
FINANCIAL SYSTEM. THEPRINCIPAL AIM OF FINANCIAL
SYSTEM IS TO TRANSFORM SURPLUS INCOME & SAVINGS
INTO INVESTMENTS.
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The word "system", in the term "financial system", implies a set of complex and
closely connected or interlined institutions, agents, practices, markets, transactions,
claims, and liabilities in the economy. The financial system is concerned about
money, credit and finance-the three terms are intimately related yet are somewhat
different from each other.
Indian financial system consists of financial market, financial instruments and
financial intermediation. These are briefly discussed below,
FINANCIAL MARKET
FINANCIAL INSTRUMENTS
FINANCIAL INTERMEDIATION
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FINANCIAL MARKET
FINANCIAL MARKETS PROVIDE CHANNELS FOR ALLOCATION OF SAVINGS TO INVESTMENT. ITIS A MARKET WHERE FINANCIAL ASSETS ARE CREATED OR TRANSFERRED THROUGH BUYING
& SELLING OF FINANCIAL ASSETS.
Defined as the market in which financial assets are created or transferred.
These assets represent a claim to the payment of a sum of money sometime in the
future and/or periodic payment in the form of interest or dividend.
Money Market- for short-term funds (less than a year)
Organized (Banks)
Unorganized (money lenders, chit funds, etc.)
Capital Market- for long-term funds
Primary Issues Market
Stock Market
Bond Market
FINANCIAL
MARKET
MONEY
MARKET
CAPITAL
MARKET
PRIMARY
MARKET
SECONDARY
MARKET
FOREX
MARKET
CREDIT
MARKET
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1 MONEY MARKET :
IT REFERS TO THE MARKET, WHERE BORROWERS & LENDERS EXCHANGE
SHORT TERM FUNDS TO SOLVE THEIR LIQUIDITY NEEDS. FUNDS ARE
AVAILABLE IN THIS MARKET FOR PERIODS RANGING FROM A SINGLE DAY
UPTO A YEAR. THE FINANCIAL CLAIMS HERE HAVE LOW RISK, HIGH LIQUIDITY& MATURITIES UNDER ONE YEAR.
1. CAPITAL MARKET :
THE CAPITAL MARKET IS DESIGNED TO FINANCE THE LONG TERM
INVESTMENTS. THE TRANSACTIONS TAKING PLACE IN THIS MARKET WILL BE
FOR PERIODS OVER A YEAR.
AGAIN THE CAPITAL MARKET CAN BE CLASSIFIED ON THE BASIS OF CLAIMS
REPRESENTING NEW ISSUES OR OUTSTANDING ISSUES AS PRIMARY &
SECONDARY
PRIMARY MARKET :
IT IS THE MARKET WHICH PROVIDES THE CHANNEL FOR SALE OF NEW
ISSUES. RESOURCES ARE REQUIRED FOR BOTH NEW AS WELL AS EXISTING
PROJECTS WITH A VIEW TO EXPANSION, MODERNISATION, DIVERSIFICATION &
UPGRADATION. IT IS THE MARKET WHERE RESOURCES ARE MOBILISED BY
COMPANIES THROUGH ISSUE OF NEW SECURITIES.
SECONDARY MARKET :
A MARKET WHERE INVESTORS TRADE OUTSTANDING SECURITIES/ ISSUES IS
CALLED SECONDARY MARKET. SECONDARY MARKET COMPRISES OF STOCK
EXCHANGES, WHICH PROVIDE PLATFORM FOR PURCHASE & SALE OF
SECURITIES BY INVESTORS, WHERE THE TRADING IS ACCESSIBLE ONLY
THROUGH BROKERS & TRADING IS CONFIED ONLY TO STOCK EXCHANGES
The most important distinction between the two:
The difference in the period of maturity
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Primary Markets Secondary Markets
When companies need financial
resources for its expansion, they borrow
money from investors through issue ofsecurities.
The place where such securities are traded
by these investors is known as the
secondary market.
Securities issued
a) Preference Shares
b) Equity Shares
c) Debentures
Securities like Preference Shares and
Debentures cannot be traded in the
secondary market.
Equity shares is issued by the under
writers and merchant bankers on behalf
of the company.
Equity shares are tradable through a
private broker or a brokerage house.
People who apply for these securities
are:
a) High net worth individual
b) Retail investors
c) Employees
d) Financial Institutions
e) Mutual Fund Houses
f) Banks
Securities that are traded are traded by the
retail investors.
One time activity by the company. Helps in mobilizing the funds for the
investors in the short run.
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FOREX MARKET:
THIS MARKET DEALS WITH THE MULTICURRENCY REQUIREMENTS, WHICH
ARE MET BY THE EXCHANGE OF CURRENCIES. DEPENDING ON THEEXCHANGE RATE THAT IS APPLICABLE, THE TRANSFER OF FUNDS TAKES
PLACE IN THIS MARKET. THIS IS ONE OF THE MOST DEVELOPED &
INTEGRATED MARKET ACROSS THE GLOBE.
CREDIT MARKET:
IT IS A PLACE WHERE BANKS, FINANCIAL INSTITUTIONS & NBFCS RENDER
SHORT, MEDIUM & LONG TERM LOANS TO CORPORATE & INDIVIDUALS
Money market
Main Function
To channelize savings into short term productive investments like working
capital.
Organized Money Market
Call money market
Bill Market
Treasury bills
Commercial bills
Bank loans (short-term)
Organized money market comprises RBI, banks (commercial and co-operative)
Purpose of the money market
Banks borrow in the money market to:
Fill the gaps or temporary mismatch of funds
To meet the CRR and SLR mandatory requirements as stipulated by the central
bank
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To meet sudden demand for funds arising out of large outflows (like advance tax
payments)
Call money market serves the role of equilibrating the short-term liquidity position
of the banks
1. MONEY MARKET INSTRUMENTS :
THE MONEY MARKET IS A MARKET FOR SHORT TERM MONEY & FINANCIAL
ASSETS THAT ARE CLOSER SUBSTITUTES OF MONEY. HERE THE TERM SHORT
TERM MEANS GENERALLY A PERIOD UPTO ONE YEAR & CLOSER
SUBSTITUTES OF MONEY MEANS ANY ASSET WHICH CAN BE QUICKLY
CONVERTED INTO MONEY WITH MINIMUM TRANSACTION COST.
THE IMPORTANT MONEY MARKET INSTRUMENTS ARE:
Instruments in Money Market
Call money market
Treasury bills market
Markets for commercial paper
Certificate of deposits
Bills of Exchange
Money market mutual funds
Promissory Note
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CALL/NOTICE MONEY:
IT IS THE MONEY BORROWED OR LENT ON DEMAND FOR A VERY SHORT PERIOD.
WHEN MONEY IS BORROWED OR LENT FOR A DAY, IT IS KNOWN AS CALL/ OVERNIGHTMONEY. HOLIDAYS & SUNDAYS ARE EXCLUDED HERE. THUS MONEY BORROWED ON A
DAY & REPAID ON THE NEXT WORKING DAY IS CALL MONEY. BUT WHEN MONEY LENT
OR BORROWED FOR MORE THAN A DAY & UPTO 14 DAYS, IT IS NOTICE MONEY.
Call Money Market Participants
Those who can both borrow and lend in the market RBI (through LAF), banks
and primary dealers
Once upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were
allowed in the call money market only on the lenders side
These were phased out and call money market is now a pure inter-bank market
(since August 2005)
Bill Market.
TREASURY BILL :
IT IS A SHORT TERM BORROWING INSTRUMENT OF THE UNION GOVT. IT IS
AN IOU I.e. ACKNOWLEDGEMENT OF DEBT OF THE GOVT. TO PAY A STATED
SUM OF AFTER EXPIRY OF STATED PERIOD FROM THE DATE OFISSUE.(LESS THAN 1 YEAR).
Treasury Bill market- Also called the T-Bill market
These bills are short-term liabilities (91-day, 182-day, 364-day) of the
Government of India
It is an IOU of the government, a promise to pay the stated amount after expiry of
the stated period from the date of issue
They are issued at discount to the face value and at the end of maturity the facevalue is paid
The rate of discount and the corresponding issue price are determined at each
auction
RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills and 364-day T-
Bills on a fortnightly basis on behalf of the central government
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COMMERCIALPAPERS :
IT REPRESENTS SHORT TERM UNSECURED PROMISORY NOTES ISSUED
BY FIRMS THAT ARE GENERALLY CONSIDERED TO BE FINANCIALLY
STRONG. COMMERCIAL PAPERS USUALLY HAVE A MATURITY PERIOD OF
90 - 180 DAYS. IT IS GENERALLY SOLD AT DISCOUNT & REDEEMED ATPAR.
IT IS EITHER DIRECTLY PLACED WITH THE INVESTORS OR SOLD
THROUGH DEALERS. BUT IT DOES NOT PRESENTLY HAVE A WELL
DEVELOPED SECONDARY MARKET IN INDIA.
Certificates of Deposit
CDs are short-term borrowings in the form of UPN issued by all scheduled banks
and are freely transferable by endorsement and delivery.
Introduced in 1989
Maturity of not less than 7 days and maximum up to a year. FIs are allowed to
issue CDs for a period between 1 year and up to 3 years
Subject to payment of stamp duty under the Indian Stamp Act, 1899
Issued to individuals, corporations, trusts, funds and associations
They are issued at a discount rate freely determined by the market/investors
TERM MONEY :
INTER BANK MARKET FOR DEPOSITS OF MATURITY BEYOND 14 DAYS IS
REFERRED TO AS THE TERM MONEY MARKET
Collateralized Borrowing and Lending Obligation (CBLO)
Operationalised as money market instruments by the CCIL in 2003
Follows an anonymous, order-driven and online trading system
On the lenders side main participants are mutual funds, insurance companies.
Major borrowers are nationalised banks, PDs and non-financial companies
The average daily turnover in the CBLO segment increased from Rs. 515 crore
(2003-04) to Rs. 32, 390 crore (2006-07)
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Market Repos
Repo (repurchase agreement) instruments enable collateralised short-term
borrowing through the selling of debt instruments
A security is sold with an agreement to repurchase it at a pre-determined dateand rate
Reverse repo is a mirror image of repo and reflects the acquisition of a security
with a simultaneous commitment to resell
Average daily turnover of repo transactions (other than the Reserve Bank)
increased from Rs.11,311 crore during April 2001 to Rs. 42,252 crore in June
2006
Money Market Instruments
Money market instruments are those which have maturity period of less than one
year.
The most active part of the money market is the market for overnight call and term
money between banks and institutions and repo transactions
Call money/repo are very short-term money market products
Certificates of Deposit
Commercial Paper
Inter-bank participation certificates
Inter-bank term money
Treasury Bills
Bill rediscounting
Call/notice/term money
CBLO
Market Repo
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Promissory Note
Referred as note payable in accounting
It is a contract detailing the terms of a promise by one party (the maker) to pay a
sum ofmoney to the other (the payee).
The obligation may arise from the repayment of a loan or from another form ofdebt.
For example, in the sale of a business, the purchase price might be a combination of an
immediate cash payment and one or more promissory notes for the balance
The Indian Capital Market
Provided resources needed by medium and large scale industries.
Purpose for these resources
Expansion
Capacity Expansion
Investments
Mergers and Acquisitions
Deals in long term instruments and sources of funds
Market for long-term capital. Demand comes from the industrial,
service sector and government
Supply comes from individuals, corporates, banks, financial
institutions, etc.
Can be classified into:
Gilt-edged market
Industrial securities market (new issues and stock market)
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Main Activity
Functioning as an institutional mechanism to channelize funds from those
who save to those who needed for productive purpose. Provides
opportunities to various class of individuals and entities
Development Financial Institutions
Industrial Finance Corporation of India (IFCI)
State Finance Corporations (SFCs)
Industrial Development Finance Corporation (IDFC)
Financial Intermediaries
Merchant Banks
Mutual Funds
Leasing Companies
Venture Capital Companies
C
AP
ITAL
MARKE
T INSTRUME
NTS :
THE CAPITAL MARKET GENERALLY CONSISTS OF THE FOLLOWING
LONG TERM PERIOD i.e. MORE THAN 1 YEAR PERIOD. THE MAJOR
FINANCIAL INSTRUMENTS USED FOR A CAPITAL MARKET ARE :
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HYBRID INSTRUMENTS: HYBRID INSTRUMENTS HAVE BOTH THE
FEATURES OF EQUITY & DEBENTURE. THIS KIND OF INSTRUMENT IS
CALLED AS HYBRID INSTRUMENTS. EXAMPLES ARE: CONVERTIBLE
DEBENTURES WARRANTS, ETC.
Industrial Securities Market
Refers to the market for shares and debentures of old and new companies
New Issues Market- also known as the primary market- refers to raising of new
capital in the form of shares and debentures
Stock Market- also known as the secondary market. Deals with securities already
issued by companies
FINANCIAL INTERMEDIATION
WHEN THE BORROWER OF THE FUNDS APPROACHES THE FINANCIAL MARKET
TO RAISE FUNDS, ADEQUATE INFORMATION OF ISSUE, ISSUER & THE
SECURITY SHOULD BE PROVIDED. SO THERE SHOULD BE A PROPER CHANNEL
TO ENSURE SUCH TRANSFER WITHIN THE FINANCIAL SYSTEM. FOR THIS
PURPOSE FINANCIAL INTERMEDIARIES CAME INTO EXISTENCE.
IN INDIA FINANCIAL INTERMEDIATION IN THE ORGANISED SECTOR IS
CONDUCTED BY VARIOUS INSTITUTIONS UNDER THE VIGILANCE OF R.B.I. IN
THE INITIAL STAGE THE ROLE OF INTERMEDIARIES WAS MOSTLY RELATED TO
ENSURE TRANSFER OF FUNDS FROM THE LENDER TO THE BORROWER. THIS
SERVICE WAS OFFERED BY BANKS, INANCIAL INSTITUTIONS, BROKERS &
DEALERS. HOWEVER, AS THE FINANCIAL SYSTEM WIDENED ALONG WITH THE
DEVELOPMENTS TAKING PLACE IN THE FINANCIAL MARKETS, THE SCOPE OF
ITS OPERATION TOO WIDENED
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SOME OF THE IMPORTANT INTERMEDIARIES OPERATING IN THE FINANCIAL
MARKETS INCLUDE:
INVESTMENT BANKERS
STOCK EXCHANGES
MUTUAL FUNDS
FINANCIAL ADVISORS
FINANCIALCONSULTANTS
PRIMARY DEALERS, ETC.
Mutual Funds- Promote savings and mobilise funds which are invested in the stock
market and bond market
Indirect source of finance to companies
Pool funds of savers and invest in the stock market/bond market
Their instruments at savers end are called units
Offer many types of schemes: growth fund, income fund, balanced fund Regulated by SEBI
Merchant banking- manage and underwrite new issues, undertake syndication of
credit, advise corporate clients on fund raising
Subject to regulation by SEBI and RBI
SEBI regulates them on issue activity and portfolio management of their business.
RBI supervises those merchant banks which are subsidiaries or affiliates of
commercial banks
Have to adopt stipulated capital adequacy norms and abide by a code of conduct
There are other financial intermediaries such as NBFCs,Venture Capital Funds, Hire and Leasing Companies, etc.
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Financial assets/instruments
Enable channelizing funds from surplus units to deficit units
There are instruments for savers such as deposits, equities, mutual
fund units, etc.
There are instruments for borrowers such as loans, overdrafts, etc.
Like businesses, governments too raise funds through issuing of
bonds, Treasury bills, etc.
Instruments like PPF, KVP, etc. are available to savers who wish to
lend money to the government
Financial Institutions
Includes institutions and mechanisms which
Affect generation of savings by the community
Mobilization of savings
Effective distribution of savings
Institutions are banks, insurance companies, mutual funds- promote/mobilise
savings
Individual investors, industrial and trading companies- borrowers
List of All India Financial Institutions
Industrial Development Bank of India (IDBI)
Industrial Finance Corporation of India (IFCI)
Export - Import Bank of India (Exim Bank) Industrial Reconstruction Bank of India (IRBI) now (Industrial Investment Bank of India)
National Bank for Agriculture and Rural Development (NABARD)
Small Industries Development Bank of India (SIDBI)
National Housing Bank (NHB)
Life Insurance Corporation of India (LIC)
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General Insurance Corporation of India (GIC)
Risk Capital and Technology Finance Corporation Ltd. (RCTC)
Technology Development and Information Company of India Ltd.(TDICI)
Tourism Finance Corporation of India Ltd. (TFCI)
Shipping Credit and Investment Company of India Ltd. (SCICI) Discount and Finance House of India Ltd. (DFHI)
Securities Trading Corporation of India Ltd. (STCI)
Power Finance Corporation Ltd.
Rural Electrification Corporation Ltd.
Indian Railways Finance Corporation Ltd.
Infrastructure Development Finance Co. Ltd.
Housing and Urban Development Corporation Ltd. (HUDCO)
Indian Renewable Energy Development Agency Ltd. (IREDA)
Types of financial Institutions
1. Banking
2. Non-Banking
Banking
Banking Company as a company which transacts the business of banking in India. It
defines banking as, accepting for the purpose of lending or investment of deposit money
from the public, repayable on demand or otherwise and withdraw able by cheque draft ,
order or otherwise
A bank as an institution dealing in money and credit. It safeguard of the savings
of the public and gives loans and advances
Indian Banking institutions can be classified into two categories :
1. Organized
2. Unorganized
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Organized sector
Central Bank (Reserve Bank of India)
Commercial banks (222)
Co-operative banks
Organized Banks can be classified as:
Scheduled (Second Schedule of RBI Act, 1934) - 218
Non-Scheduled - 4
Scheduled banks can be classified as:
Public Sector Banks (28)
Private Sector Banks (Old and New) (27)
Foreign Banks (29)
Regional Rural Banks (133)
Unorganized banks
Individual bankers like Shroffs, Seths, Sahukars, Mahajans, etc. combine trading
and other business with money lending.
Vary in size from petty lenders to substantial shroffs
Act as money changers and finance internal trade through hundis (internal bills of
exchange)
Indigenous banking is usually family owned business employing own working
capital
At one point it was estimated that IBs met about 90% of the financial
requirements of rural India
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RBI and indigenous bankers
Methods employed by the indigenous bankers are traditional with vernacular
system of accounting.
RBI suggested that bankers give up their trading and commission business andswitch over to the western system of accounting.
It also suggested that these bankers should develop the deposit side of their
business
Ambiguous character of the hundi should stop
Some of them should play the role of discount houses (buy and sell bills of
exchange)
IB should have their accounts audited by certified chartered accountants
Submit their accounts to RBI periodically
As against these obligations the RBI promised to provide them with privileges
offered to commercial banks including
Being entitled to borrow from and rediscount bills with RBI
The IBs declined to accept the restrictions as well as compensation from the RBI
Therefore, the IBs remain out of RBIs purview
Development Oriented Banking
Historically, close association between banks and some traditional industries-
cotton textiles in the west, jute textiles in the east
Banking has not been mere acceptance of deposits and lending money; included
development banking
Lead Bank Scheme- opening bank offices in all important localities
Providing credit for development of the district
Mobilising savings in the district. Service area approach
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Progress of banking in India
Nationalisation of banks in 1969: 14 banks were nationalised
Branch expansion: Increased from 8260 in 1969 to 71177 in 2006
Population served per branch has come down from 64000 to 16000
A rural branch office serves 15 to 25 villages within a radius of16 kms
However, at present only 32,180 villages out of 5 lakh have been covered
Deposit mobilisation:
1951-1971 (20 years)- 700% or 7 times
1971-1991 (20 years)- 3260% or 32.6 times
1991- 2006 (11 years)- 1100% or11 times
Expansion of bank credit: Growing at 20-30% p.a. thanks to rapid growth in
industrial and agricultural output
Development oriented banking: priority sector lending
Diversification in banking: Banking has moved from deposit and lending to
Merchant banking and underwriting
Mutual funds
Retail banking
ATMs
Internet banking
Venture capital funds
Factoring
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Profitability of Banks
Reforms have shifted the focus of banks from being development oriented to
being commercially viable
Prior to reforms banks were not profitable and in fact made losses for thefollowing reasons:
Declining interest income
Increasing cost of operations
Declining interest income was for the following reasons:
High proportion of deposits impounded for CRR and SLR, earning
relatively low interest rates
System of directed lending
Political interference- leading to huge NPAs
Rising costs of operations for banks was because of several reasons: economic
and political
Uneconomic branch expansion
Heavy recruitment of employees
Growing indiscipline and inefficiency of staff due to trade union activities
Low productivity
Declining interest income and rising cost of operations of banks led to low
profitability in the 90s