Introduction to

Indian Financial System

and Markets
MEANING :-
Financial System comprises , a set of sub-systems of
financial institutions, financial markets, financial
instruments and services which help in formation of
capital. It provides a mechanism by which savings are
transformed into investment.
The financial system is characterized by the
presence of an integrated, organized and regulated
financial markets and institutions that meet the short
term and long term financial needs of both the
household and corporate sector.
 Functions:-
 Link between savers and investors.
 Selection of the projects and review the performance
 Payment mechanism for exchange of goods & services
 Mechanism for the transfer of resources across
geographic boundaries.
 Manage and control risk
 Promotes capital formation
 Lowering the cost of transactions and
increase returns.
 Provides information to the operators/ players in the
market
 Components and Constituents

 Financial Institutions
 Financial Markets

 Financial Instruments/Assets/Securities

 Financial Services
 Structure:
 Components of Indian Financial System

Financial Institutions Financial Markets Financial Instruments Financial Services

Banking Non-Banking
Institutions Institutions Money Market Capital Market
Term Fee Based
Asset/Fund Based
-Short term -Leasing - Merchant Banking
-Medium Term -Hire Purchase -Credit Rating
-Call Money Market -Long Term -Stock Broking
Commercial -Consumer Credit
Cooperative -Treasury Bills -Bill Discounting -Mergers
Banks
Banks -Commercial Bills -Venture Capital
-Commercial Papers Type -Housing Finance
-CDs -Primary -Insurance
Public Sector Securities
Pvt. Sector -Factoring
Primary Secondary -Secondary
RRBs Securities
Foreign Banks Non-Banking Market Market
(Equity,Pref,Debt)
Financial Entities -Innovative
DFIs a) NBFCs Instruments
a) Developments - Equipment Leasing
Banks - Hire-Purchase
-All India - Investment
- State Level - Loan
b)Invt Institutions
(LIC,GIC,UTI)
c) Specialized
Institution
I. Financial Institutions

Financial institutions are the intermediaries

who facilitate smooth functioning of the
financial system by making investors and
buyers meet.
Types of Financial Institutions:-

 Banking Institutions
 Non-Banking Institutions
Banking Institutions

Indian banking industry is subject to the

control of the Central Bank (RBI).
1. Organised Sector
2. Unorganised Sector
Organised Sector
a) Commercial Banks
b) Co-operative Banks
c) Regional Rural Banks (RRBs)
d) Foreign Banks
 Commercial Banks :
Commercial banking system in India consisted of 297
scheduled banks (including foreign banks) and one non-
scheduled bank at the end of Dec. 2000.

Co-operative Banks :
This segment is represented by a group of societies registered
under the Acts of the States relating to co-operative
societies. These are classified into two broad categories:-
a) Rural credit societies which are primarily agricultural.
b) Urban credit societies which are primarily non-agricultural.
 Regional Rural Banks (RRBs) :
RRBs were set by the state government and the sponsoring
commercial banks with the objective of developing the rural
economy. IDBI, NABARD and SIDBI are also required to
provide managerial and financial assistance to RRBs under
Regional Rural Bank Act.

Foreign Banks :
1 Barclays Bank
2 Bank of Ceylon
3 Bank Indonesia International
4 Development Bank of Singapore
5 Fuji Bank
Unorganised Sector
a) Indigenous Bankers

b) Money Lenders
(Seths and Sahukars)
Indigenous Bankers :
Indigenous bankers are the forefathers of
modern commercial banks. As the term
indigenous indicates, they are the local
bankers.

Money Lenders :
Money lenders depend entirely on their own
funds for the working capital. Money lenders
may be rural or urban, professional or non-
professional. They enjoy monopoly in their
areas of operation.
 Characteristics of Money Lenders

1. Own funds.
2. Weaker sections of the society.
3. High rates of interest.
4. Unregulated Operations
5. Prompt and flexible.
Non-Banking Institutions

The non-banking institutions may be

broadly categorised broadly into two
groups:-
a) Organised Financial Institutions
b) Unorganised Financial Institutions
 Organised Financial Institutions
1. Development Finance Institutions:-
a) The institutions like IDBI, ICICI, IFCI, IIBI, IRDC at all India
level.
b) State Finance Corporations (SFCs), State Industrial
Development Corporations (SIDCs) at state level.
c) Agriculture Development Finance Institutions as NABARD,
LDBS etc.

2. Investment Institutions :- It includes those financial

institutions which mobilize savings of the public at large
through various schemes and invest these funds in corporate
and government securities. These include LIC, GIC,
UTI, and mutual funds.
Unorganised Financial Institutions
The unorganised non-banking financial institutions include
number of non-banking financial companies (NBFCs)
providing whole range of financial services.

Examples :
Hire-purchase and consumer finance companies, leasing
companies, housing finance companies, factoring
companies, credit rating agencies, merchant banking
companies etc.
 II. Financial Markets

Financial markets refer to the institutional arrangements

for dealing in financial assets and credit instruments of
different types such as currency, cheques, bank deposits,
bills, bonds etc.
Classification :
a) Negotiated loan market
b) Open Markets.
 Functions of financial markets

1. Creation and allocation of credit and liquidity.

2. Intermediaries for mobilisation of savings.
3. Balanced economic growth.
4. Financial convenience.
5. Cater Credit needs .
 Types of Financial Market

1) Money Market
2) Capital Market
 Money Market

Money Market refers to the institutional arrangements

facilitating borrowing and lending of short-term funds.

The RBI describes money market as, “the centre for

dealings, mainly of a short-term character, in
monetary assets, it meets the short-term requirements
of borrowers and provides liquidity or cash to the
lenders.”
Money Market Instruments :

 Commercial Bills
 Treasury Bills

 Call Money Market

 Commercial Papers

 Certificate of Deposits
 Functions of the Money Market

1. Adjustment of liquidity position.

2. Provides short-term funds
3. Short-term funds to the government institutions.
4. Helpful to businessmen
5. Proper flow of funds.
Capital Market

The term ‘capital market’ refers to the

institutional arrangements for facilitating the
borrowing and lending of long-term funds.
Capital Market Instruments :

 Equity Shares
 Preference Shares

 Debentures
 Importance of Capital Market

a) Coordination and balance between savings and

investment.
b) Optimum utilisation of financial resources.
c) Concentration of national savings
d) To maintain the Expected rate of economic growth
 III. Financial Instruments

A financial instrument/asset/security is a claim,

against a person or an institution, for the
payment of a sum of money or a periodic
payment in the form of interest or dividend, at a
specified future date.
Types of Financial Securities

1. PRIMARY SECURITIES

2. SECONDARY SECURITIES
Some new innovative financial
instruments :
i. Equity Warrants
ii. Secured Premium notes
iii. Floating Rate Bonds
iv. Deep Discount Bonds (DDBs)
v. Regular Income Bonds
vi. Retirement Bonds
vii. Inflation Adjusted Bonds
viii. Easy Exit Bonds
ix. Capital Bonds
 IV. FINANCIAL SERVICES

Financial services are the activities, benefits and

satisfactions, connected with the sale of money,
that offer to users and customers, financial
related value .
 Suppliers of Financial Services
i) Banks and Financial Institutions
ii) House Building Societies
iii) Insurance Companies
iv) Credit Card Issuer Companies
v) Investment Trusts and Mutual Funds
vi) Stock Exchanges
vii) Leasing Companies/Equipment Finance/Consumer
Finance Companies
viii) Unit Trusts
Characteristics of Financial Services
1. Intangible
2. Direct Sale
3. Heterogeneity
4. Fluctuation in demand
5. Protect Consumer’s interest
6. Labour Intensive
7. Geographical dispersion
8. Lack of special identity
9. Information based
10. Require quality labour
Kinds of Financial Services

A. Asset based/fund based

services.

B. Fee based/advisory services

 Asset/Fund Based Services

1. Equipment Leasing/Lease Financing

2. Hire Purchase and Consumer Credit
3. Bill Discounting
4. Venture Capital
5. Housing Finance
6. Insurance Services
7. Factoring
 B. Fee Based Advisory Services

1. Merchant Banking
2. Credit Rating
3. Stock Broking
 Indian Financial System-
An Overview

 Before Independence
 After Independence till 1990
 After 1990
Stage I : Before Independence

Characteristics :

 Unorgainsed system
 Few industrial securities in securities market
 No separate issuing institution
 Outside savings were restricted.
Stage II : After Independence
(1948-90)
1) Transfer of Ownership from Private to
Public Sector:
a) Nationalization of RBI
b) Setting up of State Bank of India
c) Nationalization of Life Insurance Business
d) Nationalization of Commercial Banks
e) Nationalization of General Insurance
Business.
 2. Setting up of Financial Institutions

a) Development of Finance Institutions :

IFCI, SFC’s, NIDC, ICICI, LIC, IDBI etc.
b) Investing Institutions : UTI established in
1964, LIC in 1956, GIC in 1973.
c) Other Institutions : RCI in 1971, EXIM
Bank in 1982, NABARD in 1982.
 STAGE III : After 1990’s

a) Privatization in banking and insurance

sector.
b) Development of Finance Institutions
c) Emergence of Non-Banking Financial
Companies
d) Growth of Mutual Funds.
e) Establishment of SEBI Act in 1992.