Indian Fin. System

8/8/2019 Indian Fin. System

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Indian Financial System

NIJAY GUPTA

98672-63944

[email protected]



Road Map Financial System Indian Financial System Evolution of Financial System Financial System & Economy Capital market Forex market Money market

Regulators Reforms Recommendations



Financial System

Existence of a well organized financial system

Promotes the well being and standard of living

of the people of a country

Money and monetary assets

Mobilize the saving Promotes investment



Financial SystemFinancial System of any country consists of financial markets, financial intermediation and

financial instruments or financial products

Suppliers of funds(Mainly households)Flow of financial services

Incomes , and financial

claims

Seekers of funds(Mainly business firms

and government)

Flow of funds (savings)



Indian Financial System

Non- OrganizedOrganized

Money lenders

Local bankers

TradersLandlords

Pawn brokers

Chit Funds

Regulators

Financial Institutions

Financial Markets

Financial services



Barter

Money Lender

Nidhi's/Chit Funds

Indigenous Banking

Cooperative Movement

Societies Banks

Joint-Stock Banks

Evolution of Financial System



Consolidation

Commercial Banks

Nationalization

Investment Banks

Development Financial Institutions

Investment/Insurance Companies

Stock Exchanges

MarketO

perationsSpecialized Financial Institutions

Merchant Banking

Universal Banking



Financial System

Savers Lenders Households Foreign

Sectors

Investors

Borrowers

Corporate Sector

Govt.Sector

Un-organized

Sector

Economy

Interrelation--Financial system & Economy





Financial Markets Mechanism which allows people to trade

Affected by forces of supply and demand

Process used

In Finance, Financial markets facilitates



Why Capital Markets Exist

Capital markets facilitate the transfer ofcapital (i.e. financial) assets from one owner to

another. They provide liquidity.

² Liquidity refers to how easily an asset canbe transferred without loss of value.

A side benefit of capital markets is that thetransaction price provides a measure of thevalue of the asset.



Role of Capital Markets

Mobilization of Savings & acceleration ofCapital Formation

Promotion of Industrial Growth Raising of long term Capital

Ready & Continuous Markets

Proper Channelisation of Funds

Provision of a variety of Services



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



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



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



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



MARKET STRUCTURE

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

Over 10000 Electronic Terminals at over 400 locations allOver 10000 Electronic Terminals at over 400 locations all

over India.over India. 9108 Stock Brokers and 14582 Sub brokers9108 Stock Brokers and 14582 Sub brokers

9644 Listed Companies9644 Listed Companies

2 Depositories and 483 Depository Participants2 Depositories and 483 Depository Participants

128 Merchant Bankers, 59 Underwriters128 Merchant Bankers, 59 Underwriters

34 Debenture Trustees, 96 Portfolio Managers34 Debenture Trustees, 96 Portfolio Managers

83 Registrars & Transfer Agents, 59 Bankers to Issue83 Registrars & Transfer Agents, 59 Bankers to Issue

4 Credit Rating Agencies4 Credit Rating Agencies



Indian Capital Market

Market Instruments Intermediaries

Primary Secondary

Equity DebtHybrid

Regulator

Brokers

Investment BankersStock Exchanges

Underwriters

SEBI

Players

Corporate IntermediariesCRABanks/FI FDI /FIIIndividual



Stock Exchanges in INDIA

Mangalore Stock Exchange

Hyderabad Stock Exchange

Uttar Pradesh StockExchange

Coimbatore Stock Exchange Cochin Stock Exchange

Bangalore Stock Exchange

Saurashtra Kutch StockExchange

Pune Stock Exchange

National Stock Exchange OTC Exchange of India Calcutta Stock Exchange

Inter-connected StockExchange (NEW)

Madras Stock Exchange

Bombay Stock Exchange

Madhya Pradesh Stock

Exchange

Vadodara Stock Exchange The Ahmedabad Stock

Exchange

Magadh Stock Exchange

Gauhati Stock Exchange

Bhubaneswar StockExchange

Jaipur Stock Exchange

Delhi Stock Exchange Assoc

Ludhiana Stock Exchange



The role of the stock exchange Raising capital for businesses

Mobilizing savings for investment

Facilitate company growth

Redistribution of wealth



The role of the stock exchange Corporate governance

Creates investment opportunities for smallinvestors

Government raises capital for development

projects

Barometer of the economy



Growth Pattern of the Indian Stock MarketSl.No.

As on 31stDecember

1946 1961 1971 1975 1980 1985 1991 1995

1No. ofStock 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

4 Capital 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

358 170 148 126 170 260 344 803



Capital Market Instruments

ADR / GDR

Equity Debt

Equity

SharesPreference

SharesDebentures Zero coupon

bonds

Deep

Discount

Bonds

Hybrid



Factors contributing to growth of


Establishment of Development banks &

Industrial financial institution. Legislative measures

Growing public confidence

Increasing awareness of investment

opportunities



Factors contributing to growth of


Growth of underwriting business

Setting up of SEBI

Mutual Funds

Credit Rating Agencies




deficiencies

Lack of transparency

Physical settlement

Variety of manipulative practices

Institutional deficiencies

Insider trading



Foreign Exchange Market Inter-bank ³wholesale´ trading: the largest part of

foreign currency trading

FOREX trading volumes are enormous, have

exploded in recent years

± International financial integration ± IT, internet

± Arbitrage is instantaneous



Decentralized, over-the-counter market, also knownas the µ inter bank ' market

Main participants: Central Banks, commercial andinvestment banks, hedge funds, pension funds,corporations & private speculators

The free-floating currency system began in 1973,and was officially mandated in 1978

Online trading began in the mid to late 1990's

Structure of the Forex Market



Exchange rate system in

India Historically linked to the Pound Sterling

As a signatory to the BrettonWoods R BI was

authorized to maintain par value of rupee within the

permitted band of 1%

First devaluation in 1966 running up to to 1995

Delinked from the Pound Sterling in 1975 and linked

to a basket of currencies



Exchange Rate RegimesExchange Rate Regimes

Pegged Exchange Rate RegimesPegged Exchange Rate Regimes

Advantages

1. Associated with stability and low inflation

2. Forces authorities to adhere to disciplined monetary andfiscal policies

Disadvantages

1. Misalignments may occur when foreign and domesticcountries face different economic conditions

2. Maintaining pegs in the face of increased speculation can be

costly



Floating Exchange Rate RegimesFloating Exchange Rate Regimes

1. Fluctuations may reflect non-fundamental noise

Exchange Rate RegimesExchange Rate Regimes

Advantages

Disadvantages

1. Currency moves with the relative performance of the economy

2. Serves as an adjustment mechanism, insulating a currency from

speculative attacks.



Fundamental Factors affecting

Exchange Rates

GDP

Industrial Production

Unemployment

Inflation

BOP



Factors Affecting USD/INR Call rate / G-sec yields

USD on rate / treasury yields

Govt. borrowing program

Credit policy announcements

Spot INR

Demand & supply



Forex Instruments Spot market

± over the counter (OTC)

± Bid-Ask spreads

Currency Derivatives (Hedging Instruments)

± Forward exchange market:

- Contract to buy/sell FX at a specified price (forward price) and future date

- OTC ± tailor made

- Sell and buy currency forward



Futures

² Standardized and traded forward contract

² Trade on Exchange² Contracts are bought and sold on the Exchange

Options

² Right to buy (call-option) or sell (put-option) FX atfuture date and specified price (strike price)

² Option price: premium

² Trade on Exchange and OTC

² American and European Options

Forex Instruments



Currency Swaps

² OTC

² Combination of a spot and a forwardtransaction

Currency Swaptions!!

Option on a future currency swap

Forex Instruments



Money Market Market for short-term money and financial assets

that are near substitutes for money.

Short-Term means generally period upto one year and near substitutes to money is used to denoteany financial asset which can be quickly converted

into money with minimum transaction cost



Money Market

It is a place for Large Institutions and government tomanage their 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



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



Money Market Instruments Treasury Bills

Commercial Paper

Certificate of Deposit

Money Market Mutual Funds

Repo Market



Segment Issuer Instruments

Government

CentralGovernment

Zero Coupon Bonds, Coupon Bearing Bonds,Capital Index Bonds, Treasury Bills.

PublicSector

Government

Agencies /StatutoryBodies

Govt. Guaranteed Bonds, Debentures

Public SectorUnits

PSU Bonds, Debenture, Commercial Paper

Private CorporateDebentures, Bonds, Commercial Paper, FloatingRate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits

Banks Certificate of Deposits, Bonds

FinancialInstitutions Certificate of Deposits, Bonds





Intermediary Market R ole

Stock Exchange Capital MarketSecondary Market to

securities

Investment BankersCapital Market, Credit

Market

Corporate advisory

services, Issue of securities

UnderwritersCapital Market, Money

Market

Subscribe to unsubscribed

portion of securities

Registrars, Depositories,

CustodiansCapital Market

Issue securities to the

investors on behalf of the

company and handle share

transfer activity

Primary Dealers Satellite

DealersMoney Market

Market making in

government securities

Forex Dealers Forex Market

Ensure exchange ink

currencies



Financial Regulators



Financial Regulators

Securities and Exchange Board of India (SEBI)

R eserve Bank of India

Ministry of Finance



Security Exchange Board of India

(SEBI)

Securities and Exchange Board of India

(SEBI) was first established in the year1988

Its a non-statutory body for regulating

the securities market It became an autonomous body in 1992



Functions Of SEBI

Regulates Capital Market.

Checks Trading of securities.

Checks the malpractices in securities market.



It enhances investor's knowledge on marketby providing education.

It regulates the stockbrokers and sub-brokers.

To promote Research and Investigation

Functions Of SEBI



Objectives of SEBI It tries to develop the securities market.

Promotes Investors Interest.

Makes rules and regulations for the securities

market.



The Recent Initiatives

Undertaken

Sole Control on Brokers

For Underwriters

For Share Prices

For Mutual Funds



Reserve Bank of India Established on April 1, 1935 in accordance

with the provisions of the RBI Act, 1934.

The Central Office of the Reserve Bank hasbeen in Mumbai.

It acts as the apex monetary authority of thecountry.



Functions Of RBIMonetary Authority:

Formulation and Implementation of monetary

policies. Maintaining price stability and ensuring adequate

flow of credit to the Productive sectors.

Issuer of currency:

Issues and exchanges or destroys currency and coins. Provide the public adequate quantity of supplies of

currency notes and coins.



Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations

Maintain public confidence, protect depositors'interest and provide 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 exchangemarket.

Functions Of RBI



Developmental role:

Performs a wide range of promotional functions to

support national objectives.

Related Functions:

Banker to the Government: performs merchant

banking function for the central and the stategovernments.

Maintains banking accounts of all scheduled banks.

Functions Of RBI



Monetary Measures(a) Bank Rate:

The Bank Rate was kept unchanged at 6.0 percent.

(b) Reverse Repo Rate:

The Repo rate is around 7.75 per cent and Reverserepo rate is around 6 per cent.

(c) Cash Reserve Ratio:

The cash reserve ratio (CRR) of scheduled banks iscurrently at 7.0 per cent.



Reforms in the Financial

System

Pre-reforms period

Steps taken

Objectives

Conclusion



Pre-Reforms Period The period from the mid 1960s to the early 1990s.

Characterized by:

² Administered interest rates

² Industrial licensing and controls

² Dominant public sector

² Limited competition² High capital-output ratio



Banks and financial institutions acted as adeposit agencies.

Price discovery process was prevented.

Government failed to generate resources for

investment and public services.

Till 90s it was closed, highly regulated, andsegmented system.

Pre-Reforms Period



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.



BANKING SECTOR REFORMS

Liberalisation of branch licensing policy which allowed banksmore freedom to plan branch expansion

Deregulation of entry of new banks

Allowing public sector banks to access the Capital market for raising resources.

Mergers between strong banks

Government shareholding in PSBs should be brought down to33% from 51%.



Objectives Reorientation of the economy

Macro economic stability

To Increase competitive efficiency in theoperations

To remove structural rigidities and inefficiencies

To attain a balance between the goals of financialstability & integrated & efficient markets



Recommendations Reduce the level of state ownership inbanking

Lift restrictions on foreign ownership of banks

Spur the development of the corporate-bondmarket

Strengthen legal protections





Speed up the development of electronicpayments.

Separate the RBI's regulatory and central-bank functions

Lift the remaining capital account controls

Phase out statutory priority lending andrestrictions on asset allocation

Recommendations



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 exchangereserves have increased but absorption of foreigncapital is low.



Thank you

Indian Fin. System

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