An Overview of Indian Financial System

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.

Financial System
The word "system", in the term "financial system", implies a set of complex and closely connected or interlinked 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.

Financial System
Mobilize the saving Promotes investment

Financial System of any country consists of financial markets, Regulatory and frame work, financial intermediation and financial instruments or financial products
Flow of funds (savings)
Seekers of funds (Mainly business firms and government) Suppliers of funds (Mainly households)

Flow of financial services Incomes , and financial claims

Financial System

INDIAN FINANCIAL SYSTEM

Financial system refers to the channel through which savings are made available for investment. A sound financial system is an essential pre-requisite for rapid economic growth and development. In a vast country of India, size and complexity mobilization of savings and directing these towards investment is formidable task. Financial system comprises a set of complex and closely connected institutions intermediary markets,claims,instruments and practices with a mechanism that works together for easy availability of funds for the borrowers and better returns for the investors. In other words the financial institutions and under line mechanism facilitate mobilization of savings from the house holds and channelizing the same towards connective investments in the trade, commerce and industry. some examples for financial institutions include Banks, Insurance Companies,Trust,Mutualfunds and so on. There are exclusive development financial institutions such as Industrial Development Bank of India (IDBI),Industrial Financial Corporation of India (IFCI) committed to promote and develop industrial units in the country.

INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.

Indian Financial System

Non- Organized Organized Money lenders Regulators Financial Institutions Financial Markets Financial services Local bankers Traders Landlords Pawn brokers Chit Funds

Organized Indian Financial System

Regulators

Financial Instruments

Financial Markets

Financial Intermediaries

Forex Market

Capital Market

Money Market

Credit Market

Primary Market Secondary Market

Money Market Instrument

Capital Market Instrument

Indian Financial Markets

Financial Markets
A Market is a place where buyers and sellers come together to exchange something Financial Markets are where financial Instruments/products are exchanged. A Financial Market is known by type of product traded in it Mechanism which allows people to trade Affected by forces of supply and demand

FINANCIAL MARKETS
Financial market comprise money market and capital market. Money market focuses on short term funds and capital market facilitates mobilization of long term funds. The main components are Repo market, call money market, commercial bill market, treasury bill market and so on. The main instrument in money market include treasury bills of varying maturity periods, commercial paper and certificate of deposit. The various institutions associated with money market are commercial bank, co-operative banks and so on. capital market consist of primary market and secondary market, primary market deals with new issues and secondary market deals with transaction in existing securities such as shares,debentures,bonds and so on.

Different Financial Markets

FINANCIAL MARKET

Money Market

Credit Market

Forex Market

Capital Market

REGULATORY FRAME WORK

Regulatory frame work specific the obligations duties,responsbilities,rights and liabilities of the intermediaries such as stock brokers, merchant bankers and so on through banking regulation act, security and exchange board of India act, security contract and regulation act, company act,indian contract act and so on

Regulatory Environment in India

RBI Reserve Bank of India
Established in 1935 Bankers Bank Regulates Indian Financial Markets

SEBI Securities and Exchange Board of India

Incorporated in 1992 Regulation of Securities Market Protecting the interests of Investors

FINANCIAL INTERMEDIARIES
Financial intermediaries such as Commercial Banks, Non Banking Financial Companies,Mutual Funds,Unit Trust of India,Insurance Organistaion,Development Financial Institutions such as IDBI,IFCI and so on

FINANCIAL INSTRUMENTS
Financial instruments comprising equity shares,preffernceshares,debentures,bonds,loa ns,termloans,derivatives.

THE UNORGANISED SECTOR

The unorganised sector contains agencies which have diverse policies, lack of uniformity and consistency in the lending business. It includes Indigenous bankers, money lenders and chit funds. Indigenous bankers are known as shroffs, multanis, chettiars, etc. In South India Chit funds are the common sources of finance. The main difference between the money lenders and Indigenous bankers is that money lenders lend only money but where as indigenous bankers receive deposit and deal Hundis that is Indigenous bill of exchange. Money lenders usually finance consumption loans.Indegenous bankers finance productive loans .Money lenders do not bother about purpose of end use of loans. Indigenous bankers are more careful regarding the purpose of loans.

CHARACTERISTICS OF THE UNORGANISED SECTOR OF THE INDIAN MONEY MARKET

Blending of money lending and trading. Informality. Simplicity Flexibility Personal touch Secrecy of business.

 Blending of money lending and trading:The unorganized agencies of the money market such as money lenders and indigenous bankers conduct the mixed business of money lending and trading. Informality:Money lenders and indigenous bankers having informal dealings with there borrowings. Simplicity:Money lenders and indigenous bankers keep there accounts in a very simple form and in the vernacular language. Flexibility:The loan operations are flexible in nature they may give new loans to the barrowers even before the repayment of the old loans. Personal touch:The business depends on the personal contacts with the borrowers.

Money Market
Markets for short term
Borrowing Lending

Primarily used by Banks Typical Financial Instruments

Bankers Acceptance Certificate of Deposit (CD) Treasury Bills Repo s

 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 denote any financial asset which can be quickly converted into money with minimum transaction cost

Money Market

Money Market
It is a place for Large Institutions and government to manage their short-term cash needs It specializes in very short-term debt securities They are also called as Cash Investments

INDIAN MONEY MARKET

Money market system is an integral part of the total financial system. It refers to the market that facilitate raising short term funds for meeting the temporarily shortage of cash and other short term obligations. The term money market refers to the institutional arrangements facilitating and lending short term funds. Money market is a market for short term funds which can be used for over night to one year duration. money market facilitates demand for and supply of funds and credit. In the money market funds are borrowed for periods varying from a day, a week, three to six months and a year against different types of instruments such as Bills of Exchange, Short Term Securities, Bankers Acceptances and so on. Money market, in essence, is a short term credit market. The institutions like Discount Houses and commercial banks deal in short term loans. The organization of money market is formal. There is no definite location where borrowers and lenders come together. Negotiations between the borrower and the lender may be carried on through the telephone, the telegraph or the mail. Thus, by money market we mean simply an arrangement that brings about a direct or indirect contact between the lender and the borrower. In different countries different money markets play an significance role in providing short term funds and credit for example New York Money Market, London Money Market and Mumbai Money Market are very well known through out the world. what a bank balance is to an individual the money market is to a countries credit.

DEFINITIONS
The Money Market is the collective name given to the various firms and institutions that deal in the various grades of near money . - Crowther 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 . -Reserve Bank of India

Capital Market
Long Term Funds Raised by
Government Corporates

Trading Instruments used

Shares Derivatives Units of Mutual Funds

OBJECTIVES OF MONEY MARKET

To equalize the short term surpluses and deficiencies. To maintained the liquidity in economy To provide appropriate instruments to ensure access to the users of short-term funds at the minimum cost and delay.

FUNCTIONS OF THE MONEY MARKET

The basic function of the money market is to provide facilities for adjustment of liquidity positions of commercial banks, business corporations, non banking financial institutions and other investors. A smoothly functioning money market facilitates the flow of funds to the most important uses in the economy. The money market provides funds to finance and distribution. It helps to promote economic growth of the country.

SCOPE OF INDIAN MONEY MARKET

The India money market is a monetary system that involves the lending and borrowing of short-term funds. India money market has seen exponential growth just after the globalization initiative in 1992. It has been observed that financial institutions do employ money market instruments for financing short-term monetary requirements of various sectors such as agriculture, finance and manufacturing. The performance of the India money market has been outstanding in the past 20 years. Central bank of the country - the Reserve Bank of India (RBI) has always been playing the major role in regulating and controlling the India money market. The intervention of RBI is varied - curbing crisis situations by reducing the cash reserve ratio (CRR) or infusing more money in the economy.

CONSTITUENTS OF THE MONEY MARKET

The money market is composed of several financial agencies that deal with different types of short term credit. Money market instruments take care of the borrowers' short-term needs and render the required liquidity to the lenders. The varied types of India money market instruments / components / constituents are following: Call Money Market Collateral Loan Market Acceptance Market Bill Market

Call Money Market

The market for extremely short period loans is referred to as the call money market . Bill brokers and dealers in stock exchange usually borrow money at call loans from the commercial banks. These loans are given for a very short duration, not exceeding 7 days. There are no collateral securities demanded against these loans. The borrower has to repay the loan immediately they are called for. As such, these loans are described as call loans or call money . Inter bank call money is very common in India.

Collateral Loan Market

When loans are offered against collateral securities like stocks and bonds, they are called Collateral Loans and the market is known as the Collateral Loan Market .This market is geographically most diversified.

Acceptance Market
It refers to the market for banker s acceptances involved in trade transactions. A banker s acceptance is a draft drawn by an individual or firm upon a bank ordering it to pay to the order of a designated party or to bearer a certain sum of money at a particular future date and this draft is accepted by the bank. Unlike cheques, banker s acceptance are used mainly in financing the movement of goods in international trade. Banker s acceptances can be easily sold or discounted in the money market called acceptance Market .

Bill Market
It is a market in which short term papers or bills are bought or sold. The most important types of short term papers are the bills of exchange and the treasury bills. The bill of exchange is a written unconditional order signed by the drawer requiring the party to whom it is addressed ( the drawee) to pay on demand or at a fixed or determinable future time a definite sum of money to the order of a specified person ( the payee) or to the bearer. Such bills of exchange are discounted and rediscounted by commercial banks to lend credit to the bill holder or to borrow from the central bank. Treasury bills are short term government security, usually of 91 days duration, sold by the central bank on behalf of the government . A particular aspect of treasury bills is that there is no prior rate of interest is fixed on them. The treasury offers these bills on the basis of competitive bidding. Thus, one who bids the lowest interest will be alloted the bills. Discounting being the main process of exchange of credit in these segments of the money market, they are also referred to as the discount market . Bills of exchange are commercial papers ;on the other hand treasury bills are government papers.

COMMERCIAL BANKS

Commercial banks are the most important group of operators in the money market. Commercial banks usually employ their excess funds to grant short term loans to the money market. They discount and rediscount commercial papers, such as bills of exchange and facilitate trade and commerce by mobilising the flow of money.

INSTITUTIONS OF THE MONEY MARKET

Commercial banks Acceptance houses and Bill brokers The central bank Non bank financial institutions

COMMERCIAL BANKS

Commercial banks are the most important group of operators in the money market. Commercial banks usually employ their excess funds to grant short term loans to the money market. They discount and rediscount commercial papers, such as bills of exchange and facilitate trade and commerce by mobilising the flow of money.

ACCEPTANCE HOUSES AND BILL BROKERS

As professor Sen points out, in the bill market of advanced countries, acceptance houses and bill brokers are the important institutions. Acceptance houses specialise in the acceptance or guaranteeing of trade bills.discount houses and bill brokers and dealers buy and sell bills drawn on the acceptance houses as well as other bills.usually discount houses specialise in discounting bills of exchange and finance drawers of bills.

THE CENTRAL BANK

The central bank occupies the highest place in the money market. It is the financial or monetary authority and is regarded as an apex institution. The central bank is the lender of last resort and controller of the money market.

NON BANK FINANCIAL INSTITUITONS

Similarly, non banking financial intermediaries, insurance companies and other financial business corporations also operate in the money market with their short term lendable resources.

FEATURES OF DEVELOPED MONEY MARKET

Deficiency of financial system is judged more by the presence of well developed money markets. The features of well developed money markets are as follows Developed banking system strong central bank Existence of well organized sub-markets Well developed secondary market Well designed credit instrument primary and satellite dealers flow of funds in large volume Efficient legal infrastructure Specialised institutions Well defined operating procedures Integrated interest rates Demand and supply of funds in sufficient quantities Remmitence facilities and other factors

CHARACTERISTICS OF DEVELOPED MONEY MARKET

Professor Sen has enlisted the following characteristics of the developed money market: Developed banking system :It possesses a well organised banking system. Banks are the main channels of short term transactions. strong central bank: It should have a central bank, which provides the ultimate liquidity as well as regulates the working of the money market. Existence of well organized sub-markets :There should be a large number of sub markets, each specialising in a particular type of short term asset, like bills of exchange, treasury bill or acceptance. The larger the number of sub markets, the broader and more developed will be the structure of the money market. Well designed credit instrument primary and satellite dealers flow of funds in large volume: There should be adequate availability of credit instruments like bills of exchange, treasury bills, short term government bonds etc.which are of highest quality and easily negotiable. The whole organisation of the market should be an integrated structure. Sub markets should be complimentary to each other, besides being competitive. There is perfect mobility of funds throughout the money market. A developed money market is also very sensitive to the impact of internal and international influences. This characteristics of a developed money market serves as a good barometer for the purpose of central banks controlling operations. The London Money Market is regarded is regarded as the most developed money market.

STRUCTURE OF THE INDIAN MONEY MARKET

The Indian money market composed of two categories of financial agencies: The Organised Sector The Unorganised Sector

DIAGRAMATIC REPRESENTATION

THE ORGANISED SECTOR

The organised sector contains well established and scientifically managed financial institutions.At the apex, there is the Reserve Bank of India, which is the lender of the money market and controls the banking sector. In India the commercial banking system is comprised of two types : 1. Scheduled Banks 2. Non Scheduled Banks. In 1969, fourteen major commercial banks were nationalised. In 1980, six more commercial banks were nationalised. The state bank of India its subsidiaries are also owned by the central government.

SCHEDULED BANKS
Scheduled banks are entitled to enjoy the facilities of borrowings from the Reserve Bank of India.They are also covered by Deposit Insurance Scheme and Credit Guarantee Scheme in operation.Scheduled banks have to abide by all the rules and regulations and directives issued by the Reserve Bank of India from time to time. Scheduled banks have also to keep minimum stipulated statutory cash reserves with the Reserve Bank of India.

THE UNORGANISED SECTOR

The unorganised sector contains agencies which have diverse policies, lack of uniformity and consistency in the lending business. It includes indigeneous bankers, money lenders and chit funds.Indigeneous bankers are known as shroffs, multanis, chettiars, etc. In South India Chit funds are the common sources of finance. The main difference between the money lenders and Indigenous bankers is that money lenders lend only money but where as indigenous bankers receive deposit and deal hundis that is and indigenous bill of exchange. Money lenders usually finance consumption loans.indegenous bankers finance productive loans.Money lenders do not boughther about purpose of end use of loans.indigenous bankers are more careful regarding the purpose of loans.

CHARACTERISTICS OF THE UNORGANISED SECTOR OF THE INDIAN MONEY MARKET

Blending of money lending and trading. Informality. Simplicity Flexibility Personal touch Secrecy of business.

 Blending of money lending and trading:The unorganized agencies of the money market such as money lenders and indigenous bankers conduct the mixed business of money lending and trading. Informality:Money lenders and indigenous bankers having informal dealings with there borrowings. Simplicity:Money lenders and indigenous bankers keep there accounts in a very simple form and in the vernacular language. Flexibility:The loan operations are flexible in nature they may give new loans to the barrowers even before the repayment of the old loans. Personal touch:The business depends on the personal contacts with the borrowers.

BLENDING OF MONEY LENDING AND TRADING

The unorganized agencies of the money market such as money lenders and indigenous bankers conduct the mixed business of money lending and trading.

INFORMALITY
Money lenders and indigenous bankers having informal dealings with there borrowings.

SIMPLICITY
Money lenders and indigenous bankers keep there accounts in a very simple form and in the vernacular language.

FLEXIBILITY
The loan operations are flexible in nature they may give new loans to the barrowers even before the repayment of the old loans.

PERSONAL TOUCH
The business depends on the personal contacts with the borrowers.

SECRECY OF THE BUSSINESS

The financial transactions are maintained secret.

DEFICIENCIES OF THE INDIAN MONEY MARKET

Dichotomy Lack of coordination Divergence of lending rates and policies Inadequate control by the reserve bank Inelasticity and in stability underdeveloped bill market No bankers acceptance Blending of lending and trading activities

DICHOTOMY
On account of wide spread indigenous bankers and money lenders with there informal methods of dealings in rural areas banking habits among the rural people is normally discourage.

LACK OF COORDINATION
The exist of no coordination organized and unorganized parts of the Indian money market thus the Indian money market may be characterized as unbalanced and its subcomponents having no ties with one another.

DIVERGENCE OF LENDING RATES AND POLICIES

Due to lack of homogeneity in the composition of the Indian money market there is vide divergence not only in the structure of interest rates but also in the lending policies of the different financial institutions.Money lenders especially charge exobitant rates of interest and lend mainly for unproductive purposes.

INADEQUATE CONTROL BY RESERVE BANK OF INDIA

The Reserve bank of India has no control over the policies and functioning of the unorganised part of the money market, which is quite large in size which plays a significant role in rural finance.

INSTABILITY AND INELASTICITY The Indian money market is inelastic as well as unstable ;hence, it becomes a great hindrance to the rapid economic development of the country.

Under Developed Bill Market

The bill market, an important constituent of the organised part of the money market, is also underdeveloped in India. As compared to advanced countries, there is a great paucity of sound and first class commercial bills of exchange in our country. Indian traders resort to hundies, rather than drawing of bills of exchange. Further, there is lack of standardisation in drawing of bills and hundies in India.

NO BANKERS ACCEPTANCE

There is no development of banker s acceptance or acceptance of credit by the banks in India.

BLENDING OF LENDING AND TRADING ACTIVITIES

In the unorganised sector, the financial agencies do not resort to money dealings only. They usually carry on retail trade agriculture and other business activities, along with lending operations.

MEASURES FOR IMPROVEMENT

On account of the reorganized condition of the money market the reserve bank is not able to enforce its monitory measures effectively in order to realize the objective of a uniform monitory policy and its influence over credit control. the reserve and the govt as such are keen on removing the deficiencies of the Indian money market. from time to time various steps have been taken in this direction. the following is a bread measures undertaken from time to time for improving the organization of the money market in India.

CHARACTERISTICA AND DEFECTS OFMONY MARKETS IN INDIA

Existence of both organized and unorganized money market Function in isolation Funds crunch Too many interest rates Seasonal stringencies Absence of well organized bill market

EXISTENCE OF BOTH ORGANIZED AND UNORGANIZED MONEY MARKET

Indian money market consist of both unorganized and organized money market. in the unorganized money market indigenous bankers and money market lenders play and dominate role. The problem with indigenous bankers is that they do not disturb between short and long term credit. One of the popular instrument with the indigenous bankers is hundi and it is very difficult to know whether hundi is genuine bill is exchange arising out of commercial transaction or mere financial paper. These features of unorganized money markets weaken the money market is whole. The organized money market consist of call money market, bill market, commercial paper,cooperative,treasury bills and so on, and intuitions such as commercial banks, cooperative banks and so on, deal with them.

FUNCTIONING IN ISOLATION
The coexistences of unorganized and organized money market is peculiarity of developing countries such as India unlike the developed world.Unfortunately,there is no integration between these two. Each of these function is isolation and there is hardly any evidence of integration between these two. The reserve bank of India is not able to regulate and control effectively the organizes money market and its players such as commercial banks. The efforts of RBI to integrate unorganised and organised sector did not fructify.

FUNDS CRUNCH
Money market always experience a crunch of lonable funds mainly owing to low per capita income, low saving rate higher consumption expenditure due to raising inflation, poor banking habits, lack of investment opportunities and black market operations. with the advent of multi-channel TVs and massive advertisement in the TV, increasing viewership has lead to demonstrate effect and resulting frend is consumption. The penetration of credit cards among the middle class has loads to further increase in the consumption expenditure resulting in reduced saving

Sources
www.wikipedia.org www.rbi.org.in www.sebi.gov.in www.nseindia.com www.bseindia.com www.moneycontrol.com !!!

And,

Thank you !!