Indian Financial System

(1)

INDIAN

FINANCIAL

SYSTEM

(2)

INTRODUCTION

The financial system or the financial sector of any country consists The financial system or the financial sector of any country consists

of:-(a)

(a) specialized & non spespecialized & non specialized financial institcialized financial institutionution (b)

(b) organized &unorgaorganized &unorganized financial markets andnized financial markets and (c)

(c) Financial instruments & servFinancial instruments & services which facilitate transfer of funices which facilitate transfer of funds.ds. Pr

Prococededurure e & & prpracactiticeces s adadopopteted d in in ththe e mamarkrketets, s, anand d fifinanancnciaial l ininteter r relationships are also the parts of the system. These parts are not always relationships are also the parts of the system. These parts are not always mu

mututualally ly exexclclususivive. e. FoFor r exexamamplple, e, ththe e fifinanancnciaial l ininststititututioion n opopereratate e inin financial market and are, therefore a part of such market. The word system financial market and are, therefore a part of such market. The word system in the term financial system implies a set of complex and closely connected in the term financial system implies a set of complex and closely connected or inters mixed institution, agents practices, markets, transactions, claims, & or inters mixed institution, agents practices, markets, transactions, claims, & liabilities in the economy. The financial system is concerned about money, liabilities in the economy. The financial system is concerned about money, credit, & finance – the terms intimately related yet some what different from credit, & finance – the terms intimately related yet some what different from each other. Money refers to the current medium of exchange or means of each other. Money refers to the current medium of exchange or means of paym

payment. Credent. Credit or Loan is a it or Loan is a sum of sum of monemoney to be y to be retureturned norrned normally witmally withh Interest it refers to a debt of economic unit. Finance is a monetary resources Interest it refers to a debt of economic unit. Finance is a monetary resources comprising debt & ownership fund of the

(4)

FEATURES OF FINANCIAL SYSTEM -:

1.

1. It provIt provideides s an Ideaan Ideal l linlinkagkage e betbetweeween n depdeposiositortors s savsavers anders and Investors Therefore it encourages savings and

Investors Therefore it encourages savings and investment.investment. 2.

2. FinFinancancial systeial system m facfaciliilitattates es expexpansansion of ion of fifinannanciacial l marmarketketss over a period of time.

over a period of time. 3.

3. FiFinanancnciaial l sysyststem em shshouould ld prpromomotote e dedefificicienent t alallolocacatition on of of financial resources of socially desirable and economically financial resources of socially desirable and economically productive purpose.

productive purpose. 4.

4. FiFinanancnciaial l sysyststem em ininflflueuencnce e boboth th ququalalitity y anand d ththe e papace ce of of economic development.

economic development.

ROLE OF FINANCIAL SYSTEM:

The role of the financial system is to promote savings & investments in The role of the financial system is to promote savings & investments in the economy. It has a vital role to play in the productive process and in the economy. It has a vital role to play in the productive process and in the mobilization of savings and their distribution among the various the mobilization of savings and their distribution among the various productive activities. Savings are the excess of

productive activities. Savings are the excess of current expenditure over current expenditure over income. The domestic savings has been categorized into three sectors, income. The domestic savings has been categorized into three sectors, household, government & private sectors.

household, government & private sectors.

The savings from household sector dominates the domestic savings The savings from household sector dominates the domestic savings component. The savings will be in the form of currency, bank deposits, component. The savings will be in the form of currency, bank deposits, non bank deposits, life

non bank deposits, life insurance funds, provident funds, pension funds,insurance funds, provident funds, pension funds, shares, debentures, bonds, units & trade debts. All of these currency & shares, debentures, bonds, units & trade debts. All of these currency & dep

(5)

savings in the household sector are mobilized directly in the form of savings in the household sector are mobilized directly in the form of un

unitits, s, prprememiuium, m, prprovovididenent t fufundnd, , anand d pepensnsioion n fufundnd. . ThThesese e arare e ththee co

contntraractctuaual l foformrms s of of sasavivingngs. s. FiFinanancnciaial l acactitivevely ly dedealals s wiwith th ththee production, distribution & consumption of goods and services. The production, distribution & consumption of goods and services. The financial system will provide inputs to productive activity. Financial financial system will provide inputs to productive activity. Financial sector provides inputs in the form of cash credit & assets in financial sector provides inputs in the form of cash credit & assets in financial for production activities.

for production activities.

The function of a financial system is to establish a bridge between the The function of a financial system is to establish a bridge between the savers and investors. It helps in mobilization of savings to materialize savers and investors. It helps in mobilization of savings to materialize investment ideas into realities. It helps to increase the output towards investment ideas into realities. It helps to increase the output towards the existing production frontier. The growth of the banking habit helps the existing production frontier. The growth of the banking habit helps to activate saving and undertake fresh saving. The financial system to activate saving and undertake fresh saving. The financial system encourages investment activity by reducing the cost of finance risk. It encourages investment activity by reducing the cost of finance risk. It helps to make investment decisions regarding projects by sponsoring, helps to make investment decisions regarding projects by sponsoring, encouraging, export project appraisal, feasibility studies, monitoring & encouraging, export project appraisal, feasibility studies, monitoring & execution of the projects.

(6)

An overview of Financial System and

An overview of Financial System and Financial Markets in IndiaFinancial Markets in India MINISTRY OF FINANCE

MINISTRY OF FINANCE

F

Fiinnaanncciiaal l IInnssttiittuuttiioonns s RBRBI I SSEEBBI I IIRRDDAA

Insurance company Insurance company

M

Muuttuuaal l FFuunndd VVeennttuurre e CCaappiittaall Fund Fund Capital Market Capital Market LIC & LIC & Other Other GIC & GIC & Other Other Commercial Commercial Banks Banks N

NBBFFCC MMoonneey y MMaarrkkeett

Primary Primary Market Market Secondary Secondary Market Market Stock Stock Exchange Exchange Government Government Security Security Market Market Development Development Banks Banks Investment Investment Banks Banks Sectoral Sectoral Banks Banks State Level State Level Financial Financial Institution Institution

(7)

BACK DROP OF INDIAN FINANCIAL SYSTEM

At the time of independence, India had a reasonably diversified financial At the time of independence, India had a reasonably diversified financial system in terms of intermediaries but a somewhat narrow focus on terms of system in terms of intermediaries but a somewhat narrow focus on terms of

intermediation, i.e., a lack of a long term capital market and the relative intermediation, i.e., a lack of a long term capital market and the relative neglect of agriculture in particular and rural areas

neglect of agriculture in particular and rural areas in general.in general.

As India embarked on a process of industrialization and growth, RBI set up As India embarked on a process of industrialization and growth, RBI set up Development Financial Institutions (DFI’s) and State Finance Corporations Development Financial Institutions (DFI’s) and State Finance Corporations (SFC’s) as p

(SFC’s) as providers of long roviders of long term capital. term capital. Agriculture’s nAgriculture’s need for credit weed for credit wasas met by cooperat

met by cooperative banks. ive banks. UTI was set up to cUTI was set up to canalize resources franalize resources from retailom retail investors to the capital

investors to the capital market.market.

In

In esessesencnce, e, ththe e unundedersrstatandndining g ththat at rereququirirememenent t of of fifinanancnciaial l neneededs s fofor r accel

accelerateerated d growtgrowth h and and devedevelopmelopment nt was was best met best met by by specispecializealized d finafinancialncial

1947

1947 _1960s_1960s

Industry’s share in credit doubled, Industry’s share in credit doubled, agriculture, rural areas, SSI, exports still agriculture, rural areas, SSI, exports still neglected

neglected

Nationalisation of Banks to Nationalisation of Banks to

ensure credit allocation as per ensure credit allocation as per plan priorities plan priorities 1980s 1980s 1970s 1970s

NABARD, EXIM, SIDBI, NABARD, EXIM, SIDBI, NHB setup NHB setup RRBs setup RRBs setup 1990s 1990s

Credit to Industry / Govt Credit to Industry / Govt doubled

doubled

Highly segmented financial Highly segmented financial market, highly

market, highly restrictedrestricted Neglected: long term, agricultural, and rural area credit

Neglected: long term, agricultural, and rural area credit Need for specialized FIs felt.

Need for specialized FIs felt. DFIs, SFCs, UTI, Co-op Banks setup. DFIs, SFCs, UTI, Co-op Banks setup.

(8)

inte

intermedrmediarieiaries s who who perfperformeormed d specispecializealized d funcfunctions tions influinfluenceenced d finafinancianciall market architecture.

market architecture.

To ensure that these

To ensure that these specializations were adhered to, financial intermediariesspecializations were adhered to, financial intermediaries dev

develoeloped ped and and propromotmoted ed by by the the ResReserverve e BanBank k of of IndIndia ia had had sigsignifnificaicantnt restrictions on both the asset and liabilities side of their balance sheets.

restrictions on both the asset and liabilities side of their balance sheets.

In the 1950s and 1960s, despite an expansion of the commercial banking In the 1950s and 1960s, despite an expansion of the commercial banking system in terms of both reach and mobilization of resources, agriculture still system in terms of both reach and mobilization of resources, agriculture still rema

remained undeined under funded and rural arear funded and rural areas under bankeds under banked. . WherWhereas industeas industry’sry’s share in credit disbursed almost doubled between 1951 and 1968, from 34 to share in credit disbursed almost doubled between 1951 and 1968, from 34 to 67.5%, agricult

67.5%, agriculture got barure got barely 2% of avely 2% of available. ailable. Credit to expCredit to exports and smalorts and smalll scale industries were relatively neglected as

scale industries were relatively neglected as well.well.

In view of the above, it

In view of the above, it was decided to nationalize the banking sector so was decided to nationalize the banking sector so thatthat cr

crededit it alallolocacatition on cocoululd d tatake ke plplacace e in in acaccocordrdanance ce in in plplan an prprioiorirititieses.. Nationalization took place in two phases, with a first round in 1969 followed Nationalization took place in two phases, with a first round in 1969 followed by another in 1980.

by another in 1980.

By the mid-seventies it was felt that commercialized banks did not have By the mid-seventies it was felt that commercialized banks did not have sufficient expertise in rural banking and hence in 1975 Regional Rural sufficient expertise in rural banking and hence in 1975 Regional Rural Banks (RRBs) were set up to help bring rural India into the ambit of the Banks (RRBs) were set up to help bring rural India into the ambit of the fina

financial netwncial network. ork. This effoThis effort was capped in 1980 with the fort was capped in 1980 with the formatirmation of on of National Bank for Agriculture and Rural Development (NABARD), which National Bank for Agriculture and Rural Development (NABARD), which was to function as an apex bank for all cooperative banks in the country, was to function as an apex bank for all cooperative banks in the country, helpi

helping contrng control and guide theol and guide their activir activitiesities. . NABANABARD was also given thRD was also given thee remit of regulating rural

(9)

Following with the logic of specialization, the 1980s saw other DFIs with Following with the logic of specialization, the 1980s saw other DFIs with specific remits being se

specific remits being set up – e.g. t up – e.g. The EXIM Bank for expThe EXIM Bank for export financing, theort financing, the Sm

Smalall l InInduduststriries es DeDevevelolopmpmenent t BaBank nk of of InIndidia a (S(SIDIDBIBI) ) fofor r smsmalall l scscalalee industries and the National Housing Bank

industries and the National Housing Bank (NHB) for housing finance.(NHB) for housing finance.

Long term finance for the private sector came from DFIs and institutional Long term finance for the private sector came from DFIs and institutional investors or throug

investors or through the capital market. h the capital market. However both price anHowever both price and quantity of d quantity of capital issues was regulated by the Controller of Capital Issues.

capital issues was regulated by the Controller of Capital Issues.

Therefore the deepening of financial intermediation had occurred with an Therefore the deepening of financial intermediation had occurred with an incr

increase in ease in the draft by the draft by both the both the commcommerciercial al sectosector r and the and the govegovernmenrnment t onon financial resources mobilized.

financial resources mobilized.

At the end of the 1980s then the Indian financial system was characterized At the end of the 1980s then the Indian financial system was characterized by segmented financial markets with significant restrictions on both the by segmented financial markets with significant restrictions on both the asset and liability side of the balance sheet of financial intermediaries as asset and liability side of the balance sheet of financial intermediaries as well as the price at which financial products could be offered.

well as the price at which financial products could be offered.

In the Indian

In the Indian context segmentatcontext segmentation meant that compion meant that competition was mutedetition was muted. . In aIn a scenario where price was determined from outside the system and targets scenario where price was determined from outside the system and targets we

were re seset t in in tetermrms s of of ququanantitititieses, , ththerere e wawas s no no prpresessusure re fofor r nonon-n-prpricicee comp

competitietition as well. on as well. As a result the financAs a result the financial systeial system had relativm had relatively highely high transaction costs and political economy factors meant that asset quality was transaction costs and political economy factors meant that asset quality was not a prime co

not a prime concern. ncern. Therefore even thTherefore even though the Indian ough the Indian financial system atfinancial system at the end of 1980s had achieved substantial expansion in terms of access, this the end of 1980s had achieved substantial expansion in terms of access, this had come at the cost of as

had come at the cost of asset quality. set quality. In addition, was the fIn addition, was the fact that the draftact that the draft of

of the the govgovernernmenment t on on resresourources ces of of the the finfinancancial ial syssystem tem had had incincreareasedsed significantly.

(10)

pe

perioriod, d, i.ei.e., ., the the 1981980s, 0s, the the comcompospositiition on of of govgovernernmenment t expexpendendituiture re waswas changing as well, with shift towards current rather than capital expenditure. changing as well, with shift towards current rather than capital expenditure. In addition, in the absence of a reasonably liquid market for government In addition, in the absence of a reasonably liquid market for government securities, an increase in net bank lending to the government meant that the securities, an increase in net bank lending to the government meant that the asset side of banks’ balance sheets tended to become increasingly illiquid. asset side of banks’ balance sheets tended to become increasingly illiquid.

Th

The e imimpepetutus s fofor r chchanange ge cacame me frfrom om onone e exexpepectcted ed anand d onone e ununexexpepectcteded quarter - first, the importance of prudential capital adequacy ratios was quarter - first, the importance of prudential capital adequacy ratios was underlined by the announcement of BaselI norms (see

underlined by the announcement of BaselI norms (see Error: ReferenceError: Reference sou

source rce not not foufoundnd ErrErroror: : RefRefereerence nce sousource rce not not foufoundnd) ) ThThat at babanknks s wewerere expected to adhere to; second

expected to adhere to; second the macroeconomic crisis of 1990-91.the macroeconomic crisis of 1990-91.

The reform process that followed accelerated the process of liberalization The reform process that followed accelerated the process of liberalization already begun in the 1980s and began a series of measured and deliberate already begun in the 1980s and began a series of measured and deliberate ste

steps ps to to intintegregrate ate IndIndia ia intinto o the the gloglobal bal ecoeconomnomy, y, incincludluding ing the the gloglobalbal financial network.

financial network.

Br

Brieieflfly y hohowewevever, r, gigiveven n ththe e prproboblelems ms fafacicing ng ththe e fifinanancnciaial l sysyststem em anandd keeping in mind the institutional changes necessary to help India financially keeping in mind the institutional changes necessary to help India financially in

intetegrgratate e ininto to ththe e glglobobal al ececononomomy, y, fifinanancnciaial l rerefoform rm fofocucusesed d on on ththee following: improving the asset quality on bank balance sheets in particular following: improving the asset quality on bank balance sheets in particular and operational efficiency in general; increasing competition by removing and operational efficiency in general; increasing competition by removing regulatory barriers to entry; increasing product competition by removing regulatory barriers to entry; increasing product competition by removing restrictions on asset and liability sides of financial intermediaries; allowing restrictions on asset and liability sides of financial intermediaries; allowing financial intermediaries freedom to set their prices; putting in

financial intermediaries freedom to set their prices; putting in place a marketplace a market for government securities; and improving the functioning of the call money for government securities; and improving the functioning of the call money market.

(11)

Th

The e gogovevernrnmement nt sesecucuririty ty mamarkrket et wawas s papartrticicululararly ly imimpoportrtanant t nonot t ononlyly because it was decided the RBI would no longer monetize the fiscal deficit, because it was decided the RBI would no longer monetize the fiscal deficit, which would now be financed by directly borrowing from the market, but which would now be financed by directly borrowing from the market, but also monetary policy would be conducted through open market operations also monetary policy would be conducted through open market operations and a large liquid bond market would help the RBI sterilise, if necessary, and a large liquid bond market would help the RBI sterilise, if necessary, foreign exchange movements.

foreign exchange movements.

IN

INDIA

DIAN

N FIN

FINAN

ANCIA

CIAL

L SY

SYSTE

STEM

M FRO

FROM

M 195

1950

0 TO

TO

1980 –

Indian Financial System During this period evolved in response to the Indian Financial System During this period evolved in response to the objective of planned economic development. With the adoption of mixed objective of planned economic development. With the adoption of mixed economy as a pattern of industrial development, a complimentary role was economy as a pattern of industrial development, a complimentary role was conceived for public and private sector. There was a need to align financial conceived for public and private sector. There was a need to align financial sy

syststem em wiwith th gogovevernrnmement nt ececononomomic ic popolilicicieses. . At At ththat at titime me ththerere e wawass gov

(12)

elements of financial organization in planned economic development are as elements of financial organization in planned economic development are as

follows:-1. Public ownership of

1. Public ownership of financial institutions – financial institutions –

1. Public ownership of financial institutions – 1. Public ownership of financial institutions –

The nationalization of RBI was in 1948, SBI was set up in 1956, LIC came The nationalization of RBI was in 1948, SBI was set up in 1956, LIC came in to existence in 1956 by merging 245 life insurance companies in 1969, 14 in to existence in 1956 by merging 245 life insurance companies in 1969, 14 major private banks were brought under the

major private banks were brought under the direct control of Government of direct control of Government of India. In 1972, GIC was set up and in 1980; six more commercial banks India. In 1972, GIC was set up and in 1980; six more commercial banks were brought under public ownership. Some institutions were also set up were brought under public ownership. Some institutions were also set up during this period like development banks, term lending institutions, UTI during this period like development banks, term lending institutions, UTI was set up in public sector in 1964, provident fund, pension fund was set up. was set up in public sector in 1964, provident fund, pension fund was set up. In this way public sector occupied commanding position in Indian Financial In this way public sector occupied commanding position in Indian Financial System.

System.

2. Fortification Of

2. Fortification Of InstitutionInstitutional structure – al structure –

2. Fortification Of Institutional structure – 2. Fortification Of Institutional structure –

Financial institutions should stimulate / encourage capital formation in the Financial institutions should stimulate / encourage capital formation in the eco

economnomy. y. The The impimportortant ant feafeaturture e of of welwell l devdeveloeloped ped finfinancancial ial syssystem tem isis strengthening of institutional structures. Developmen

strengthening of institutional structures. Development banks was t banks was set up withset up with this objective like industrial finance corporation of India (IFCI) was set up this objective like industrial finance corporation of India (IFCI) was set up in 1948, state financial corporation (SFCs) were set up in 1951, Industrial in 1948, state financial corporation (SFCs) were set up in 1951, Industrial credit and Investment corporation of India Ltd (ICICI)was set up in 1955. It credit and Investment corporation of India Ltd (ICICI)was set up in 1955. It wa

was s pipiononeeeer r in in mamany ny rerespspecects ts lilike ke unundederwrwrirititing ng of of isissusue e of of cacapipitatal,l, ch

chanannenelilisasatition on of of foforereigign n cucurrrrenency cy loloanans s frfrom om WoWorlrld d BaBank nk to to prprivivatatee industry. In 1964, Industrial Development of India (IDBI).

industry. In 1964, Industrial Development of India (IDBI).

3. Protection of Investors –

3. Protection of Investors – 3. Protection of Investors –

(13)

Lot many acts were passed during this period for protection of investors in Lot many acts were passed during this period for protection of investors in financial markets. The various acts Companies Act, 1956 ; Capital Issues financial markets. The various acts Companies Act, 1956 ; Capital Issues Control Act, 1947 ; Securities Contract Regulation Act, 1956 ; Monopolies Control Act, 1947 ; Securities Contract Regulation Act, 1956 ; Monopolies and Restrictive Trade Practices Act, 1970 ; Foreign Exchange Regulation and Restrictive Trade Practices Act, 1970 ; Foreign Exchange Regulation Act, 1973 ; Securities & Exchange Board of India, 1988.

Act, 1973 ; Securities & Exchange Board of India, 1988.

4. Participation in Corporate Management –

4. Participation in Corporate Management – 4. Participation in Corporate Management –

As participation were made by large companies and financial instruments it As participation were made by large companies and financial instruments it leads to accumulation of voting power in hands of institutional investors in leads to accumulation of voting power in hands of institutional investors in several big companies financial instruments particularly LIC and UTI were several big companies financial instruments particularly LIC and UTI were able to put considerable pressure on management by virtual of their voting able to put considerable pressure on management by virtual of their voting power. The Indian Financial System between 1951 and mid80’s was broad power. The Indian Financial System between 1951 and mid80’s was broad based number of institutions came up. The system was characterized by based number of institutions came up. The system was characterized by diversifying organizations which used to perform number of functions. The diversifying organizations which used to perform number of functions. The Financial structure with considerable strength and capability of supplying Financial structure with considerable strength and capability of supplying industrial capital to various enterprises was gradually built up the whole industrial capital to various enterprises was gradually built up the whole financial system came under the ownership and control of public authorities financial system came under the ownership and control of public authorities in this manner public sector occupy a commanding position in the industrial in this manner public sector occupy a commanding position in the industrial enterprises. Such control was viewed as integral part of the strategy of enterprises. Such control was viewed as integral part of the strategy of planned economy development.

planned economy development.

INDIAN FINANCIAL SYSTEM POST 1990’S

The organizations of Indian Financial system witnessed transformation after The organizations of Indian Financial system witnessed transformation after launching of new economic policy 1991. The development process shifted launching of new economic policy 1991. The development process shifted

(14)

from controlled economy to free market for these changes were made in the from controlled economy to free market for these changes were made in the eco

economnomic ic polpolicyicy. . The The rolrole e of of govgovernernmenment t in in busbusineiness ss was was redreduceuced d thethe measure trust of the government should be on

measure trust of the government should be on development of infrastructure,development of infrastructure, public welfare and equity. The capital

public welfare and equity. The capital market an important role in allocationmarket an important role in allocation of resources. The major development during this

of resources. The major development during this phase are:-phase

are:-1. Privatisation of Financial Institutions

1. Privatisation of Financial Institutions

1. Privatisation of

1. Privatisation of Financial InstitutioFinancial Institutionsns – – – –

At this time many institutions were converted in to public company and At this time many institutions were converted in to public company and number of private players were allowed to enter in to various sectors:

number of private players were allowed to enter in to various sectors:

aa)) IIndndususttririal al FiFinanannce ce CoCorprpoorratatiion on on on IIndndia ia ((IIFCFCI)I): : ThThe e ppiiononeeer er de

devevelolopmpmenent t fifinanancnce e ininststititututioion n wawas s coconvnvererteted d in in to to a a pupublblicic company.

company. b)

b) InInduduststririal al DeDevevelolopmpmenent t BaBank nk of of InIndidia a & & InInduduststririal al FiFinanancncee Corporation of India (IDBI & IFCI): IDBI & IFCI ltd offers their Corporation of India (IDBI & IFCI): IDBI & IFCI ltd offers their equity capital to private investors.

equity capital to private investors.

cc)) PPririvavatte e MuMututuaal l FuFundnds s hahavve e bebeeen n seset t uup p unundeder r tthe he guguididelelinineses prescribed by SEBI.

prescribed by SEBI. d)

d) NumNumber of privber of private banate banks and foreiks and foreign bankgn banks s camcame e up undeup under the r the RBIRBI guidelines. Private institution companies emerged and work under the guidelines. Private institution companies emerged and work under the guidelines of IRDA, 1999.

guidelines of IRDA, 1999. e)

e) In this manneIn this manner governr government monment monopoly ovopoly over finaner financial insticial institutiotutions hasns has been dismantled in phased manner. IT was done by converting public been dismantled in phased manner. IT was done by converting public financial institutions in joint stock companies and permitting to sell financial institutions in joint stock companies and permitting to sell equity capital to the

(15)

2. Reorganization of Institutional Structure –

2. Reorganization of Institutional Structure – 2. Reorganization of Institutional Structure –

The importance of development financial institutions decline with shift to The importance of development financial institutions decline with shift to capital market for raising finance commercial banks were give more funds capital market for raising finance commercial banks were give more funds to investment in capital market for this. SLR and CRR were produced; SLR to investment in capital market for this. SLR and CRR were produced; SLR earlier @ 38.5% was reduced to 25% and CRR which used to be 25% is at earlier @ 38.5% was reduced to 25% and CRR which used to be 25% is at pr

preseesent nt 5%. 5%. PerPermismissiosion n was was alsalso o givgiven en to to banbanks ks to to didirecrectly tly undundertertakeake le

leasasining, g, hihirere-p-pururchchasase e anand d fafactctororining g bubusisinenessss. . ThTherere e wawas s trtrusust t onon development of primary market, secondary market and money market.

development of primary market, secondary market and money market.

3. Investors Protection –

3. Investors Protection – 3. Investors Protection –

SE

SEBI BI is is gigiveven n popowewer r to to reregugulalate te fifinanancnciaial l mamarkrketets s anand d ththe e vavaririououss intermediaries in the financial

intermediaries in the financial markets.markets.

FINANCIAL MARKET

(16)



 Money MarketMoney Market 

 Call Money MarketCall Money Market



 Commercial Paper Commercial Paper 

 Certificate of DepositCertificate of Deposit 

 Treasury Bill MarketTreasury Bill Market 

 Money Market Mutual FundMoney Market Mutual Fund 

 Capital MarketCapital Market



(17)

MONEY MARKET AND GOVT. SECURITIES MARKET

Money market deal with short term monetary assets and claims, which are Money market deal with short term monetary assets and claims, which are generally from one day to

generally from one day to one year duration.one year duration.

Govt. securities on the other hand are also called dated securities to denote Govt. securities on the other hand are also called dated securities to denote that they are generally long term in nature and

that they are generally long term in nature and are issued by state and are issued by state and centralcentral govt. under their borrowing programmes and duration of more than one govt. under their borrowing programmes and duration of more than one year, generally of 5 years and above.

year, generally of 5 years and above.

These securities being long term in nature are also traded in govt. securities These securities being long term in nature are also traded in govt. securities market between institution and banks also on the stock exchanges- debt market between institution and banks also on the stock exchanges- debt segments.

segments.

MONEY MARKET

One of the important function of a well developed money market is to One of the important function of a well developed money market is to cha

channennelizlize e savsaving ing intinto o shoshort rt terterm m proproducductivtive e invinvestestmenments ts liklike e worworkinkingg ca

capipitatal. l. CaCall ll momoneney y mamarkrketet, , trtreaeasusury ry bibilllls s mamarkrket et anand d mamarkrketets s fofor r commercial paper and certificate of deposit are some of the example of commercial paper and certificate of deposit are some of the example of money market.

money market.

CALL MONEY MARKET

The call money markets form a part of the national money market, where The call money markets form a part of the national money market, where day –to- day surplus funds, mostly of banks are traded . The call money day –to- day surplus funds, mostly of banks are traded . The call money loans are very short term in nature and the maturity period of this vary from loans are very short term in nature and the maturity period of this vary from 1 to 15 days. The money which is

(18)

“call money”, and if it exceeds one day (but less than 15 days), is

“call money”, and if it exceeds one day (but less than 15 days), is referred asreferred as “noti

“notice money” in this marce money” in this market any amounket any amount could be lent or borrot could be lent or borrowed at wed at aa convenient interest rate . Which is acceptable to both borrower and lender convenient interest rate . Which is acceptable to both borrower and lender .these loans are

.these loans are consider as highlconsider as highly liquid as they liquid as they are repayable y are repayable on demandon demand at the option of ether the lender or borrower.

at the option of ether the lender or borrower.

PURPOSE

Call money is borrowed from the market to meet various requirements of Call money is borrowed from the market to meet various requirements of com

commermerciacial l bilbill l marmarket ket and and comcommermerciacial l banbanks. ks. ComCommermerciacial l bibill ll marmarketket borrower call money for short period to

borrower call money for short period to discount commercial bills.discount commercial bills. Banks borrower in call market to:

Banks borrower in call market to: 1:- Fill the temporary gaps, or

1:- Fill the temporary gaps, or mismatches that banks normally face.mismatches that banks normally face. 2:- Meet the cash Reserve Ratio requirement.

2:- Meet the cash Reserve Ratio requirement.

3: - Meet sudden demand for fund, which may arise due to large payment 3: - Meet sudden demand for fund, which may arise due to large payment and remittance.

and remittance.

Banks usually borrow form the market to avoid the penal interest rate for not Banks usually borrow form the market to avoid the penal interest rate for not meeting CRR requirement and high cost of refinance from RBI. Call money meeting CRR requirement and high cost of refinance from RBI. Call money helps the banks to maintain short term liquidity position at comfortable helps the banks to maintain short term liquidity position at comfortable level.

level.

LOCATION

In India call money markets are mainly located in commercial centers and In India call money markets are mainly located in commercial centers and bi

big g indindustustriarial l cencenterters s and and indindustustriarial l cencenter ter sucsuch h as as MumMumbaibai, , CalCalcutcutta,ta, Chennai, Delhi and Ahmedabad. As BSE and NSE and head office of RBI Chennai, Delhi and Ahmedabad. As BSE and NSE and head office of RBI

(19)

and many other banks are situated in

and many other banks are situated in Mumbai; the volume of funds involvedMumbai; the volume of funds involved in call money market in Mumbai is far bigger than other cities.

in call money market in Mumbai is far bigger than other cities.

PARTICIPANTS

Initially, only few large banks were operating in the bank market. however Initially, only few large banks were operating in the bank market. however the mark

the market had expandet had expanded ed and now schedand now scheduled , non scheduuled , non scheduled commeled commercialrcial banks foreign banks ,state , district, and urban cooperative banks , financial banks foreign banks ,state , district, and urban cooperative banks , financial institution such as LIC,UTI,GIC, and its subsidiaries , IDBI, NABARD, institution such as LIC,UTI,GIC, and its subsidiaries , IDBI, NABARD, IRBI, ECGC, EXIM Bank, IFCI, NHB , TFCI, and SIDBI, Mutual fund IRBI, ECGC, EXIM Bank, IFCI, NHB , TFCI, and SIDBI, Mutual fund such as SBI Mutual fund . LIC Mutual funds. And RBI Intermediaries like such as SBI Mutual fund . LIC Mutual funds. And RBI Intermediaries like DFHI and STCI are participants in local call money markets. However RBI DFHI and STCI are participants in local call money markets. However RBI has recently introduced restriction on some of the participants to phase them has recently introduced restriction on some of the participants to phase them out of call money market in a time bound manner.

out of call money market in a time bound manner.

Participant in call money market are

Participant in call money market are split into two categoriessplit into two categories

1:- BORROWER AND

LENDER:-Th

This is cocompmpririseses s enentititities es ththosose e whwho o cacan n boboth th boborrrrowower er anand d lelend nd in in ththisis market, such as RBI, intermediaries like DFHI, and STCI and commercial market, such as RBI, intermediaries like DFHI, and STCI and commercial banks.

banks.

2: ONLY LENDER:

-This category comprises of entities those who can act only as lender, like This category comprises of entities those who can act only as lender, like financial institution and mutual

(20)

CALL RATES

The interest paid on call loan is known as the call rates. Unlike in the case of The interest paid on call loan is known as the call rates. Unlike in the case of other short and long rates. The call rate is expected to freely reflect the day other short and long rates. The call rate is expected to freely reflect the day to day

to day availavailabiliability and ty and long rateslong rates. . These rates vary highly from day to These rates vary highly from day to day.day. Often from hour to hour. While high rates indicate a tightness of liquidity Often from hour to hour. While high rates indicate a tightness of liquidity position in market. The rate is largely subject to be influenced by sources of position in market. The rate is largely subject to be influenced by sources of

supply and demand for funds. supply and demand for funds.

The call money rate had fluctuated from time to time reflecting the seasonal The call money rate had fluctuated from time to time reflecting the seasonal variation in fund requirements. Call rates climbs high during busy seasons in variation in fund requirements. Call rates climbs high during busy seasons in relation to those in slack season. These seasonal variations were high due to relation to those in slack season. These seasonal variations were high due to a limited number of lender and many borrowers. The entry of financial a limited number of lender and many borrowers. The entry of financial institution and money market mutual funds into the call market has reduced institution and money market mutual funds into the call market has reduced the demand supply gap and these fluctuations gradually came down in the demand supply gap and these fluctuations gradually came down in recent years.

recent years.

Though the seasonal fluctuations were reduced to considerable extent, there Though the seasonal fluctuations were reduced to considerable extent, there are still variations in the call rates due to

are still variations in the call rates due to the following reason:the following reason:

1:- large borrower by banks to meet the CRR requirements on certain dates 1:- large borrower by banks to meet the CRR requirements on certain dates cause a gate demand for call money. These rates usually go up during the cause a gate demand for call money. These rates usually go up during the first week to meet

first week to meet CRR requirements and decline afterwards.CRR requirements and decline afterwards.

2:- the sanction of loans by banks, in excess of their own resources compel 2:- the sanction of loans by banks, in excess of their own resources compel the bank to rely on the call market. Banks use the call market as a source of the bank to rely on the call market. Banks use the call market as a source of funds for meeting dis-equilibrium of inflow and out

(21)

3:- the withdrawal of funds to pay advance tax by the corporate sector leads 3:- the withdrawal of funds to pay advance tax by the corporate sector leads to steep increase in call money rates in

to steep increase in call money rates in the market.the market.

COMMERCIA

COMMERCIAL

L PAPER

PAPER

Commercial paper are short term, unsecured promissory notes issued at a Commercial paper are short term, unsecured promissory notes issued at a discount to face value by well- known companies that are financial strong discount to face value by well- known companies that are financial strong and ca

and carry rry a high crea high credit ratdit rating . They are soling . They are sold direcd directly by the issutly by the issuers toers to investor, or else placed by borrowers through agents like merchant banks investor, or else placed by borrowers through agents like merchant banks and security houses the flexible maturity at which they can be issued are and security houses the flexible maturity at which they can be issued are oneone of the main attraction for borrower and investor since issues can be adapted of the main attraction for borrower and investor since issues can be adapted to the needs of both. The CP market has

to the needs of both. The CP market has the advantage of giving highly ratedthe advantage of giving highly rated corporate borrowers cheaper fund than they could obtain from the banks corporate borrowers cheaper fund than they could obtain from the banks while still providing institutional investors with higher interest earning than while still providing institutional investors with higher interest earning than they could obtain form the banking system the issue of CP imparts a degree they could obtain form the banking system the issue of CP imparts a degree of financial stability to the systems as the issuing company has an incentive of financial stability to the systems as the issuing company has an incentive to remain financially strong.

to remain financially strong.

THE FEATURES OF CP

1.

1. They are negotiable by They are negotiable by endorsement and delivery.endorsement and delivery. 2.

2. They They are iare issued ssued in muin multiplltiple of e of Rs 5 Rs 5 lakhlakhs.s. 3.

3. The maturity varies between 15 days to a year.The maturity varies between 15 days to a year. 4.

4. No prior approval of RBI is needed for CP issued. No prior approval of RBI is needed for CP issued. 5.

5. ThThe e tatangngibible le nenet t wowortrth h isissusuining g cocompmpanany y shshouould not ld not be less thabe less than n 44 lakhs

lakhs 6.

6. The compThe company fund baany fund based worksed working capiing capital limital limit should not should not less than Rst less than Rs 10 crore.

(22)

7.

7. The issThe issuinuing compag company shalny shall have P2 and A2 l have P2 and A2 ratrating froing from CRISm CRISIL andIL and ICRA.

ICRA.

CERTIFICATE OF DEPOSIT

Certificate

Certificate of Deposits,. of Deposits,. Instruments Instruments such as the such as the Certificates of Certificates of DepositDeposit (CDs introduced in 1989), Commercial Paper (CP introduced in 1989), (CDs introduced in 1989), Commercial Paper (CP introduced in 1989), in

inteter-r-babank nk papartrticicipipatatioion n cecertrtifificicatates es (w(witith h anand d wiwiththouout t ririsksk) ) wewerere introduced t

introduced to increase the o increase the range of instrrange of instruments. uments. Certificates of Certificates of DepositDeposit are basically negotiable money market instruments issued by banks and are basically negotiable money market instruments issued by banks and fina

financiancial institutil institutions durinons during tight liquidg tight liquidity conditity conditions. ions. SmallSmaller bankser banks with relatively

with relatively smaller branch netwsmaller branch networks generally moborks generally mobilise CDs. ilise CDs. As CDsAs CDs are large size deposits, transaction costs on CDs are lower than retail are large size deposits, transaction costs on CDs are lower than retail deposits

deposits

FEATURES OF CD

1.

1. All scheAll scheduleduled bank othed bank other than RRB and scr than RRB and scheduheduled coopled cooperatierativeve bank are eligible to issue CDs.

bank are eligible to issue CDs. 2.

2. CDs can be issueCDs can be issued to individd to individuals, coruals, corporatporation, comion, companiepanies, trusts, trust,, funds and associations. NRI can subscribe to CDs but only on a funds and associations. NRI can subscribe to CDs but only on a non- repatriation basis.

non- repatriation basis. 3.

3. ThThey are ey are isissusued ed at at a a didiscscouount nt rarate freete freely detely determrminined ed by theby the issuing bank and market.

issuing bank and market. 4.

4. TheThey issuey issued in the multd in the multipliple of Rs e of Rs 5 lakh sub5 lakh subjecject to minimt to minimumum size of each issue of Rs is 10 lakh.

(23)

5.

5. ThThe bae bank cank can issn issue CDue CDs rans rangiging ng frfrom 3 moom 3 montnth t h t 1 yea1 year ,r , whereas financial institution can issue CDs

whereas financial institution can issue CDs ranging from 1 year ranging from 1 year to 3 years.

to 3 years.

TREASURY BILLS MARKET

TREASURY BILLS MARKET TREASURY BILLS MARKET:-:-:-

:-Treasury bills are the main financial instruments of money market. These Treasury bills are the main financial instruments of money market. These bills are issued by the government. The borrowings of the government are bills are issued by the government. The borrowings of the government are monitored & controlled by the central bank. The bills are issued by the RBI monitored & controlled by the central bank. The bills are issued by the RBI on

on bebehahalf lf of of ththe e cecentntraral l gogovevernrnmementnt. . ThThe e RBRBI I is is ththe e agagenent t of of UnUnioionn Government. They are issued by tender or tap. The bills were sold to the Government. They are issued by tender or tap. The bills were sold to the p

pubublilic c by by tetendnder er memeththod od up up to to 19196565. . ThThesese e bibilllls s wewere re puput t at at weweekeklyly auctions. A treasury bill is a particular kind of finance bill. It is a promissory auctions. A treasury bill is a particular kind of finance bill. It is a promissory note issued by the government. Until 1950 these bills were also issued by note issued by the government. Until 1950 these bills were also issued by the state government. After 1950 onwards the central government has the the state government. After 1950 onwards the central government has the authority to issue such bills. These bills are greater liquidity than any other authority to issue such bills. These bills are greater liquidity than any other kind of bills. They are of two kinds: a) ad

kind of bills. They are of two kinds: a) ad hoc, b) regular.hoc, b) regular.

Ad hoc treasury bills

Ad hoc treasury bills are issued to are issued to the state governments, semi governmentthe state governments, semi government departments & foreign ventral banks. They are not marketable. The ad hoc departments & foreign ventral banks. They are not marketable. The ad hoc bills are not sold to the banks & public. The regular treasury bills are sold to bills are not sold to the banks & public. The regular treasury bills are sold to the general public & banks. They are freely marketable. These bills are sold the general public & banks. They are freely marketable. These bills are sold by the RBI on behalf of the central government.

by the RBI on behalf of the central government. The treasury bills can be categorized as The treasury bills can be categorized as

(24)

follows:-1)

1) 14 da14 days trys treaseasury bury billills:-

s:-The 14 day treasury bills has been introduced from 1996-97. s:-These The 14 day treasury bills has been introduced from 1996-97. These bills are non-transferable. They are issued only in book entry system bills are non-transferable. They are issued only in book entry system they would be redeemed at par. Generally the participants in this they would be redeemed at par. Generally the participants in this market are state government, specific bodies & foreign central banks. market are state government, specific bodies & foreign central banks. The discount rate on this bill will be decided at the beginning of the The discount rate on this bill will be decided at the beginning of the year quarter.

year quarter.

2)

2) 28 days treasury bills:-28 days treasury

bills:-These bills were introduced in 1998. The treasury bills in India issued These bills were introduced in 1998. The treasury bills in India issued on auction basis. The date of issue of these bills will be announced in on auction basis. The date of issue of these bills will be announced in advance to the market.

advance to the market. The information regarding the notified amountThe information regarding the notified amount is announced before each auction. The notified amount in respect of is announced before each auction. The notified amount in respect of treasury bills auction is announced in advance for the whole year treasury bills auction is announced in advance for the whole year sep

separaarateltely. y. A A uniuniforform m calcalendendar ar of of trtreaseasury ury bilbills ls ississuanuance ce is is alsalsoo announced.

announced.

3)

bills:-The 91 days treasury bills were issued from July 1965. bills:-These were The 91 days treasury bills were issued from July 1965. These were issued tap basis at a discount rate. The discount rates vary between issued tap basis at a discount rate. The discount rates vary between 2.5 to 4.6% P.a. from July 1974 the discount rate of 4.6% remained 2.5 to 4.6% P.a. from July 1974 the discount rate of 4.6% remained uncha

uncharged the return on rged the return on these bills were very low. these bills were very low. HoweHowever the RBIver the RBI provides rediscounting facility freely for this bill.

provides rediscounting facility freely for this bill.

4)

bills:-The 182 days treasury bills was introduced in November 1986. bills:-The The 182 days treasury bills was introduced in November 1986. The chakravarthy committee made recommendations regarding 182 day chakravarthy committee made recommendations regarding 182 day

(25)

treasury bills instruments. There was a significant development in this treasury bills instruments. There was a significant development in this market. These bills were sold through monthly auctions. These bills market. These bills were sold through monthly auctions. These bills were issued without any specified amount. These bills are tailored to were issued without any specified amount. These bills are tailored to meet the requirements of the holders of

meet the requirements of the holders of short term liquid funds. Theseshort term liquid funds. These bills were issued at a discount. These instruments were eligible as bills were issued at a discount. These instruments were eligible as

securities for SLR purposes. These

securities for SLR purposes. These bills have rediscounting facilities.bills have rediscounting facilities.

5)

bills:-The 364 treasury bills were introduced by the government in April The 364 treasury bills were introduced by the government in April 1992. These instruments are issued to stabilise the money market. 1992. These instruments are issued to stabilise the money market. These bills were sold on the basis of auction. The auctions for these These bills were sold on the basis of auction. The auctions for these instruments will be conducted for every fortnight. There will be no instruments will be conducted for every fortnight. There will be no indication when they are putting auction. Therefore the RBI does not indication when they are putting auction. Therefore the RBI does not provide rediscounting facility to these bills. These instruments have provide rediscounting facility to these bills. These instruments have been instrumental in reducing, the net RBI credit to the government. been instrumental in reducing, the net RBI credit to the government.

These bills have become very popular in India. These bills have become very popular in India.

Money Market Mutual Funds (MMMFs)

The benefits of developments in the various in the money market like The benefits of developments in the various in the money market like cell money loans. Treasury bills, commercial papers and certificate of cell money loans. Treasury bills, commercial papers and certificate of deposits were available only to the few

deposits were available only to the few institutional participants in theinstitutional participants in the ma

markrketet. . ThThe e mamain in rereasason on fofor r ththis is wawas s ththat at huhuge ge amamouountnts s wewerere required to be invested in these instruments, the minimum being Rs. required to be invested in these instruments, the minimum being Rs. 10 lack, which was beyond the means of individual money markets to 10 lack, which was beyond the means of individual money markets to small investors.

(26)

MMMFs are mutual funds that invest primarily in money market MMMFs are mutual funds that invest primarily in money market in

inststrurumementnts s of of vevery ry hihigh gh ququalalitity y anand d of of vevery ry shshorort t mamatuturirititieses.. MM

MMMFMFs s cacan n be be seset t up up by by vevery ry hihigh gh ququalalitity y anand d of of vevery ry shshorortt maturities. MMMFs can be set up by commercial bank, RBI and maturities. MMMFs can be set up by commercial bank, RBI and public financial institution either directly or through their existing public financial institution either directly or through their existing mutual fund subsidiaries. The guidelines with respect to mobilization mutual fund subsidiaries. The guidelines with respect to mobilization of funds by MMMFs provide that only individuals are allowed to of funds by MMMFs provide that only individuals are allowed to invest in such funds.

invest in such funds.

Earlier these funds were regulated by the RBI. But RBI withdrew its Earlier these funds were regulated by the RBI. But RBI withdrew its gu

guididelelinineses, , wiwith th efeffefect ct foform rm MaMarcrch h 7, 7, 202001 01 anand d nonow w ththey ey araree governed by SEBI.

governed by SEBI.

The schemes offered by MMMfs can either by open – ended or The schemes offered by MMMfs can either by open – ended or close-ended. In case of open- ended schemer, the units are available for ended. In case of open- ended schemer, the units are available for purchase on a continuous basis and the MMMFs would be willing to purchase on a continuous basis and the MMMFs would be willing to

re

repupurcrchahase se ththe e ununitits. s. A A clclosose e –e–endnded ed scscheheme me is is avavaiailalablble e fofor r subscription for a limited period and

subscription for a limited period and is redeemed at maturity.is redeemed at maturity.

The guidelines on the on MMMfs specify a

The guidelines on the on MMMfs specify a minimum lock – in periodminimum lock – in period of 15 days during which the investor cannot redeem his investment. of 15 days during which the investor cannot redeem his investment. The guid

The guidelineelines also stipuls also stipulate the miniate the minimum sizmum size of the MMMF to e of the MMMF to bebe Rs. 50 crore and this should not exceed 2% of the aggregate deposits Rs. 50 crore and this should not exceed 2% of the aggregate deposits of the latest accounting year in the case of banks and 2% of the of the latest accounting year in the case of banks and 2% of the long-term domestic borrowings in the case

(27)

Structure of capital market

Private Private Placement Placement CAPITAL MARKET CAPITAL MARKET Secondary Market Secondary Market L

Liissttiinngg TTrraaddiinngg PPrraaccttiiccees s oof f SSeettttlleemmeennttss & Clearing & Clearing Primary Market Primary Market Costs of Costs of Issue Issue Method of Method of Issue Issue Public Public Issue Issue Quantum Quantum of Issue of Issue Bonus Bonus Issue Issue Operation Operation Right Issue Right Issue Players Players

(28)

CAPITAL MARKET

Capital market is market for long term securities. It contains financial Capital market is market for long term securities. It contains financial instruments of maturity period exceeding one year. It involves in long instruments of maturity period exceeding one year. It involves in long term nature of transactions. It is a growing element of the financial term nature of transactions. It is a growing element of the financial system in the India economy. It differs from the money market in terms system in the India economy. It differs from the money market in terms of maturity period & liquidity. It is the financial pillar of industrialized of maturity period & liquidity. It is the financial pillar of industrialized economy. The development of a nation depends upon the functions & economy. The development of a nation depends upon the functions & capabilities of the capital market.

capabilities of the capital market.

Capital market is the market for long term sources of finance. It refers to Capital market is the market for long term sources of finance. It refers to meet the long term requirements of the industry. Generally the business meet the long term requirements of the industry. Generally the business concerns need two kinds of

concerns need two kinds of finance:- finance:-1.

1. ShorShort term fut term funds for wnds for workiorking caping capital reqtal requireuirementsments.. 2.

2. Long Long term term fundfunds for s for purchpurchasing asing fixefixed assed assets.ts.

Therefore the requirements of working capital of the industry are met by the Therefore the requirements of working capital of the industry are met by the money market. The long term requirements of the funds to the corporate money market. The long term requirements of the funds to the corporate se

sectctor or arare e susupppplilied ed by by ththe e cacapipitatal l mamarkrketet. . It It rerefefers rs to to ththe e ininststititututioionanall arrangements which facilitate the lending & borrowing of long

arrangements which facilitate the lending & borrowing of long term funds.term funds.

IMPORTANCE OF CAPITAL MARKET

Companies (Issuer) Companies (Issuer)

Intermediaries (Merchant Intermediaries (Merchant

Banks FIIs & Broker) Banks FIIs & Broker)

Investor (Public) Investor (Public) Instruments Instruments Interest Rates Interest Rates Procedures Procedures

(29)

Capital market deals with long term funds. These funds are subject to Capital market deals with long term funds. These funds are subject to uncertainty & risk. Its supplies long term funds & medium term funds to the uncertainty & risk. Its supplies long term funds & medium term funds to the corporate sector. It provides the mechanism for facilitating capital fund corporate sector. It provides the mechanism for facilitating capital fund tr

tranansasactctioionsns. . It It dedealals s I I orordidinanary ry shsharareses, , bobond nd dedebebentnturures es & & ststococks ks && securities of the governments. In this market the funds flow will come from securities of the governments. In this market the funds flow will come from sa

saveversrs. . It It coconvnvererts ts fifinanancnciaial l asassesets ts in in to to prprododucuctitive ve phphysysicical al asassesetsts. . ItIt provides incentives to savers in the form of interest or dividend to the provides incentives to savers in the form of interest or dividend to the investors. It leads to the capital formation. The following factors play an investors. It leads to the capital formation. The following factors play an important role in the growth of

important role in the growth of the capital market:-the capital

market:-•

• A strong & powerful central government.A strong & powerful central government. •

• Financial dynamicsFinancial dynamics •

• Speedy industrializationSpeedy industrialization •

• Attracting foreign investmentAttracting foreign investment •

• Investments from NRI’sInvestments from NRI’s •

• Speedy implementation of policiesSpeedy implementation of policies •

• Regulatory changesRegulatory changes •

• GlobalizationGlobalization •

• The level of savings & investments pattern of the household sectorsThe level of savings & investments pattern of the household sectors •

• Development of financial theoriesDevelopment of financial theories •

• Sophisticated technological advances.Sophisticated technological advances.

PLAYERS IN THE CAPITAL

MARKET

PLAYERS IN THE CAPITAL MARKET

Capital market is a market for long term funds. It requires a well structured Capital market is a market for long term funds. It requires a well structured market to enhance the financial capability of the country. The market consist market to enhance the financial capability of the country. The market consist a number of players. They are categorized

a number of players. They are categorized as:-1

(30)

2.

2. FinFinancancial iial intentermermediadiarieriess 3

3.. IInvnvesestotorsrs..

II..

C

CO

OM

MP

PA

AN

NIIE

ES

S::

Generally every company which is a

Generally every company which is a public limited company can accesspublic limited company can access the capital market. The companies which are in need of finance for the capital market. The companies which are in need of finance for their project can approach the market. The capital market provides their project can approach the market. The capital market provides funds from the savers of the community. The companies can mobilize funds from the savers of the community. The companies can mobilize the resources for their long term needs such as project cost, expansion the resources for their long term needs such as project cost, expansion & diversification of projects & other expenditure of India to raise the & diversification of projects & other expenditure of India to raise the capital from the market. The SEBI is the most powerful organization to capital from the market. The SEBI is the most powerful organization to mo

moninitotor, r, cocontntrorol l & & guguididanance ce ththe e cacapipitatal l mamarkrketet. . It It clclasassisififies es ththee companies for the issue of share capital as new companies, existing companies for the issue of share capital as new companies, existing un

unliliststed ed cocompmpananieies& s& exexisistiting ng liliststed ed cocompmpananieies. s. AcAccocordrdining g to to ititss guidelines a company is a new company if it satisfies all

guidelines a company is a new company if it satisfies all the following:-the following:-aa)) TThhe ce coommppaanny sy shhaalll nl noot ct coommpplleette 1e 12 m2 moonntthhs os of cf coommmmeerrcciiaall operations.

operations. b

b)) IItts s aauuddiitteed d ooppeerraattiivve e rreessuulltts s aarre e nnoot t aavvaaiillaabbllee..

cc)) TThhe ce coommppaanny my maay sy seet ut up bp by ey ennttrreepprreenneeuurrs ws wiitth oh or wr wiitthhoouutt track record.

track record.

A company which can be treated as existing listed company, if its A company which can be treated as existing listed company, if its shares are listed in any recognized stock exchange in India. A company shares are listed in any recognized stock exchange in India. A company is said to be an existing unlisted company if it is a closely held or is said to be an existing unlisted company if it is a closely held or private company.

private company.

(31)

Fi

Finanancnciaial l inintetermrmedediaiariries es arare e ththosose e whwho o asassisist st in in ththe e prprococesess s of of con

conververtinting g savsavingings s intinto o capcapitaital l forformatmation ion in in the the coucountrntry. y. A A strstrongong ca

capipitatal l foformrmatatioion n prprococesess s is is ththe e oxoxygygen en to to ththe e cocorprpororatate e sesectctoror.. Therefore the intermediaries occupy a dominant role in the capital Therefore the intermediaries occupy a dominant role in the capital formation which ultimately leads to the growth of prosperous to the formation which ultimately leads to the growth of prosperous to the community. Their role in this situation cannot be. The government community. Their role in this situation cannot be. The government sho

should uld encencourourage age thethese se intintermermediediariaries es to to bubuild ild a a strstrong ong finfinancancialial em

empipire re fofor r ththe e cocoununtrtry. y. ThThey ey arare e alalso so bebeining g cacalllled ed as as fifinanancnciaiall architectures of the India digital economy. Their financial capability architectures of the India digital economy. Their financial capability cannot be measured. They take active role in the capital market. The cannot be measured. They take active role in the capital market. The major intermediaries in the capital market

major intermediaries in the capital market are:-aa)) BBrrookkeerrss..

b)

b) StoStock brck brokeokers & sub brrs & sub brokeokersrs c)

c) MeMercrchahant nt babanknkererss d)

d) UnUndederwrwriritetersrs e)

e) ReRegigiststrararsrs ff)) MuMututual al ffununddss g)

g) ColColleclectinting g ageagentsnts h)

h) DeDepoposisitotoririeses ii)) AAggeennttss

j

j)) AdAdvevertrtisisining ag agegencncieiess

IIIIII..

IIN

NV

VE

ES

ST

TO

OR

RS

S::

The capital market consists many numbers of investors. All types The capital market consists many numbers of investors. All types of

of ininveveststoror’s ’s babasisic c obobjejectctivive e is is to to geget t gogood od reretuturnrns s on on ththeieir r investment. Investment means, just parking one’s idle fund in a investment. Investment means, just parking one’s idle fund in a

Indian Financial System

INDIAN

INDIAN

INDIAN

INDIAN

FINANCIAL

FINANCIAL

FINANCIAL

FINANCIAL

SYSTEM

SYSTEM

SYSTEM

SYSTEM

CONTENTS

CONTENTS

CONTENTS

CONTENTS

INTRODUCTION

INTRODUCTION

INTRODUCTION

INTRODUCTION

FEATURES OF FINANCIAL SYSTEM -:

FEATURES OF FINANCIAL SYSTEM -:

FEATURES OF FINANCIAL SYSTEM -:

FEATURES OF FINANCIAL SYSTEM -:

ROLE OF FINANCIAL SYSTEM:

ROLE OF FINANCIAL SYSTEM:

ROLE OF FINANCIAL SYSTEM:

ROLE OF FINANCIAL SYSTEM:

BACK DROP OF INDIAN FINANCIAL SYSTEM

BACK DROP OF INDIAN FINANCIAL SYSTEM

IN

INDIA

DIAN

N FIN

FINAN

ANCIA

CIAL

L SY

SYSTE

STEM

M FRO

FROM

M 195

1950

0 TO

TO

1980 –

1980 –

INDIAN FINANCIAL SYSTEM POST 1990’S

INDIAN FINANCIAL SYSTEM POST 1990’S

FINANCIAL MARKET

FINANCIAL MARKET

MONEY MARKET AND GOVT. SECURITIES MARKET

MONEY MARKET AND GOVT. SECURITIES MARKET

MONEY MARKET

MONEY MARKET

CALL MONEY MARKET

CALL MONEY MARKET

PURPOSE

PURPOSE

LOCATION

LOCATION

PARTICIPANTS

PARTICIPANTS

1:- BORROWER AND

1:- BORROWER AND

2: ONLY LENDER:

2: ONLY LENDER:

CALL RATES

CALL RATES

COMMERCIA

COMMERCIAL

L PAPER

PAPER

THE FEATURES OF CP

THE FEATURES OF CP

CERTIFICATE OF DEPOSIT

CERTIFICATE OF DEPOSIT

FEATURES OF CD