THE INDIAN FINANCIAL SYSTEM

MONETARY & FISCAL POLICY MONEY & CAPITAL MARKET INDIAN FINANCIAL INSTITUTIONS

COMPOSITION OF INDIAN FINANCIAL SYSTEM

DEVELOPMENT FINANCIAL INSTITUTIONS

CAPITAL MARKET MONEY MARKET

(MEDIUM AND LONG TERM FUNDS) (SHORT TERM BORROWING AND LENDING OF FUNDS)
GILT-EDGED MARKET NONBANKING FINANCIAL COMPANIES

ORGANISED SECTOR
(CONSISTS OF BANKS)

INDUSTRIAL SECURITIES MARKET OLD ISSUE MARKET NEW ISSUE MARKET

UNORGANISED SECTOR
(CONSISTS OF INDIGENOUS BANKERS SUCH AS NON-BANKING FINANCIAL COMPANIES)

RESERVE BANK OF INDIA

( CENTRAL BANK AND MONETARY AUTHORITY)

COMMERCIAL BANK
(mobilise savings in urban areas and make them available for industrial units mainly for working capital requirement)

REGIONAL RURAL BANK

CO-OPERATIVE BANKS
(promote savings and meet their credit needs for cultivation) STATE COOPERATIVE BANK

PUBLIC SECTOR

(providing credit and deposit facilities to small and marginal farmers, agricultural labourers, artisans and small PRIVATE entrepreneurs)

SECTOR
CENTRAL COOPERATIVE BANKS

PRIMARY CREDIT SOCIETIES STATE BANK GROUP OTHER NATIONALISED BANK

STATE BANK OF INDIA

ASSOCIATE BANKS

REGIONAL RURAL BANK

REGIONAL RURAL BANKS (RRBS) WERE SET UP IN 1975 TO HELP BRING RURAL INDIA INTO THE AMBIT OF THE FINANCIAL NETWORK NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD) WAS ESTABLISHED IN 1980 NABARD WAS THE APEX BANK FOR ALL COOPERATIVE BANKS NABARD ALSO REGULATED RURAL CREDIT COOPERATIVES.

CO-OPERATIVE BANK
REGISTERED UNDER THE CO-OPERATIVE SOCIETIES ACT OF THE RESPECTIVE STATES (WHERE FORMED ORIGINALLY) BANKING RELATED ACTIVITIES OF THE COOPERATIVE BANKS ARE ALSO REGULATED BY THE RESERVE BANK OF INDIA GOVERNED BY THE BANKING REGULATIONS ACT 1949 AND BANKING LAWS (COOPERATIVE SOCIETIES) ACT, 1965

MONEY MARKET
MONEY MARKET IS A CENTRE FOR DEALINGS, MAINLY OF A SHORT-TERM CAHRACTER, IN MONETARY ASSETS; IT MEETS THE SHORT-TERM REQUIREMENTS OF THE BORROWERS AND PROVIDE LIQUIDITY OR CASH TO LENDERS. IT IS A PLACE WHERE SHORT-TERM SURPLUS INVESTIBLE FUNDS AT THE DISPOSAL OF THE FINANCIAL AND OTHER INSTITUTIONS AND INDIVIDUALS ARE BID BY BORROWERS, AGAIN COMPRISING INSTITUTIONS AND INDIVIDUALS AND ALSO BY GOVERNMENT. -RESERVE BANK OF INDIA

CHARACTERISTICS OF MONEY MARKET

LARGE DENOMINATIONS
UNITS OF $1 - $10 MILLION TRANSACTIONS COSTS LOW IN RELATIVE TERMS INDIVIDUAL INVESTORS DO NOT PARTICIPATE IN THIS MARKET

LOW DEFAULT RISK

ONLY HIGH QUALITY BORROWER PARTICIPATE LOW TIME MATURITIES REDUCE THE RISK OF CHANGES IN BORROWER QUALITY

INSENSITIVE TO INTEREST RATE CHANGES

MATURITY (< 1 YEAR) TOO SHORT TO BE ADVERSELY AFFECTED, IN GENERAL, BY CHANGES IN RATES

INDIAN MONEY MARKET

ORGANISED BANKING SECTOR (CONSISTS OF RBI, SBI AND ITS ASSOCIATE BANK, 20 NATIONALISED BANKS & OTHER PRIVATE BANKS)

UNORGANISED BANKING SECTOR ( CONSISTS OF INDIGENOUS BANKERS)

SUB-MARKETS

CALL MONEY MARKET

BILL MARKET

364 DAYS BILL MARKET

CERTIFICATES OF DEPOSITS (CDs)

COMMERCIAL PAPERS (CPs)

COMMERCIAL BILLS

TREASURY BILLS (90 DAYS)

CALL MONEY MARKET

DAY-TO-DAY SURPLUS FUNDS (MOSTLY OF BANKS) ARE TRADED LOANS ARE OF SHORT-TERM DURATION VARYING FROM 1 TO 14 DAYS MONEY THAT IS LENT FOR ONE DAY IN THIS MARKET IS KNOWN AS "CALL MONEY IF IT EXCEEDS ONE DAY (BUT LESS THAN 15 DAYS) IT IS REFERRED TO AS "NOTICE MONEY MONEY LENT FOR 15 DAYS OR MORE IN THE INTERBANK MARKET IS CALLED TERM MONEY

NEED FOR CALL MONEY (BY BANKS)

TO FILL THE GAPS OR TEMPORARY MISMATCHES IN FUNDS TO MEET THE CRR & SLR MANDATORY REQUIREMENTS AS STIPULATED BY THE CENTRAL BANK TO MEET SUDDEN DEMAND FOR FUNDS ARISING OUT OF LARGE OUTFLOWS.

CALL MONEY MARKET PARTICIPANTS

RBI WHICH CAN BOTH BORROW AS WELL AS LEND LIC, UTI, GIC, IDBI, NABARD, ICICI AND MUTUAL FUNDS ETC WHICH CAN ONLY LEND FINANCIAL INSTITUTIONS

CERTIFICATE OF DEPOSITS (CDs)

SHORT TERM BORROWINGS IN FORM OF PROMISSORY NOTES MATURITY OF NOT LESS THAN 15 DAYS UP TO A MAXIMUM OF ONE YEAR SUBJECT TO PAYMENT OF STAMP DUTY UNDER INDIAN STAMP ACT, 1899 (CENTRAL ACT) ARE FREELY NEGOTIABLE INSTRUMENTS AT PRESENT CDS ARE ISSUED IN PHYSICAL FORM

CERTIFICATE OF DEPOSITS (CDs) contd..

ALL SCHEDULED BANKS (EXCEPT RRBS AND CO-OPERATIVE BANKS) ARE ELIGIBLE TO ISSUE CDS ISSUED TO INDIVIDUALS, CORPORATIONS, TRUSTS, FUNDS AND ASSOCIATIONS

TREASURY BILLS ( T-BILLS)

ARE SHORT TERM GOI SECURITIES ARE ZERO RISK INSTRUMENT AVAILABLE BOTH IN THE PRIMARY AS WELL AS SECONDARY MARKET MATURITY PERIOD MAY BE 3 MONTHS, 6 MONTHS, OR ONE YEAR ISSUED AT A DISCOUNT-TO-FACE VALUE INTEREST EARNED= MATURITY PRICE -PURCHASE PRICE

TREASURY BILLS (T-BILLS) contd..

ARE ISSUED FOR DIFFERENT MATURITIES VIZ. 14DAY, 28 DAYS (ANNOUNCED IN CREDIT POLICY BUT YET TO BE INTRODUCED), 91 DAYS, 182 DAYS AND 364 DAYS. 14 DAYS T-BILLS HAD BEEN DISCONTINUED RECENTLY. 182 DAYS T-BILLS WERE NOT REINTRODUCED BANKS, PRIMARY DEALERS, STATE GOVERNMENTS, PROVIDENT FUNDS, FINANCIAL INSTITUTIONS, INSURANCE COMPANIES, NBFCS, FIIs (AS PER PRESCRIBED NORMS), NRIs & OCBs CAN INVEST IN TBILLS

T-BILL AND RBI

USED BY RBI TO ABSORB LIQUIDITY FROM THE MARKET BY CONTRACTING MONEY SUPPLY (REVERSE REPO) USED BY RBI TO INFUSE LIQUIDITY IN THE MARKET BY PURCHASING IT AT A SPECIFIED DATE (REPO REPURCHASE TRANSACTION)

COMMERCIAL PAPERS (CPs)

IS A SHORT TERM UNSECURED PROMISSORY NOTE IS ISSUED BY CORPORATES AND FINANCIAL INSTITUTIONS DISCOUNTED VALUE ON FACE VALUE. USUALLY ISSUED WITH FIXED MATURITY BETWEEN ONE TO 270 DAYS YIELD HIGHER RETURNS AS COMPARED TO T-BILLS ACTIVELY TRADED IN THE SECONDARY MARKET
(since they are issued in the form of promissory notes and are freely transferable in demat form)

MONEY MARKET MUTUAL FUNDS

IS A MUTUAL FUND THAT INVESTS SOLELY IN CASH/CASH EQUIVALENT SECURITIES, WHICH ARE ALSO OFTEN REFERRED TO AS MONEY MARKET INSTRUMENTS INVESTMENTS ARE SHORT-TERM, VERY LIQUID INVESTMENTS WITH HIGH CREDIT QUALITY REGULATED BY RBI AND BROUGHT UNDER PURVIEW OF SEBI REGULATIONS SINCE MARCH 7, 2000

CAPITAL MARKET

WHAT IS CAPITAL MARKET?

IS A PART OF THE LARGER FINANCIAL MARKET WHERE FINANCIAL ASSETS MAY BE PURCHASED OR SOLD
SURPLUS UNITS
(PROVIDE FUNDS) TRANSFER OF FINANCIAL ASSETS TRANSFER OF FUNDS DEFICIT UNITS (OBTAIN FUNDS)

PARTICIPANTS OF CAPITAL MARKET

HOUSEHOLDS BUSINESS (INCLUDING THOSE THAT ARE IN FINANCE) GOVERNMENTS REGULATORY BODIES

CAPITAL MARKET SECURITIES INCLUDE.

GOVERNMENT BONDS- issued by union
and state governments. CORPORATE BONDS- issued by corporations and companies MORTGAGES- issued by households, corporate bodies or individuals DEBT EQUITY SHARES- issued by companies
OWNERSHIP

CAPITAL MARKET

PRIMARY MARKET New issue market Issues of new and existing companies Issues may be of shares, right issue, public offers or debentures or bonds Investors can apply directly (no trading) Intermediaries include merchant bankers, registrars, underwriters, brokers, advisors, bankers, advertising agents and printers

SECONDARY MARKET Facilitates trading of existing securities Activities take place at stock exchanges, over the counter exchanges Intermediaries include members/ brokers at the exchanges, portfolio managers, investment advisers and transfer agents

 STOCK EXCHANGS AND OTHER INSTITUTIONS WHERE SECURITIES ARE BOUGHT AND SOLD SUPPLY OF FUNDS COME FROM INDIVIDUALS AND CORPORATE SAVINGS, INSTITUTIONAL INVESTORS AND SURPLUS OF GOVERNMANTS DEMAND OF CAPITAL COMES FROM AGRICULTURE, INDUSTRY, TRADE AND THE GOVERNMENT BUSINESS FIRMS RAISE FUNDS FROM THE CAPITAL MARKET BY ISSUING SHARES AND CREDIT INSTRUMENTS

CAPITAL MARKET

LONG TERM FINANCIALS

POST OFFICE SAVINGS PUBLIC PROVIDENT FUND COMPANY FIXED DEPOSITS BONDS MUTUAL FUNDS STOCK EXCHANGE EQUITY/SHARE DEBT INSTRUMENT DERIVATIVE MUTUAL FUND INDEX DEPOSITORY

MONETARY POLICY

OBJECTIVE OF GOVERNMENT
LOW UNEMPLOYMENT, LOW INFLATION, ECONOMIC GROWTH, AND A BALANCE OF EXTERNAL PAYMENTS

WHAT IS MONETARY POLICY?

MONETARY POLICY IS THE CENTRAL BANKS ACTIONS TO INFLUENCE THE AVAILABILITY AND COST OF MONEY AND CREDIT IN THE ECONOMY. THE PRIMARY OBJECTIVE OF THESE ACTIONS IS TO ENSURE PRICE STABILITY.

HOW?

RBI EMPLOYES 4 MEASURES OF MONEY STOCK M1: MONEY SUPPLY

( CURRENCY WITH PUBLIC AND DEPOSITS)

M2 : M1 + POST OFFICE SAVINGS BANK DEPOSITS M3 : M1 + TIME DEPOSITS WITH THE BANKS
( MONEY SUPPLY + FIXED DEPOSITS WITH BANKS)

M4 : M3 + TOTAL POST OFFICE DEPOSITS

( MONEY SUPPLY + FIXED DEPOSITS WITH BANKS + TOTAL POST OFFICE DEPOSITS)

FACTORS AFFECTING MONEY SUPPLY:

DEFICIT FINANCING BANK CREDIT

ANNOUNCEMENT OF MONETARY POLICY

TILL 1998-99: IT WAS ANNOUNCED TWICE IN A YEAR: OCT.FOR OCT..MARCH.TO COINCIDE WITH BUSY SEASON APRILFOR APRIL TO SEPTTO COINCIDE WITH LEAN SEASON OF AGRI. WITH DECLINE IN AGRI. AND RISE IN INDUSTRIAL CREDIT SINCE 1999-2000 IN APRIL RBI MAKES AN ANNUAL POLICY STATEMENT AND A REVIEW IN OCT

INSTRUMENTS OF MONETARY POLICY

GENERAL METHODS
( AFFECT THE TOTAL QUANTITY OF CREDIT AND AFFECT ECONOMY IN GENERAL)

SELECTIVE METHODS
( AFFECT SELECT SECTORS ONLY)

VARIABLE RESERVE REQUIREMENTS BANK RATE/ DISCOUNT RATE

OPEN MARKET OPERATIONS

FISCAL POLICY
BASED ON THE THEORIES OF BRITISH ECONOMIST JOHN MAYNARD KEYNES

JOHN MAYNARD KEYNES THEORY

GOVERNMENT SPENDING CHANGES TAX LEVELS & PUBLIC
AFFECTS

INFLATION EMPLOYMENT HEALTHY VALUE OF MONEY

PRODUCTIVITY INFLUENCES

WHAT IS FISCAL POLICY?

THE TERM FISCAL POLICY REFERS TO THE EXPENDITURE A GOVERNMENT UNDERTAKES TO PROVIDE GOODS AND SERVICES AND TO THE WAY IN WHICH THE GOVERNMENT FINANCES THESE EXPENDITURES.

RECEIPTS AND DISBURSEMENTS OF UNION GOVERNMENT CONSOLIDATED FUND OF INDIA PUBLIC ACCOUNT OF INDIA

INSTRUMENTS OF FISCAL POLICY

PUBLIC EXPENDITURE TAXES PUBLIC DEBT

INDIAN FINANCIAL INSTITUTIONS

PROBLEMS WITH DEVELOPING COUNTRIES

LACK OF FINANCE IMPERFECTIONE IN INFORMATION FLOW LACK OF ENTREPRENEURSHIP

DEVELOPMENT BANKS
SHARES ENTREPRENEURIAL RISK CHANGES ITS APPROACH IN TUNE WITH INDUSTRIAL CLIMATE ENCOURAGES NEW INDUSTRIAL PROJECTS
DISCOVERY OF INVESTMENT PROJECTS PREPARATION OF PROJECT REPORTS PROVISION OF TECHNICAL ADVICE ASSISTING MANAGEMENT OF INDUSTRAIL UNITS

DEVELOPMENT BANKS

CENTRE DEVELOPMENT FINANCIAL INSTITUTIONS IDBI IFCI IRCI ICICI INVESTMENT INST. UTI LIC GIC

STATE SFCs SIICs/ SIDCs

IRBI

IIBI

FINANCIAL ASSISTANCE TO SMALL SCALE SECTOR

NATIONAL SMALL INDUSTRIES CORPORATION (NSIC) STATE SMALL INDUSTRAIES DEVELOPMNT CORPORATIONS (SSIDCs) KHADI AND VILLAGE INDUSTRIES COMMISSION (KVIC) SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

INDUSTRIAL DEVELOPMENT BANK OF INDIA

ESATBLISHED IN 1964 UNDER INDUSTRIAL DEVELOPMENT BANK OF INDIA ACT, 1964 INITIALLY ESTABLISHED AS WHOLLY OWNED SUBSIDIARY OF RBI OWNERSHIP TRANSFERRED TO GOI IN 1976 FUN. INCLUDE- LENDING, CAPITAL MARKETS, ADVISORY AND RISK MANAGEMENT

SUBSIDIARIES OF IDBI SIDBI- FOR SMALL-SCALE INDUSTRIES

IDBI CAPITAL- STOCK BROKING COMPANY

IDBI BANK COMMERCIAL BANK

INTECH IT SOLUTIONS PROVIDER IN FINANCIAL SECTOR ITSI ( IDBI TRUSTESHIP SERVICES LTD.)- PROVIDE INFORMATION TO SUBSCRIBERS & ISSUERS OF DEBENTURES

SCHEMES OF ASSISTANCE OF IDBI

PROJECT FINANCE:
LONG TERM FINANCE FOR NEW PROJECTS AND EXPANSION, DIVERSIFICATION AND MODERNISATION OF EXISTING PROJECT FOR ACQUIRING SPECIFIC MACHINERY/ EQUIPMENT FOR FINANCIALLY SOUND COMPANIES

EQUIPMENT FINANCE: ASSET CREDIT: CORPORATE LOAN:

FOR CAPITAL EXPENDITURE AND LONG TERM WORKING CAPITALLY REQUIREMENT TO FINANCIALLY SOUND Co. TO COMPANIES ALREADY ASSISTED BY IDBI

WORKING CAPITAL LOAN:

SCHEMES OF ASSISTANCE OF IDBI

DIRECT DISCOUNTING OF BILLS: EQUIPMENT LEASE:
COMPANIES ASSSIATNCE UPTO 100 PER CENT OF TOTAL VALUE MAY BE PROVIDED FOR FINANCIALLY SOUND

VENTURE CAPITAL FUND FINANCE FOR MEDIUM SCALE INDUSTRIES BILLS REDISCOUNTING: TO COVER OR PROMOTE
SALE OF INDIGENOUS MACHINERY/ EQUIPMENT TO COMMERCIAL ESTABLISHMENT OR INSTITUTIONS

SERVICES:

MERCHANT BANKING, DEBENTURE TRUSTEESHIP AND FOREIGN EXCHANGE SERVICES

INDUSTRIAL FINANCE CORPORATION OF INDIA

ESTABLISHED IN 1948 UNDER IFCI ACT OBJECTIVE IS TO PROVIDE MEDIUM AND LONG TERM CREDIT CORPORATISED IN 1993 IPO MADE IN 1993

SCHEMES OF ASSISTANCE OF IFCI FINANCIAL SERVICES

EQUIPMENT FINANCE EQUIPMENT CREDIT, EQUIPMENT LEASING SUPPLIERS/ BUYERS CREDIT LEASING AND HIRE PURCHASE CONCERNS CORPORATE LOANS WORKING CAPITAL LOANS

PROJECT FINANCING
(MID- TERM & LONG-TERM CREDIT) SETTING UP NEW PROJECTS EXPANSION/ DIVERSIFICATION SCHEMES MODERNISATION/ BALANCING SCHEMES OF EXISTING SCHEMES

COMPREHENSIVE CORPORATE ADVISORY SERVICES

PROBLEMS OF IFCI
(AFTER 1998)
RISING LEVEL OF NPAs RESOURCE CRUNCH

REASON?

RECOMMENDATION FOR IMPROVEMENT

SHOULD REDUCE PROJECT FINANCE AND DIVERSIFY INTO POST-PROJECT AND SHORT TERM- FINANCE SHOULD STOP FUNCTIONING AS GOVERNMENT ENTITY NEEDS TO DEVELOP NEW PRODUCTS AND SERVICES

INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED

FOUNDED BY WORLD BANK, GOI, AND REPRESENTATIVES OF PRIVATE INDUSTRIES OBJECTIVE WAS TO ENCOURAGE AND ASSIST INDUSTRAIL DEVELOPMENT AND INVESTMENT DIVERSIFIED IN 1990s IN AREAS OF COMMERCAIL BANKING, INVESTMENT BANKING, NON-BANKING FINANCE, INVESTOR SERVICING, BROKING, VENTURE CAPITAL FINANCING AND STATE-LEVEL

IRCA (1971) (1997)

OBJECTIVE:

INDUSTRIAL INVESTMENT BANK OF INDIA

IRBI (1985)
OBJECTIVE: SAME BUT MORE POWERFUL

IIBI

OBJECTIVE REVIVAL OF SICK UNITS & OTHER BUSINESSORIENTED ACTIVITIES

RECONSTRUCTION & REHABILITION OF INDUSTRIAL UNITS WHICH WERE CLOSED DOWN OR FACING RISK OF CLOSURE

DISCOUNT AND FINANCE HOUSE OF INDIA

SET UP BY RBI ALONG WITH PUBLIC SECTOR BANKS AND FINANCIAL INSTITUTIONS HAS SET UP A COMPANY CALLED DISCOUNT AND FINANCE HOUSE OF INDIA LIMITED

INSTITUTIONS FOR SMALL INDUSTRIES

SIDBI NSIC SSIDCs

SIDBI
MISSION TO EMPOWER THE MICRO, SMALL AND MEDIUM ENTERPRISES (MSME) SECTOR WITH A VIEW TO CONTRIBUTING TO THE PROCESS OF ECONOMIC GROWTH, EMPLOYMENT GENERATION AND BALANCED REGIONAL DEVELOPMENT

 SIDBI FOUNDATION FOR MICRO CREDIT (SFMC) MISSION- TO CREATE A NATIONAL NETWORK OF STRONG, VIABLE AND SUSTAINABLE MICRO FINANCE INSTITUTIONS (MFIS) FROM THE INFORMAL AND FORMAL FINANCIAL SECTOR TO PROVIDE MICRO FINANCE SERVICES TO THE POOR, ESPECIALLY WOMEN MAHILA UDYAM NIDHI (MUN) COST OF PROJECT NOT TO EXCEED RS.1 MILLION - TO MEET GAP IN EQUITY

NSIC
ESTABLISHED IN 1956 WHOLLY OWNED BY GOI MEANT EXCLUSIVELY FOR DEVELOPMENT OF SMALL-SCALE INDUSTRIES

FUNCTIONS OF NSIC
SUPPLY OF MACHINERY PROTOTYPE DEVELOPMENT AND TRAINING CENTRES RAW MATERIAL ASSISTANCE MARKETING OF PRODUCTS ( GOVT. STORES
PURCHASE PROGRAMME & INTERNAL MARETING APPROACH)

TURN-KEY PROJECTS, FEASIBILITY STUDY TO INSTALLATION AND COMMISSION OF PLANT

SSIDCs
PROCUREMENT AND DISTRIBUTION OF RAW MATERIALS SUPPLY OF MACHINERY TO ENTREPRENEURS ON HIRE PURCHASE UNDERTAKING MARKETING ACTIVITIES CONSTRUCTION AND MANAGEMENT OF INDUSTRAIL ESTATES