INDIAN FINANCIAL SYSTEM

Unit 1 - Introduction to Indian Financial System

 Meaning of Financial system

• Financial system refers to a set of complex and closely connected or

interlinked financial institutions or organized and unorganized financial
markets, financial instruments, and which facilitate the transfer of funds.
• A financial system consists of institutional arrangements through which
financial surplus in the economy are mobilized from units having surplus
funds and it is transferred to units having financial deficit. Financial
system is a total of financial institution, financial markets, financial
services, financial practices and procedures.
 Features of Financial system

• ⊸ It is a set of inter related activities or services

• ⊸ Services are working together to achieve predetermined goals
• ⊸ The system allows transfer of money between savers and borrowers
• ⊸ It is applicable at global, regional and firm level
⊸ It includes financial institutions , markets , instruments,
services , practices and transactions
•

• ⊸ The main objective is to formulate capital ,investment and profit generation.

 Objectives of Financial system

• To mobilize the resources.

• To create link between savers and investors.

• To establish a regular smooth and efficient markets.

• To create assets for the use of people.

• To encourage savings and investment.

 Objectives of Financial system

• To facilitate economic development of the country.

• To facilitate for expansion of financial markets.

• To promote for efficient allocation of financial resources.

• To make sound decisions based on cash flow and available resources.

Functions of Financial System
Savings Function

Financial Deepening
and Broadening Liquidity Function

Lowers the Cost of

Payment Function
Transactions

Provides Financial
Risk Functions
Services
 Structure of Indian Financial System or Components
of Indian Financial System.

Indian Financial
System

Financial Institutions Financial Markets Financial Instruments Financial Services

7
 Financial Institutions/Intermediaries

• Financial institutions or financial intermediaries are those

institutions, which provide financial services and products which
customers needs.
• E.g. Customers not having skill to invest in equity market efficiently can
invest money in Mutual Funds and can avail the benefits of capital
market. Financial institutions provide all those financial provide all those
financial services, which are available in financial system.
 Financial Markets
• A financial market is a market in which people and entities can trade
financial securities, commodities, and other fungible items of items of
value at low transactions costs and at prices that reflects supply and
demand. Securities include stocks and bonds, and commodities include
precious metals or agricultural goods.
 Classification of Financial Markets

Money Market

Financial Markets Primary Market

Capital Market

Secondary Market
 Money Market

• Money market refers to the market where money and highly liquid

marketable securities are bought and sold having a maturity period of one or

less than one year. The money markets constitute a very important segment

of the Indian Financial System.

 Capital market
• Capital market is a place where the medium term and long term financial
needs of business and other undertakings are met by financial institutions
which supply medium and long term resources to borrowers.
 Primary Market
• It is also called new issues market. In this market, funds are raised by
industrial and commercial enterprises from investors through the issue of
shares, debentures and bonds. The primary market is that part of the
capital markets that deals with the issuance of new securities.
 Secondary Market
• Secondary market is the market in which existing securities are bought
and sold. Existing securities are bought and sold in the stock exchanges
with the help of brokers. The secondary market is the financial market in
which previously issued financial instruments such as stock, bonds,
options, and futures are bought and sold.
 Financial instruments
• Financial instruments are monetary contracts between parties. They can be
created, traded, modified and settled. They can be cash (currency),
evidence of an ownership interest in an entity (share), or a contractual
right to receive or deliver cash (bond).
 Financial Services
• Financial services are the economic services provided by the finance
industry, which encompasses a broad range of organizations that manage
money, including credit unions, banks, credit card companies, consumer
finance companies, stock brokerages, investment funds and some
government sponsored enterprises.
 Role of Financial System in Economic
Development
• • Mobilizing Savings.
• • Promoting Investments
• • Encouraging Investment in Financial Assets
• • Allocating Savings on the Basis of National Priorities
• • Creating Credit
• • Providing a Spectrum of Financial Assets
• • Financing Trade, Industry and Agriculture
• • Encouraging Entrepreneurial Talents
• • Providing Financial Services
• • Developing Backward Areas
 SWOT of Indian Financial System
Banking Sector Issues
Large Market Size
Inequality in Financial Access
Robust Regulatory Framework
Complex Tax and Regulatory Systems
Growing Financial Inclusion
Diverse Financial Products
Volatility in Financial Markets
High Savings Rate

SWOT

Digital Transformation •Economic Slowdown

Rising Middle Class •Regulatory Challenges
Infrastructure Development •Cybersecurity Risks
Global Integration •Political and Social Instability
 Financial Regulators in India
• Regulation is a form of supervision which subjects financial institutions to
certain requirements, restrictions and guidelines aiming to maintain the
integrity of the financial system.
 21

Regulatory bodies in India

Reserve Bank Of India (RBI)

Securities Exchange Board of India (SEBI)

Insurance Regulatory and Development Authority (IRDA)

Pension Fund Regulatory and Development Authority (PFRDA)

 Reserve Bank of India
• The Reserve Bank of India - constituted as a shareholder’s bank - capital of 5 crore divided into 5 lakhs fully paid up
shares of rs100 each.

• Majority share capital was contributed by private shareholders

• 2.2 lakhs subscribed by the central government.

• After Independence the public opinion was strongly in favor of nationalization of the RBI.

• A decision was taken in this regard in 1947 and RBI Act was passed in 1948.

• The entire share capital of the bank was acquired by the Central Government against compensation to the shareholders.

• From 1st. January. 1949 it began to function as government owned institution.

• Current RBI Governor - Shaktikanta Das

 Objectives of RBI
• To manage the monetary and credit system of the country
• To stabilize the internal and external value of rupee.
• For balanced development of banking in the country
• For the development of organized money market in the country
• For proper arrangement of agricultural finance
• For proper arrangement of industrial finance
• For proper arrangement of Public debts
• For centralization of cash reserves of commercial banks .
 SEBI

• The Securities and Exchange Board of India (SEBI) is

the regulator for the securities market in India.

• It was established in the year 1988 and given statutory powers on 30

January 1992 through the SEBI Act.

• SEBI has its headquarters in Mumbai

 Objectives of SEBI
• To regulate and control the business of stock exchange.

• To protect the interest of the investors.

• To give proper education and guidance regarding their investments in securities.

• SEBI keeps supervision on brokers. Registration of the brokers is made compulsory and are expected to follow
the rules and regulations.

• To provide training to the intermediaries which is useful for healthy atmosphere on the stock exchange and also
ensures protection of small investors.
 Objectives of SEBI

• To regulate mergers, takeovers of companies to protect the interest of investors.

• To prohibit fraudulent and unfair practices of intermediaries operating on securities
market.

• To issue guidelines to companies regarding capital issues.

• To conduct inspection, inquiries and audits of stock exchanges, intermediaries.
• To restrict insider trading activity
 IRDA
• IRDA - Insurance Regulatory Development and Authority is
the statutory, independent and apex body that governs and
supervise the Insurance Industry in India.

It was constituted by Parliament of India Act called Insurance

Regulatory and Development Authority of India (IRDA of
India) after the formal declaration of Insurance Laws
(Amendment) Ordinance 2014, by the President of India
Pranab Mukherjee on December 26,2014.
 IRDA - Insurance Regulatory
Development and Authority
• Establishment:
• IRDA Act was passed upon the recommendations
of Malhotra Committee report (7 Jan,1994), headed
by Mr R.N. Malhotra (Retired Governor, RBI)
 IRDA - Insurance Regulatory
Development and Authority
• Main Recommendations - Entrance of Private
Sector Companies and Foreign promoters & An
independent regulatory authority for Insurance Sector in
India
• In April,2000, it was set up as statutory body, with its
headquarters at New Delhi.
• The headquarters of the agency were shifted
to Hyderabad, Telangana in 2001.
 Objectives of IRDA:

• To promote the interest and rights of policy holders.

• To promote and ensure the growth of Insurance Industry.
• To ensure speedy settlement of genuine claims and to
prevent frauds and malpractices
• To bring transparency and orderly conduct of in financial
markets dealing with insurance.
 PFRDAI
• The Pension Fund Regulatory & Development Authority Act was passed
on 19th September, 2013 and the same was notified on 1st February, 2014.
PFRDA is regulating NPS, subscribed by employees of Govt. of India,
State Governments and by employees of private institutions/organizations
& unorganized sectors.
 Objectives of PFRDAI
• The Pension Fund Regulatory and Development Authority (PFRDA) has several
objectives, including:
• Promoting old-age income security: PFRDA's goal is to create, develop, and regulate
pension funds to help ensure that people have a secure income in their later years.
• Protecting subscriber interests: PFRDA protects the interests of people who subscribe
to pension funds.
• Regulating pension schemes: PFRDA regulates the National Pension System (NPS)
and other pension schemes, such as the Atal Pension Yojana (APY).
 Objectives of PFRDAI
• Educating citizens: PFRDA helps educate citizens about the importance of pensions for
retirement.
• Resolving disputes: PFRDA resolves disputes between various intermediaries.
• Training intermediaries: PFRDA trains and informs intermediaries about pension schemes
and how they work.
• Promoting transparency and efficiency: PFRDA aims to promote transparency and
efficiency in retirement planning and pension fund management.