Indian Financial System

INDIAN FINANCIAL

SYSTEM SLIDES: 28

2FINANCIAL SYSTEM

DEMAND HAND SUPPLY HANDOrganized

System • Players

• Instruments• Regulatory

Body

3FUNCTIONS

Saving Function

Payment Function

Return Function

Reformatory Function

AGENDA

• Financial Institutions

• Financial Markets• Money Market• Capital Market

• Financial Instruments

• Financial Services

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INDIAN FINANCIAL SYSTEM

Financial Institutions

Financial Markets

Financial Instruments

Financial Services

Banking Institutions

Non-Banking Institutions

6Banking Institutions

• Legal Requirement - Having an approval under Banking Regulation Act, 1949 and RBI.

• Function – Accepting and Lending of funds people involved in commerce, industry and agriculture Primary function , Secondary function and Credit creation

• Establishment Rationale - “Accepting for the purpose of lending and investment of deposits of money from the public repayable on demand or otherwise”

7TYPES OF NBFIs

Establishment

Rationale

All-India Financial

Institutions

State Finance Corporations

(SFCs)

Investment Institutions

Act as an instrument of economic development in conformity with national objectives, plans and priorities.

Provide loans to small and medium scale industries within the state. E.g. KFC

Collection of savings of the people through life policies and invests the fund in a variety of investments.

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Developmental Banks

Industrial Finance Corporation of India (IFCI)Its objective is to render financial assistance to large scale industrial units at a time when the ordinary banks are not forth coming to assist these concerns.Functions – • Financial Assistance: Guaranteeing of 25 Years term loans• Promotional Activities: Discovering Opportunities• Financial services: (i) Revival of sick units (ii) Financing of risky

projectsMore Development• IDBI bank - Refinancing and re-discounting institution operating in

the capital market • ICICI bank - Fund long term projects in private sector

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Investment Institutions

Case Study – LIC – Registered under LIC Act, 1956 under which the life insurance was nationalized. As a result, business of 243 insurance companies was taken over by LIC on 1-9-1956.

Function - 1. Spread life insurance widely and in particular to the rural areas2. Maximization of mobilization of people’s savings for nation building activities.3. Provide complete security and promote efficient service to the policy-holders at economic

premium rates. 4. Conduct business with utmost economy and with the full realization that the money belong to

the policy holders.

General Insurance Corporation of India (GIC) – Any insurance other than ‘Life Insurance’ (anything under the sun) falls under the classification of General Insurance.

10NBFCs

• High Risk, High Return• Attract deposits by offering high deposit rates• Deal with Unsecured Loans and loans with no security

AGENDA





12Money Market

• A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.

• Mainly consist of – 1. Treasury bills2. Commercial papers3. Certificate of deposits

13T-bills

• Treasury Bills are Money Market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price

• They are auctioned by Reserve Bank of India at regular intervals.

• Treasury Bills are available for a minimum amount of INR 25,000 and in multiples of INR 25,000 thereafter.

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Advantages of T-bill

• No Tax Deducted at Source (TDS)• Zero default risk as these are the liabilities of GOI• Active secondary market thereby enabling holder to meet

immediate fund requirement.

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Commercial Papers

• Commercial Paper is a low-cost alternative to bank loans. It is a short term unsecured promissory note issued by corporates and financial institutions at a discounted value on face value. They are usually issued with fixed maturity between one to 270 days.

• They yield higher returns as compared to T-Bills as they are less secure in comparison to these bills. Chances of default are almost negligible but are not zero risk instruments. Commercial Paper being an instrument not backed by any collateral, only firms with high quality credit ratings will find buyers easily without offering any substantial discounts.

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Certificate of Deposit

• It is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued in any denomination. They are stamped and transferred by endorsement. Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand.

AGENDA





18Capital Market

• Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.

• Capital market consists of primary markets and secondary markets. Primary markets deal with trade of new issues of stocks and other securities, whereas secondary market deals with the exchange of existing or previously-issued securities.

19Division on the basis of nature of security traded

• Bond market – where investors go to trade (buy and sell) debt securities, prominently bonds.

• Stock market - where investors go to trade (buy and sell) equity securities like common stocks and derivatives (options, futures etc.). Stocks are traded on stock exchanges.

• Can be differentiated on the basis of given points:-1. Manner of trade2. Risk involved

AGENDA





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Financial Instruments

• Financial instruments refers to those documents which represent financial claims on assets. Example – BOE

• On the basis of type:• Primary Securities- Directly issued by the ultimate

investors to the ultimate savers. Example IPO• Secondary Securities- Issued by some intermediaries called

financial intermediaries to the ultimate savers. Mutual funds• On the basis of term:• Short (Mature within an year) / Medium / Long-term

AGENDA





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FUND-BASED INCOME

• Fund-based financial services earn income mainly from interest spread (= interest earned – interest paid), lease rental, investments in capital and real estate market.

• Factoring: • Assume Yogi owes 100 to Shubham. At this point, CR (a ₹

factor here) agrees to discount the invoice by say 10%, advancing 60 to Shubham immediately, and promises to ₹pay 30 on receipt of the full payment from Yogi. ₹

• Sale of receivables of a business in exchange for payment.

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FUND-BASED INCOME

• Leasing: • A legal document outlining the terms under which one party agrees to

rent property from another party.• Mr. X (lessee) wants to rent an apartment (from lessor), the lease will

describe how much the monthly rent is, when it is due, what will happen if you don't pay, how much of a security deposit is required, the duration of the lease and any other essential information

• If such an agreement leads to an ownership of the property once full amount of the contract is paid, this arrangement is called Hire-Purchase.

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FUND-BASED INCOME

• Private Equity and Venture Capitalists: • Refer to firms that invest in companies and exit through

selling their investments in equity financing• Private equity firms mostly buy mature companies that are

already established. The companies may be deteriorating or not making the profits they should be due to inefficiency. Private equity firms buy these companies and streamline operations to increase revenues.

• Venture capital firms, on the other hand, mostly invest in start-ups with high growth potential.

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FEE-BASED INCOME

• Fee-based financial services involve lower risk, but require a high level of expertise on the part of the company offering such services.• Credit Rating• Loan Syndication• M&A• Merchant Banking • Corporate Advisory Services• Issue Management • Capital Restructuring

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FEE-BASED INCOME

• Merchant Banking:• Transfers capital from those who possess it to those who need it• It helps to revive sick business units. It also helps companies to

register, buy and sell shares at the stock exchange.

• Loan Syndication:• Process of involving several different lenders in providing various

portions of a large loan

• Credit Rating:• An assessment of the credit worthiness of a borrower• Big 3 CRA: Standard & Poor’s, Moody’s, Fitch Group

THANK YOU!

Indian Financial System

Economy & Finance

Transcript of Indian Financial System