An Overview of

Indian Financial
System
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 Financial Markets
and Institutions
MS 223

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 Table of Contents
• Meaning of financial system
• An overview of financial system
• Functions of the financial system
• Evolution of Indian financial system
• Components of the financial system

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 MEANING OF FINANCIAL SYSTEM
• A financial system or financial sector functions as
an intermediary and facilitates the flow of funds
from the areas of surplus to the areas of
deficit. A Financial System is a composition of
various institutions, markets, regulations and
laws, practices, money manager, analysts,
transactions and claims and liabilities.
• The financial system is concerned about money,
credit and finance

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• In finance, the financial system is the system
that allows the transfer of money between
savers and borrowers. It comprises a set of
complex and closely interconnected financial
institutions, services, markets, instruments ,
practices, and transactions

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 Indian financial system

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 AN OVERVIEW OF FINANCIAL SYSTEM

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 Functions of a financial system
• Liquidity Function : The financial markets provide the investor
with the opportunity to liquidate investments like stocks
bonds debentures whenever they need the fund.

• Payment function : The financial system offers a very

convenient mode for payment of goods and services. Cheque
system, credit card system etc are the easiest methods of
payments. The cost and time of transactions are drastically
reduced

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• Saving function : Public saving find their way into the
hands of those in production through the financial system.
Financial claims are issued in the money and capital
markets which promise future income flows. The funds
with the producers result in production of goods and
services thereby increasing society living standards.

• Risk function: The financial markets provide protection

against life, health and income risks. These are
accomplished through the sale of life and health insurance
and property insurance policies. The financial markets
provide immense opportunities for the investor to hedge
himself against or reduce the possible risks involved in
various investments
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• Policy function : The government
intervenes in the financial system to
influence macroeconomic variables like
interest rates or inflation so if country
needs more money government would
cut rate of interest through various
financial instruments and if inflation is
high and too much money is there in the
system then government would increase
rate of interest
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 Evolution of Indian financial
system
• Evolution of Indian financial system Barter,
money lender, chit funds, indigenous bankers,
cooperative banks, joint stock banks,
consolidation, commercial banks
,nationalization ,investment banks, insurance
companies, stock market, specialized financial
institutions, merchant banking, universal
banking

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 Evolution of Financial System
Barter

Money Lender

Chit Funds

Indigenous Banking

Cooperative Movement

Societies Banks

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 Consolidation

Commercial Banks

Nationalization

Investment Banks

Development Financial Institutions

Investment/Insurance Companies

Stock Exchanges

Market Operations

Specialized Financial Institutions

Merchant Banking

Universal Banking
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 Indian Financial System

Non- Organized
Organized
Money lenders
Financial Institutions
Local bankers
Financial Markets
Traders
Financial Instruments
Landlords
Financial services
Pawn brokers
Chit Funds
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Components of the Financial System
 Financial Institutions/ Intermediaries

 Financial Markets

 Financial Instruments

 Financial Services

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Financial intermediaries/ Institutions
• Come in between the ultimate borrowers and
ultimate lenders

• provide key financial services such as merchant

banking, leasing, credit rating, factoring etc.

• Services provided by them are: Convenience(

maturity and divisibility), Lower
Risk(diversification), Expert Management and
Economies of Scale.

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 Types of Financial intermediaries

Financial
Intermediaries

Insurance
Banks NBFCs Mutual Funds
Organizations

Commercial Banks at a
Glance 

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 Given below are the Top 10 Non Banking Financial
Companies in India and the countdown follows

• RELIANCE CAPITAL
• L&T FINANCE
• MAHINDRA AND MAHINDRA FINANCIAL SERVICES
LIMITED (MMFSL)
• SUNDARAM FINANCE
• SHRIRAM TRANSPORT FINANCE COMPANY LIMITED
• LIC HOUSING FINANCE LIMITED
• INDIABULLS HOUSING FINANCE LIMITED
• POWER FINANCE CORPORATION LIMITED
• BAJAJ FINSERV
• HDFC
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 Life insurance companies
(http://www.policyholder.gov.in/registered_insurers_life.aspx)
• Aviva India
• Bajaj Allianz Life Insurance
• Birla Sun Life Insurance Company Limited
• Exide Life Insurance
• HDFC Standard Life Insurance
• ICICI Prudential Life Insurance
• IDBI Federal Life Insurance
• IndiaFirst Life Insurance Company
• Life Insurance Corporation
• Max Life Insurance
• Peerless Group
• PNB MetLife India Insurance Company
• SBI Life Insurance Company
•9/13/2018
Edelweiss Tokio Life Insurance
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 General Insurance Companies
• Agriculture Insurance Company of India
• Apollo Munich Health Insurance
• Cholamandalam MS General Insurance
• Bajaj Allianz General Insurance
• Bharti AXA General Insurance
• Cigna TTK
• Export Credit Guarantee Corporation of India
• GIC Re
• HDFC ERGO General Insurance Company
• ICICI Lombard
• IFFCO Tokio
• L&T General Insurance
• Liberty Videocon General Insurance
• National Insurance Company
• New India Assurance
• The Oriental Insurance Company
• Reliance General Insurance
• Religare
• Royal Sundaram General Insurance
• Star Health and Allied Insurance
• Tata AIG General
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 List of Mutual Fund Companies in India
(https://www.bankbazaar.com/mutual-fund/Top-10-Mutual-Funds-
India.html)
1. Reliance Mutual Funds
2. HDFC
3. Fidelity
4. Franklin Templeton
5. ABN Amro
6. AIG
7. Bank of Baroda
8. Birla Sun Life
9. Canara Bank
10. DBS Chola Mandalam AMC
11. DSP Merrill Lynch
12. Deutsche Bank
13. Escorts Mutual
14. HSBC
15. ICICI Prudential
16. ING
17. JM Financial
18. JP Morgan
19. Kotak Mahindra
20. LIC
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 Types of Financial intermediaries
1. commercial banks
• Collect savings primarily in the form of deposits and
traditionally finance working capital requirement of
corporates.
• With the emerging needs of economic and financial
system banks have entered in to:
 Term lending business particularly in the infrastructure
sector,
 Capital market directly and indirectly,
 Retail finance such as housing finance, consumer
finance……

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 2. Non-banking finance companies (NBFC)
• A Non-Banking Financial Company (NBFC) is a company
registered under the Companies Act, 1956 engaged in the
business of loans and advances, acquisition of shares/stocks/
bonds/debentures/securities issued by Government or local
authority or other marketable securities of a like nature,
leasing, hire-purchase, insurance business, etc.
• Depending upon the nature and type of service provided, they
are categorised into:
 Asset finance companies
 Housing finance companies
 Venture capital funds
 Merchant banking organisations
 Credit rating agencies
 Factoring and forfaiting organisations
 Housing finance companies
 Stock brokering firms
 Depositories
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 3. Mutual funds
• A mutual fund is a company that pools money from
many investors and invests in well diversified portfolio
of sound investment.
• issues securities (units) to the investors (unit holders)
in accordance with the quantum of money invested by
them.
• profit shared by the investors in proportion to their
investments.
• set up in the form of trust and has a sponsor, trustee,
asset management company and custodian
• advantages in terms of convenience, lower risk, expert
management and reduced transaction cost.

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 Mutual Fund Operation
Flow Chart

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 4. Insurance organizations

• They invest the savings of their policy holders

in exchange promise them a specified sum at
a later stage or upon the happening of a
certain event.
• Provide the combination of savings and
protection
• Through the contractual payment of premium
creates the desire in people to save.

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 Financial Market
• It is a place where funds from surplus units are
transferred to deficit units.
• It is a market for creation and exchange of
financial assets
• They are not the source of finance but link
between savers and investors.
• Corporations, financial institutions, individuals
and governments trade in financial products
on this market either directly or indirectly.

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 Financial
Market

Capital/
Money Securities
Market Market

Primary
Market

Secondary/
Stock Market

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 Money market
• A market for dealing in monetary assets of short term
nature, less than one year.
• enables raising up of short term funds for meeting
temporary shortage of fund and obligations and
temporary deployment of excess fund.
• Major participant are: RBI and Commercial Banks
• Major objectives:
 equilibrium mechanism for evening out short term
surpluses and deficits
 focal point for influencing liquidity in economy
 access to users of short term funds at reasonable cost

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 Money
Market

Call T-bills Bills CP CD Repo

Market Market Market Market Market Market

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 Capital market

• A market for long term funds

• focus on financing of fixed investments
• main participants are mutual funds, insurance
organizations, foreign institutional investors,
corporate and individuals.
• two segments: Primary market and secondary
market

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 Primary/new issue market
• A market for new issues i.e. a market for fresh
capital.
• provides the channel for sale of new securities,
not previously available.
• provides opportunity to issuers of securities;
government as well as corporates.
• to raise resources to meet their requirements of
investment and/or discharge some obligation.
• does not have any organizational setup
• performs triple-service function: origination,
underwriting and distribution.
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 Secondary market/
stock market
• A market for old/existing securities.
• a place where buyers and sellers of securities can enter
into transactions to purchase and sell shares, bonds,
debentures etc.
• enables corporates, entrepreneurs to raise resources for
their companies and business ventures through public
issues.
• has physical existence
• vital functions are:
 nexus between savings and investments
 liquidity to investors
 continuous price formation
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 Indian Financial System – An Overview
STRUCTURE OF FINANCIAL MARKETS IN INDIA

Financial Markets in India

Debt Market Forex Capital Market Insurance Banks (including Mutual Funds,
Primary / Market Primary / Life/General RRBs, co-op etc) Venture Funds,
Secondary Secondary & Investment Bonds
Depository

RBI RBI SEBI IRDA RBI RBI/SEBI

REGULATORY AUTHORITY

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 Indian Capital markets -
Chronology
• 1994-Equity Trading commences on NSE
• 1995-All Trading goes Electronic
• 1996- Depository comes in to existence
• 1999- FIIs Participation- Globalisation
• 2000- over 80% trades in Demat form
• 2001- Major Stocks move to Rolling Sett
• 2003- T+2 settlements in all stocks
• 2003 - Demutualisation of Exchanges

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 Financial Instruments
• Primary Securities: Equity, Preference, Debt
and Various combinations.

• Secondary Securities: Mutual Fund Units

and Insurance Policies etc.

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 Financial Services
• Depositories
• Custodial
• Credit Rating
• Leasing
• Portfolio Management
• Underwriting etc.
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