Indian Financial System

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Evolution
Introduction
Components
Main Players
Intermediaries
Regulating Organisations
Dr. Smita Sovani

Indian Economy
1. Agriculture : Farming and allied
commercial activities
2. Industry : Extractive & generic
3. Trade : Sales & after sales service
4. Aids to trade : Communication, transport,
infrastructure
5. Services : Banking, insurance, consultancy,
entertainment, medical, tourism, education
etc.
Money
links
all
economic
activities
to
humans
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1. The Evolution of
financial system in India

India has been a thrifty economy rather than a spending

economy
Indian economy has a heritage of thousands of years of
civilisation
Barter system of exchange existed for a long time where
money was absent
Kingdoms used to have their own coins but the use was limited
Saving was limited, mostly in the form of ornaments, land,
food-grain, cattle etc.
The financial system was manually driven
The components were the masses, money lenders, the rulers,
farmers, local manufacturers etc.
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Dr. Smita Sovani

Post Industrial Revolution

1760 : The landmark year when steam
engine was introduced in manufacturing
Production : In anticipation of demand
Money : Required to invest in huge
machinery, inventory, shops etc.
Monetary surplus : A major status symbol
Emergence of currency notes, evolution of
banking, improved means of transport &
communication, British rule etc. contributed
to speedy change in Indian Economy

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Dr. Smita Sovani

The Independence Movement

The Swadeshi movement in the freedom struggle
inspired Indians to come out of the set-back of East
India Company
Lokmanya Tilak, Jamshedji Tata, Sheth Walchand
Hirachand, Lala Shriram, Laxmanrao Kirloskar etc.
started manufacturing plants in India
Banks were started to extend financial services to all
sectors of the economy
The financial system developed volume-wise as well
as geographically in post-independence era
Due to the reasons like after-effects of the British
rule, licence-raj, over-emphasis to government
investment in businesses etc. the development
process faced hurdles but the growth was consistent
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Dr. Smita Sovani

Post 1991

1991 : The financial revolution in India

L-P-G policy was adopted
E-revolution Around yr. 2000
More and more emphasis on divestment,
promotion of private-sector businesses,
e-commerce,
more interaction with the developed nations,
higher purchasing power of the masses,
India Shining etc. has given todays modern,
technology driven, complex, multi-faceted and huge
financial system of India
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Dr. Smita Sovani

Major areas of reforms

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Policy reforms
Banking reforms
Stock market reforms
Government securities market reforms
External financial market reforms

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Dr. Smita Sovani

Todays Picture
Worlds 5th largest economy
Worlds youngest society
Continuously winning over the problems
like population, corruption, terrorism,
poverty, religious differences etc.
Developed countries are looking at India
as a promising investment destination
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Dr. Smita Sovani

Financial System
1.
2.
3.
4.
5.
6.
10/11/16

Evolution
Introduction
Components
Main Players
Intermediaries
Regulating Organisations
Dr. Smita Sovani

2. Introduction
Meaning: Financial system is an organised
mechanism for mobilising monetary
resources by the institutions to the needy
sector of the economy.
Characteristics of Financial system:
1. Links savers, investors and borrowers
2. Provides a mechanism for resource
mobilization
3. Attempts to allocate optimum risk
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Characteristics of Financial system cont.

3. Collects the relevant data and makes it available to

the people to arrive at financial decisions

4. Provides financial services to the people
5. Creates an impulse to save by offering a return on
savings and charging a cost on borrowing
6. Promotes financial deepening by increasing fin.
Assets as a % of GDP
7. Promotes financial deepening by increasing the
number and the variety of participants in the
financial system
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3. Components
A. Financial Institutions Intermediaries
that mobilize the savings to economy
E.g. Banks, LIC, RBI
B. Financial Markets Mechanism enabling
the participants to deal in financial claims
E.g. Capital Market, Money market,
Primary & secondary market
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3. Components.. continued
C. Financial Instrument- A claim against a
person or institutions for payment at a
future date or a periodic payment of a sum
of money by way of interest or dividend.
E.g. bank deposit, units of mutual fund,
insurance policies, shares, bonds etc.

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C. Financial Instruments.contd.
Forms of Financial Instruments depend
upon the marketibility, liquidity, risk, return
etc.
(i) Primary instrument is a security directly
issued by the borrowing organisation
(ii) Secondary instrument is a security
issued by an intermediary to an investor by
way of a financial service

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3. Components.. continued
D. Financial Services Support to the
investor to minimise lack of knowledge
and provide sophisticated services.
E.g. investment, credit rating, lending, bill
discounting, factoring, broking, managing
IPOs etc.
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4. Main Players in financial markets

1. Financial Institutions: Banks, LIC, IDBI,
NBFCs etc.
2. Government: Various state & central
government departments, government run
organizations
3. Private sector companies: Companies in
manufacturing and other industries.
4. Intermediaries: Mutual funds, brokers,
portfolio advisors etc.
5. Investors: Public at large
6. Regulating organisations: SEBI, RBI etc.
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5. Intermediaries
A financial intermediary is an entity serving as a
link between the savers, the investors and the
businesses.
A financial intermediary primarily aims to connect
the needy class to the savers.
A financial intermediary connects that components
of the economy which create wealth to that
component which has surplus to be mobilised.
The economies with developed intermediaries
develop fast; while the economies with primitive
intermediaries observe a slow growth rate.
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Role of intermediaries
1. Mobilisation of funds through investments
and lending
2. Maturity transformation by offering
financial services needed by the clients
3. Risk reduction by way of diversified
portfolios, collective bargaining and
economies of scale
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5. Some important intermediaries in India

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Banks
NBFCs
Provident funds
Mutual funds
Pension funds
Insurance companies
Stock exchanges
Brokers / sub brokers
Portfolio advisors
Credit societies
Chit Funds etc.

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6. Regulating Organisations

Ministry of Finance of the government of India,

RBI,
SEBI,
IRDA,
Registrar of Companies
Self Regulating Organisations (SROs) promoted
by SEBI to regulate various participants in market
e.g. Association of Merchant Bankers of India
(AMBI), The Registrars Association of India
(RAIN) etc.

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Home Assignment
1. Elucidate the role of intermediaries in
the economy (write the role of each
major intermediary in separate
paragraphs)
2. Write a note on the impact of post
1991 economic reforms on the Indian
financial system
3. Submit the same on Monday.
4. Print-out will not be accepted.
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