ROLE OF ECONOMIC AND

FINANCIAL INSTITUTIONS

PROF. K. K. KRISHNAN
FOUNDATION COURSE
JUNE 2010
 IMPORTANT INSTITUTIONS
 Central / State Governments, CBDT, CBEC
 Planning Commission
 Reserve Bank, SEBI
 IRDA, Insurance Companies, NABARD, SIDBI,
IDFC, EXIM BANK, LIC, GIC, HUDCO, National
Housing Bank (NAB) Asset Management Cos
(AMC) etc.
 Non – Banking Financial Companies
(NBFCs)
 Developmental And Regulatory role
 CONTEXT
 Tepid – to - torrid transformation since
1980s
 Midnight’s Children's income doubled over
40 years
 Their grandchildren (India Shining
Generation) can expect 6 fold improvement
 Strong Institutions bequeathed by
Founding Fathers
 Two Views – Free From State Shackles or
Strengthening Of Institutions
 FUNCTIONS OF INSTITUTIONS
 Institutions Create Markets
Property Rights, Contractual Rights, Ensuring
Law and Order, Environment and directions
for Business

 Institutions Regulate and or Substitute Markets

Markets may not deliver what is socially desirable –
Banks/markets need to be regulated against
excessive risk taking – Private sector may not
deliver literacy, water et.
 INSITUTIONS (CONT’D)
 Economic / Financial institutions offer
frame work for stability of markets

 Avoidance of financial crisis - they

‘legitimize’ markets through the mechanism
of social protection , insurance

 Democracy is the overall institution par

excellence

 Abandonment of “commanding heights” by

the state
 PLANNING COMMISSION
 A body set up by Govt. of India (1950s) to
assess material, capital and human resources
to improve growth
 Formulate Five Year Plan (Long Term Strategic
Vision) to lay down road maps for development
every 5 Years (12th FYP 2007–12) - Financial
Inclusion Theme
 Identify factors holding up Growth
 Review achievements and fine tune Activities
 Allocate resources to States
 Consultancy within Government
 P.M. Head of Planning Commission
 ROLE AND FUNCTIONS OF BANKS

 Financial Intermediation – Mobilisation

of Savings
 Trade and Business Facilitation
 Meeting needs of Financial Market
Developments
ROLE AND FUNCTIONS (CONT’D)

 Primary And Secondary Functions

 Accepting Deposits, Granting Loans & Advances –

(Long & Short Term) Short Term Financial Assistance

 Cash Credit, Overdraft, Discounting of Bills

 SECONDARY FUNCTIONS

 Treasury Operations ( Held to Market

Securities)
 Letters of Credit, Traveler’s Cheques,
enlisted services, Foreign Exchange,
money transfer, Guarantor, Factoring
Services, Demand Drafts & Pay Orders,
Reports of credit worthiness
 Bancassurance
 AGENCY / UTILITY SERVICES

 Collection and Payment of Cheques,

Dividend, Interest, Rent etc. for clients
 Purchase & Sale of Securities
 Acting as a Trustee / Executor
 Underwriting of Shares
 Safe Keeping of Valuables
 Foreign Exchange Business
 Project Finance, ECB
 TYPES OF BANKS

 Central Bank, RBI (Banker’s Banker)

 Public Sector Banks – 22
 Private Sector Indian Banks – 25
 Foreign Banks – 32
 Plus Cooperative & Regional Rural Banks
 79,000 Banking Outlets, 15 crore s b a/cs
 Merchant Banks, Investment Banks
 Regulator – RBI
 Self - Regulation - IBA
 INSURANCE COMPANIES
 Life (23) and Non – life companies (22)
 Role of ins. cos.
 Savings intermediaries, providers of long term
capital, protect life and assets, major role in
stock market, eco. devt.
 Employment generation ( <14 lakh agents)
 Instrument of Financial Planning
 Micro insurance, rural insurance
 Tax benefits – EEE/EET
 Regulator : IRDA
 Self Regulation – Life, General Councils
 MUTUAL FUNDS
 Run by Asset Management Companies
 Trust that pools the savings of a number of
investors who share common financial
goals.
 Different from portfolio management
schemes (PMS)
 Net asset value : (NAV) on a particular date
reflects the value that the investor will get
for each unit that he is holding if the
scheme is liquidated on that date.
 Open ended & close ended schemes
 Tax benefits
 Regulator SEBI
 Self Regulation - AMFI
FUNCTIONS & SUPERVISION OF
RESERVE BANK OF INDIA
 To undertake consolidated supervision of
the financial sector comprising
Commercial Banks, Financial
Institutions and Non – Banking
Financial Institutions
 Fighting Inflation, Stability of Monetary
System
 Conservative, Interest rate and financial
management
 FUNCTIONS (CONT’D)

 Monetary Authority
 Regulator & Supervisor of financial
system – CRR, Repo, Reverse Repo,
SLR, LAF
 Manager of Foreign Exchange –
Managed Float
 Issuer of Currency – M3
 FUNCTIONS (CONT’D)
 BASEL, Asset – Liability Match,
Capital Adequacy, NPA
 Banker to Govt. – Borrowoing Target
 Banker to Banks
 Manages Central Govt’s debt
ROLE AND FUNCTIONS OF SEBI
 Regulation of Stock Exchange and Subsidiaries
 Inspection of Stock Exchanges (risk based
supervision) – Exchanges to be fair, equitable &
offer growing market to investors
 Registration & regulation of the working of
Intermediaries
 Two markets – primary (merchant bankers,
underwriters & portfolio managers) – secondary
(stock brokers and sub brokers)
 Regulating the working of depositories
(participants), custodians of securities, foreign
institutional investors (FIIs) & credit rating
agencies
 SEBI (Cont’d)
 Registration & Regulation Of Mutual
Funds, Venture Capital Funds &
Collective Investment Schemes
 Prohibiting Unfair Trade Practices in
the Securities Market – Stock Watch
System
 Prohibition of insider trading
 Investor education & the training of
Intermediaries
 Vetting of Draft Prospectus in IPO
 SEBI (Cont’d)
 Broker’s Code
 Search and Seizure
 Clause 49 & Corporate Governance
 Delisting
 Public Issue Guide Lines, IPO
 Demat
 Creeping Acquisition, M&A activity
control