MODULE -6

FINANCIAL SYSTEM IN INDIA

FINANCIAL SYSTEM IN INDIA

Learning objectives: Money Market Capital market Forex market Sources of industrial finance-internal & external

INDIAS FNANCIAL SYSEM

Finance refers to funds of monetary resources needed by individuals, business houses and the Government.
The financial system in India is calssified into: 1. Industrial finance 2. Agricultural finance 3. Development finance 4. Government finance Composition of Indian Financial system: 1. Money Market 2. Capital Market

MONEY MARKET
Money market is the market in which short term funds are borrowed and lent. Indian Money Market is not an integrated unit. It is broadly divided into two parts:

Organized sector Unorganized sector

Unorganized sector of the money market comprises the indigenous bankers and the moneylenders.

MONEY MARKET
Who are indigenous bankers? They are individuals or private firms which receive deposits & give loans and thereby operate as banks. Since their activities are not regulated . They belong to the unorganized segment of money market. a) Gujarati shroffs b) Chettiars & Marwari kayas

MONEY MARKET
Who are Money lenders?
Professional money lenders whose main activity is money lending. Money lenders like Pathans and Kabulis. There are several types of unregulated non-bank financial intermediaries .

1.

Financial Companies lend loans to artisans, peasants & other self employed persons and they charge high rates of interest.
Chit Funds- saving institutions. A chit fund has regular subscription to the funds. The periodic collection is givn to some member of the chit fund selected on the basis on previously agreed criterion.

2.

MONEY MARKET
Organized sector of the money market comprises both Nationalized and the private sector commercial banks. RBI, Co-operative banks, Foreign Banks, Discount and Finance House of India, development finance institutions like IDBI, ICICI and investment finance companies like the LIC, GIC and UTI and Mutual funds are the other institutions which operate in the organised sector of the Indian money market.

MONEY MARKET
RBI- the apex organization in the Indian money market. It is the leader and controller of the money market, it has great responsibility in respect of smooth functioning of the financial system.

MONEY MARKET
The principal constituents of the Indian money Market are: Call money market meant to balance the short term needs of banks. UTI & LIC were large lenders. These investment Institutions had a sizable shortterm float which they could profitably deploy in the call money market. Commercial banks were usually borrowers CMM centred at Mumbai, Calcutta & Chennai. Treasury Bill Market: short term liability of central Govt. It is issued for meeting the temporary deficits which Govt. faces to its excess expenditure over revenue at some point of time. RBI captive holder.

MONEY MARKET
Commercial Bill Market: bills arise out of domestic Transactions. The legitimate purpose is to reimburse the seller while the buyer delays payment. Commercial bills as instruments of credit are useful For both business firms and banks. Certificate of Deposits Market: CD issued is a certificate by a bank to depositors of funds. CDs are similar to the traditional term deposits but are negotiable and tradable in the short term money markets.

MONEY MARKET
Commercial paper Market: short term instrument of raising funds by corporates. Money Market Mutual Funds: MMMFs introduced by RBI. Objective of the scheme was to provide an additional short-term

avenue to the individual investors.

CHARACTERISTICS OF THE INDIAN MONEY MARKET

1. 2. 3. 4. 5. Existence of unorganized money market Lack of integration: Seasonal stringency of money Shortage of funds in the money market Inadequate banking facilities:

CHARACTERISTICS OF THE INDIAN MONEY MARKET

1. Existence of unorganised money market: Major defect of the Indian money market has always been the existence of the indigeneous bankers. They do not distinguish between short & long term finance, nor even between the purpose of finance. Many attempts were made by RBI to bring these bankers under their purview but in vain

2.

CHARACTERISTICS OF THE INDIAN MONEY MARKET

2. Lack of integration: financial operations are quite independent and whatever goes in one sector are completely separate from each other. More of competition than cooperation and coordination between various components of Indian money market.
Ex: Cooperative banks compete with the Commercial banks in the countryside. Com. Banks not only compete among themselves but also with foreign banks.

CHARACTERISTICS OF THE INDIAN MONEY MARKET

3. Seasonal stringency of money : High rates of interest during a part of the year during busy season. During the off-season or slack season, banks have large surplus funds and the rate of interest vary from one period of the year to another.

CHARACTERISTICS OF THE INDIAN MONEY MARKET

4. Shortage of funds in the money market Savings are small due to low percapita income Because of widespread of poverty. Inadequate banking facilities, lack of banking habit among the people. People have little option but to hoard their savings.

CHARACTERISTICS OF THE INDIAN MONEY MARKET

5. Inadequate banking facilities: coverage of the rural sector by the modern banks leaves much scope for further development
USA 1,400 per person there is a branch of a commercial Bank

India 15,000 per persons

CAPITAL MARKET IN INDIA

CM- for the long term funds. MM- for short term funds.

CM- refers to all the facilities and institutional arrangements for borrowing and lending term funds.
Business unit needs money to finance its activities. Money is invested in physical resources, land and building, Machines and equipment, stock of raw materials, etc. Which are used by the enterprises in production. All these resources together constitute Capital is often defined Wealth

ROLE OF CAPITAL MARKET IN INDIAS INDUSTRIAL GROWTH

1. For financing Five year plans 2. Mobilization of savings and acceleration of capital formation 3. Promotion of Industrial Growth 4. Raising long term capital 5. Ready and continuous market 6. Proper channelisation of funds 7. Provision of a variety of services

FOREX MARKET
Foreign exchange is the process of converting currencies of foreign country into that of the home currency.

And a place where these transactions is carried called as foreign exchange market.

INDIAN FOREX MARKET

CONCEPTS: 1. 2. Exchange rate: is the rate at which currencies are brought Or sold Authorized dealers: are persons who are eligible to operate in the market. Such authorizations given by RBI/central Bank. Exchange dealers: are the ones who act as agents between banks in the inter-bank market. Full convertibility of rupee: where in foreign currecies can be converted into rupees a the market rate or floating rate. Fixed or official rate: RBi fixes the rate of exchange

3.
4.

5.

Foreign Exchange Management (FEMA) 1999

The FEMA introduced in July 1999 in the parliament to consolidate and simplify the law relating to foreign exchange. The objective of FEMA facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India

INDUSTRIAL FINANCE
Finance is the life blood of industry. Adequate finance is absolutely necessary to oil the wheels of the industrial machine to ensure its smooth working & to prevents its breakdown. Lack of adequate & timely finance is one of the causes of slow development of industries of India.

INDUSTRIAL FINANCE
Why industry needs finance? Industry needs finance to meet the capital expenditure i.e. purchase of land, erection of factory building, for installation of machinery. Working capital- to meet its day to day requirements of the industry i.e purchase fo raw material ect.

SOURCES OF INDUSTRIAL FINANCE

There are two broad sources of finance: 1. Internal 2. External The internal sources mean internal funds e.g. free reserves of an industrial concern, its depreciation funds and retained profits. The external sources mean sources outside the businesses, i.e raising fresh capital through shares & debentures, Public deposits, long & short term loans from various sources, accepting deposits, etc.,

SOURCES OF INDUSTRIAL FINANCE

1. All India Development Banks(AIDB) 2. Industrial Development Bank of India(IDBI) 3. Industrial Finance Corporation of India (IFCI) 4. Industrial Credit and Investment Corporation of India Ltd (ICICI) 5. Small Industries Development Bank of India (SIDBI)

SOURCES OF INDUSTRIAL FINANCE

6. Investment Institutions Unit Trust of India(UTI) Life Insurance Corporation of India(LIC) General Insurance Corporation of India (GIC) 7. State level institutions: State Financial Corporations(SFCs) and State Industrial Development Corporations (SIDCs)

Industrial Finance Corporation of India

Functions of IFCI are as follows: 1. 2. Granting loans or advances in rupees and foreign currencies repayable within 25 years. Guaranteeing rupee loans floated in the open market by industrial concerns. Underwriting of shares and debentures of the industrial concerns Deferred payments in respect of imports of machinery Foreign currency loans raised from foreign institutions

3.
4. 5.

THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LTD (ICICI) ICICI BANK second all India Development Bank set up in 1955. ICICI Bank differes from two other all india development banks the IFCI & IDBI in respect of ownership, management and lending operations

ICICI provides assistance in various forms :

1. 2. 3. Long or medium term loans Guranteeing loans from other private investment sources Rendering consultancy service to India industry in the form of managerial and technical advice.

THE INDUSTRIAL DEVELOPMENT BANK OF INDIA

IDBI apex organization in the field of development of Banking. 1. Direct financial assistance to industrial enterprise in the form of loans at concessional rates longer grace period etc., . Indirect financial assistance to industries; concessional refinance assistance to projects in backward areas Promotional functions: Provision of training in project evaluation and development of entrepreneurship.

2.

3.

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA

Financial assistance by SIDBI: 1. Ensuring larger flow of assistance to the small scale units. 2. Initiating steps for technological up gradation and modernization of existing units.

3.

Expanding channels for marketing the products of the small scale sector.
Promotion of employment oriented industries especially in semi-urban areas to create more employment opportunities. Extending financial support to State Small Industries Development corporations.

4.

5.

INVESTMENT INSTITUTIONSUTI & LIC

Primary objective of the UTI is to encourage and mobilise savings of the community and channelise them into productive corporate investments so as to promote the growth and diversification of the countrys economy. It allows small investors to share in the industrial prosperity of the country. The small savers by buying units make indirect investments in industries and thereby contribute to the industrial development of the country

THE END.