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Contents
ABOUT THE AUTHORS
ACKNOWLEDGEMENTS
SYLLABUS
CHAPTER 1
AN INTRODUCTION TO FINANCIAL SYSTEM
CHAPTER 2
MONEY MARKETS
CHAPTER 3.
CAPITAL MARKETS INSTRUMENTS
CHAPTER 4
INDIAN DEBT MARKETS
CHAPTER 5
PRIMARY MARKETS
CHAPTER 6
SECONDARY MARKETS.
CHAPTER 7
SEBI AND INVESTOR PROTECTION
CHAPTER 8
FINANCIAL INSTITUTIONS
CHAPTER 9
COMMERCIAL BANKING
PAGE
15
17
19
27
47
57
71
83
108
119 Liz CONTENTS,
[| CHAPTER 10
LIFE AND NON-LIFE INSURANCE COMPANIES IN INDIA
“IL CHAPTER 11
MUTUAL FUNDS
CHAPTER 12
NON-BANKING FINANCE COMPANIES
— CHAPTER 13
OVERVIEW OF FINANCIAL SERVICES INDUSTRY
E CHAPTER 14
MERCHANT BANKING Cents aly \
T CHAPTER 15
LEASING AND HIRE PURCHASE ~~ Ss hos rh ty
I CHAPTER 16 - cud Huds
VENTURE CAPITAL AND FACTORING SERVICES Shan
I CHAPTER 17
CREDITRATING — Financial Markets Meaning and Functions
> Financial System & Economic Development PLE
> Financial Intermediation ___ AY
> Interdependence of Financial Markets in Economic Development. <2
> Role Played by Financial Markets in Allocation of Funds PLL,
> An overview of Indian Financial System—42X,2%"
|» Recent Reforms in the Financial Sector, —-A@a<”
Introduction
Theresources required for developing any economy are generated through
the process of savings. These savings remain unutilized or underutilized
if the financial system of the economy is under developed. The size of the
savings and its appropriate utilization for investment in industries can help
economic growth. However, this channelizing of savings [rom savers to
the industry requires the presence of vibrant, active and reliable financial
markets system that aids in mobilization and appropriate channelization.
The efficiency of the financial markets, decides the speed of the economic
growth of a country.
A financial system is a system through which the exchange of funds is
enabled through various institutions like banks, insurance companies, and
stock exchanges, It helps to channelize the surplus funds from lenders and
Touted to the borrowers. There are three major functions of the Financial
system: saving function, policy function, and credit function. Figure | shows
the flow of funds through the financial system. There are two routes of
the flow of funds between the lenders-savers and the borrowers- -spenders:
1
TAXMANN® =
a as
Direct finance and Indirect finance tn Indireet Finance
mediary play,
{emtothe bore iy borrow Tus by sling heey
Financial markets. ling the securities In the
“Source Mishkin, FS (207). The ecornies of money, Banking and finan
rues Pearson education. oe
‘Fnaneal markets are markets through which funds required by thewsers
Baal marta atu then excise fan ac
Fear ded whole the funds and those who require these funds,
Onnersot funds would save more when they haveincentiveto save. hich
sed hoon xerey of financial instruments available and thereturn on
{hima Sn a a ie
sors vent diferent instruments dependinguponshereturn andthe
sat a rT cence een oars ustren
Serna markets to meet the diferent requirements of savers as wl
‘Bithe users funds deciles the sizeof funds mebilzed
‘raxatany® ——_—_——
x
3
cnt masts aol pviting iy prs done Ug
nani nc el these raferted fom ReASST
stor
spe jredevelopment of thefinancial markets the saving thataregenerated
i cll orc untscae aac operon sventoe oa
Inline fan lena ee hd
Pha compl Parse rm ian surplus un co Grant deli
ar ly the umd appropene usage for develonment Of
meer of an economy thercare ih dependent an eg
evelon lilt financier. An ce Fbranrand developed
eee erated horns oe
Eocene cs
eras lat re St eae
ede gleurmtoinean cs at rant aot cove
Sammie aht ee opponent
ee Nema Ete
Hewett te anaciy oeea
nec lipre ichneroare ne eam
pie a go te nce
incognito
femreene yanl omarion
ic a ea cetera
preg ene or
Biel ict Fors genplan ca
aa ovathe mri polo
“Theinnovative nature of
focconvert their innovates
the markets,
—— asasn9¢§
ae E—-— ——__
meet
DrouncaL seve :
jes. They shell approac
FSC, OF Foy ye finamncta
atcialintermealiaries to meet He sm
se UP 1 1981 (Phase 1)
their an financtal system (IFS) before 1931 was largely closed circle charae-
to dustrial entrepreneurship: ahorees a semi-arganized and narrow
a scours mathet was dowfl Cane tense Trees
aioe of mtspatnty finan antemetacs forte
tea invest During ts erand ried ser
sd by the govcthmcns The gerath el the persed shone
Pie fnanclal stem from 1951, mig Eighties (Phase Hh
Indian Financlal System
Xe exy nets, the planed economic development In Inca ha st} pesatetokednten-asctotheinperstnelyaned econ
Tegiy intetaoed the course ol Roncial develeoaice eke eet Tee opment Planning sland the driburon ul cet an tance 1
EiSatancel sys hat emerged wa . Shththe rare
cot The fands therefore, funneled rowards
| Taetrdiw economy to moniire more funds lor spprupriate meee eee the reste ray fests hy he gverer ute yd
cial ystom of a county consists of finanelal inatutions the major characterstis of the fnane‘al sp
mse ere Financ stations int Ye) Publi oomnershp af tran encore
a Pajlic ownership Fnsncist Instinstions was trooght shows party
E INDIAN FINANCIAL S¥Stew Owough caliotalzation of existing ettuons (22: State Tack ok
_ ridin (1956), LIC (1956) Comnmores! bunks (W065) and UIC OTD,
— and partly throuxh the creation a thepuic sector news inalantions
. vc a
rae
gr
iuamels, spectalpampne termder dite,
(ORME? PR banks) acd UTL
MARKETS
(b) Fortification of the institutional structure
‘etepisoy + Omirind |e Pinay
witulons (evelopmncat
The fortification of the insti utional tracture of the odin Financiat
4 Moai System was partly the resule of mediation inthe sirvetine and
4: Melsemciny ¢ remsy Meet 4 Shut thm Meee regal | policies of the existing Financia! stitutions aad also wath the ad
sobs 1 Soxonlay et © Men Teom— kewng ition of new mstitutions. The banking policies snd practices wer
Sinem © Seranaee Structured t0 be in tare sith the planned padiicw ant practices,
aoe Banks wereencouragudtoreoricnt their operational plkiestowact
ae finuneingof ratustry,asazaimstcommerceandtrade They wereal
valuation of Indian Financial System can be divided i flloine f
encouraged to enter inlo new forme! tndustcial financiog. el
underwnting and termksning rather than lending For pure she
1 The financial systern upto 1951 Phase term ran
4 The finan system from 1981 ta mid-Fighties (Phase)
‘¢ The financial System from 1950 onwards (Phase 1)
‘Thehanks akoenlarped their funcrional coveragein ernst fins
1p small scale industries, exports and agtieuluure, To expand
‘coverage and il tue credit gaps of the priority sector, a scher
social control was introduced. This was followed up by national
oo rte
rex", =)
‘ sp nernopecTHOS TO FINANCIAL SYSTEM
pectthe tanks jest est desopnet of bees
Aa th a apis an bee,
fo) Prowaon af Fveters
ne cig akin omrthen nd ery
og wih ent ns nace een
inguinal oe orng te pid a Pride pees
reforms wee ai ore the confiencelnindustl wets,
Fe ee borate leila co apie y
Brera c oe aeyCapallenice ConIMD ACCOR)
Grrr rs Core Sl Act Sevan Cone
a a a Ey RTE Aven sofa by Compe
Fee sa ee Rcelauon ACTPSRA) now rene
Sea Ta panageent At GEN
a) benopbtoetPosscalnsttlon( FI) ln Coorete Managemen
Peet gruel [ioncial sysem space wes
ah rit By och nce was provi a atl
FE raion ot ot een inched
oma pt mento eed compas Ths changetn
a ibe pire lato: Gove
a a alacant ieepinelercat
ca ons ihe or pea te corganis hgh
fo ng tne funding exe comparsn
sy the rine Syste vom 1990 onwards (Phase
aon rulatonpral ie seneantchangesinconeion]
a as Ths euled man aeeeaon of ced
ce teorandeonacquaptderlincthessaroTare
eae ser necro ductorceteions and creat aon
pchcktnee! she tatoalstructare ofthe in Financial ten
Fareritn ofenhe aegatedstactre of devehopmcnt Pan
At Spal TCL cick SPC S1DCy, SCs a som They ws
aaa enacts the Sate abet ot rect cn 22
Fen ee teem ti planed pa
{encraly secoing the development af private industry along the desing
sii otac nat ellecive public conto ol private enterne, They Wee
a a oe aos sbjectives of State
{So the agency through which speific socio-economle object
pulley suchas cacouragemrent to newentreprenctreand sal
Ene tae development of backward regions to broad base the growl
industry, were being realized
seacgs§ $$
AS ISTHCOUCTION TO RAANCIAL SYSTEM t
she sting wf he UG 2rd of malgmainuf 288 He
Catania naatrtmreste are
ee a centage rae on
SAAR renee len
Sa ce eral oceogriss te
‘An ovorview of Indian financial system
Indian trancalsector has undergonesgrificnt changestadusiog the rast
ences withPrivatesetraultaiues poninarapid.inconercad
feespundassetimanogemest eines Thederaulston olefin
area innelatonofcompcrion aur tnancil mercies
Buveled os dscline terest aes
‘Thezcpulators ofthe arlussegrentsof the ackt ike TheSccurtesand
Peshekge Board ef Fnda and thc Inuraace Resnlsory and Development
Eeeten IRDA) PFKDA have become important ustiutons Ut The
franc vector of fell.
The Govererent of nda has started the processofcosoidton of pubic
Jectorbonkstosurviee edison public sector barks Due tothe visi
Sonera Assets and wessbslance shel estractarinul bankas
BSSastric. Recto 001 the uber e publ sects bankshesbeen
{eluced to toe froma enh seven air te merge of ensiteonted
tank othe fou major bans
orwithstarulng ihe onoaree cf the Publ sector bas (PS ate
Set bance aresrocaty gag stone fool inthe rani sectoral
ina The Govern lc jropusing 9 redoce seq taken P56
{3 percent Tis san wise lead te prvotiztion 8 PSBS
2s part ofthe becalsatin proces, the RBI has een ging eens 0
eb pret senor anise Rearing of peste wet Pani bas
red wath afew bake meryieg im aed to ers sronger eat Pak
‘Feat fesse tason over by ICT Rank ims Cermon Bak
Gt Push hae Pen ken over by HDFC barks Zc essing private sector
fink have tar beuce monasera eapabits and final strength com
Paredes public sectotarhsund exer are expected exparapiy 4 aw eopuCHOK TO HMANEENL SYSTEM
Development Finance Institutions (OF1)
Ds sich as IDI and ICICT sich ere fargely Known as devekapmeniy
banks entored ether segments of nancial services such as corm a
banking moet monagement ave iimorance through separate renee
‘Thismotetounrersal hanking hae really caught upwita masoneros
banks now tang upshot tem vs wells long term fnanclng,
Several measures have been inated and inelade ness money marke
instruments, strnihening of esiling instruments and selling op 6!
Discount and Finance House of India (OFT). cle
“Thc RBI conduct te sales of dated securities and treasiy bis through
item market operations (QMO) window Primaty desl hd or i,
Sccuntics and also trade so them, The DFHU isthe principal specs he
dleveloping a sccondary market for mone market tiers aed
Gonermment of Inds teanury bls: The RAL has iereuced 6 boule
‘ostment faci (LAI) an whch gut istnfluencedthecwgh repo
fever rope auctions
On accuunt of the subssnial Rave of government debs the glt-cdge
‘market occuples an important postion i the inancil setup
SEDI has nore decided to concentrate om the development of a longstern
debt market which is erucial to Uhetinaneing of infrastcucture: The dem
{eraistion of debt iestruments i arder to encourage papesiew eadiog,
hha heiped in streamlining the debt shes.
The number of shareholders in diay estimated in vilons, However
con avery small nuntcrof aneatimated two lah persons atively
instocks There has been s drsimatic improveinent the eoantey' stack
smarketradingnfrastracturedurng elas fs years Inde mare}
hhasnowbecome an aliractiveemerginginarkel with tremendous potential
Indian ftutual Funds Market
‘Notwithstanding the Fact that retail investor's participation In the markets
for direct investments hay reduced, their faith inthe mst Pnels has
improved remarkatly durin the past few years
Themutwal fundsinduyiryisnow regulated uncer the SEBI(Mutual Fun)
Regulations, 1996 and amnendments thervia. With the issuance of SE
uideline, the industry had a framework for the establishment of many
Imvore players both Indian snd loreig players,
‘The popularity ofthe mutual fundls in recent yours has been driven by the
growin thesecuritiesmarketsandtax advantages granted forinvestene
fre fond cag nN Nena aN advantoues
i rxtrnene
Te ero Mul and sz gta fe ilp wth sey
icone ite Sagan
Ranutrds and experinssiie wih nce gee eee me
thetbamimiranccinton aie er statonee ce aua camer
thn troa he ates hates spate Rees aes ae
ipo reaticted ta 49 percent ape =
Thema mprseierste the wre erannalcdtehne
tentekenuptradey hs secre ses gaara
Mice ef force pers ha eae eta es
Tet pected ane Rca
Rhcncter onhowlastecomaileecr i aang
isis boon gate enrars
Forsgn companies ras edt da muy ake inet
frame compas Sel AFC p19 ee fa a
aim ul pecen ines congue
Banking system
Anindcation of teenth othe refrmed Indian franca seman
teeter eves iduvosnacticedby desumbese une
Eitipame abe
lor changes In he baring em arent ye nie nto
tbe Rg mn me na ta
{hestipalaced cupitalacequsey nom, substaniialeapiltasbeen proved
bribe Govenenio fae =~
he Goncrat preempion of tals eure thou sary
Fae eee rao eho sob oh
erovoas
(Other proton spe ile
in ‘con deposit sd enaingsieslmest entirely deregulated,
ent ame orn comet
=
ssvourmocverion ro rQaKcta SYSTEM a
structure of Capit! Market of ingia
andaof financial econ elena impeosementof he capitaemathet
fobvoctaniatealsuiableacton as ee aeni ine wh the overall
scien 980s the some aca inte ae capt mathe
Testes Lnted which cateniedapich sm she foe ang the tazket
sation of companies Fogercd Entee BSE eos ane Sper oent o
GABE tn 1980 to 13 pr ent in 9 Indian caital eer we ouch
refarmsin de dscadecf 199% und treater The Govetaancat of
and SEBL ok minuerous measure Tonprove tre working of the
progrewive and energsik: The
Srcurfies sid Fachunge Bodo! iia SEBD wav csaslshed i 988 Tt
SiMlegat sas 1992
omparics sho Wanted to acecwthe capital atket nected por pets
oof the government whl ales ad Wo approve the pice wt WH h oe
uty cold he robe While new isues sere src comet tere
{Ses tsaiciem regulon uf Sock market ati ahd atv of taekos
tratkt portipansincludmgstick exchanger beckery tat ange
‘The domestiotapial marcet wav aa loed toprtily venient Hors
atid except though few closed ended mtu uneflatedsbread by
the Unit Tat of Inds (UTD which were commuted tolndian inv extn
Capital market reforms started 1992 alr the lve recommended by
theNerarmhans Coramites ‘The efor peuvese ws intended to remove
Arex governmeitconirolandrepacing ton
fntansparency and dbelinurc rene bys inlepere regio,
“he fr siap Was taker in 1992 wica the Secsttes al Exchange Bod
of India (SEL, Which was epabhaned as a nonstautory hace in 1988,
seas raised toa complote ctl market regulator with sotety poets
in 199, The requires ef rie pmetniment peti lor secag
‘opital markets ad for prov apsoval lise Dich Was stp at
ompanies were permissive (a access markeis and pave iasoee licely,
Sulbjet only tod lontre rusts iid co by SEB
vera perio ftinns Sr apt lace mudernreeutory framework
‘ith res ani regulthins su cea she Showin of maior art sot
Ail such as stock ecfunges. cers amerchans banker, and eel
funds. tha ass wish vont activites suchas takeovers and tet
teading which hove implications for fovestor pretion, The soxeenng
structure ul sack exchanges hes bet changed make the based ofthe
exchanges more broad hese and les domitted by hvokers Theexchang.
4 ve Beer: contort tr the assrcition to demtaoed carport
The new cegulatry rancor intone toconttoldneth ox proven
Support tainvestr protection ky ensuring disclosure and amaene®
Gj
