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OVER VIEW OF BANKING Indian Financial Sys tem PRIYANKA SANGOLGI

Objectives :

Objectives Financial System-Nature, Evolution and Structure. Functions of Financial Intermediaries. Financial Instruments. Role of Financial System in Economic Development.Indian Financial System. Indian Financial System

Financial System :

Financial System The word System means an ordered, organized and comprehensive assemblage of facts, principles or components relating to a particular field and workingfor a specified purpose. A financial system is an Integral Part of a Modern Economy. Indian Financial System

The Financial System :The Financial System The word system in the term financial system represents a set of closely held financial institutions, financial services and financial instruments or Claims.The financial system of a country can be defined as a set of organizations, instruments, markets, services and methods of operations, procedures that are closely interrelatedwith each other. Indian Financial System

Nature and Evolution of the Financial System :

Nature and Evolution of the Financial System The basic requirements for any financial system to be efficient are; Efficient Monetary System- indicates an efficiency medium ofexchange for goods and services. Facilities for the creation of the capital- to meet the demands of the economy. The capital will be necessary to undertake the productionactivities. The financial system helps to meet such demands by mobilizing the savings of the surplus units to the demanding units. Efficient financial markets- andmethodologies, which facilitate the process of transfer of resources and the conversion of financial claims into money. Indian Financial System

Nature and Evolution of the Financial System :

Nature and Evolution of the Financial System Complexities in the functions of the financial system, especially when the requirements of the savers and those of the borrowersdid not match, created a need to enhance the financial system. The growth of an economy indicates the growth of the Financial System The evolution or the growth of thefinancial system in any economy can be cl assified into three major phase, namely; Ac tive government intervention- soon after independence Partial liberalization Totalliberalization-1990s Indian Financial System

Segments of the Financial System :

Segments of the Financial System The Financial System is Segmented into two Parts namely, the Organized and the Un Organized. The Organized system represents theStructure or nationalized banking, Co-operative banks and development banks set by the government through various enactments and regulations. This includes the privatesector also. The Government/RBI controls this sector. The Unorganized sec tor comprises of individual money lenders, bankers, pawn brokers and traders, etc. Indian FinancialSystem

Structure of the Financial System :

Structure of the Financial System Indian Financial System

Functions of Financial Intermediaries :Functions of Financial Intermediaries Offering professional and individually tailored support and advising their clients on a variety like taxation, money matters etc., with the helpof specialists. Extending global expertise to their clients in various countries. Having access to sophisticated technologies and resources to undertake their functions andoffering a range of comprehensive and integrated products and services. Pro-active support and assistance at all stages of their clients financial requirements. Having an activepresence on all the worlds key financial markets. Providing security, discretion and high service quality. Indian Financial System

Types of Financial Intermediaries :

Types of Financial Intermediaries Financial Intermediaries are Classified into two types namely, Depository and Non-Depository Institutions. Depository Institutions DepositoryInstitutions include Commercial banks, Savings & loans institutions and credit unions. Depository institutions directly lend these funds to consumers and businesses for a fullrange of purposes. They also lend them indirectly by investing in securities. Indian Financial System

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Depository Financial Institutions that is legally allowed to accept monetary deposits from consumers such as a savings bank. A deposit account is a current account, savingsaccount, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder.

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Non-depository Institutions Non-depository institutions include Finance Companies, Mutual Funds, Security firms Investment bankers, Brokers and Dealers, Pension funds andInsurance companies. Finance companies cater to the wide and varied segments of society. They cater in mul tiple ways to both the business as well as to the consumercommunities. In a way they are called as department stores of consumer and business credit. Finance companies handle a range of business, which include, automobilefinance, purchase of business equipment, home appliances, etc.

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Mutual funds can be described as single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors. The investment company(AMC) is responsible for the management of the fund, and it sells shares in the fund to individual investors. When an individual invests in a mutual fund, he or she becomes apart owner of a large investment portfolio, along with other shareholders of the fund. The fund managers job is to regularly look into the performance of the investments madeand bring about changes and invest new funds collected from investors.

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Insurance companies play an important role in the financial markets as non-depository institutions. Insurance companies basically make payment for a price (premium) if certainevents occurs to the policy holders or their dependents. There are two types of insurance companies-life insurance companies and property and casualty insurance or generalinsurance companies. Investment bankers are fi nancial institutions and individuals who assist companies in raising capital, often through a private placement or public offeringof company stock. Sometimes they are referred to as brokers or dealmakers. They market large amounts of new securities on behalf of governments, governments agenciesand companies.

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Security brokers or dealers are intermediaries who help companies and investors find one another. Many entrepreneurs hire brokers to help them raise money in the hope, thatby doing so, they will reduce the amount of time they will have to spend in fund raising. In some cases, brokers can provide companies with valuable introductions that lead tofinancing. Leasing represents a specialized financial institution that provides the access to productive assets such as airplanes, automobiles, machinery, etc. The leased assetsallow the businesses to use them at a lower cost than borrowing or owing them. Both the parties involved in the lease agreement will benefit through the arrangement.

Slide 16:Mortgage bankers commit themselves to take on new mortgage loans used to fund the construction of homes, offices, buildings and other structures. They carry these loans fora short time until the mortgages can be sold to a long-term lender such as an insurance company or savings bank. Pension funds that are dedicated to protect the individualsand families against loss of income in the retirement years by allowing them to set aside and invest a portion of their current income are called as pension funds. They are long-term investments with limited need for liquidity.

Financial Instruments :

Financial Instruments Financial assets/instruments represent the financial obligations that arise when the borrower raises funds in the financial market. The Types of financialAssets used world wide are in the form of deposits, stocks and Debt. Deposits: can be made either with banking or non-banking firm. In return, the lender will receive acertificate in case of a fixed deposit and a checking account in case of a saving/current deposit. These serve as a payment mechanism for the supplier of funds. Interest will beearned on such deposits except current deposits. Indian Financial System

Slide 18:Stock they represent ownership of the issuing company. Due to this right to ownership, the holder of the stocks will have a share in the firms profits. Unlike the stocks, fi nancialassets in the form of debt create an obligation on the borrower to repay the amount borrowed. The debt instrument will be a contract entered into by the borrowed after a

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predetermined period and at a certain rate of interest. If an asset serves as collateral to the borrowing, then the holder of the debt instrument will have a priority claim on theasset.

Issuers Considerations :

Issuers Considerations Indian Financial System ISSUERS CONSIDERATIONS Past performance Cost of funds Regulatory aspects

Investors Considerations :

Investors Considerations Indian Financial System TAX PLANNING CASH FLOWS INVESTORS CONSIDERATIONS RETURN

Issuers Considerations :Issuers Considerations Cash Flows: Issuers may consider the period for which the funds are required and try to spread the borrowings in a way to minimize the costs.

Generally, the need for funds will depend on the purpose for which the funds are raised. Taxation: Issuers may have to assess the tax liability of the company and try to designthe instrument in order to grant certain tax incentives to the company and the investors. The attempt would be to minimize the tax liability of the issuer. Leverage: Issuers mayassess the debt to equity ratio of the company since excess of debt may burden the company with debt servicing. Further, in a falling interest rate scenario a debt contracted fora long-term will increase the cost of funds for the company.

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Maturity Plan: Depending upon the future requirement of funds and their availability to repay the lenders, the repayment schedule of the instrument has to be designed. Marketconditions: One of the important considerations for the issuer will be the environment, both economic and political. Notwithstanding the credibility of an issuer, it is important thatthe market is conducive to facilitate raising of funds. Investor Profile: Instrument design should necessarily suit the target investors for the issuer. Past Performance: Theperformance of the previous issues of the same company or performance of the previous issues of companies in the same industry will have to be considered before designingthe instrument. Cost of funds: Raising funds is a costly affair, so based in the above factors the company should ensure to choose an option which minimizes its cost of funds.Regulatory Aspects: Finally, the instrument needs to be created after considering all the possible factors in the light of the regulatory aspects.

Investors Consideration: :

Investors Consideration: Risk: The primary consideration for the investor will be the safety of the funds lent. Every investment option will have an element of risk. Liquidity: TheInvestor will also give due consideration to the liquidity of the ins trument, which depends mainly on the secondary market. Returns: The investor generally expects to earn areturn that compensates for the risk exposure taken by investing in the security.

Slide 24:Tax Planning: Investors can invest in those securities that offer tax incentives, as the post-tax returns are significant to them. Cash flows: The investment decision of the investorwill also depend on the period for which the surplus funds are available for investment. Simplicity: The salient features of the instrument should be easily understood by theinvestor in order to take the investment decision.

Role of Financial System in Economic Development :

Role of Financial System in Economic Development The financial system of a country is of immense use in its economic development. The volume and growth of the capital inthe country very much depends upon the efficiency and intensity of the operations and activities in the financial markets. An immature financial system hinders the growth of theeconomy. Indian Financial System

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Financial intermediaries enhance the investment in the economy through direct and indirect investments. The process of transferring the monetary resources of the public intothe financial resources by the financial intermediaries involves Maturity intermediation, Risk reducti on through diversification, Reducing costs of transaction & information andProviding a payments mechanism. Indian Financial System

The Indian Financial System :

The Indian Financial System The Indian Financial System before independence closely resembled the model given by RL Benne in his theory of financial organization in atraditional economy. According to him in a traditional economy the per capita output is low and constant. Some principal features of the Indian Financial system beforeindependence were: closed-circle character of industrial entrepreneurship; a narrow industrial securities market, absence of issuing institutions and no intermediaries in thelong-term financing of the industry. Outside savings could not be invested in industry. That is, the savings of the financial system could not be channeled to investmentopportunities in industrial sector. Indian Financial System to supply finance and credit was greatly strengthened in the post-1950. Significant diversification and innovations inthe structure of the financial institutions, have accompanied the growth of Indian Financial System Indian Financial System

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In the past 50 years the Indian financial system has shown tremendous growth in terms of quantity, diversity, sophistication, innovations and complexity of operation. Indicatorslike money supply, deposits and credit of banks, primary and secondary issues, and so on, have increased rapidly. India has witnessed all types of financial innovations likediversification, disintermediation, securitization, liberalization, and globalization etc. As a result, today the financial institutions and a large number of new financial instrumentslead a fairly diversified portfolio of financial claims. Indian Financial System at present

Summary :

Summary The word system in the term financial system represents a set of closely held financial institutions, financial services and financial instruments or claims. Thesevaried requirements of the lenders and the borrowers led to a mismatch in periods. These factors created a need to develop the financial system in such a way that it matchedthe requirements of the borrowers and lenders. The financial system can be segmented into two parts namely, the organized and the unorganized sector. Financial assets /instruments represents the financial obligation that arises when the borrower raises funds in the financial market. Indian Financial System

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The financial system of a country is of immense use in its economic development, adequate capital formation is indispensable to economic development and financial marketsare of crucial importance for capital formation. An immature financial system hinders the growth of the economy. Indian Financial System

Summary :

Summary Financial System-Nature, Evolution and Structure. Functions of Financial Intermediaries. Financial Instruments. Role of Financial System in Economic Development.Indian Financial System. Indian Financial System

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Thank you Indian Financial System