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CHP. 1 - Indian Financial System

This document provides an overview of the development of India's financial system post-1950. It discusses the key components of the system including currency and money supply, banking, small savings, insurance funds, stock markets, public deposits, government securities, and interest rates. It then describes the major institutions, intermediaries, financial instruments, markets, and services that comprise India's financial system and how they have grown significantly in size, diversity, and sophistication since 1950. Finally, it outlines some recent policy developments aimed at liberalizing and increasing competition in the financial system.

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Nandini Jagan
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140 views

CHP. 1 - Indian Financial System

This document provides an overview of the development of India's financial system post-1950. It discusses the key components of the system including currency and money supply, banking, small savings, insurance funds, stock markets, public deposits, government securities, and interest rates. It then describes the major institutions, intermediaries, financial instruments, markets, and services that comprise India's financial system and how they have grown significantly in size, diversity, and sophistication since 1950. Finally, it outlines some recent policy developments aimed at liberalizing and increasing competition in the financial system.

Uploaded by

Nandini Jagan
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 1:

Period

Indian Financial System in the Post 1950

INTRODUCTION:1) Banking sector is one major factor for promoting


financial market in India.
2) System operates through markets & institutions
3) Gap between receipt & expenditure, can be bridge by
borrowing through the network of financial system.
4) Currency & exchange from an essential part.
5) Business can operate only with economic development.
INDIAN FINANCIAL SYSTEM:a) CURRENCY AND MONEY SUPPLY:-Planning-50 yrs
-silver then gold
-England abandoned gold standard & sterling exchange
standard was established.
- Currency notes issued by banks & use limited.
-1861, government acquired monopoly of issuing notes.
- Major increased in the Second World War.
-supply increased from 57% in 1935 to 67% in 1952.
b) BANKING SECTOR:After 1910 - Indigenous bankers played a dominant role.
'Hundis'
- Modern bank in 19th century 3 presidency banks, bank
of Bengal 1806, bank of Bombay 1840, bank of madras

1846 - In 1900- 9 joint stock banks increase 8 exchange


banks & 3 presidency banks.
- Presidency banks 1921- Amalgamated and imperial bank
of India.
- RBI established in 1935.
- all functions transferred to SBI.
- 1950 - banking company comprised RBI, SBI, COOPERATIVE BANKS, EXCHANGE BANKS & INDIAN
JOINT
c) SMALL SAVINGS:- Old form
- Huge population & low income- Post offices.
d) INSURACE FUNDS:- Indian life insurance companies act 1912.
- Provident societies post and telegram
- Apart from mobilization, also supply of funds to capital
market.
e) STOCK MARKET:- Public sector raised huge amount through stock market.
- First stock exchange 1887 BSE.
- World war, industrialization increases the market.
- Equity, then not popular.
f) PUBLIC DEPOSITS:- 1 to 7 yrs

-11% to 39% of total finance and Ahmadabad mills in


1930.
- Interest rates decreased than common banks.
g) GOVT. SECURITIES AND TREASURY BILLS:- GILT GDGED
-participants, banks, state banks and private trusts.
-treasury bills 1st issued in Oct 1917
-RBI was the main supporter.
h) INTEREST RATES:-different for different banks and periods.
-IBI did not pay but exchange banks and Indian stock
banks payed on current accounts
-organized sector increased interest rates.
COMPONENTS OF INDIAN FINANCIAL SYSTEM:1) FINANCIAL INSTITUTIONS:Agencies which provide credit n the financial system are
financial institutions.
-makes available uninterrupted supply of capital
-possess professional knowledge and enterprise
-contribute to individual development. IFCI, IDBI, SFC.
2) FINANCIAL MARKETS:- Facilitates the exchange of financial instruments.
- Special locations like stock exchange
- Place where wanting money and surplus funds are meeting

each other.
- To allow lenders to earn interests
- To allow for productive use of funds borrowed
- provide mechanism for selling financial assets
3) FINANCIAL INSTRUMENTS:Claims to the payment of sum of money in future.
E.g.:-bonds, fixed deposits, etc, shares
- Regular payment of dividends to investors
- Helps in borrowing and lending money.
4) FINANCIAL SERVIES:- Any industry of service of financial nature offered by
service provider.
- All the banking and insurance related services
-wide range of economic activities
-e.g.: share transfer, pledging of shares, mutual funds,
discounting, credit cards.
-in India financial services was started in 1980s
A recent estimate contained in Rakesh Mohan committee
report states India needs 7,50,000 crores to assemble a
medium infrastructure
-First leasing company in India was in 1973.
GROWTH OF INDIAN FINANCIAL MARKET:-enormously grown since 1950 size, diversity, innovation,
complexity and sophistication.
-money supply, savings, bank deposits, credit, primary,
etc.

Bank deposits increased 909 in 1951 to 12,80,853 crores


in 2003.
Acompanied by diversification and innovation.
COMPOSITION IN POST 1950 PERIOD:1) INSTITUTIONS: - IFCI, ICICI, IDBI, EXIM,
SIDBI, NABARD, IRBD
2) INTERMEDIARIES:a) Banking intermediaries- RBI, Commercial Banks, COOPERATIVE BANKS, POST OFFICE, FOREIGN BANKS.
b) Non-banking intermediaries- GC, LIC, UTI, FINANCE
COMPANIES, PROVIDENT AND PENSION FUNDS, HDFC,
MUTUAL FUNDS.
C) Regulatory bodies-SEBI, RBI, BOARD OF IFC, ECGCI,
SHCIL, DFHI, Merchant Bankers.
d) instrumentsInstruments used in financial system
-equity shares & preference
-debentures & bonds
-NSC
-postal vikas patra
-fixed deposits certificates
e) Financial marketsSince independence developed
-call money market
-commercial bill market
-stock market, individual securities market
-govt. securities market

-foreign exchange market


-OTCET
f) servicesIndian financial system provides following services
-underwriting
-funds transfer
-credit cards
-ATM
-loan syndicating
-merchant banking
-broking
-portfolio management
FACTORS RESPONSIBLE FOR THE DEVELOPMENT OF
CAPITAL MARKET IN INDIA:1) Rapid industrialization
2) Use of new technology
3) Regulatory frame work-favorable govt. policies
4) Tax incentives
5) Corporate performance
6) Dominance of private sector
7) Development of financial institution
RECENT POLICY DEVELOPMENTS:1) Removal of ceiling on interest rates-base lending rate decreased to 16%.
-later removed
2) Liberal housing finance-

Period of repayment 20 yrs


7 to 9%
3) Competition in banking system-RBI freedom to borrowers to transfer A/cs & funds
4) Participation certificate:Vaghuls committee
-to even out liquidity in banking system
5) Interest on deposits-decreased to 5% to 4.5%p.a in 1994-95
6) invest on shares debentures:7) Narasimhan committee report- Nov 1991 is a blue
print report giving dimension for banking and financial
system liberalisation.

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