FINANCIAL INSTITUTIONS,

MARKETS AND SERVICES

INTRODUCTION
Financial market as a place where people
and organizations wanting to borrow money
are brought together with those having
surplus funds.
Financial market does not refer to a physical
location.
Transferring of funds from the surplus sector
to the deficit sector is the main function of the
financial market.
2

 The credit requirements of the corporate

sector are greater than their savings.
The savings of the household sector are
channelized into the corporate and public
sectors for productive purposes.
The market participants in financial markets
are investors or buyers of securities,
borrowers or sellers of securities,
intermediaries and regulatory bodies.
3

COMPONENTS OF FINANCIAL MARKETS

FINANCIAL
MARKETS

MONEY
MARKET

CAPITAL
MARKET

FOREX
MARKET
4

CALL
MONEY

CB
MARKET

TREASURY
BILL

MONEY
MARKET
CP
MARKET

TERM
MONEY

CD
MARKET
5

Call Money
Call money is a short term finance repayable on demand,
with maturity period of one day to fifteen days, used for inter
bank transactions. Commercial banks have to maintain a
minimum cash balance known as cash reserve ratio. The
Reserve Bank of India changes the cash reserve ratio from
time to time which in turn affects the amount of funds
available to be given as loans by commercial banks. Call
money is a method by which banks borrow from each other to
be able to maintain the cash reserve ratio. The interest rate
paid on call money is known as call rate. It is a highly volatile
rate that varies from day-to-day and sometimes even from
hour-to-hour.
6

TREASURY BILL
T-bills are short-term securities that mature in one
year or less from their issue date. They are issued
with three-month, six-month and one-year maturities.
T-bills are purchased for a price that is less than
their par (face) value; when they mature, the
government pays the holder the full par value.
Effectively, your interest is the difference between
the purchase price of the security and what you get at
maturity. For example, if you bought a 90-day T-bill
at Rs.9,800 and held it until maturity, you would earn
Rs.200 on your investment.
7

Term money
Term money refers to borrowing/lending of funds for a period
exceeding 14 days. The interest rates on such funds depends on
the surplus funds available with lenders and the demand for the
same which remains volatile.
This market is governed by the Reserve Bank of India which
issues guidelines for the various participants in the call/notice
money market. The entities permitted to participate both as
lender and borrower in the call/notice money market are
Scheduled Commercial Banks (excluding RRBs), Co-operative
Banks other than Land Development Banks and Primary
Dealers.
8

CD MARKET
Certificate of deposit is a negotiable money market instrument
issued in de-materialised form or as a Usance Promissory
Note by scheduled commercial banks excluding Regional
Rural Banks (RRBs) and local Area Banks (LABs); and select
all-India Financial Institutions that have been permitted by
RBI to raise short-term resources.
CDs are discounted instruments and are issued at a discounted
price and redeemed at par value. The tenor of issue can range
from 7 days to 1 year, however most CDs are issued by banks
for 3, 6 and 12 months.
9

Commercial Paper (CP) Market

With a view to enable highly rated corporate borrowers to
diversify their sources of short-term borrowing and also
provide an additional instrument to investors, RBI introduced
Commercial Papers as a money market instrument in the
Indian financial market in 1990.
A Commercial Paper (CP) is an unsecured money market
instrument issued in the form of a promissory note.

Corporates and primary dealers (PDs), and the all-India

financial institutions (FIs) that have been permitted to raise
short-term resources by Reserve Bank of India are eligible to
issue CP.
10

Commercial Bill (CB) Market

It is a market for Bills of Exchange arising out of genuine
trade transactions. In the case of credit sales, the seller
may draw a bill of exchange on the buyer. The buyer
accepts such a bill, promising to pay at a later date the
amount specified in the bill. The seller need not wait until
the due date of the bill. Instead, he can get immediate
payment by discounting the bill.
In India the bill market is under-developed. The RBI has
taken many steps to develop a sound bill market. The
Discount and Finance House of India was set up in 1988
to promote secondary market in bills. The commercial
banks play a significant role in this market.
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CAPITAL MARKET
The capital market is a market for financial
assets which have a long or indefinite
maturity. Generally, it deals with long term
securities which have a maturity period of
above one year.

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Capital
market

Industrial
securities
market

Govt.
Securities
market

Long-term
loans
market

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Industrial securities market

It is a market where industrial concerns raise
their capital or debt by issuing appropriate
instruments.

Industrial securities
Equity
shares

Preference Debentures
shares
or Bonds
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 Further the industrial securities market

subdivided into two. They are

Primary
market (or)
New issue
market

Secondary
market (or)
Stock
Exchange

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Primary Market
It is a market for new issues or new
financial claims. Hence, it is also called
New Issue Market. It deals with those
securities which are issued to the public
for the first time. Primary market facilitates
capital formation. There are three ways by
which a company may raise capital in a
primary market. They are:
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Public issue

Rights issue
Private
placement
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 The most common method of raising capital

by new companies is through sale of
securities to the public. It is called public
issue.
When an existing company wants to raise
additional capital, securities are first offered
to the existing shareholders on priority
basis. It is called Rights Issue.
Private placement is a way of selling
securities privately to a small group of
investors.
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19

Secondary Market
It is a market for secondary sale of securities. Securities
which have already passed through the new issue
market are traded in this market. Generally, such
securities are quoted in the stock exchanges.

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Government Securities Market

It is also called Gilt-Edged securities market. In
this govt. securities are traded. In India there are
many kinds of govt. securities Short-term and
long-term.
Long-term securities are traded in this market
while short term securities are traded in the
money market.
Securities issued by Central Govt., State Govt.,
Semi-Govt. authorities like City Corporations etc.
State Electricity Boards, All India and state level
financial institutions are dealt in this market.
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Long term loans Market

Development banks and commercial
banks play a significant role in this market
by supplying long-term loans to corporate
customers. Long term loans market may
further classified as floows:

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Long-Term Loans Market

Financial
Term loans Mortgages
guarantees
market
market
market

23

Term-Loans Market
In India, many industrial financing
institutions have been created by the
Government both national and regional
levels to supply long-term and medium
term loans to corporate customers directly
as well as indirectly. These development
banks dominate the industrial finance in
India.
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Examples:Industrial Reconstruction Bank of India.

Industrial Finance Corporation of India
And other state financial corporations
comer under this category. These
institutions meet the growing long-term
financial requirements of industries by
supplying long-term loans. They also help
in identifying investment opportunities,
encourage new entrepreneurs and support
modernisation efforts.
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Mortgages markets
The market refers to those centers which supply
mortgage loan mainly to individual customers. It is
a loan against the security of immovable property
like real estate.

TYPES OF MORTGAGE
EQUITABLE
LEGAL
MORTGAGE MORTGAGE
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 Equitable Mortgage: it is created by a

mere deposit of title deeds to properties as
security.
Legal mortgage: in the case of legal
mortgage the title in the property is legally
transferred to the lender by the borrower.
Legal mortgage is less risky.
The mortgage market may have primary market
as well as secondary market. The primary
market consists of original extension of credit
and secondary market has sales and re-sales of
existing mortgages at prevailing prices.
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 In India, residential mortgages are the most

common ones. The housing and urban
development corporation (HUDCO) and
LIC play a dominant role in financing
residential projects. Besides, the land
development banks provide cheap
mortgage loans for the development of
lands, purchase of equipment etc.
These development banks raise finance
through the sale of debentures which are
treated as trustee securities.
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Financial Guarantees Market

A guarantee market is a centre where
finance is provided against the guarantee
of a reputed person in the financial circle.
Guarantee is a contract to discharge the
liability of a third party in case of his
default. Guarantee acts as a security from
the creditors point of view.

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Different
types of
guarantees

Performance
guarantee

Financial
guarantee
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 Performance guarantees cover the payment of

earnest (serious) money, retention (custody)
money, advance payments, non-completion of
contracts etc.
Financial guarantees cover only financial
contracts.
In India, the market for financial guarantees is
well organised. The financial guarantees in India
relate to:
Deferred payments for imports and exports
Medium and long-term loans raised abroad
Loans advanced by banks and other financial institutions
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 These guarantees are provided mainly by

commercial banks, development banks
Governments, both central and state and
other specialised guarantee institutions like
ECGC, DICGC.
This guarantee financial services is
available to both individual and corporate
customers.
Export Credit Guarantee Corporation of
India Limited
Deposit Insurance and Credit Guarantee
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Corporation

FINANCIAL SERVICES
Services that are financial in nature are
known as financial services.
They are a part of the financial system
consisting of financial institutions, financial
markets, financial instruments and services
that facilitate the transfer of funds.
All four are interrelated. Financial institutions
operate in the financial markets and provide
financial services.(FS)
EX:- CAN YOU TELL ONE FS?
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 Ex:1. Merchant bankers provide services for

issuing financial products such as equity
shares, bonds and debentures.
2. While stock brokers provide services to the
investors in the buying and selling of
securities in stock exchanges.

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Special features of Financial Services

Financial services are intangible in nature.
Financial services are inseparable from the
provider. Ex:- Credit rating services, not being a
material product, cannot be separated from the
credit rating agency of the provider.
Financial services are customer- centric. Services
are provided, depending on the needs of the
customer.
Ex- Leasing Finance service may be needed by an
industrial consumer, while merchant bankers
services may be needed by a company issuing new
equity shares in the market.
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 Financial services are dynamic in nature.

With the changes in the economic and
social environment, innovative services
have to be provided.

The credibility of the providers is very

important in financial services. Clients
confidence and trust depends on the quality
and worth of the service provider.
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TYPES OF FINANCAIL SERVICES

LEASING

VENTURE
CAPITAL

FACTORING

CREDIT
RATING

BILLS
DISCOUNTING

CREDIT
CARDS

MERCHANT
BANKING

MUTUAL
FUNDS
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 A financial lease is a
means of financing
capital equipments.

It gives momentum to
the investment activity
and facilitates the flow
of savings into real
investment.
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 A finance lease or capital lease is a type

of lease. It is a commercial arrangement
where: the lessee (customer or borrower) will
select an asset (equipment, vehicle, software);
the lessor (finance company) will purchase
that asset;

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 It is a financial service designed to

manage the receivables, improve the
sellers cash flow and cover risk.

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41

BILLS DISCOUNTING & VENTURE CAPITAL

This is a practice of lending against the

commercial bills of a trader.
The venture capital deals with a form of
equity financing designed especially for
funding high risk and return projects..

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CREDIT RATING
It indicates an opinion on the future ability
of the issuer to make timely payments of
principal and interest of fixed income
security.
Ex- Moody's Investors Service has downgraded the
State Bank of India's (SBI) bank financial strength rating
(BFSR), or stand-alone rating, to D+ from C-. (4/10/11)
Moody's Corporation (NYSE: MCO) is the parent
company of Moody's Investors Service, which provides
credit ratings and research covering debt instruments
and securities. Visit: http://www.moodys.com/ratingsprocess/Ratings-Definitions.
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MUTUAL FUNDS
Mutual funds are financial intermediaries
that collect the savings of small investors
and invest them in a diversified portfolio of
securities to minimize risk and maximize
returns for their participants.
Ex:- www.amfiindia.com, visit for more
details.

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CREDIT CARDS
It entitles the holder to a revolving line of
credit which is determined by the users
income.
A credit card allows the cardholder to pay
for purchases made over a period.

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MERCHANT BANKING
Offering of specialized services like issue
management, credit syndication, capital
restructuring, etc., by financial institutions
is known as merchant banking.

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 Merchant Banking is a combination of banking and

consultancy services. It provides consultancy, to its
clients, for financial, marketing, managerial and legal
matters. Consultancy means to provide advice, guidance
and service for a fee. Merchant banking helps a
businessman to start a business. It helps to raise
(collect) finance. It helps to expand and modernise the
business. It helps in restructuring of a business. It helps
to revive sick business units. It also helps companies to
register, buy and sell shares at the stock exchange.
In short, merchant banking provides a wide range of services for
starting until running a business. It acts as Financial Engineer for a
business.
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Classification of Financial Institutions

According to one classification, financial
institutions are divided into the banking and
non-banking ones.
FINANCIAL
INSTITUTIONS

BANKING

NON-BANKING
53

 Financial institutions are business organisations

that act as mobilisers and depositories of savings,
and as suppliers of credit or finance.
They also provide various financial services to the
community.
We need to classify the financial institutions and
this is done on such basis as their primary activity
or the degree of their specialisation with relation to
savers or borrowers with whom they customarily
deal or the manner of their creation.
54

 The banking institutions have quite a few

things in common with the non-banking ones.
The banking system in India comprises the
commercial banks and co-operative banks.

The Example of non-banking financial

institutions are Life Insurance Corporation
(LIC) and Unit Trust of India (UTI).

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FINANCIAL
INSTITUTIONS

INTERMEDIARIES

NONINTERMEDIARIES
56

 The financial institutions are also classified

as intermediaries and non-intermediaries.
As the term indicates, intermediaries
intermediate between savers and investors.
They lend money as well as mobilise
savings, their liabilities are towards the
ultimate savers, while their assets are from
the investors or borrowers.
Non-intermediary institutions do the loan
business but their resources are not directly
obtained from the savers.
57

 All banking institutions are intermediaries. Many

non-banking institutions also act as intermediaries
and when they do so they are known as nonbanking financial intermediaries (NBFI).
Ex:- UTI, LIC AND GIC are some of the NBFIs in
India.

58

 The non-intermediary institutions like

Industrial Finance Corporation of India (IFCI)
AND National Bank for Agriculture and Rural
Development (NABARD) have come into
existence because of governmental efforts to
provide assistance for specific purposes,
sectors and regions.
Which we can call as Non-Banking Statutory
Financial Organisations (NBSFO).
59

FINANCIAL MARKETS
Financial Markets are the centers or
arrangements that provide facilities for buying and
selling of financial claims and services.
The corporations, financial institutions, individuals
and governments trade in financial products in
these markets either directly or through brokers
and dealers on organised exchanges.
The participants on the demand and supply sides
of these markets are financial institutions, agents,
brokers, dealers, borrowers, lenders savers and
other who are inter-linked by the laws, contracts,
agreements and communication networks.
60

Classification of financial markets

FINANCIAL
MARKETS

Primary &
Secondary
markets
Money &
Capital
Markets
61

Primary & Secondary markets

The primary (direct) markets deals in the new

financial claims or new securities and,
therefore, they are also known as the new

issue markets.

The secondary markets deal in securities

already issued or existing or outstanding.
The primary markets mobilise savings and
they supply fresh or additional capital to
business units.
The secondary markets do not contribute
directly to the supply of additional capital .

62

 Stock markets have both

primary and secondary market
segments.

63

Money & Capital Markets

Very often the financial markets are
classified as money markets and capital
markets, although there is no essential
difference between the two because both
perform the same function of transferring
resources to the producers.

This conventional distinction is based on the

differences in the period of maturity of
financial assets issued in these markets.
64

 The money markets deal in the short-term

claims (with a period of maturity of one year
or less), the capital markets does so in the
long-term ( maturity period above one year)
claims.

65

Structure of financial system

Financial
system

Financial
institutions

Financial
markets

Financial
instruments

Financial
services

66

Financial institutions

Regulatory

intermediaries

banking

Nonintermediaries

others

Non-banking

67

Financial markets

Organised

Unorganised
Money Lenders,
Indigenous Bankers

Capital Markets

Primary Markets

Money Markets

Secondary Markets

68

Capital
markets

Industrial
securities
Market

Government
Securities
Market

Long Term
Loans Market

69

 Industrial Securities Market: It is a market

for industrial securities namely:
Equity / Ordinary Shares
Preference Shares
Debentures / Bonds
It is a market where industrial concerns raise
their capital or debt by issuing appropriate
instruments. It can be further subdivided into
two they are:
Primary / New issue Market
Secondary / Stock Exchange Market
70

 In the Primary Market, borrowers exchange

new financial securities for long term funds.
Thus, Primary Market facilitates capital
formation. There are 3 ways to raise capital
in Primary Market. They are:
Public Issue
Rights Issue
Private Placement

71

 Government Securities Market: it is also called

as Gilt-Edged securities market. In India there are
many kinds of Government Securities.
Securities issued by the Central Government,
State Governments, semi-government authorities
like City Corporations etc., State Electricity
Boards, All India and State level financial
institutions and public sector enterprises are dealt
in this market.
Government Securities are issued in
denominations of Rs.100. Interest is payable halfyearly and they carry tax exemptions also. The
major participants in this market is the
commercial bankers.
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 Long-Term Loans Market: Development banks

and commercial banks play a significant role in this
market by supplying long term loans to corporate
customers. These loans can be classified:
Term Loans Market: which is provided by IFCI, IDBI
and other state financial corporations.
Mortgages Market: Which supply mortgage loan
mainly to Individual customers.LIC and Housing
and Urban Development Corporation (HUDCO)
play a dominant role in this.
Financial Guarantees Market: Where finance is
provide against the guarantee of a reputed person
in the financial circle.
73

 In India, the market for financial guarantees is well

organised. The financial guarantees in India relate
to:
Deferred payments for imports and exports
Medium and long-term loans raised abroad.
Loans advanced by banks and other financial
institutions.
These guarantees are provided mainly by
commercial banks, development banks,
governments, both central and state and other
specialised guarantee institutions like ECGC
(Export Credit Guarantee Corporation) etc. this
facility is available to both individual and corporate
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customers.

Financial
Instruments

Primary

Short Term

Secondary

Medium Term

Long Term

75

 Financial Instruments: Refers to those documents

which represent financial claims on assets. Ex:Bills of Exchange, Promissory Note, Government
Bond, Deposit Receipt, etc.,
These may be classified on the basis of duration:
Short-Term: which mature within a period of one
year. Ex: Bills of Exchange.
Medium-Term: which have a maturity period
ranging from 1 to 5 years. Ex: Debentures maturity
having 5 years.
Long-Term: Securities which have a maturity
period of more than five years. Ex: Government
Bonds maturing after 10 years.
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77

EQUILIBRIUM IN FINANCIAL MARKETS

The equilibrium (balance) in financial markets is
usually determined by assuming that there would
be perfect competition, and by using the wellknown tool of supply and demand.
The financial markets are said to be perfect when:
A large number of savers and investors operate in the
markets.
The savers and investors are rational (balanced).
All operators in the market are well-informed and
information is freely available to all of them,
There are no transaction costs,
The financial assets are infinitely divisible,
The participants in markets have homogeneous (uniform)78
expectations and there are no taxes.

 Under these ideal conditions, the financial

markets attain the equilibrium position when
the supply and demand are equal to each
other i.e., the supply curve and demand
curve intersect (meet) with each other.
The question which naturally arises here is
the supply of and demand for what?
There is a great deal of controversy among
economists in this regard, and this has
resulted in different theories of equilibrium
price (interest rate) in financial markets.
79

 There are different theories are there, among them,

The Classical Theory holds that the supply of
savings and demand for investment determine the
equilibrium level of rate of interest.
The Loanable Funds Theory argues that it is the
supply of and demand for loanable funds which
determine the equilibrium rate of interest.

On the whole, the equality of total desired

borrowing with the total desired lending, is
necessary for establishing equilibrium rate of
interest

80

The following graphs shows the financial markets equilibrium

Supply of deposits/funds
12
11
Rate of interest

10

6
5
rate of interest &
supply of amount

10000

20000

30000

40000

Deposits in Crores
81

 EX:- On 25th October,2011 , the Reserve Bank of

India (RBI) deregulated interest rates on savings
deposit accounts in Indian commercial banks.
Rather than the RBI setting the interest rate for all
banks, individual banks can now vary rates
according to their own funding needs and market
liquidity conditions. This development is credit
positive as it recognizes the difference between the
RBI controlling policy rates, the rates at which it
lends to and borrows from banks, and private
interest rates, the rates at which the private sector
lends to and borrows from banks.
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Demand for loans

18

Rate of interest on loans

16

16

14

12

12

10
8

loan demand curve

6
4

0
10000

20000

30000

Demand for loans in crores

40000
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18
16
14
12
10

rate of interest &

supply of amount SS
curve
loan demand curve/DD
curve

r 8
6
4
2
0
10000

20000

30000

40000

84

 In the above figures the SS curve shows

the aggregate supply of funds and DD
curve shows the aggregate demand for
funds.
Their intersection point E, reflects the
equilibrium position at which Q amount of
funds will be supplied and demanded at the
equilibrium rate of interest, r.
It is to be noted that the supply curve slops
upward from left to right, which means that as the
rate of interest increases (decreases), more (less)
funds would be made available in the financial
system.
85

 On the other hand, the demand curve slops

downward from left to right, which means that as
the rate of interest increases, the demand for
finance would decline.
The shifts in either the supply curve or the demand
curve or both of them would result in changes in
the market equilibrium.
When the supply of funds increases, other things
(demand) being the same, the equilibrium rate of
interest declines from r to r1.
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Determinants of Supply and Demand for Funds

One of the major determinants of supply of funds is
the aggregate savings by the household sector,
business sector and the government sector, in a
given economy.
A variety of factors have a bearing on the volume of
savings in the economy. The level of current and
expected income, cyclical changes in income, age
wise variations in income, distribution of income in
the economy, wealth, inflation, desire to provide for
old age, family members, contingencies, rate of
interest, are the relevant factors in this respect.
87

 The demand for funds depend upon:

Investment in fixed and circulating(working)
capital.
Demand for consumer durables
Investment in housing.
The demand for consumer durables
depends upon:
Changes in tastes and preferences .
Fashion
Demonstration effect.
88

INDICATORS OF FINANCIAL DEVELOPMENT

What constitutes financial development is

generally discussed by pointing out the
differences in the financial structures of the
developed and developing countries.

Based on this approach, different

researchers have used one or more of the
following measures or indicators to denote
the extent, stage, degree of financial
development.
89

1.

FINANCE RATIO (FR):

It is the ratio of total issues of primary and secondary
claims to national income.

2.

FINANCIAL INTER-RELATION RATIO (FIR):

It is the ratio of financial assets to physical assets in the
economy.

NEW ISSUE RATIO (NIR):

it is the ratio of primary issues to the physical capital
formation which indicates how far investment has been
financed by direct issues to the savers by the investing
sectors.
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4. INTERMEDIATION RATIO (IR): it is the ratio of

secondary issues to primary issues, which
indicates the extent of development of financial
institutions as mobilizers of funds relative to real
sectors as direct mobilizers of funds.
It indicates institutionalisation of the financial
activity in the economy.
5. THE RATIO OF MONEY TO NATIONAL
INCOME: The higher this ratio the greater the
financial development because, it indicates the
size of exchange economy in the country.
91

6. The proportion of current account deficit (shortage) which is

financed by market related flows; the higher this ratio, the
greater the financial development.
7. Developed financial sector is fully integrated domestically as
well as internationally. The rate of return on domestic
investments would not differ significantly from returns on
comparable foreign investments.

8. The lower the transaction cost and information cost, the

higher the financial development.
9. In a developed financial system, private banking is
predominant (leading) not the public sector banking, there is
little government intervention in credit allocation, and
concentration of banking is absent.
92

STRUCTURE OF THE CURRENT ACCOUNT IN INDIAS BOP STATEMENT

A. CURRENT ACCOUNT
I.

Merchandise

CREDITS

DEBITS

NET

XXX

XXX

XXX

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

XXX

XXX

XXX

II. Invisibles (a+b+c)

(a) Services
1.
2.
3.
4.
5.

Travel
Transportation
Insurance
Govt. not elsewhere classified
Miscellaneous.

(b) Transfers
6. Official
7. private

( c ) Income
(i) Investment income
(ii) Compensation to Employees
TOTAL CURRENT ACCOUNT ( I + II )

93

 10. In a well-developed financial sector, there is a

strong and effective system of supervision,
inspection, auditing, and regulation, and regular
collection of prudential information and financial
organizations match to international standards with
regard to capital, non-performing loans, etc.

11. in a developed financial system, indirect rather

than direct technique of monetary policy are used in
a more frequent manner, and the interest rates are
freely determined by the markets.
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FINANCIAL SECTOR REFORMS AFTER 1991

The financial services sector and financial markets were

targets for financial sector reforms in the period after
1991.
Structural changes were introduced in the financial sector.
Factors that require reforms are given below.

1.

The balance of payment crisis of the 1990 threatened the

international credibility of the country. Non-debt capital
inflows were required to fund the current account deficit.

2.

Foreign equity capital through FDI and portfolio

investment was needed for accelerating industrial growth.

3.

There was a considerable growth in the size of the stock

market and stock investment culture. This required
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regulations to protect investors interests.

96

STOCK EXCHANGE DEVELOPMENT

97

98

Service sector
reforms
Financial
sector reforms
after 1991

Capital market
reforms
Banking
sector reforms
99

SERVICE SECTOR REFORMS

Some of the significant reforms that took place in

the financial service sector along with their impact
have been listed.
1. Mutual fund service, Once the monopoly of UTI,
was opened to national and international private
players. A excess of mutual funds with diverse
portfolio mixes were issued and traded in the
secondary.
2. Amendments to SEBI (merchant bankers)
Regulations, 1992 were made. Only body
corporate was allowed to function as merchant
banker.
3. The merchant bankers were required to seek
separate registration if they wished to act as an
underwriter or a portfolio manager.
100

101

4. Also, merchant bankers were prohibited

from carrying on fund-based activities other
than those related exclusively to the capital
market. In effect, the activities undertaken by
NBFCs such as accepting deposits, leasing,
bill discounting, etc., are not allowed to be
undertaken by a merchant banker.
5. Insurance Regulatory and Development
Authority Act, 1999 (IRDA Act) was enacted.
The Insurance sector was opened up for
competition from Indian Private Insurance
Companies.
102

NUMBER OF LIFE INSURANCE COMPANIES IN INDIA

(As on 31st March)

2002

2001

Private
22 21 17 15 14 13 12 12
Sector

11

Total 23 22 18 16 15 14 13 13

12

Particulars

2010 2009 2008 2007 2006 2005 2004 2003

Public
1
Sector

103

NUMBER OF NON-LIFE INSURERS IN INDIA

(As on 31st March)

Particulars

2010 2009 2008

2007

2006

2005

2004

2003

2002

2001

Public Sector

Private Sector

15

12

10

Health Insurers

Specialised
Insurers

Re-Insurer

25

21

19

16

15

15

15

14

12

TOTAL

104

NAME OF THE COMPANY

NAME OF THE COMPANY

ACE Tempest Reinsurance Ltd.

Berkshire Hathaway Reinsurance Group

Argo Group

Endurance Specialty Holdings Ltd.

Axis Capital

Munich Re Group

Everest Re Group

Paris Re

Glacier Group

Odyssey Re Holdings Corp.

Hannover Re Group

Partner Re Ltd.

Korean Re

Platinum Underwriters Holdings Ltd.

Lloyds of London

105

106

6.As per the provisions of IRDA Act. 1999, IRDA was

established on 19 April 2000 to protect the interest
of holders of insurance policy and to regulate,
promote and ensure orderly growth of the
insurance industry.
7.To regulate the credit rating agencies, The SEBI
(Credit Rating Agencies) Regulations, 1999 was
framed.
8. The Act namely, The Securitization and
Reconstruction of Financial Assets and
Enforcement of Security Interest Ordinance, 2002
was enacted.
9. The above act purpose was to promote the setting
up of asset reconstruction/securitization companies
to take over the Non Performing Assets (NPA)
accumulated with banks and public financial
institutions.
107

NPA's of Banks in India for the last three years

108

109

 The net NPAs of the banking sector are

expected to cross Rupees 2 lakh crore by
the end of March 2013, from Rs.1.57 lakh
crore in june, 2012.
it is mainly due to slowdown in the
economy.
(as on 5th october, 2012)

110

CAPITAL MARKET REFORMS

The major reform in the capital market was the abolition of

capital issues control act and the introduction of free
pricing of equity issues in 1992.

The SEBI was set up as an apex (top) regulator of the

Indian Capital Markets in 1988. SEBI has framed
regulations on a number of matters relating to capital
markets.
The depository and share dematerialization systems were
introduced to enhance the efficiency of the transaction
cycle.
Online trading was introduced in all stock exchanges.
Stock exchanges were corporatized.
Foreign Institutional Investors (FIIs) were permitted in the
111
Indian Stock Market.

 Many new instruments were introduced in the

markets, including index futures, index options
besides options and futures in select stocks.
Entry norm for capital issues were tightened
Disclosure requirements were improved
Regulatory framework for takeovers was revamped
(modernized).
The private sector allowed to set up banks, mutual
funds, money market mutual funds, insurance
companies etc., public sector banks permitted
diversified ownership by law subject to 51% holding
of govt/RBI, SBI, IFCI converted into public limited
companies.
112

scheduled commercial banks (SCBs) , regional rural banks (RRBs)

113

 RRBs increased to 16001 as on 31

March 2011
(as per NABARD)

114

 The IDBI Act, 1964 amended to allow IDBI to raise

capital up to 40% of its paid-up capital from the
public and to induct (Invest) private participation in
its Board of Directors.
The policy of permitting foreign banks to open
branches liberalised.
The RBI (Amendment) Act, 1997 passed all nonbank financial companies (NBFCs) with net-owned
funds of Rs.25 lakh and more to register with the
RBI.
Mutual Funds permitted to underwrite public issues.
Stock exchanges asked to modify listing
agreements in order to provide for the payment of
interest by companies to investors from the 30th day
of the closure of public issue.
115

 The BSE and other exchanges with screen-based

trading system allowed to expand their trading
terminals to locations where no stock exchange
exists and to others subject an understanding with
the local stock exchange.
SEBI framed guidelines relating to disclosure of
grading of IPO by issuer companies who may want
to opt for grading of their IPOs by the rating
agencies. If the issuer companies opt for grading,
then they are required to disclose the grades,
including the unaccepted ones, in the prospects.
PAN was made mandatory for all transactions in
the cash maket with effect from january 01, 2007.
116

Issue Open: Oct 18, 2010 - Oct 21, 2010

Issue Type: 100% Book Built Issue IPO
Issue Size: 631,636,440 Equity Shares of Rs. 10
Issue Size: Rs. 15,199.44 Crore
Face Value: Rs. 10 Per Equity Share
Issue Price: Rs. 225 - Rs. 245 Per Equity Share
Market Lot: 25 Shares
Minimum Order Quantity: 25 Shares
Listing At: BSE, NSE

Coal India Ltd IPO Grading / Rating:

CRISIL has assigned an IPO Grade 5 to Coal Indid Ltd IPO. This means as
per CRISIL, company has 'Strong fundamentals'. CRISIL assigns IPO
grading on a scale of 5 to 1, with Grade 5 indicating strong fundamentals
and Grade 1 indicating poor fundamentals.
117

ISSUE
PARTICULARS

BSE

NSE

Issue Price:

Rs. 245.00

Rs. 245.00

Open:

Rs. 287.75

Rs. 291.00

Low:

Rs. 287.45

Rs. 291.00

High:

Rs. 344.75

Rs. 344.90

Last Trade:

Rs. 342.35

Rs. 342.55

Volume:

192,839,607 479,716,245
118

NSE
Oct 12, 17:00 359.30
52 WK LOW/HIGH 289.40 386.25
Pr. Close : 359.30
Open : 358.80
Low: 353.75

High: 358.80
Close : 356.45

119

 SEBI Board approved the draft guidelines

for real estate mutual funds (REMFs).
REMF means a scheme of a mutual fund
which has investment objective to invest
directly or indirectly in real estate property
and shall be governed by the provisions
and guidelines under SEBI (Mutual Funds)
Regulations.

120

BANKING REFORMS
The SBI and other nationalised banks enabled to
access the capital market for debt and equity.
Banks required to make their balance sheets fully
transparent and make full disclosure in keeping
with International Accounts Standards Committee.
Banks given greater freedom to open, shift, and
swap branches as also to open extension counters.
Banking Ombudsman Scheme, 1995 introduced to
appoint 15 ombudsmen (by RBI) to look into and
resolve customers grievances in a quick and
inexpensive manner.
121

 Transparent norms have been issued for entry of

Indian private sector, foreign and joint-venture
banks and insurance companies, permission for
foreign investment in the financial sector in the form
of foreign direct investment as well as portfolio
investment, permission to banks to diversify
product portfolio and business activities.
Roadmap has bee developed for presence of
foreign banks and guidelines are issued for
mergers and amalgamation of private sector banks
and NBFCs.
Guidelines on ownership and governance in private
sector banks are developed.
Know Your Customer norms introduced.
122

123

 The stability of the financial system is of

crucial importance for the stability of the
economic system.
Financial Institutions and Markets are
closely regulated than manufacturing
industries almost everywhere.
Each country has evolved its own regulatory
system or regulatory framework to ensure
smooth functioning of the financial sector.
124

 The financial system deals in other peoples

money and therefore, their confidence, trust
and faith in it is crucially important for its
smooth functioning.
Financial regulation is necessary to
generate, maintain and promote this trust. A
regulation is needed to check purity in the
system.

125

 It is the central bank of the country and it is the

centre of the Indian financial and monetary
system.
As the apex institution, it has been guiding,
monitoring, regulating, controlling and
promoting the destiny of the Indian Financial
System since its inception.
It is the oldest among the central banks in the
developing countries but it is quit young
compared with such central banks as the bank
of england, and the Federal Reserve Board of
the US.
127

 It is started functioning from April 1, 1935

on the terms of the Reserve Bank of India
Act, 1934.
The bank is managed by a Central Board of
Directors, Four Local Boards of Directors
and a committee of the central Board of
Directors.
The functions of the Local Boards are to
advise the central Board on matters
referred to them; they are also required to
perform duties as are delegated to them.
128

 The final control of the Bank vests in the

Central Board which comprises the
Governor
Four Deputy Governors
And 15 Directors nominated by Central
Government.
The internal organisational set-up of the
Bank has been modified and expanded
from time to time in order to cope with the
increasing volume and range of the Banks
activities.
129

 In order to perform its various functions, the

bank has been divided and sub-divided into a
large number of departments.
A part from banking and issue departments,
there are at present 20 departments and 3
training establishments at the central office of
the bank.

130

FUNCTIONS
To maintain monetary stability so that the
business and economic life can deliver
welfare gains of a properly functioning
mixed economy.
To maintain stable payments system so
that financial transactions can be safely
and efficiently excuted.

131

 To maintain financial stability and ensure

sound financial institutions so that monetary
stability can be safely pursued and economic
units can conduct their business with
confidence.

132

FINANCIAL SYSTEM AND ECONOMIC DEVELOPMENT

The financial system influence the level of

national income, employment, standard of
living, and social welfare through variations
in the supply of finance

133