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INDIAN FINANCIAL SYSTEM
IFS and its Functions
• System that allows the transfer of money between savers and borrowers
• It channels household savings to the corporate sector
• Allows “asset - liability” transformation • It helps in risk transformation by diversification
IFS
Capital market
Money market
Banking sector
Structure of Banking in India
Scheduled bank
Commercial bank
Public sector (27)
Nationalized banks (19)
State bank of India & its
associates (8)
Private sector (30)
Foreign banks (40)
Regional Rural banks
(196)
Co-operative bank
Commercial banks
Public sector banks are those where government holdings are more than 50% while nationalized banks are those banks which were nationalized on July 19, 1969. Thus all nationalized banks are public sector banks.
so one can say public sector bank=Nationalized bank+ SBI + SBI associates + IDBI Thus in total 27 PSB’s are there.
• As on December 31st , Public sector banks recorded a rise of 24.1% when compare to 16.9% in the last year.
Private sector Banks
• Private sector banks are those banks in which majority of stake is held by private individuals and not by government
• The first private bank in India was Induslnd Bank• IDBI ranks the 10th largest development bank in the
world as private banks in India • As on December 31st , Private sector banks
recorded a rise of 28% when compare to 8.4% in the last year.
Foreign Bank
• Banks from other countries which have branches in a country.
• Citi Bank opened its branch in India in 1902
• The foreign banks have brought forth some innovations and changes in the banking industry of the country. The banking industry is now more competitive and customer friendly than before.
• As on December 31st , Foreign banks recorded a rise of 19.8% when compared to a decline of 8% in the last year.
Regional rural bank
• The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal farmers and small entrepreneurs
• RRB’s was set up by the government of India on October 2, 1975
• The total authorized capital was earlier fixed at Rs. 1 crore which is now raised to Rs. 5 crore
• The RRB’s are under control of NABARD which is in charge of laying down policies for the RRB’s
Funds flow from commercial bank
STRONG DEMANDCREDIT FLOW FROM SCHEDULED COMMERCIAL BANKS (RS CRORE)Item Outstanding as
onMarch 26, 2010
As on March 27, 2009
As on March 26, 2010
Amount Per cent Amount Per cent
Public Sector Banks 27,93,705 3,25,608 16.9 5,41,737 24.1
Foreign Banks 1,90,766 -14,028 -8.1 31,474 19.8
Private Banks 6,89,232 41,424 8.4 1,51,618 28.2
All Scheduled Commercial Banks*
37,63,213 3,66,914 13.8 7,38,641 24.4
*: Including Regional Rural Banks Source:RBI
Capital market
Capital Market in India
Government security (Gill-
edged market)
Industrial security market
New issues market
and
Old issue market
Development financial
Institution
IFCI
ICICI
SFC’s
IDBI
IIBI
UTI
Financial Intermediaries
Merchant banks
Mutual funds
Leasing companies
Venture capitalist
Gilt Edged Market And Types
• This market refers to the market for government securities which are “of the best quality”.
• Credible instrument used by government for meeting its financial requirement.
• Types:-
I. Dated Securities with a fix maturity date.
II. Zero coupon bonds
III. Partly paid stock
IV. Treasury Bills
Industrial security market• An initial public offering (IPO), referred to simply
as an "offering" or "flotation", is when a company (called the issuer) issues common stock or shares to the public for the first time.
• India’s largest IPO is from Coal India Ltd which raised upto Rs.15000 crore
• A stock exchange is an entity that provides "trading" facilities for stock brokers and traders to trade stocks, bonds, and other securities.
Recent changes by SEBI
• Investment limit in IPO is increased from 1 lakh to 2 lakh
• SEBI decides IPO’s should be listed with in 12 days
• SEBI introduced spot delivery system for derivatives from April 1st 2011
• Pre open market introduced by SEBI
Development financial Institutions
• It was developed by “The Narasimham committee”in 1991
• These institutions provide a crucial role in providing credit in the form of higher risk loans, equity positions and risk guarantee instruments to private sector investments in developing countries
Merchant banks
• Merchant bankers assist corporate in raising capital.
• They assist in issue of Shares, syndicating loans, public issue of debentures. They do not provide funds.
• They only assist. They also actively arrange working capital, appraisal Projects scrutinize & persuade merger proposals
Merchant bankers as lead managers
Sl.no Size of the issue Maximum number of lead managers
1 Less than 50 crores 2
2 50 – 100 crores 3
3 100 – 200 crores 4
4 200 – 400 crores 5
5 Above 400 crores 5 or more as prescribed by SEBI
Mutual Funds
• A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities.
• Types of mutual Funds
I. Open - ended schemes
II. Close – ended schemes
Bank v/s Mutual Fund
particulars BANKS MUTUAL FUNDS
Returns Low Better
Administrative Expenses
High Low
Risk Low Moderate
Investment Options Less More
Quality of assets Not transparent Transparent
Interest calculation Minimum balance between 10th & 30th of every year
Everyday
Lease financing and hire purchase
• Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments.
• A hire-purchase contract allows the buyer to hire the goods for a monthly rent.
• A hire purchase is termed an installment plan.
Venture capital Financing
• Venture capital is risk financing available in the form of equity
• A venture capitalist also provides management support and acts as a partner and advisor to the entrepreneur
• Methods of venture financing
I. Equity – Contribute 49% of the total equity capital
II. Conditional loan – Amount repayable in form of royalty, No interest charged
III. Income notes – Charges both interest and royalty on sales
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