INDIAN FINANCIAL SYSTEMINDIAN FINANCIAL SYSTEM

FINANCIALMARKETS

DEMANDERS OF FUNDS

PRIVATE PLACEMENT

SUPPLIERS OF FUNDS

FINANCIAL INSTITUTIONS

deposits/shares

funds

funds

securities

funds

loans

funds

securities

securitiesfunds

FINANCIAL SERVICE – AN OVERVIEW

Financial System

Financial Institutions / Intermediaries

Banking Institutions

Non Banking Institutions

1 2

RBI

Scheduled Bank Non-Scheduled Bank

State Co-Operative

Commercial Banks

Indian Foreign

Public Sector Private Sector

Central Co-Operative &

Primary Credit Societies

Commercial Banks

SBI & its Subsidiaries

Other Nationalized Bank

Reg. And Rural Bank

1

Fee / Service Based Activity

Asset / Fund based service

Issue Management

Portfolio Management

Corporate Counselling

Loan / Lease Syndicate

Mergers & Acquisition

Leasing

HP Finance & Consumer Credit

Factoring

Housing Finance

Insurance

Venture Capital

NON BANKING FINANCIAL COMPANIES

Indian Financial System

Formal/Organized FS Informal/Unorganized FS

RegulatorsMOFSEBIRBIIRDA

Financial Institutions

Banking NBIsMutual FundsInsurance &Housing FC

Financial Markets

Capital MarketDebt Market

Money Market

Financial InstrumentsA. TermST, LTB.Type Primary Equity, Pref Debt,Combinations Secondary Time Deposits MF Units Insurance policies

Financial Services

DepositariesCustodiansCredit RatingFactoringMerchant BankingLeasingHire purchasePortfolio ManagementUnderwriting

FINANCIAL SERVICESFINANCIAL SERVICES

MEANINGMEANINGServices that are offered by Services that are offered by Financial CompaniesFinancial Companies

DEFINITIONDEFINITIONAny activity that facilitates Any activity that facilitates individual economic agents to individual economic agents to exchange resources to be available exchange resources to be available at different points of time and firms at different points of time and firms to acquire invest able resources to acquire invest able resources can be called financial services.can be called financial services.

FINANCIAL SERVICES FINANCIAL SERVICES - OBJECTIVES- OBJECTIVES

Raise FundsRaise Funds

Deploy FundsDeploy Funds

Economic GrowthEconomic Growth

CONSTITUENTSCONSTITUENTS

Institutions – Comm. Banks, NBFC, Institutions – Comm. Banks, NBFC, FI, MF, MB, Stock Brokers..FI, MF, MB, Stock Brokers..

Instruments – innovative , wide and Instruments – innovative , wide and deepdeep

Regulatory Bodies – SEBI, RBI, Regulatory Bodies – SEBI, RBI, Department of Banking and Department of Banking and InstitutionsInstitutions

ROLE OF FINANCIAL ROLE OF FINANCIAL SERVICE SECTORSERVICE SECTOR

Changing economic scenario – Changing economic scenario – financial deregulation, industrial financial deregulation, industrial liberalization liberalization

New institutions that provide a New institutions that provide a range of financial services.range of financial services.

Financial innovations at the Financial innovations at the disposal of commercial banks and disposal of commercial banks and investment financing institutions in investment financing institutions in IndiaIndia

GROWTHGROWTH

Merchant Banking ServicesMerchant Banking Services

Investment ServicesInvestment Services

Modern ServicesModern Services

Depositary ServicesDepositary Services

PROBLEMSPROBLEMS Lack of ExpertiseLack of Expertise ConcentratedConcentrated Low level of TechnologyLow level of Technology Quality of ServicesQuality of Services SubsidiariesSubsidiaries RestrictionsRestrictions Limited InnovationsLimited Innovations Institutional mechanismsInstitutional mechanisms

BANKSBANKS

Commercial BanksCommercial Banks Central Govt, RBICentral Govt, RBI New Branch, Prudential norms, New Branch, Prudential norms,

Liquidity, CRR, SLRLiquidity, CRR, SLR Appointment of officersAppointment of officers Inspection and Disclosure NormsInspection and Disclosure Norms

NON BANKING NON BANKING COMPANIESCOMPANIES

NBFCNBFC RBI, Banking Laws, NBFC RBI, Banking Laws, NBFC

Directions 1977, Residuary Directions 1977, Residuary Directions 1987Directions 1987

Who can Raise funds, limit, Who can Raise funds, limit, deployment of fundsdeployment of funds

Reporting, Inspection Reporting, Inspection CancellationCancellation

LEASINGLEASING

Use of an asset of a company Use of an asset of a company (lessor) by a company (lessor) by a company (lessee) without owning it (lessee) without owning it against commitment for against commitment for payment of rent for use.payment of rent for use.

Divorce between ownership Divorce between ownership and economic use of asset and economic use of asset

Financial Vs Operating LeaseFinancial Vs Operating Lease

LEASINGLEASING

Financial leasing pioneered in India dr. Financial leasing pioneered in India dr. 1973 – Private companies like 20 th 1973 – Private companies like 20 th century leasing co, Sundaram Finance, century leasing co, Sundaram Finance, MGF Ltd, Goodwill Ltd….MGF Ltd, Goodwill Ltd….

Diversified their finance and hire Diversified their finance and hire purchase business by starting leasing purchase business by starting leasing activities activities

Recently several commercial banks and Recently several commercial banks and financial institutions are in to leasingfinancial institutions are in to leasing

LEASINGLEASING

Financial Institution – Industrial Financial Institution – Industrial reconstruction bank of India, Industrial reconstruction bank of India, Industrial credit and Investment Corp. of India, credit and Investment Corp. of India, IDBI, IFCI.IDBI, IFCI.

Commercial banks – into leasing Commercial banks – into leasing through their subsidiaries or by making through their subsidiaries or by making portfolio investment in existing or newly portfolio investment in existing or newly set up private leasing companies - SBI, set up private leasing companies - SBI, CANFINA, PNB…..CANFINA, PNB…..

High profitability and attractive tax High profitability and attractive tax concessionsconcessions

HIRE PURCHASEHIRE PURCHASE

Mode of financing goodsMode of financing goods

Goods are let on hireGoods are let on hire

Purchase price is paid in Purchase price is paid in installments installments

Option to purchase the goods by Option to purchase the goods by paying allpaying all installmentsinstallments

LEASING VS HPLEASING VS HP

OwnershipOwnership DepreciationDepreciation Magnitude of fundsMagnitude of funds Extent of financingExtent of financing Tax BenefitsTax Benefits

HOUSING FINANCEHOUSING FINANCE

NHB set up as an apex body in NHB set up as an apex body in 1988 for housing finance 1988 for housing finance

NHB Fully owned Subsidiary of NHB Fully owned Subsidiary of RBIRBI

Facilitate middle and low income Facilitate middle and low income group to purchase or construct group to purchase or construct houseshouses

HOUSING FINANCEHOUSING FINANCE

Commercial banks set up Commercial banks set up subsidiaries for housing financesubsidiaries for housing finance - Canfin Homes , PNB Housing Fin, - Canfin Homes , PNB Housing Fin,

SBI home FinSBI home Fin GIC – 1990 GIC Grih VitsaGIC – 1990 GIC Grih Vitsa LIC – 1991 LIC housing financeLIC – 1991 LIC housing finance HDFCHDFC HDFC + LIC controls around 82 HDFC + LIC controls around 82

% of the market% of the market

INSURANCEINSURANCE Device to reduce / eliminate riskDevice to reduce / eliminate risk 1950 – 154 Indian, 16 Foreign, 75 1950 – 154 Indian, 16 Foreign, 75

provident societies in life insurance provident societies in life insurance businessbusiness

(Scams, irregularities and (Scams, irregularities and dubious investment practices - Govt dubious investment practices - Govt nationalized Life assurance nationalized Life assurance business)business)

1956 – LIC ( 245 cos)1956 – LIC ( 245 cos) 1972 – GIC - Monopoly1972 – GIC - Monopoly 1993-2000 – reopening of insurance sector 1993-2000 – reopening of insurance sector

R.N.Malhotra committee – IRDA in 2000R.N.Malhotra committee – IRDA in 2000

Function of IRDAFunction of IRDA

Promote growthPromote growth Protect the policy holdersProtect the policy holders Bring in ProfessionalismBring in Professionalism Investor ProtectionInvestor Protection Disseminate Information Disseminate Information

Application of FundsApplication of Funds

Mutual fundsMutual funds Equity of Pvt & Public sector Equity of Pvt & Public sector

undertakingsundertakings Approved Govt SecuritiesApproved Govt Securities Loans to HUDCO….Loans to HUDCO…. Loans to banks through Loans to banks through

certificates, bills discounting certificates, bills discounting schemesschemes

As per IRDA Publication -2002As per IRDA Publication -2002

TypeType PublicPublic

SectorSectorPrivatePrivate

SectorSectorTotalTotal

LifeLife

InsurancInsurancee

11 1212 1313

GeneralGeneral

InsurancInsurancee

44 99 1313

ReinsuraReinsurancence

11 -- 11

ISSUE MANAGEMENTISSUE MANAGEMENT

Merchant Bankers / Lead Merchant Bankers / Lead ManagersManagers

UnderwritersUnderwriters Bankers to an IssueBankers to an Issue Brokers to an IssueBrokers to an Issue Registrars to an IssueRegistrars to an Issue Debenture TrusteesDebenture Trustees Portfolio ManagersPortfolio Managers

MERCHANT BANKING MERCHANT BANKING SERVICESSERVICES

Fin IntermediariesFin Intermediaries , provide , provide whole whole rangerange of services with finance like of services with finance like

Technical and managerial, knowledge Technical and managerial, knowledge and competence and expert advice on and competence and expert advice on legal and industrial matters needed legal and industrial matters needed by users of fundsby users of funds For establishing a new unitFor establishing a new unit Diversify/ modernizeDiversify/ modernize M&A another unit M&A another unit Enter into foreign collaboration or Enter into foreign collaboration or

launching a JV abroad.launching a JV abroad.

MERCHANT BANKING MERCHANT BANKING SERVICESSERVICES

19671967 – Grind lay's bank opened the first – Grind lay's bank opened the first divisiondivision

Followed by SBI, Bank of Baroda, Followed by SBI, Bank of Baroda, Canara Bank, ICICI and some leading Canara Bank, ICICI and some leading broking firms and financial consultants.broking firms and financial consultants.

Subsidiaries Subsidiaries like SBI Capital Markets, like SBI Capital Markets, Can fin, Ind Bank Fin, BOI Fin, PNB Can fin, Ind Bank Fin, BOI Fin, PNB CAPS..CAPS..

Development banksDevelopment banks like IDBI, IFCI like IDBI, IFCI and ICICI are actively involved in the and ICICI are actively involved in the primary securities GIC, LIC and UTI are primary securities GIC, LIC and UTI are active in the secondary marketactive in the secondary market

MUTUAL FUNDSMUTUAL FUNDS

Are portfolios that pool the Are portfolios that pool the savings of a large number of savings of a large number of individuals into a large diversified individuals into a large diversified investment portfolio.investment portfolio.

Ideal alternative for small savers - Ideal alternative for small savers - inadequate resources - expertise inadequate resources - expertise for diversified portfolio, lack of for diversified portfolio, lack of time, and market knowledge.time, and market knowledge.

Can own a share of the fund, share Can own a share of the fund, share costs, profits and losses of the fund.costs, profits and losses of the fund.

First MF in India – UTI in 1964, First MF in India – UTI in 1964, gained momentum in 80’sgained momentum in 80’s

By Fin institutions, commercial By Fin institutions, commercial banks – can bank MF, LIC MF, banks – can bank MF, LIC MF, Bank of Baroda, PNB, Canbank MF Bank of Baroda, PNB, Canbank MF and GIC MFand GIC MF

BY Private sector – 20BY Private sector – 20thth century, century, Tata MF, Birla MF, JM MFTata MF, Birla MF, JM MF

Foreign tie –ups for inland schemes Foreign tie –ups for inland schemes – Alliance capital MF of USA, ICICI – Alliance capital MF of USA, ICICI MF with JP Morgan Invst. Mgt. of MF with JP Morgan Invst. Mgt. of USAUSA

Money market Mutual funds - Money market Mutual funds - Governed by RBI and SEBI (MF)Governed by RBI and SEBI (MF)

VENTURE CAPITALVENTURE CAPITAL As against conventional security As against conventional security

backed lending enables high risk backed lending enables high risk but high promise projects to but high promise projects to realize their full potentialrealize their full potential

Recent origin – 1986 - IDBI Recent origin – 1986 - IDBI followed by ICICI in 1988 and IFCI followed by ICICI in 1988 and IFCI

Development fin corpn. , state level Development fin corpn. , state level fin. Corpn., public sector bank – fin. Corpn., public sector bank – can bank fin service, SBI capital can bank fin service, SBI capital markets and private sector units markets and private sector units also set up venture capital financealso set up venture capital finance

FACTORINGFACTORING

Factoring is a business activity Factoring is a business activity where in the factor (a bank) where in the factor (a bank) purchases the receivables of the purchases the receivables of the sellers of goods (clients) and sellers of goods (clients) and reimbursement is obtained latter reimbursement is obtained latter on from the buyer of goods.on from the buyer of goods.

Factoring Vs Bills DiscountingFactoring Vs Bills Discounting

FACTORINGFACTORING

Provides critical input of credit Provides critical input of credit to both buyers and sellers of SSI to both buyers and sellers of SSI and MSIand MSI

First factoring in India-SBI First factoring in India-SBI commercial and factoring commercial and factoring services followed by canbank and services followed by canbank and PNB factoring.PNB factoring.

SECURITISATIONSECURITISATION Process of pooling and repacking Process of pooling and repacking

homogeneous illiquid assets financial homogeneous illiquid assets financial assets into marketable securities that assets into marketable securities that can be sold to investorscan be sold to investors

PartiesParties OriginatorOriginator SPVSPV InvestorsInvestors ObligorObligor Rating AgencyRating Agency StructurerStructurer Ancillary service providerAncillary service provider

CREDIT RATINGCREDIT RATING Important in the process of financial Important in the process of financial

reforms is establishment of credit reforms is establishment of credit rating agencies.rating agencies.

CRISILCRISIL ( Credit Rating Information ( Credit Rating Information Services of India ltd) Promoted by Services of India ltd) Promoted by ICICI in 1987 and UTI. SH include ICICI in 1987 and UTI. SH include ADB, LIC, SBI, HDFC, GIC and 20 ADB, LIC, SBI, HDFC, GIC and 20 other banks.other banks.

ICRAICRA (The investment information and (The investment information and credit rating agency of India limited)– credit rating agency of India limited)– Promoted in 1991 by IFCI, LIC, SBI an Promoted in 1991 by IFCI, LIC, SBI an 17 other banks.17 other banks.

CREDIT RATINGCREDIT RATING

CARE CARE ( Credit Rating and Information ( Credit Rating and Information Services) Promoted by IDBI, FI, Pub/Pvt Services) Promoted by IDBI, FI, Pub/Pvt sector Banks and Pvt finance cos in sector Banks and Pvt finance cos in 19931993

DCR DCR ( Duff and Phelps credit Rating ( Duff and Phelps credit Rating (India) Private Ltd) JV between (India) Private Ltd) JV between international credit agency D & P, JM international credit agency D & P, JM Financial and Alliance groupFinancial and Alliance group

Rates debentures, bonds, preference shares, Rates debentures, bonds, preference shares, fixed deposits, ST instruments like fixed deposits, ST instruments like commercial paper..etccommercial paper..etc

STOCK BROKINGSTOCK BROKING

Stock Broker is a member of a Stock Broker is a member of a recognized stock exchange who recognized stock exchange who buys, sells or deals in securities.buys, sells or deals in securities.

Certificate of Registration Certificate of Registration Mandatory from SEBI - FeeMandatory from SEBI - Fee

Capital adequacy Norms – 5-2 Capital adequacy Norms – 5-2 lakh; how it is to be maintained; lakh; how it is to be maintained; Capital Vs Volume of businessCapital Vs Volume of business

TRADING AND CLEARING TRADING AND CLEARING MEMBERSMEMBERS

Trading member is a member of a derivatives Trading member is a member of a derivatives exchange/segment of a stock exchange . Who exchange/segment of a stock exchange . Who settles the trade in the clearing corpn settles the trade in the clearing corpn through a clearing memberthrough a clearing member

Self Clearing Member is a member of clearing Self Clearing Member is a member of clearing corporation who may clear and settle corporation who may clear and settle transaction on its own account or on accounts transaction on its own account or on accounts of its clients. (not for any other member)of its clients. (not for any other member)

TM- Min NW – 3Cr, Deposit – 50 LakhsTM- Min NW – 3Cr, Deposit – 50 Lakhs SCM – additional NW – 1Cr, Deposit – 50 SCM – additional NW – 1Cr, Deposit – 50

LakhLakh TM in WDM SegmentTM in WDM Segment

OTHERSOTHERS

Credit CardCredit Card Debit CardDebit Card Smart CardSmart Card Consumer FinanceConsumer Finance