Introduction: The Financial system of India
The financial system of India refers to the system of
borrowing and lending of funds or the demand for and the supply of funds of all
individuals, institutions, companies and governments.
The financial system is classified into industrial finance,
agricultural finance, development finance and government finance.
India’s financial system includes many institutions and the
mechanism which affects the generation of saving by the community, the
mobilization of saving and the effective distribution of the saving among all
those who demand the funds for investment purposes.
The Financial system of India: Segments
1.Banks
Private Sector Banks
NBFCs Non Banking Financial Companies
Deposit taking NBFCs
Non-deposit taking NBFC
2. Mutual Funds
Equity Market: There are two major stock exchanges in India namely:
i Bombay Stock Exchange(BSE)
ii National Stock Exchange(NSE)
Insurance Companies
i Life Insurance Companies
ii Non- Life Insurance Companies
Indian Financial Market
The market of an economy where funds are transacted between
the fund surplus and fund scarce individuals is known as the financial market.
The basis of transaction is either interest or dividend.
This market
might be organised (institutionalised) as well as unorganised
(unregulated/non-institutionalised) segments in an economy.
Financial
markets in every economy has 2 separate segments.
One
relating to the requirements of short term (364 days) funds is known as money
market, the financial market related to requirements of long term (more than
364 days) funds is known as capital market.
In a
financial market, financial assets/instruments are created or transferred.
Indian Financial System
Capital Formation:
The Indian financial system performs a crucial role in
economic development of the country through saving investment process known as
capital formation.
Therefore the financial system is also called the financial
market.
The purpose of financial market is to mobilize savings
effectively and allocate the savings efficiently among the ultimate users of
the funds- Investors
A high rate of capital formation is an essential requirement
for rapid economic development.
The process of capital formation depends of increase in
savings, mobilization of savings and proper investment of funds.
In the organized sector the money market consists of banks
(licensed and regulated by RBI).
The unorganized sector consists of indigenous lenders.
Indian Banking System
The organized banking system consists of 3 categories.
Commercial banks (including Regional Rural Banks - RRBs)
Cooperative banks
Differentiated banks (Small Finance Banks -SFBs, Payments
bank
Another classification of banks in India is scheduled banks
and non-scheduled banks in terms of financial strength.
The Reserve Bank of India (RBI) is the supreme monetary and
banking authority in the country and has responsibility to control the banking
system in India.
It works in coordination with other regulators in the Indian
financial system like the regulators of capital market, insurance market and
pension market.
Regulatory Agencies
The Indian financial system has the following regulatory
agencies:
The Reverse Bank of India (RBI) regulates credit, products,
saving and remittances.
The Securities and Exchange Board of India (SEBI) regulates
investment products.
The Insurance Regulatory and Development Authority of India
(IRDAI) regulates the insurance product.
The Pension Fund Regulatory and Development Authority (PFRDA) regulates pension products.
The Reserve Bank of India (RBI)
Banking Sector
The central bank of India- Reserve Bank of India
Two distinct roles:
Monetary control- includes controlling inflation
Regulation & supervision over banks
The RBI is the apex bank in the country ensuring the overall
financial health of the banks.
This is ensured through onsite supervision and offsite
surveillance on the banks.
The RBI periodically issues guidelines regarding procedures
to be followed for various banking operations, norms to be adhered to for
provision of credit to various sectors, rules to be adhered to for
classification of issues and governing all other aspects for ensuring sustained
growth of banks in the country.
Monetary control is exercised through the following
instruments
1. Cash Reserve Ratio (CRR)
Cash Reserve Ratio (CRR) is a specified minimum
fraction of the total deposits of customers, which commercial banks have to
hold as reserves either in cash or as deposits with the RBI
2. Statutory Liquidity Ratio (SLR)
Statutory Liquidity Ratio (SLR) is a minimum percentage
of deposits that a commercial bank has to maintain in the form of liquid cash,
gold or other securities. It is basically the reserve requirement that banks
are expected to keep before offering credit to customers.
3. Bank rate
Bank rate is a rate at which the Reserve Bank of India
(RBI) provides the loan to commercial banks without keeping any security. There
is no agreement on repurchase that will be drawn up or agreed upon with no
collateral as well.
4. Repo rate
The Repo Rate is the interest rate at which the Reserve Bank
of India (RBI) loans money to commercial banks. Repo Rate full form is
Repurchase Agreement or Repurchasing Option. Banks obtain loans from the
Reserve Bank of India (RBI) by selling qualifying securities. The current Repo
Rate in India, fixed by RBI is 6.50%.
5. Reverse repo rate
Reverse repo rate is the rate at which the central bank, the
RBI in our case, borrows money from the commercial banks when there is excess
liquidity in the market. This aims to absorb the liquidity in the market, which
helps restrict the borrowing power of the investors. The current Reverse repo
rate in India is 3.35%.
RBI acts as lenders of last resort to banking system and are
responsible for ensuring an efficient payment and settlement system.
All other banks like Regional Rural Banks (RRBs),
Cooperative banks and other banks are licensed and regulated by RBI
Monetary Authority
Formulation, implementation & monitoring of the monetary
policy
Maintenance of price stability, focus on growth objectives
Currency Authority
Issuing of new currency notes & coins (except of Rs 1,
issued by MoF), exchanging & destroying which are not fit for circulation,
distribution of currencies & coins & maintaining adequate supply of
quality currencies & coins
Regulator & Supervisor
Prescribing broad parameters of banking operations,
maintaining public confidence in the system, protecting depositor’s interest
& providing cost effective banking services to public
Forex Management
Managing the FEMA (Foreign Exchange Management Act), keeping
forex reserves of the country, stabilizing the exchange rate of the rupee,
representing the GoI in IMF & World Bank, objective being to facilitate
external trade & external payments, promoting orderly development/
maintenance of the foreign exchange market in India
Regulator & Supervisor: Payment& Settlement System
Introduction & upgrading safe & efficient modes of
payment systems in the country to meet the requirements of the people,
objective being to maintain public confidence in payment & settlement
system
Banker of the Government & Banks
Acts as banker to the State & Central Governments, also
is the Banker for the banks, maintaining bank accounts of scheduled commercial
banks- domestic, foreign, public & private banks, broad objective is to
mobilize enough liquidity for functioning of Government & banks,
RBI deals with borrowing plans of the governments
RBI provides short term & long term loans to the banks(
as lender of last resort)
Developmental Function
Facilitated setting up of Financial Institutions like
NABARD, SIDBI, NHB & NaBFID for growth & development of sectors of
priority for growth of the economy
Plays an important role in promotion of financial inclusion in the country by developing policies & guidelines
Securities and Exchange Board of India (SEBI)
Capital Market
Capital market plays an extremely important role in
promoting and sustaining the growth of an economy.
It is important to mobilize the funds to enterprises and
provide an effective source of investment in the economy.
Securities and Exchange Board of India is entrusted with the
responsibility to regulate the Indian capital markets.
It monitors and regulates the securities markets and
protects the interests of the investors by enforcing the rules and regulations
of the SEBI.
SEBI was founded on 1992 under the SEBI Act 1992.
The objective of SEBI is to unsure that Indian capital
market works in a systematic manner and provide investors with a transparent
environment for their investment.
It prevents malpractices in the capital market and promotes
development of the capital markets.
SEBIs Responsibilities
Issuers of the Securities:
Companies that issue securities to raise funds are listed on
the stock exchange, SEBI ensures that the issuance of Initial Public Offerings
(IPOs) & follow up Public Offers (FPOs) takes place in a healthy &
transparent manner
Protects the Interests of Traders and Investors:
Fact is that capital markets are functioning as traders
exist, SEBI is responsible for safeguarding interests & ensuring investors
do not become victims of fraud/manipulation
Financial Intermediaries
SEBI acts as mediator in the stock market to ensure all
market transactions take place in a smooth & secure manner, monitors every
activity of financial intermediaries, such as broker, sub- broker, NBFCs etc.
SEBI
SEBI is enjoying quasi judicial, quasi legislative and quasi
executive status in terms of the SEBI act.
SEBI based on the powers vested in it have been notifying
regulations for mutual funds, overseeing the function of the stock exchange.
Mutual funds are allowed to enter the capital market based
on guidelines of SEBI.
Insurance Market: IRDAI
Insurance aims to protect the economic value of assets or
life of a person.
Insurance is classified into life insurance and non-life
insurance.
In a contract of insurance, the insurer agrees to make good
any loss on the insured property or life (as the case may be) that may occur in
a course of time in consideration of a small premium to be paid by the insured.
Objectives of IRDAI
To protect the interest of and secure fair treatment to
policy holders.
To bring about speedy and orderly growth of the insurance
industry (including annuity and superannuation payments) for the benefit of the
common man and to provide long term funds for acceleration growth of the
economy.
To set, promote, monitor and enforce high standards of
integrity, financial soundness, fair dealing and competence of those it
regulates.
To ensure speedy settlement of genuine claims, to prevent
insurance frauds and other malpractices and put in place effective grievance
redressal machinery
To promote fairness, transparency and orderly conduct in
financial markets dealing with insurance and build a reliable MIS.
To enforce high standards of financial soundness amongst
market players.
To take action where such standards are inadequate or
ineffectively enforced.
To bring about optimum amount of self regulation in day to
day work of the industry consistent with the requirements of prudential
regulation.
Pension Market: PFRDA
Pension plans are essential components of any nation’s
social welfare system because they give its citizens financial security during
the old age.
The Pension Fund Regulatory and Development Authority
(PFRDA) in India was established in the year 2003 with the main objective of
promoting, managing and expanding the nation’s pension market.
The PFRDA was initially established to oversee pension plans
only for government employees.
It later
extended services to all Indian citizens and NRIs including those who were self
employed.
With PFRDA
regulations the pension sector in India has experienced significant growth and
development presenting better opportunities for people to secure their
financial future
Central Record Keeping Agency (CRA)
A team of intermediaries has been hired by PFRDA to help
with pension fund organization, collection , management, record keeping and
distribution.
PFRDA has appointed 2 CRAs to perform record keeping.
Accounting , administration and customer support function for pension fund (PF)
subscribers
National Securities Depository Ltd. And Karvy Computershare
Pvt Ltd. Employers who have
pension subscribing employees in the private sector have a choice between the 2
CRAs
Non
employee voluntary subscribers may decide for themselves which CRA to use.
Atal
Pension Yojana signatories and government sector employee pensions the relevant
government may select a CRA.
Between the 2 CRAs the aggregator the chooses one for the
NPS subscribers.
Conclusion
In a Financial Market, financial assets/instruments are
created or transferred.
The financial intermediaries play an important role in the
operation of the financial market.
The financial system
comprises a system of intermediaries, markets and instruments that are related
with each other.
This provides a system by which savings are transformed into
investments.
The RBI being the central banking authority exercises
monetary control and supervises banking institutions.
Different institutions such as commercial banks, NBFCs ,
mutual funds, insurance companies, primary dealers, brokers, depositories, and
insurance agents are part of different markets such as capital market and money
market which are part of the financial system.
SEBI is the regulating body of securities markets, SEBI acts
as a watchdog for Indian capital market.
The IRDAI has issued various regulations for the licensing
and functioning of insurers, reinsurers and insurance intermediaries.
PFRDA is the regulatory body for overall supervision and
regulation of the pension scheme in India
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