JAIIB (Module A) : Indian Financial System Tanushree Mazumdar, Iibf

JAIIB (Module A)
Indian Financial System
Tanushree Mazumdar,
IIBF
Financial System
 An institutional framework existing in a country to
enable financial transactions
 Three main parts
 Financial assets (loans, deposits, bonds, equities, etc.)
 Financial institutions (banks, mutual funds, insurance
companies, etc.)
 Financial markets (money market, capital market, forex
market, etc.)
 Regulation is another aspect of the financial system
(RBI, SEBI, IRDA, FMC)
Financial assets/instruments
 Enable channelising funds from surplus units to
deficit units
 There are instruments for savers such as deposits,
equities, mutual fund units, etc.
 There are instruments for borrowers such as loans,
overdrafts, etc.
 Like businesses, governments too raise funds
through issuing of bonds, Treasury bills, etc.
 Instruments like PPF, KVP, etc. are available to
savers who wish to lend money to the government
Financial Institutions
 Includes institutions and mechanisms which
 Affect generation of savings by the community
 Mobilisation of savings
 Effective distribution of savings
 Institutions are banks, insurance companies,
mutual funds- promote/mobilise savings
 Individual investors, industrial and trading
companies- borrowers
Financial Markets
 Money Market- for short-term funds (less
than a year)
 Organised (Banks)
 Unorganised (money lenders, chit funds, etc.)
 Capital Market- for long-term funds

 Primary Issues Market
 Stock Market
 Bond Market
Money Market Instruments (1)
 Money market instruments are those which
have maturity period of less than one year.
 The most active part of the money market is
the market for overnight call and term money

between banks and institutions and repo
transactions
 Call money/repo are very short-term money
market products
Money Market Instruments(2)
 Certificates of Deposit
 Commercial Paper
 Inter-bank participation certificates
 Inter-bank term money
 Treasury Bills
 Bill rediscounting
 Call/notice/term money
 CBLO
 Market Repo
Certificates of Deposit
 CDs are short-term borrowings in the form of UPN issued by all
scheduled banks and are freely transferable by endorsement and
delivery.
 Introduced in 1989
 Maturity of not less than 7 days and maximum up to a year. FIs
are allowed to issue CDs for a period between 1 year and up to 3
years
 Subject to payment of stamp duty under the Indian Stamp Act,
1899
 Issued to individuals, corporations, trusts, funds and associations
 They are issued at a discount rate freely determined by the
market/investors
Commercial Papers
 Short-term borrowings by corporates, financial institutions,
primary dealers from the money market
 Can be issued in the physical form (Usance Promissory Note) or
demat form
 Introduced in 1990
 When issued in physical form are negotiable by endorsement
and delivery and hence, highly flexible
 Issued subject to minimum of Rs. 5 lacs and in the multiple of
Rs. 5 lacs after that
 Maturity is 7 days to 1 year
 Unsecured and backed by credit rating of the issuing company
 Issued at discount to the face value
Market Repos
 Repo (repurchase agreement) instruments enable
collateralised short-term borrowing through the
selling of debt instruments
 A security is sold with an agreement to repurchase it
at a pre-determined date and rate
 Reverse repo is a mirror image of repo and reflects
the acquisition of a security with a simultaneous
commitment to resell
 Average daily turnover of repo transactions (other
than the Reserve Bank) increased from Rs.11,311
crore during April 2001 to Rs. 42,252 crore in June
2006
Collateralised Borrowing and
Lending Obligation (CBLO)
 Operationalised as money market instruments by
the CCIL in 2003
 Follows an anonymous, order-driven and online
trading system
 On the lenders side main participants are mutual
funds, insurance companies.
 Major borrowers are nationalised banks, PDs and
non-financial companies
 The average daily turnover in the CBLO segment
increased from Rs. 515 crore (2003-04) to Rs. 32,
390 crore (2006-07)
The Indian Capital Market (1)
 Market for long-term capital. Demand comes
from the industrial, service sector and
government
 Supply comes from individuals, corporates,
banks, financial institutions, etc.

 Can be classified into:
 Gilt-edged market
 Industrial securities market (new issues and stock
market)
The Indian Capital Market (2)
 Development Financial Institutions
 Industrial Finance Corporation of India (IFCI)
 State Finance Corporations (SFCs)
 Industrial Development Finance Corporation (IDFC)
 Financial Intermediaries
 Merchant Banks
 Mutual Funds
 Leasing Companies
 Venture Capital Companies
Industrial Securities Market
 Refers to the market for shares and

debentures of old and new companies
 New Issues Market- also known as the
primary market- refers to raising of new
capital in the form of shares and debentures
 Stock Market- also known as the secondary
market. Deals with securities already issued
by companies
Financial Intermediaries (1)
 Mutual Funds- Promote savings and mobilise funds
which are invested in the stock market and bond
market
 Indirect source of finance to companies
 Pool funds of savers and invest in the stock
market/bond market
 Their instruments at saver’s end are called units
 Offer many types of schemes: growth fund, income
fund, balanced fund
 Regulated by SEBI
Financial Intermediaries (2)
 Merchant banking- manage and underwrite new
issues, undertake syndication of credit, advise
corporate clients on fund raising
 Subject to regulation by SEBI and RBI
 SEBI regulates them on issue activity and portfolio
management of their business.
 RBI supervises those merchant banks which are
subsidiaries or affiliates of commercial banks
 Have to adopt stipulated capital adequacy norms
and abide by a code of conduct
 Thank you

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JAIIB (Module A)

Indian Financial System

 Capital Market- for long-term funds

the market for overnight call and term money

banks, financial institutions, etc.

 Refers to the market for shares and

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