Indian Financial System- India

1st sem and 2nd sem Virtusa- data science overview, python R MACHINE LEARNING TITANIC DATASETS, FEATURES IN ALGORITHMS , MISSING DATA , NON RESPONSE ERRORS, STATISTICS, INDIAN FINANCIAL SYSTEM INTRODUCTION Indian Financial System Introduction Introduction to Indian Financial System – The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments. It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties. The financial system of a country is concerned with: Allocation and Mobilization of savings Provision of funds Facilitating the Financial Transactions Developing financial markets Provision of legal financial framework Provision of financial and advisory services The primary function of a financial system is “to provide a link between savings and investment for creation of wealth and to permit portfolio adjustment in the composition of existing wealth” A Financial System consists of various financial Institutions, Financial Markets, Financial Transactions, rules and regulations, liabilities and claims etc. Features of Financial System: It plays a vital role in economic development of a country It encourages both savings and investment It links savers and investors It helps in capital sformation It helps in allocation of risk It facilitates expansion of financial market According to Robinson, the primary function of a financial system is “to provide a link between savings and investment for creation of wealth and to permit portfolio adjustment in the composition of existing wealth” A Financial System consists of various financial Institutions, Financial Markets, Financial Transactions, rules and regulations, liabilities and claims etc. Features of Financial System: It plays a vital role in economic development of a country It encourages both savings and investment It links savers and investors It helps in capital formation It helps in allocation of risk It facilitates expansion of financial markets It aids in Financial Deepening and Broadening Structure of Indian Financial System/Components of Indian Financial System:   (1) Financial Institutions – Financial institutions are intermediaries of financial markets which facilitate financial transactions between individuals and financial customers. It simply refers to an organization (set-up for profit or not for profit) that collects money from individuals and invests that money in financial assets such as stocks, bonds, bank deposits, loans etc. There can be two types of financial institutions: • Banking Institutions or Depository institutions – These are banks and credit unions that collect money from the public in return for interest on money deposits and use that money to advance loans to financial customers. • Non- Banking Institutions or Non-Depository institutions – These are brokerage firms, insurance  and mutual funds companies that cannot collect money deposits but can sell financial products to financial customers.   Financial Institutions may be classified into three categories: • Regulatory – It includes institutions like SEBI, RBI, IRDA etc. which regulate the financial markets and protect the interests of investors. • Intermediaries – It includes commercial banks such as SBI, PNB etc. that provide short term loans and other financial services to individuals and corporate customers. • Non – Intermediaries – It includes financial institutions like NABARD, IDBI etc. that provide long-term loans to corporate customers.   (2) Financial Markets – It refers to any marketplace where buyers and sellers participate in trading of assets such as shares, bonds, currencies and other financial instruments. A financial market may be further divided into capital market and money market. While the capital market deals in long term securities having maturity period of more than one year, the money market deals with short-term debt instruments having maturity period of less than one year.   (3) Financial Assets/Instruments – Financial assets include cash deposits, checks, loans, accounts receivable, letter of credit, bank notes and all other financial instruments that provide a claim against a person/financial institution to pay either a specific amount on a certain future date or to pay the principal amount along with interest.   (4) Financial Services – Financial Services are concerned with the design and delivery of financial instruments and advisory services to individuals and businesses within the area of banking and related institutions, personal financial planning, leasing, investment, assets, insurance etc. It involves provision of a wide variety of fund/asset based and non-fund based/advisory services and includes all kinds of institutions which provide intermediate financial assistance and facilitate financial transactions between individuals and corporate customers. Functions of Indian Financial System It bridges the gap between savings and investment through efficient mobilization and allocation of surplus funds It helps a business in capital formation It helps in minimising risk and allocating risk efficiently It helps a business to liquidate tied up funds It facilitates financial transactions through provision of various financial instruments It facilitate trading of financial assets/instruments by developing and regulating financial markets Importance of Indian Financial System It accelerates the rate and volume of savings through provision of various financial instruments and efficient mobilization of savings It aids in increasing the national output of the country by providing funds to corporate customers to expand their respective business It protects the interests of investors and ensures smooth financial transactions through regulatory bodies such as RBI, SEBI etc. It helps economic development and raising the standard of living of people It helps to promote the development of weaker section of the society through rural development banks and co-operative societies It helps corporate customers to make better financial decisions by providing effective financial as well as advisory services It aids in Financial Deepening and Broadening: Financial Deepening – It refers to the increase in financial assets as a percentage of GDP Financial Broadening – It refers to increasing number of participants in the financial system. Financial Intermediaries/Intermediaries in Indian Financial System Commercial Banks Cooperative Banks Regional Rural Banks Development Banks Non-banking Financial Companies Mutual Fund companies Insurance Companies FINANCIAL MARKETS: A financial market is a marketplace for financial products.  Here buyers and sellers interact with each other. They trade in financial assets like equities, bonds, mutual funds, currencies, and derivatives. The price discovery of such financial assets is purely the play of demand and supply of the underlying assets in the market. Thus, the financial market acts as a bridge between those who have access money with those who are in deficit and in need of money. So, through financial market funds flows from suppliers to demander of the funds through the use of financial instruments. Now let us look at the different types of financial markets and their brief role. Types of financial markets and their roles Broadley speaking financial market can be subcategorized as following – Stock exchanges, Money market, Bond market, Foreign exchange, and Interbank market 1. Stock exchanges Stock exchange provides a facility for trading and investing in sport and future market. Instruments that are stocks, commodities, and currencies. Future and options of these instruments are the part of the future segment of the market. Options trading includes both put and call options. In Indian market not every instrument of spot market have their future and option counterpart. Very few future contracts are available and same with options contract. The next major issue with future and option market is that barring a few, there is an issue of liquidity and depth in these future and options contracts. 2. Money market The money market in India is a marketplace for short duration funds requirements. The instruments of money markets have in general maturities that range from overnight to a year. Instruments include treasury bills, call money, commercial papers, certificate of deposits, repos, interest rate swaps, cash management bills and etc. Retailers do not have permission to buy and sell all money market instruments directly. They have options to do so through mutual funds, investing exclusively in such instruments. Also, not all corporates, institutions and banks of all categories have permission to trade in all these instruments. Details of money market instruments in India and RBI guidelines can be found here in this RBI document. 3. Bond market In India, the bond market is also known as debt market. Here, in the bond market along with government bonds, corporate bonds are also traded. Some mutual funds schemes also deal exclusively with bonds. So we can consider them as a subpart of Indian bond market. However, government bonds dominate Indian bond market. Comparing to other bond markets, government bonds markets are highly liquid. Government bonds are either sovereign bonds or municipal bonds. All sovereign bonds are in INR denomination while municipal bonds are in both INR and foreign currency denomination. So far only one municipal bond in HDK (Hong Kong Dollar) is issued. In a similar way, corporate bonds are either in INR or foreign currency denomination. US Dollar, Singapore Dollar, and Euro-denominated corporate bonds are there in the market. Indian corporates have issued these bonds in international markets to raise debt as Eurobonds, foreign bonds, quasi-debt instruments like FCCB’s (Foreign currency convertible bonds) and FRN’s (Floating Rate Notes). Thus, Indian bond market has the following 5 subcategories – Government bond market Municipal bond market Corporate bond market Funding bond market Mortgage-backed and collateral debt obligation bond market 4. Foreign exchange market Foreign exchange market is also known as international currency market. Here in this market you can buy and sell international currencies. We also call it Forex market. This market gives the organizational framework for the participants. Participants of forex market include individuals, banks, firms, merchants, traders, and governments. The FEMA (The Foreign Exchange Management Act, 1999) regulates Indian forex market. However, all interbank forex trading is regulated by FEDAI (the Foreign Exchange Dealers Association of India). In India, spot Forex market operates under three segments. In the first segment, all authorized dealers do the transaction with RBI. Then, these authorized dealers, who are mainly commercial banks do interbank dealings. And in last segments, these authorized dealers deal with customers both retail and corporate. Basically, there are three types of foreign exchange market in India. Beside spot forex market, there is derivative market both forward forex market and future forex market. The last one is the settlement and dealing market. 5. Interbank market Interbank market is mainly for banks. Here banks exchanges and trades different foreign currencies with each other. It is, in fact, a subpart of foreign exchange market in India. There are three main parts of interbank markets – Spot market Forward market SWIFT (The Society for Worldwide Interbank Financial Telecommunications) Financial Institutions Financial Institutions in India are divided in two categories. The first type refers to the regulatory institutions and the second type refers to the intermediaries. The regulators are assigned with the job of governing all the divisions of the Indian financial system. These regulatory institutions are responsible for maintaining the transparency and the national interest in the operations of the institutions under their supervision. The regulatory bodies of the financial institutions in India are as follows: Reserve Bank of India (RBI) Securities and Exchange Board of India (SEBI) Central Board of Direct Taxes (CBDT) Central Board of Excise & Customs Apart from the Regulatory bodies, there are the Intermediaries that include the banking and non-banking financial institutions. Some of the specialized financial institutions in India are as follows: Unit Trust of India (UTI) Securities Trading Corporation of India Ltd. (STCI) Industrial Development Bank of India (IDBI) Industrial Reconstruction Bank of India (IRBI), now (Industrial Investment Bank of India) Export – Import Bank of India (EXIM Bank) Small Industries Development Bank of India (SIDBI) National Bank for Agriculture and Rural Development (NABARD) Life Insurance Corporation of India (LIC) General Insurance Corporation of India (GIC) Shipping Credit and Investment Company of India Ltd. (SCICI) Housing and Urban Development Corporation Ltd. (HUDCO) National Housing Bank (NHB) The banking institutions of India play a major role in the economy of the country. The banking institutions are the providers of depository and transaction services. These activities are the major sources of creating money. The banking institutions are the major sources of providing loans and other credit facilities to the clients. Apart from the banking financial institutions, there are a number of specialized financial institutions in India that have been incorporated for a definite purpose. These institutions include the insurance companies, the housing finance companies, mutual funds, merchant banks, credit reporting and debt collection companies and many more. Apart from these, there are several other financial institutions that are existing in the country. These are the stock brokers and sub-brokers, portfolio managers, investment advisors, underwriters, foreign institutional investors and many more.   Financial Institutions and others India Infrastructure Finance Company Ltd (IIFCL) Export-Import Bank of India (EXIM Bank) Small Industries Development Bank of India(SIDBI) National Housing Bank (NHB) SME Rating Agency of India Ltd (SMERA) List of CMDs of Financial Institutions Industrial Finance Corporation of India (IFCI)