Indian Financial System

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Information about Indian Financial System

Published on April 6, 2009

Author: joetrichy


Indian Financial System : Indian Financial System Joseph Anbarasu, ASU Objectives : To make a historical account of Indian Financial system before and after liberalization; To appreciate the evolutionary process for having attained the present phase; To evaluate each component of the system in a global context; and To loot at your business decisions in the context of prevailing financial system of a state. Objectives What is a good financial system? : What is a good financial system? What is a good financial system? : What is a good financial system? Player in Middle : Player in Middle Indian Financial System Before 1991 – Controlled by state : Indian Financial System Before 1991 – Controlled by state Indian Financial System Before 1991 : Indian Financial System Before 1991 Indian Financial System Before 1991 – Low profile of market : Indian Financial System Before 1991 – Low profile of market Pre-LPG period (prior to 1991) : Pre-LPG period (prior to 1991) Most banks were state-owned Banks, pension funds and insurance companies were forced to buy State Issued bonds - primary investment. Bombay Stock Exchange was closed market. Run by Brokers for the benefit of its members. There was no right governance and regulation. There was no single derivative market. All financial transactions were controlled by the RBI and Ministry of Finance Pre-LPG period (prior to 1991) : Pre-LPG period (prior to 1991) Socialistic Model Weapons Strict entry barriers in every sub-industry. Difficult to start a bank, a mutual fund, a brokerage firm, an insurance company, a pension fund, a securities exchange or sub-broking firm. Foreign firms were restricted to touch any one of these parts Comprehensive capital control and restrictive legislations Look at a typical bureaucrats of yester years as perceived Big Villains were MRTP act, 1969 The Capital Issues (control) act, 1947 Indian Companies Act, 1956 Industries Act, 1956 Foreign Exchange Regulation Act, 1973 Slide 11: Male , Balding head , Ugly stained metal rimmed glasses . Thick bushy eyebrows[Usually as a mono-brow], Mustache[See pictures], No beard., Paan Chewing [ The teeth and tongue are often discolored]. “I-don't-care-what-you-say, I'll-do-it-only-my-way” attitude. Drinking coffee 10 times a day. Looking for a slightest opportunity to take bribe. Take home salary is Rs. 5000[Official] + Rs. 25000[Bribes and Misc. tips]. Taking the rules and law by word and not understanding the true essence of it. Even though the laws usually date back to the 1850 British Colonial period . No respect for anyone's privacy. Not taking anyone's ideas on improving productivity even though they are right. Piles and piles of paper with folders and gem-clips strewn about. A rotary dial telephone on the desk.. No air-conditioning and a ceiling fan that rotates 6 times in an hour. Runs errands for his bosses or chats with family during work. Also misuses official equipment. Is usually in a vital position of authority/ In a position that requires interaction with people everyday. Typical Government Official Dream Financial System - Visible in twenties in Nations : Dream Financial System - Visible in twenties in Nations Dream Financial System : Market driven All players with integrity and accountability Innovators and Creators flourish Contributes favorably to the Economy No greedy Global but not taking external shocks State facilitates rather than suppresses Dream Financial System BALANCED (NOT A PERFECT ONE BUT A POSSIBLE) SYSTEM : BALANCED (NOT A PERFECT ONE BUT A POSSIBLE) SYSTEM Change since 1991 : Change since 1991 Liberalization Facilitators Eighteen to Three – Scheduled Industries Eight Hundred to Fifty – SSI MRTP not active Capital Issues Act repealed Foreign Exchange Regulation Act repealed Insurance, Banking Industries open its gates for Private Players MNC allowed Banking Regulation Act simplified Security Exchange Board constituted Foreign Exchange Management Act – passed Company’s Act – subject to scrutiny Private players allowed to do insurance and banking business SEZs opened FDI encouraged Benefit to the Lender : Benefit to the Lender Lender's risk has dwindled substantially Liquidity position is improved Return is certain on his savings (either fixed or variable) Lender gets impetus to save He will get accurate information from specialized financial institutions. Lenders botheration with respect to selecting a prompt borrower is reduced Benefit to the Borrower : Benefit to the Borrower Borrower certainty in rising funds is soared He needs make less effort and minimum time in questing for an ultimate lender. In whatsoever fashion he needs funds he can procure He can seek professionals and specialized assistance from specialist in the field. Major Institutions as Merchant Middlemen : 1. Banking financial institutes (RBI, Commercial banks and co-operative banks) 2. Development banks (all India financial institutes like IDBI, IFCI) 3. Investment financial institutes (LIC,GIC,UTI, since 2000 Private insurance companies like SunLife, Allianz Bajaj, ICICI Prudential etc. ) 4. Non-Banking financial institutes (SBI capital services, Merchant banking companies Hire-purchase companies, etc.,) 5. Postal department Financial services (Recurring deposits, NSC, KVP, Postal Life-Insurance etc.). Major Institutions as Merchant Middlemen Indian financial system since 1991 : Indian financial system since 1991

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