FINANCIAL SYSTEM

BY
NIDHINA ELIZABATH TOM
Financial Economics
• Financial Economics is a generic term applicable to a vast array
of topics relating Finance with Economics
• Financial economics is a branch of economics that analyzes the use
and distribution of resources in markets
• It employs economic theory to evaluate how time, risk, opportunity
costs, and information can create incentives or disincentives for a
particular decision
What is financial system?

• Financial system is actually concerned about money, credit and

finance.
• It implies a set of complex and closely connected or inter-mixed
institutions, agents, practices, markets, transactions, claims and
liabilities in the economy.
• Many economists argued that an efficient financial system greatly
helped a nation’s economy to grow.
Nature of financial system
• “ A financial system is a complex, well integrated set of sub systems of
financial institutions, markets, instruments and services which
facilitate the transfer and allocation of funds, efficiently and
effectively.”
• Constituents of financial system.
1. Financial institutions
2. Financial markets
3. Financial instruments
4. Financial services
1. Financial institutions
• Financial institutions are business organisations that act as mobilisers and depositors
of saving and as purveyors of credit of finance.
• It can be classified as follows:
1. Banking and non banking institutions
The banking institutions have quite a few things in common with the non banking
institutions, but the differences can be understand as banking deals with the creator of
credit or money but the latter is purveyors of credit.
Banking system in india comprises of commercial and cooperative banks and non
banking institutions includes LIC, Mutual funds and other NBFCs
2. Intermediaries and non intermediaries
intermediaries act as intermediate between the savers and investors. But non
intermediaries do the loan business but the resources are not directly obtained from
the savers.
2. Financial markets.
• Financial markets are the mechanism enabling participants to deal
with financial claims. The markets also provide a facility in which their
demands and requirements interact to set a price for such claims.
The financial markets can be classified as follows:
1. Primary markets and secondary markets
Primary markets deal in the new financial claims or new securities.
And secondary markets deal in securities already issued or existing or
outstanding.
2. Money market and capital markets
Money market is a market for short term securities with a maturity
of one year. And capital market is a market for long term securities.
3. Financial instruments
• Financial instruments are the claims against a person or an institution
for the payment at a future date a sum of money and/or a periodic
payment in the form of interest or dividend.
4. Financial services
• Financial services are rendered by the financial intermediaries to
bridge the gap between the lack of knowledge on the part of
investors and increasing sophistications of financial instruments and
markets.
Functions of financial system
• A system is a collection of objects related by regular interaction and
interdependence.
• The role and significance of a sound financial system can be better appreciated if
we review the state of an economy which does not have a presence of a sound
financial system
Lack of financial system and vicious circle:
a) The UDCs which does not have sound financial system may suffer from low level
of investment and slow economic growth.
b) Lack of financial system also lead to low saving rate.
c) Poverty traps due to high information cost occur as a result of deficient financial
system.
d) Lack of financial system will reduce the overall levels of business environment.
• From the above description, it is clear that a sounded financial system
is a pre-requisite for rapid economic development.
• A sounded financial system can contribute significantly to the
acceleration of economic development through the following ways:
1. Technical progress is endogenous; human and physical capital are
its important sources.
2. Helps in the capital formation.
3. It also enlarges the market over time and space.
• In order to play such a crucial role in economic development, a
financial system performs following functions:
1. To link the savers, investors and borrowers and thereby help in
mobilising and allocating the saving effectively and efficiently.
2. Helps in selecting the projects to be funded and inspires the
operators to monitor the performance of the investment.
3. To achieve the optimum allocation of risk bearing. It limits, pools
and trades the risk involved in mobilising saving and allocating
credit.
4. It makes the price-related information available.
5. An effective financial system minimises situations where the
information is asymmetric and likely to affect the motivations
among the operators.
6. It provides the financial services.
7. Financial system helps in the creation of financial structure that
lowers the cost of transactions.
8. A well functioning financial system helps in the process of financial
deepening and broadening.
In short the function of financial system are to establish a bridge
between savers and investors and thereby enlarge the markets over
space and time and to allocate financial resources efficiently and there
by achieve economic development.
Structure of Indian Financial system
• In this context it is also becomes important to understand the structure of financial
system in an economy.
• The structure of Indian financial sector can be assessed in terms of the institutions
that comprise the financial sector as well as the various financial markets in which
these institutions interact and carryout transactions.
• Finance can be divided in to two:
1. Direct finance: In this case the borrower directly borrow funds from the lender in
the financial markets by selling them securities (also called financial instruments),
which are claim on the borrower’s future income/assets.
2. Indirect finance: In this case the role of channelizing the funds from the savers to
borrowers is done through financial intermediaries (example commercial banks,
such as HDFC Bank, Canara Bank etc.; and non-bank financial institutions such as
LIC, IDBI, Mutual Funds etc.).
• The structure of Indian financial system is given below.
Money market
• Money market is a market for funds seeking safe or riskless avenues.
• Money market can be defined as a market for money and close substitutes for
money. In other words market for assets that can be converted into money
easily and without any loss of capital.
• Market for short term funds.
• It is a market for overnight to short term fund and instrument having a maturity
period of one or less than one year.
• It deals in funds and financial instruments having a maturity period of one day
to one year
Financial institutions, business firm, a corporate body or a govt. body etc:
Finance to meet daily expenses
Finance to meet capital expenditure
Functions of money market
• The money market is generally expected to perform the following functions:
1. It should provide an equilibrating mechanism to even out demand and supply
of short term funds. It caters to the short term financial requirements of the
economy
2. It should provide a focal point for central bank intervention for influencing
liquidity and general level of interest rates in the economy. It supports the RBI
in actual enactment of budgetary policy
3. It should provide reasonable access to providers and users of short term funds
to fulfil their borrowing and investment requirements at an efficient market
clearing price.
4. Financing trade and industry
5. Profitable investment.
Features
• Presence of central bank
• Highly organized
• Presence sub markets
• Integrated structure
• Access to instruments
• Uniformity in interest rates
• Stability in prices
Participants
• Central government
• Public sector undertakings
• Insurance companies
• Mutual funds
• Banks
• Corporates
• Traders
• Farmers
• Industrialists
• Exporters and importers
• General public
Structure of Indian money markets
• Organised sector: systematically coordinated by RBI
• Unorganised sector: not systematically coordinated and controlled by RBI.
• Sub markets:
1. Call money/ notice money market: market for call money granted for
one day or an overnight. It is also known as interbank call money
market.
2. Treasury bills market: markets for treasury bills issued by central govt.
3. Commercial bill market: deals with commercial bills issued by firms
engaged in business.
4. Collateral loan market: deals with collateral loans
5. CD and CP market: deals with the trading of certificate of deposits and
commercial paper.
Features of money market transactions
• Short term in nature
• Instruments with very low risk are used.
• Very low transaction cost.
• No transaction hassles.
• Very high volumes.
• Thus market efficiency depends on:
low cost of transaction
information availability and
large number of participants.
Money market instruments
• As we have discussed earlier, the institutions having temporary surpluses seek risk less
investments. Thus special type of instruments are needed in this market.
1. Call money/Notice money: Call money is the overnight inter bank funds market in India.
call money is very short term fund such as overnight call money and notice money(14
days) known as money at call. The money that is lent for one day in this market is known
as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as
"Notice Money". Its features are:
• The call/notice money market was predominantly an interbank market until 1990
• Call money refers to the unsecured segment of the money market that is designed for
management of liquidity for a very short period of time - mostly overnight.
• The call market enables banks to even out their day-to-day demand for and supply of short-
term funds.
• This market is a purely unsecured market as no collateral is offered for securing the funds and
there are no brokers involved. Settlement is done between the participants through the
current account maintained with the RB
• Under notice money market funds are transacted for the period
between 1 days and 14 days. The funds lent in the notice money
market do not have a specified repayment date when the deal is
made. The lender issues a notice to the borrower 2-3 days before the
funds are to be paid. On receipt of this notice, the borrower will have
to repay the funds within the given time.
• Generally, banks rely on the call money market where they raise funds
for a single day.
• The main participants in the call money market are commercial banks
(excluding RRBs), cooperative banks and primary dealers. Discount
and Finance House of India (DFHI), Non-banking financial institutions
such as LIC, GIC, UTI, NABARD etc. are allowed to participate in the
call money market as lenders.
 the call money deals in short term finance which is repayable on demand, with
a maturity period varying from one day to 14 days
Features
• Overnight/fortnight funds/deposits
• Participants- Banks, primary dealers, financial institutions
• Demand and supply: Temporary surpluses / deficits of banks and PD’s
• RBI restrictions: Totally deregulated and left to market forces. But, Only for
Banks and Primary Dealers
• Volatile: wide fluctuations even during the day
• Interest rates: Deregulated i.e., rates determined by the market forces
• Intervention of RBI:through LAF, OMO
• High value transactions.
• Clean Lending, in the form of a deposit
• Brokers not allowed
2. Treasury bills: these are only issued by the central govt. of a
country when it requires funds to meet its short term obligations.
Mainly two types:
Ad hoc and Regular treasury bills.
these securities do not generate interest but allow an investor to
make capital gains as it is sold at a discounted rate while the entire face
value is paid at the time of maturity. Maturity can be 91, 182 and 364
days
• Treasury Bills Treasury Bills are instruments of short-term borrowing
of the government and play a vital role in cash management of the
government. Their characteristics are as follows:
• Short Term Debt of Government of India z
• Maturity less than a year
• Issued : through RBI – at a discount to face-value and redeemed at FV
– for 91, 182 and 364 days maturity – by weekly / fortnightly auction –
competitive and non-competitive bids
• Anybody can invest
• Minimum investment Rs 25,000
• Good instrument for cash management
• Eligible for Reverse Repo transactions with the RBI
• Treasury Bills market has been the most preferred by central banks for
market interventions to influence liquidity and short-term interest
rates, generally combined with repos/reverse repos
3. Commercial paper: this type of money market instrument serves as
a promissory note generated by a company to raise short term
funds. Issued for a minimum period of maturity of 7 days to
maximum period of one year.
Commercial paper
• Issued in India in 1990
• It can be issued in two ways: as a promissory note, or in a dematrialised
form
• Terms and conditions for issuing CP like eligibility, modes of issue, maturity periods,
denominations and issuance procedure, etc., are stipulated by the Reserve Bank.
• Who can issue: firms with tangible net worth not less than 4 crore,
primary dealers, all- India financial institutions
• Investors: wide variety of entities with high credit rating and less
potential risk, individuals, banks, corporates, unicorporated bodies,
NRI’s, FII
4. Certificate of deposit: while deposits kept with banks are not
ordinarily tradable, when such deposits are mobilised by a bank by
issue of CD, then such deposits get securitised and therefore,
becomes tradable.
Certificate of deposit
• while deposits kept with banks are not ordinarily tradable, when such
deposits are mobilised by a bank by issue of CD, then such deposits
get securitised and therefore, becomes tradable.
• Thus, CDs represent essentially securitised and tradable term deposits
• WHO CAN ISSUE: commercial banks and financial institutions
• Investors: companies, individuals, banks, NRI’s, trusts etc
• In India, CDs were first introduced in 1989. The terms and conditions for issuing
CDs like eligibility, maturity periods, size, transferability, applicability of reserve
requirements, etc., are stipulated by the Reserve Bank.
5. Repurchase agreements(Repos)/ ready forward transaction: Repo
refers to a transaction in which a participant acquires immediately
funds by selling securities and simultaneously agreeing for
repurchase of the same or similar securities after a specified time at
a given price.
6. Collateralised borrowing and lending obligation(CBLOs): CBLOs
allow short term loans to be secured by financial institutions,
helping to cover their transaction. To access these funds the
institution must provide eligible securities as collateral- such as T-
bills that are at least from 6 months of maturity. Clearing
corporation of India ltd(ccil)
7. Money market mutual funds: were introduced in India in April 1991
to provide an additional short term avenues to investors and to
bring money market instruments with in the reach of individuals.
8. Commercial bills: “An instrument in writing containing unconditional
order, signed by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of a certain person or to the bearer of the
instrument”.
It is also known as bill of exchange
A bill of exchange is also known as Commercial Bill or Trade Bill.
• A bill of exchange is an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay a certain sum
of money only to, or to the order of, a certain person or to the bearer of
the instrument for the value of goods / service delivered by him.
• The maker of the bill of exchange is called the 'drawer', and the person
directed to pay is the 'drawee’
• The person named in the instrument, to whom or to whose order the
money is, to be paid, is called the 'payee’
• At times, the drawer and payee may be the same entity.
These types are as follows:
a) Demand and usance bills.
b) Clean bills and documentary bills(D/A, D/P)
c) Inland and foreign bills.
d) Export and import bills
e) Indigenous bills.
f) Accommodation and supply bills.
g) Trade bills
Capital market
• The term capital market refers to the institutional arrangements for facilitating the
borrowing and lending of long-term funds
• It is concerned with those private savings, individuals as well as corporate, that are
turned into investments through new capital issues and also new public loans floated
by government and semi-government bodies.
• A capital market may be defined as an organised mechanism for effecive and efficient
transfer of money capital or financial resources from investing parties, i.e, individuals or
institutional savers to the enterpreneurs engaged in industry or commerce in the
business either be in the private or public sectors of an economy.
• Ensures best possible coordination and balance between the flow of savings on the one
hand and flow of investment leading to capital formation on the other.
• Directs the flow of savings into most profitable channels and thereby ensures optimu
utilisation of financial resources.
Capital Market
• The market deals with long term funds.
• Capital markets constitute the mechanism for bringing together
buyers and sellers of various types of financial assets.
• Capital markets are the markets where long term debt contracts are
traded, like bond markets, debentures, or equity markets where
financial claims are sold which allows the holder a share in the profits
of the firms issuing these shares.
• Capital markets are all about raising of capital and matching of those
who want capital(borrowers) with those who have capital(lenders).
• Capital market is referred to as a place where saving and investments are
done between capital suppliers and those who are in need of capital. It is
therefore a place where various entities trade different financial
instruments.
• Mainly it can be divided in to two: debt market and equity market.
Participants in the capital markets:
Borrowers: 1. Individuals
2. companies/ business firm.
3. governments
4. psc
5. foreign agencies or institutions:
Lenders: individuals, financial intuitions and even companies
Characteristics of Capital Market
The following are the important features of a developed capital market
• Market for long term funds.
• Important component of financial system.
• Facilitates borrowing and lending of funds.
• Helps in raising capital.
• Involves both individual and institutional investors.
• Meets demand and supply of long term capital.
• Involves intermediaries. :Are service providers in the market, including stock
brokers, sub-brokers, financiers, merchant bankers, underwriters, depository
participants, registrar and transfer agents, portfolio managers, custodians, e
• Deals in marketable and non-marketable securities.
Functions of capital market
• It links investors/savers and borrowers
• Facilitates the movement of capital to be used more profitably and
productively to boost the economic growth.
• Mobilisation of savings to finance long term investment
• Facilitates trading of securities
• Improvement in the effectiveness of capital allocation.
• Perfect information among the participants.
• Reduction in transaction cost and search cost.
• Integrates different sectors of the economy.
• Capital markets facilitates the flow of funds into efficient channels through
proper investment.
Importance of capital market in an economy
• Allocation of capital
• Allocation of risk
• Mobilization of savings
• Encouragement to investment
• Stability in security prices
• Benefits to investors
Classification of Capital Market
• Primarily there are two types of capital markets: Debt Market and
Equity market
• And it can further divided into Primary markets and secondary
markets.
• How much of the capital the firm should raise through debt and how
much through equity is a decision that is important to the firm. This is
called the capital structure of firm.
Debt market
• Market where the debt instruments are traded.
• Debt instruments are assets that require a fixed payment to the holder
usually with interest.
• Debt market is an arena in which investment in loans are bought and
sold.
• The main debt market instrument is bonds, which are fixed income
securities. The investor gets periodic interest payments over the life of
bond and the principal payment at the time of redemption of the bond.
• Straight bonds, zero coupon bonds, floating rate bonds, bonds with
embedded options and commodity linked bonds are the different types
of bonds.
Equity market
• It is the market where stocks are bought and sold.
• Equity financing allows a company to acquire funds without incurring debt.
Equity shareholders gain ownership.
• It represents the share of ownership of the company.
• Equity capital is ownership capital. It is the shareholders who collectively own
the company. They undertake the risk, but also earn the rewards of ownership.
• Parameters to judge the functioning of equity markets are:
1. Volatility
2. Liquidity
3. Size of the market
4. Level of transaction cost.
Instruments traded in the capital market
• Equity shares : rights shares, bonus shares, blue chips shares
• Preference shares
• Debentures: convertible debentures and non convertible, redeemable
and irredeemable, fully convertible and partially convertible
• Bonds
Primary market and secondary market
1. Primary market:
• Primary market is a market for new issue of securities where the securities are initially
offered for the public.
• Also known as direct market/ New Issue Market
• Deals with new financial claims or new securities and also known as new issue market.
• In the primary market the security is purchased directly from the issuer. The primary
market is a market for new issues. Hence it is also called new issue market. It is a
market for fresh capital. It deals with the new securities which were not previously
available to the investing public
• Mobilise savings and supply fresh or additional capital to business
• Funds mobilised through prospectus, rights issue, private placement and bonus
shares.
• SEBI regulates primary market.
• It does not have any organisational setup located in any particular
place and is recognized only by the specialist institutional services
that it tenders to the lenders/borrowers (buyers/sellers) of capital
funds at the time of any particular operation.
Functions
• The main function of a new issue market is to facilitate transfer of
resources from the savers to the users. The savers are individuals,
commercial banks, insurance companies etc. The users are public
companies and the government.
• Origination: that is, investigation & analysis & processing of new issue
proposals
• Underwritting:
• Distribution
Role of NIM
• Capital formation
• Diversification of risk
• Reduction in cost
Types of primary market issues
A company can raise capital from the primary market through various methods. The
methods include:
• Public issue: initial public offering and follow-on public offering
• Offer for sale method/ bought out deal:
• Private placement:
• Right issue:
• Tender method:
• Issue of bonus shares; Bonus issue method
• Offer to the employees: employee stock option scheme and employee stock
purchase scheme
• Pure prospectus method
• Book building method
2. Secondary market:
• A market for already issued financial assets.
• Also known as indirect market.
• Secondary market also known as stock market and it operates through stock
exchanges
• Deals with the securities already issued or existing or outstanding.
• SEBI is the regulatory markets.
• In secondary markets principal role is played by the stock exchanges. Recent
innovations include depository system and custodian services.
• After 1991 reforms, Indian secondary market has 3 tier form
1) Regional stock exchanges
2) National stock exchange
3) Over the counter exchange of India (OTCEI)
The stock exchanges
• The stock exchange is the market where stock, shares and other securities are bought and sold. It is the
market where the owners may dispose of their securities as and when they like
• Stock market represents the secondary market where existing securities are traded.
• Stock exchanges are organised and regulated markets for various securities issued by corporate sector and
other institutions.
• As per Hartely withers, “a stock exchange is something like a vast warehouse where securities are taken away
from the shelves and sold across the countries at a fixed price in a catalogue which is called the official list
• Husband and Dockery- “securities or stock exchanges are privately organised markets which are used to
facilitate trading in securities”.
Features
• It is a place where securities are purchased and sold.
• A stock exchange is an association of persons whether incorporated or not.
• The trading in a stock exchange is strictly regulated
• Both genuine investors and speculators buy and sell shares.
• The securities of corporations, trusts, governments, municipal corporations etc. are both allowed to be dealt at
stock exchange
• It is an organized capital market.
• It may be incorporated or non-incorporated body (association or body of individuals).
• It is an open market for the purchase and sale of securities.
• Only listed securities can be dealt on a stock exchange.
• It works under established rules and regulations.
• The securities are bought and sold either for investment or for speculative purpose
Functions
• Ensures liquidity to capital
• Continuous market for securities
• Mobilization of savings
• Capital formation
• Evaluation of securities
• Economic developments
• Safeguard for investors
• Barometer for economic conditions
• Platform for public debt
• Helps banks
• Pricing of securities
Listing of securities
• Listing of securities means permission to quote shares and debentures officially on the trading floor of the
stock exchange. Listing of securities refers to the sanction of the right to trade the securities on the stock
exchange
Management
• A stock exchange is managed by a governing body which consists of a President, Vice- president, Executive
Director, elected directors, public representatives and government nominees
Method of Trading on a Stock Exchange

• Placing an order with a broker

• Execution of the order
• Reporting the deal to the client
• Settlement of transactions
Major stock exchanges in India
• BSE: BSE is the leading and the oldest stock exchange in India as well as in Asia. It was established in
1887 with the formation of "The Native Share and Stock Brokers’ Association". BSE is a very active stock
exchange with highest number of listed securities in India. Nearly 70% to 80% of all transactions in the India
are done alone in BSE.
• NSE: NSE was incorporated in 1992 but started its operations in 1994 with trading in the wholesale debt
market segment. In November 1994, it launched the capital market segment as a trading platform for equities.
• Over the Counter Exchange of India (OTCEI): It was established in October 1990, with an objective to
provide an alternative market for securities of smaller companies
• New york stock exchange
• NASDAQ
• LONDON STICK EXCHANGE
• JAPAN STOCK EXCHANGE
• SSE(SANGHAI STOCK EXCHANGE)
SEBI
• The Securities and Exchange Board of India (SEBI) is the designated regulatory body for the finance and
investment markets.
• In January 1995, the Government promulgated ordinance to amend SEBI act, 1992 so as to arm SEBI with
additional power for ensuring the orderly development of the capital market and to enhance its ability to
protect the interests of the investors.
The basic function of SEBI
• To regulate the securities market and
• To promote the development of Securities Market;
• To protect the interests of investors in securities;
• For matters connected therewith or incidental there to.
• Functions of SEBI are classified in to two they are as follows:
1. Regulatory Functions
• Registration of brokers and sub-brokers and other players in the market
• Registration of collective investments schemes and Mutual Funds
• Regulation of stock exchanges and other self-regulatory organisations (SRO) merchant etc
• Prohibition of all fraudulent and unfair trade practices
• Controlling Insider Trading and takeover bids and imposing penalties for such Practices
2. Development functions
• Investor education
• Training of intermediaries
• Promotion of fair practices and Code of conduct for all SROs
• Conducting Research and Publishing information useful to all market Participants
Powers of SEBI
• Powers related to stock exchanges and intermediaries
• Power to impose monetary penalties
• Powers to initiate actions in the functions assigned
• Power to regulate insider trading
• Powers under securities contract act
• Power to regulate business of stock exchanges
Differences between money market and
capital market
Recent trends in money market
• Deregulation of interest rates
• Money market mutual funds
• Establishment of DFHI(Discount and Finance House of India)
• Electronic transactions
• Establishment of clearing corporation of India ltd(CCIL)
• Development of new money market instruments
• Liquidity adjustment facility
Financial sector reforms
• Refers to the reforms in the banking system and financial markets.
• Financial sector reforms involve instituting policies which will increase the
allocative efficiency of available saving, promote growth of real sector,
and enhance the health, stability, profitability and viability of financial
institutions.
• The reforms refers to the policy of reducing or removing completely the
legal restrictions, physical or administrative or direct controls, ceilings on
interest rates, restrictions on flow of funds, official directives regarding
sectoral and other allocations of funds, restrictions on the scope of
activities of banks and other financial institutions and so on..
• An efficient banking system and a well functioning of financial markets
are essential to mobilize savings and to channel them to productive uses.
Recommendations of Narasimham committee
• Reductions in the CRR and SLR
• Priority sector lending
• Set up tribunals for recovering loans of NPA
• Entry of new private banks in the banking system
• Deregulations of interest rates
Objectives
• To develop a market oriented, competition, world integrated, diversified,
autonomous and transparent financial system
• To increase the allocative efficiency of available savings and to promote accelerated
growth in the real sector
• To increase effectiveness, accountability, profitability, viability, vibrancy, balanced
growth, operational economy and flexibility, professionalism in the financial sector.
• To increase rate of return on investment
• To promote competion and facilitating free entry and exit for the participants
• To ensure that the interest rates are flexible
• To build a financial structure relating to supervision, audit, technology and legal
matters
• To modernise the instruments of monetary control
• The financial sector reforms includes the following:
1. Liberalisation.
2. Privatisation.
3. Prudential regulation
4. Integration
5. Internationalisation and globalisation
6. Securitisation
7. Reduction in Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)
8. End of Administered Interest Rate Regime
9. Prudential Norms: High Capital Adequacy Ratio
10. Competitive Financial System/ allowing private sector banks
11. A foreign bank may operate in India
• as foreign bank branches
• as a subsidiary of a foreign bank which is wholly owned by the Indian bank
• As a subsidiary of a foreign bank within which maximum foreign investment by
74%

12. Non-Performing Assets (NPA) and Income Recognition Norm.

13. Elimination of Direct Credit Controls
14. Promoting Micro-Finance to Increase Financial Inclusion
15. Reforms in government debt market
17. Reforms in foreign exchange market,.
18. Reforms in banking sector
19. Reforms in derivatives market
20. Reforms in primary and secondary markets
Impacts
• The operational profits of the commercial banks were increased
• The assest quality of Indian banking system has improved
• The financial performance of SCBs had also improved
• Improvements in the efficiency of the banking system
• Encouraged productivity of banking sector
• It increased competition
• Reforms in derivatives market helped the participants to manage risk
• Efficiently managed inflation rate in the economy
• Reflected strong growth prospects in Indian economy.
• Risk management practices of banks were improved
• The BoP composition has undergine significant changes
• Current account surplus
• Allowed for flexibility in the determination of exchange rate
• It has increased competition among the banks
• It has quickened the pace of structural transformation of IFS