INDIAN FINANCIAL

SYSTEM
 INDIAN FINANCIAL SYSTEM
The Indian financial system is a
complex and ever-evolving network of
institutions, markets, and services that
channel funds from savers to investors. It
plays a vital role in the country's economic
development by mobilizing savings,
facilitating investments, and promoting
inclusive growth.
• The system is broadly classified into two
sectors: organized and unorganized.
 1. Organized Sector

• This sector is regulated by the Reserve Bank of

India (RBI) and other sectoral regulators like
SEBI (Securities and Exchange Board of India)
and IRDAI (Insurance Regulatory and
Development Authority of India)
• It consists of formal institutions like banks,
insurance companies, and stock exchanges. These
institutions provide a wide range of financial
services to individuals and businesses, including
deposit taking, lending, investment products,
insurance policies, and trading platforms.
 2. Unorganized Sector
• This sector comprises informal lenders like
money lenders, chit funds, and self-help
groups.
• It plays a significant role in meeting the
credit needs of a large section of the
population, particularly in rural areas.
• However, the unorganized sector is often
characterized by high interest rates and
limited access to regulation.
.

• Saving and investment are two core

components of capital formation

• Large numbers of factors that affect the rate of

capital formation in the country like income
levels of the people, institutional factors like
availability, number and policy of the country,
prevailing coverage of financial institutions,
the monetary and fiscal rate of interest,
population, size of the market, etc.
 FINANCIAL SYSTEM
• A financial system consists of a set
of institutions, instruments and
markets which brings the savers and
the investors to a common platform
and provide the means by which
savings are translated to investment
OBJECTIVE OF THE FINANCIAL
SYSTEM
The objective of the financial system
or financial markets is to channelise
the savings into the most productive
opportunity or avenues.
FUNCTIONS OF FINANCIAL MARKETS

•To connect borrowers and lender of funds and to

lead to the process of price discovery/determination.
•To provide liquidity in the system by allocation of
funds in an efficient manner.
•Easy access of funds to the borrowers which in
turn reduces the cost of the transaction.
•Provides a way for managing uncertainty and
controlling risks.
 COMPONENTS OF FINANCIAL
MARKETS
• 1. Money Market
• 2.Capital Market
Both are essential for the economic
development of the country.
 MONEY MARKET
• The money market is a market for short-term
financial assets and assets which are close
substitutes of money.
• Short term implies time period of less than one year
• The financial assets that can be converted to money
with minimum/no transaction cost and without loss
in value.
• The major participants in the money market are
scheduled commercial banks, cooperative banks
and primary dealers
 OBJECTIVES OR FUNCTIONS OF
MONEY MARKET

•To provide equilibrating mechanism between short

term surpluses and deficiencies.
•Maintaining liquidity in the system.
•Providing access to short term funds to the
borrowers at minimum or realistic cost.
•To enable the central bank of the country
intervention to influence and regulate liquidity in
the economy.
INSTRUMENTS OF THE MONEY MARKET

•Call Market/ Notice Market

•Commercial Papers (CPs) Market
•Treasury Bills (T-Bills) Market
•Commercial Bills Market
•Certificate of Deposits (CDs) Market
•Money Market Mutual Funds (MMMFs)
 1.CALL MARKET/ NOTICE MARKET

• It is a market for short term financial funds that are payable

immediately and in full when the lender demands them.
• The maturity period varies from one day to a fortnight (14 days).
• When the funds are browed/lent for a day it is called call
(overnight) money. If the duration of funds borrowed/lent is more
than a day and upto 14 days it is called notice market. For
conducting transactions in the call/notice market there is no need
for any collateral security.
 2. COMMERCIAL PAPERS(CPS) MARKET

• CPs are short term unsecured instruments issued by

companies to raise short term debts.
• They are issued in the form of promissory notes and in
India they were introduced in 1990.
• The maturity duration of CPs is a minimum of 7 days and a
maximum of up to one year from the date of issue. They are
typically issued to short term financial obligations like
funding of the new project. They can be issued in
denomination of Rs 5 lakh or multiples thereof.
 3.TREASURY BILLS
• Treasury bills, or T-bills, are short-term
debt obligations issued by the Indian
government to meet its short-term
funding needs.
• They are considered one of the safest
investment options in India because they
are backed by the government's
guarantee.
.

• T-bills are short term borrowing instruments by the

government of India.
• They are a kind of promissory note issued by the
Reserve Bank of India (RBI). The government uses
T-bills to raise short term funds to bridge the
temporary/seasonal gaps when a deficit arises due
to shortfall ( situation when receipts fall short of
expenditure).
.

• Issuance: Issued by the Government of India.

• Maturity: T-bills are short-term instruments with
maturities ranging from 91 days (3 months) to
364 days (1 year).
• Interest: Unlike traditional bonds, T-bills don't
pay regular interest. Instead, they are issued at a
discount to their face value and redeemed at par
on maturity. Your profit is the difference between
the purchase price and the maturity value.
• Example: Let's say you buy a ₹10,000 T-bill at a
discount of ₹100 (purchase price = ₹9,900). At
maturity, you'll receive ₹10,000. Your profit here
is ₹100.
Benefits of T-bills:
• Safe investment: Backed by the
government, T-bills are considered highly
secure.
• Low risk: Interest rates are determined by
market forces, but due to the short tenure,
they are generally less volatile than long-
term bonds.
• High liquidity: T-bills can be sold in the
secondary market before maturity if
needed.
 4.COMMERCIAL BILLS MARKET

• Commercial bills include bills of exchange and

promissory notes. A promissory note is a form of
financial instrument in which the note’s issuer and the
note’s payee undertake a written promise whereby the
issuer promise to pay a definite sum of money either on
demand or at a specified future date to a particular
person or to the bearer of the instrument.
.

• There are many types of bills like

trade bills, commercial bills, inland
bills, foreign bills, indigenous bills
and others.
• Rediscounting of bills is an
important segment of the bill market.
Commercial banks often make use of
such facilities.
 5.CERTIFICATE OF DEPOSITS (CDS) MARKET

• CDs are negotiable money market instrument against funds

deposited in a bank or other financial institutions for a
fixed time period at a specific rate of interest. Scheduled
commercial banks ( except RRBs and local area bank) and
selected all India FIs can issue CDs in a minimum amount
of Rs. 1 Lakh and in the multiples of Rs. 1 Lakh. The
maturity period of CDs is a minimum of 7 days and a
maximum up to one year.
 6.MONEY MARKET MUTUAL FUNDS (MMMFs)

• To increase the participation of individuals and small

investors in the money market and to provide additional short
term funds avenues to the investors MMMFs were introduced
in April1991 and the detailed scheme of MMMFs was
announced by RBI in 1992.
• Money is collected from a large number of investors and
this pool of money is invested in stocks, bonds and other
securities.
Structure of Money Market in India

Money Market

Organised Unorganised

Commerci Indigeneous Bank, Non

RBI Banking companies, Money
al Bank lenders
BANKING STRUCTURE IN INDIA
Definition of Bank

According to the Banking Regulation Act 1949, a banking

company is a company that transacts the business of banking
in India and banking means accepting deposit of money from
the public for the purpose of lending or investment however
with the promise of repayment on the demand by the depositor
with the facility of withdrawal by cheque, draft, order or
otherwise.
 Reserve Bank
of India (RBI)

.
Scheduled
Banks in India

Scheduled Scheduled
Commercial Banks Cooperative Banks

Public Sector Private Sector Foreign Banks Regional Rural

Banks Banks Banks

Nationalised State Bank of India Old Private New Private

Banks and its associates sector banks sector banks
 RESERVE BANK OF INDIA (RBI)
• RBI is an apex bank of the country and acts as
the regulator of the financial and monetary
system in the country.
• It was established after the recommendation of
the ‘Hilton- Young Commission’.
• It was established as a banker to the central
government by the Reserve Bank of India Act
1934 and it began its operations from April 1935
as a private shareholders bank with the paid-up
capital of Rs.5 crore and in 1949,
• RBI was nationalized.
 Functions of the RBI
•Note Issuing authority
•Banker to the Banks
•Banker of the Government and Debt Manager
•Banking Sector Regulator
•Foreign Exchange Manager
•Maintaining Financial Stability
•Development Role
•Regulator of the Monetary Policy
a) Note Issuing Authority

•RBI has a monopoly over note-issuing in India other

than one rupee coins and coins of smaller
denomination. RBI ensures that both currency notes
and coins are available in an adequate amount in the
country. The currency notes issued by RBI are legal
tender in the length and breadth of the country
b)Banker to the Banks

•All the banks in the country have an account

in the RBI via which banks settle inter-bank
transaction and customer transactions.
•RBI provides short term loans and advances to
banks as and when the need arises.
 c) Banker of the Government and Debt Manager

•RBI acts a banker to the central government of the

country along with those state governments which have
agreed with RBI.
•It maintains the government accounts and financial
transaction with the transfer of government funds.
•It manages the government domestic debt and raises the
money both from the public and financial market to bridge
the shortcoming of revenue
 d) Banking Sector Regulator
RBI regulates and supervises the banking system of the country in
accordance with the various provisions of the RBI Act and Banking
Regulation Act.
RBI as a regulator does a wide range of activities like providing
licenses, prescribing capital requirement like capital adequacy norms,
paid-up capital and lending to the priority sectors of the economy
like farmers, women, etc.
Regulation of interest rate, an inspection of the banks and bank
branches, setting of different regulatory norms and also to initiate
new regulation in accordance to changing circumstances.
 e)Foreign Exchange Manager

•RBI plays an important role in both the

development and regulation of the foreign
exchange market.
•It regulates the transactions which are related to
both exports and imports and ensure smooth
conduct in the domestic foreign exchange
market.
f) Development Role
•RBI aims at promoting financial literacy and education
among the public and also ensures that credit is available to
the productive sectors of the economy.
•For the development purpose RBI has established many
institutions like the National Bank for Reconstruction and
Rural Development (NABARD), Unit Trust of India
(UTI), Deposit Insurance and Credit Guarantee
Corporation, Industrial Development Bank of India (IDBI)
among others
 g) Regulator of Monetary Policy

•Monetary policy is the policy of RBI through

which it regulates the financial market of the
country and most importantly it is used for
credit control.
•Credit creation is one of the chief functions of
the bank.
Methods adopted by RBI for credit control.

i) Quantitative Methods

ii) Qualitative Methods

 Quantitative Methods
•Quantitative methods are used to control total quantity or volume and the cost of the credit
created by banks. Within Quantitative methods divided into direct and indirect instruments.
DIRECT INSTRUMENTS.
•Cash Reserve Ratio (CRR),
•Statutory Liquidity Ratio (SLR) and
• Refinance facilities

INDIRECT INSTRUMENTS.
•Bank rate, Repo and Reverse repo rate,
•Liquidity Adjustment Facility (LAF),
•Open Market Operations,
•Market Stabilisation Scheme (MSS) and
•Marginal Standing Facility (MSF)
 Qualitative Methods

•These methods focus on certain sectors only. By using

these methods RBI can divert the flow of credit from one
sector to another.
•The different qualitative methods used by RBI are
•Credit rationing,
•Consumer credit regulation,
•Increasing margin requirement,
•Moral suasion,
 SCHEDULED BANKS IN INDIA

Scheduled banks are those

banks that are included in the second schedule
of the RBI Act, 1934.
Scheduled commercial banks are
further classified as
• Public sectors banks,
• State Bank of India (SBI)
• Private sector banks
• Foreign banks.
Public Sector Banks(PSBs)
PSBs are those banks in which more than 50 percent of shares are held by the GoI.
At present (2021) there are 12 PSBs namely
SBI,
Bank of Baroda,
Bank of India,
Punjab National Bank (PNB),
Indian Overseas Bank,
Punjab and Sind Bank,
Indian Bank,
UCO Bank,
Bank of Maharashtra,
Central Bank of India,
Canara Bank
Union Bank of India.
SBI
•SBI is the biggest commercial bank in the country with
nearly 25 percent market share and has over 22000
branches and 58500 ATMs.
•SBI initially had 7 associates namely State Bank of
Bikaner and Jaipur, Hyderabad, Indore, Mysore, Patiala,
Saurashtra and Travancore. However, in 2008 and 2009
State Bank of Saurashtra and Indore was merged with SBI
and the remaining 5 associate banks were merged in 2017.
Private Sector Banks

•Private sector banks are those banks in which the majority of the
stake is owned by private shareholders.
•In India, private sector banks are classified as Old and New
private sector banks.
•The private banks which were not nationalized
•Old private sector banks such as The Jammu and Kashmir Bank
Ltd., Lord Krishna Bank Ltd. etc.
•As of April 2021, the number of private sector banks in India was
22.
Foreign Banks
•Foreign banks are those banks which have headquarter
in a different country but has branches in India.
•As of July 14, 2020, there are 46 foreign banks in India.
•These banks have to follow rules both of home and host
country.
•Bank of America, Bank of Ceylon, National Australia
Bank, BNP Paribas, etc are some of the foreign banks in
India.
 Regional Rural Banks (RRBs)

•Regional Rural Banks (RRBs)

were established in 1975 to develop the rural
economy and creation of additional channel to the
cooperative credit structure to enhance the reach of
institutional credit for the rural and agriculture sector.
•There were 43 RRBs as of April 2021.
 Scheduled Co-operative Banks

Cooperative banks function on the concept of cooperative

credit societies wherein the members of the society join
together to extend a loan to each other at a subsidised rate
of interest.
Scheduled Co-operative Banks are of two types Scheduled
State Co-operative Banks and Scheduled Urban
Cooperative Banks.
There are 23 Scheduled State Co-operative banks and 53
Scheduled Urban Cooperative banks.
STRUCTURE OF CAPITAL MARKET

• A capital market is a market for long term

securities or financial instruments having a
maturity period of more than one year.
• Capital markets are important for channelizing
savings, capital formation and industrial
growth.
 .

• The capital market is a financial

marketplace where long-term investments
are bought and sold. This includes things
like stocks, bonds, and other securities.
• Businesses and governments use capital
markets to raise money for long-term
projects, such as building new factories or
funding infrastructure improvements.
 .

• .

Capital Market

Markets Instruments Intermediaries Regulator

Primary

Securties and
Secondary Exchange Board
of India (SEBI)
 TYPES OF CAPITAL MARKETS
• Primary markets are where new securities
are issued for the first time. Companies or
governments will sell new stocks or bonds
to investors in a primary market
transaction.
• Secondary markets are where existing
securities are traded between investors. The
stock market and the bond market are both
examples of secondary markets.
 Financial Instruments

•Shares

A share indicates a unit of ownership by the buyer of shares

called shareholder of the company. A shareholder has
ownership in the company and has voting rights and shares
the company profit or loss. The benefit which a shareholder
receives out of company profit is called a dividend.
Bonds

Bonds are issued by state and central governments,

companies and municipalities to raise money for a
variety of projects and activities.
It is fixed- income security and essentially a loan
agreement between a bond issuer and an investor.
The bondholders unlike shareholders do not have
any ownership of the company or have voting
Debentures
• Debentures are also a type of debt instrument
which is issued by companies for raising
funds
• An investor buys debentures based on the
reputations and the creditworthiness of the
issuer.
• The interest rate on debentures is higher than
that of bonds.
 CAPITAL MARKET INTERMEDIARIES

•Merchant Bankers
•Underwriters
•Portfolio Managers or Portfolio Management
Services (PMS)
•Stock Brokers
•Regulator of the Capital Market /SEBI
 INDUSTRIAL POLICY FRAMEWORK

Reformation started after 1995 and was influenced by

three factors:

•Young entrepreneurs entered a competitive

economy.
•Tariff rates started dropping down along with
quantitative import restrictions becoming history.
•MNCs started entering India in greater numbers
and created a competitive landscape from within.
 STAGES OF INDUSTRIAL POLICY
PRIOR TO 1991
• Industrial Policy and Strategy
• Industrial Licensing
•industrial licensing was represented in three different Acts:

• Industries Development and Regulation (IDR) Act, 1951 –

• Monopolies and Restrictive Trade Practices (MRTP) Act, 1969
• Foreign Exchange Regulation (FERA) Act, 1973

• Phase of Liberalisation
 NEW INDUSTRIAL POLICY 1991

 Industrial Licensing Policy

Foreign Investment:
Foreign Technology Agreements:
Public Sector:
 MRTP Act:
 STATE SPECIFIC INDUSTRIAL POLICIES

•With technology and innovation, India is catching up

with its global counterpart while pioneering business
models and strategies.
•The state governments have shown immense progress.
Policies of states in Southern region are a perfect
example of how consistent compliant policy helped
the region in developing private enterprises and
making investments beneficial while nurturing MSMEs.
This helped in curtailing unemployment at a drastic rate.
•The state specific industrial policies have focused on
.

simplification and developments in the following

areas:
•Single window clearance
•Labour regulation
•Online tax return filing
•Inspection reform
•Commercial dispute resolution
•Availability of land
•Construction permit
•Access to information and transparency
•Obtaining electricity connection
•Environment registration
AGRI-BUSINESS ENVIRONMENT
• The progress can be witnessed through
increase in crop production, productivity,
diversification, and technological
developments
 TRENDS IN AGRICULTURE
PRODUCTION, SALES, AND EXPORTS
• The prime source of living and employment
for about 58% of Indian population.
• The food industry has a huge potential for
value addition with a bright prospect
• Currently, the food and grocery market in
India is the sixth largest globally, with retail
contributing to 70% of the sales and the
agriculture, forestry and fishing growth is
predicted to be 3% in the 2021.
EVOLUTION OF FARM POLICIES IN
INDIA
• Domestic Agricultural Policies 1947-1965
• Domestic Agricultural Policies 1965-1980
• Domestic Agricultural Policies 1980-1991
• Domestic Agricultural Policies 1991 onwards
• Marketing Policies
• Essential Commodities Act (ECA)
• Agricultural Produce Market Regulation
Acts (APMC)
 FARM REFORMS 2020
• Farmers' Produce Trade and Commerce
(Promotion and Facilitation) Act, 2020
• Farmers’ (Empowerment and Protection)
Agreement on Price Assurance and Farm
Services Act, 2020
•Essential Commodities (Amendment) Act,
2020
 KEY PLAYERS IN THE
AGRICULTURE SECTOR
 Merchant Middlemen

•They are of four types:

a) Wholesalers:
b) Retailers:

c) Village merchants:

d)Mashakakhores:
 Agent Middlemen

•They are basically representatives of clients and do not own the

products. They act as negotiators between sellers and buyers and
help them in sale and purchase of products. They usually receive
commission or brokerage on sale. Agent middlemen are of two types:
Commission Agents: A commission agent generally operates in
the wholesale market and acts as the proxy of either a seller or
a buyer by representing them in buying and selling of products.

Brokers: They act as communicators between buyers and sellers

to bring them on the same platform while facilitating personal
services to their clients in the market.
 Speculative Middlemen

•These middlemen are the ones who buy

products at a low price when arrivals are sizable
usually in off-season when prices are high.

•Processors

•Facilitative Middlemen
 ROLE AND IMPORTANCE OF
AGRICULTURAL MARKETING
•Optimization of Resource use and Output
Management
• Increase in Farm Income
• Widening of Markets
• Growth of Agro-based Industries
• Price Signals
• Adoption and Spread of New Technology
• Employment Creation
• Addition to National Income
• Improved Living