Personal Loans

Financial System

It is an institutional framework existing in a country to enable financial transactions.  There are three main parts in Indian financial system. They are as follows:

lFinancial assets comprises of loans, deposits, bonds, equities, etc.

lFinancial institutions such as banks, mutual funds, insurance companies, etc.

lFinancial markets include money market, capital market, forex market, etc.

lRegulation is another aspect of the financial system. The regulatory authorities are RBI, SEBI, IRDA, FMC

Financial assets/instruments

 It Enable channelising funds from surplus units to deficit units. There are instruments for savers such as deposits, equities, mutual fund units, etc.Also there are instruments for borrowers such as loans, overdrafts, etc. Just Like corporate, governments too raise funds through issuing of bonds, Treasury bills, etc. The Instruments like PPF, KVP, etc. are available to savers who wish to lend money to the government

Financial Institutions

 Influence generation of savings by the community and gives long term loans to business community. .  Further, it offers the following;

Mobilisation of savings

Effective distribution of savings

Institutions are banks, insurance companies and mutual funds- promote/mobilize savings

Individual investors, industrial and trading companies- borrowers

Financial Market: It includes,

Money Market- for short-term funds (less than a year)

Organized (Banks)

Unorganized (money lenders, chit funds, etc.)

Capital Market- for long-term funds

Primary Issues Market

Stock Market

Bond Market

Growth of Money Market:

The developments made in the Money Market are mentioned below:                            

Prior to mid-1980s participants depended heavily on the call money market

The volatile nature of the call money market led to the activation of the Treasury Bills market to reduce dependence on call money.

Emergence of market repo and collateralized borrowing and lending obligation (CBLO) instruments.

Turnover in the call money market declined from Rs. 35,144 crore in 2001-02 to Rs. 14,170 crore in 2004-05 before rising to Rs. 21,725 crore in 2006-07. 

Purpose of the money market          

The Banks can borrow in the money market to:

To fill the gaps or temporary mismatch of funds.

To meet the CRR and SLR mandatory requirements as stipulated by the central bank.

To meet sudden demand for funds arising out of large outflows (like advance tax payments)

Call money market serves the role of equilibrating the short-term liquidity position of the banks

Organized Money Market:

 It is meant for short tem securities, which include

Call money market

Bill Market

Treasury bills

Commercial bills

Bank loans (short-term)

Organized money market comprises RBI, banks (commercial and co-operative)

Call money market

Is an integral part of the Indian money market where day-to-day surplus funds (mostly of banks) are traded?

The loans are of short-term duration (1 to 14 days). Money lent for one day is called ‘call money’; if it exceeds 1 day but is less than 15 days it is called ‘notice money’. Money lent for more than 15 days is ‘term money’

The borrowing is exclusively limited to banks, which are temporarily short of funds. Call loans are generally made on a clean basis- i.e. no collateral is required. The main function of the call money market is to redistribute the pool of day-to-day surplus funds of banks among other banks in temporary deficit of funds .The call market helps banks economize their cash and yet improve their liquidity. It is a highly competitive and sensitive market. It acts as a good indicator of the liquidity position

 Call Money Market Participants

Those who can both borrow and lend in the market – RBI (through LAF), banks and primary dealers. Once upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were allowed in the call money market only on the lender’s side.These were phased out and call money market is now a pure inter-bank market (since August 2005)

Bill Market   

Treasury bill market- Also called the T-Bill market

These bills are short-term liabilities (91-day, 182-day and 364-day) of the Government of India

It is an IOU of the government, a promise to pay the stated amount after expiry of the stated period from the date of issue

They are issued at discount to the face value and at the end of maturity the face value is paid

The rate of discount and the corresponding issue price are determined at each auction

RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills and 364-day T-Bills on a fortnightly basis on behalf of the central government

Money Market Instruments

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

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 (CD)

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 lakhs and in the multiple of Rs. 5 lakhs 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 collateralized 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

Collateralized Borrowing and Lending Obligation (CBLO)

Operationalised as money market instruments by the CCIL in 2003

Follows an unspecified, order-driven and online trading system. On the lenders side main participants are mutual funds, insurance companies.

Major borrowers are nationalized 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)

Capital Market

   It is a Market for long-term capital. Demand comes from the industrial, service sector and government.The Supply of funds comes from individuals, corporates, banks, financial institutions, etc. It can be classified into:

Gilt-edged market

Industrial securities market (new issues and stock market)

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: It 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

Mutual Funds- Promote savings and mobilize 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

Merchant banking- manages and underwrites new issues; undertake syndication of credit, advice corporate clients on fund raising and 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 and they have to adopt stipulated capital adequacy norms and abide by a code of conduct

Development Oriented Banking

Historically, close association between banks and some traditional industries- cotton textiles in the west, jute textiles in the east. Banking has not been mere acceptance of deposits and lending money; included development banking. Lead Bank Scheme- opening bank offices in all important localities providing credit for development of the districtMobilising savings in the district. ‘Service area approach’

Progress of banking in India

Nationalization of banks

 In 1969: 14 banks were nationalized

Branch expansion: Increased from 8260 in 1969 to 71177 in 2006

Population served per branch has come down from 64000 to 16000

A rural branch office serves 15 to 25 villages within a radius of 16 kms

However, at present only 32,180 villages out of 5 lakh have been covered.

Indian Banking System

Central Bank (Reserve Bank of India)

Commercial banks (222)

Co-operative banks

Banks can be classified as:

Scheduled (Second Schedule of RBI Act, 1934) – 218

Non-Scheduled – 4

Scheduled banks can be classified as:

Public Sector Banks (28)

Private Sector Banks (Old and New) (27)

Foreign Banks (29)

Regional Rural Banks (133)

Indigenous bankers (IB)

Individual bankers like Shroffs, Seths, Sahukars, Mahajans, etc. combine trading and other business with money lending. It Vary in size from petty lenders to substantial shroffs.  Further it acts as money changers and finance internal trade through hundis (internal bills of exchange). Indigenous banking is usually family owned business employing own working capital. At one point it was estimated that IBs met about 90% of the financial requirements of rural India

RBI and indigenous bankers

The Methods employed by the indigenous bankers are traditional with vernacular system of accounting.RBI suggested that bankers give up their trading and commission business and switch over to the western system of accounting. It also suggested that these bankers should develop the deposit side of their business; Ambiguous character of the hundi should stop. Some of them should play the role of discount houses (buy and sell bills of exchange).  IB should have their accounts audited by certified chartered accountants. They should submit their accounts to RBI periodically. As against these obligations the RBI promised to provide them with privileges offered to commercial banks. Being entitled to borrow from and rediscount bills with RBI,the Indigenous bankers declined to accept the restrictions as well as compensation from the RBI.Therefore, the indigenous Bankers remain out of RBI’s purview.

 

Deposit mobilization:

1951-1971 (20 years) – 700% or 7 times

1971-1991 (20 years) – 3260% or 32.6 times

1991- 2006 (11 years) – 1100% or 11 times

 

Expansion of bank credit:

 Growing at 20-30% p.a. thanks to rapid growth in industrial and agricultural output

Development oriented banking: priority sector lending.

Diversification in banking: Banking has moved from deposit and lending to

Merchant banking and underwriting

Mutual funds

Retail banking

ATMs

Internet banking

Venture capital funds

Factoring

Profitability of Banks

Reforms have shifted the focus of banks from being development oriented to being commercially viable

Prior to reforms banks were not profitable and in fact made losses for the following reasons:

Declining interest income

Increasing cost of operations

Declining interest income was for the following reasons:

High proportion of deposits impounded for CRR and SLR, earning relatively low interest rates.

System of directed lending

Political interference- leading to huge NPAs

Rising costs of operations for banks was because of several reasons: economic and political.

As per the Narasimham Committee (1991) the reasons for rising costs of banks were:

Uneconomic branch expansion

Heavy recruitment of employees

Growing indiscipline and inefficiency of staff due to trade union activities

Low productivity

Declining interest income and rising cost of operations of banks led to low profitability in the 90s.

 Suggestions to improve Bank profitability:

Following suggestions made by Narasimham Committee are:

1. Establish an Asset Reconstruction Fund to take over doubtful debts.

2. SLR should be reduced to 25% of total deposits.

3. CRR to be reduced to 3 to 5% of total deposits.

4. Banks to get more freedom to set minimum lending rates.

5. Share of priority sector credit is reduced to 10% from 40%.

6. All concessional rates of interest should be removed.

7. Banks should go for new sources of funds such as Certificates of Deposits.

8. Branch expansion should be carried out strictly on commercial principles.

9. Diversification of banking activities.

Almost all suggestions of the Narasimham Committee have been accepted and implemented in a phased manner since the commencement of Reforms.

NPA Management

The Narasimham Committee recommendations were made, among other things, to reduce the Non-Performing Assets (NPAs) of banks. To tackle this, government enacted the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act (SARFAESI) Act, 2002. Further more, it enabled banks to realise their dues without intervention of courts.

 SARFAESI Act

Enables setting up of Asset Management Companies to acquire NPAs of any bank or FI (SASF, ARCIL are examples).NPAs are acquired by issuing debentures, bonds or any other security. As a second creditor can serve notice to the defaulting borrower to discharge his/her liabilities in 60 days, failing which the company can take possession of assets, takeover the management of assets and appoint any person to manage the secured assets. Borrowers have the right to appeal to the Debts Tribunal after depositing 75% of the amount claimed by the second creditor

 Conclusion

There are other financial intermediaries such as NBFCs, Venture Capital Funds, Hire and Leasing Companies, etc.  India’s financial system is quite huge and caters to every kind of demand for funds. Banks are at the core of our financial system and therefore, there is greater expectation from them in terms of reaching out to the vast populace as well as being competitive.

 

 

 

 

Dr.R.SRINIVASAN is a Post graduate in commerce and Management. He received his doctoral degree from Alagappa University in 1997. He is now Working as an ASSOCIATE PROFESSORin Post graduate and Research Department of Corporate Secretaryship at Bharathidasan Government College for Women (Autonomous), Pondicherry University, Puducherry.He currently teaches Accounting ,financial management and Research Methodology Subjects. Before Joining BGCW, he was teaching in SNR College, Coimbatore, Sindhi college, Chennai& T.S.Narayanasamy College, Chennai for eight years. He was with the industry for a short term at Salzar Electronics Pvt. Ltd, Coimbatore. He has about 20 years of teaching experience and having research experience of 15 years. His interests are in Accounting and finance, Capital Market, Quantitative Methods. He underwent the Faculty Development Programme at Indian Institute of Management Ahmedabad during 2000-01. He has presented 20 papers in national and international conferences and has published twenty papers in the areas of Finance and Human resource Management in National Journals. Co-authored a book titled, ‘Investors Protection, published by Raj Publications, New Delhi He has delivered lectures in contemporary finance topics at Pondicherry University. He is involved in consultancy projects for Godrej Saralee, Chennai in the areas of Statistical Applications. He has supervised a number of research projects in the area of corporate finance and Human Resource Management. He is the Board of examiner in corporate Secretaryship and Management for the past two decades.
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Article Source:http://www.articlesbase.com/banking-articles/indian-financial-system-an-appraisal-1333863.html