INDIAN FINANCIAL OVERVIEW

• Up to 1951 corresponding to post independence

• Between 1951 and mid eighties – imperatives of planned economic growth

• After early nineties - LPG

PRE 1951

1. Control of Money Lenders

2. No Laws / Total Private Sector

3. No Regulatory Bodies

4. Hardly any industrialization

5. Banks – Traditional lenders for Trade and that too short term

6. Main concentration on Traditional Agriculture

7. Narrow industrial securities market (i.e. Gold/Bullion/Metal but largely linked to London Market)

8. Absence of intermediatory institutions in long-term financing of industry

9. Industry had limited access to outside saving/resources

Nationalisation

RBI 1948

SBI 1956 (take-over of Imperial Bank of India)

LIC 1956 (Merges of over 250 Life Insurance Companies)

Banks 1969 (14 major banks with Deposits of over Rs. 50

1980 (6 more Banks with deposits over Rs. 200 Crs.)

Insurance 1972 (General Insurance Corp. GIC by New India,

New institutions: Development finance institutions, UTI etc.

Fortification of institutional structure

Development Banks

 Directing the Capital in conformity with Planning priorities

 Encouragement to new entrepreneurs and small set-ups

 Development of Backward Region

 IFCI (1948)

 State Finance Corporation (1951) Purely Mortgage institution

 IDBI (1964) As subsidiary of RBI to provide Project / Term Finance

 ICICI (1966) Channelizing of Foreign Currency Loan from World Bank to Pvt. Sector and
underwriting of Capital issues.

 SIDC’s & SIIC State Level Corporations for SME sector

 UTI (1964) to enable small investors to share Industrial Growth

 IRCI (1971) to take care of rehabilitation of sick-mills promoted by IDBI, Banks & LIC-Name changed
to IIBI in 1997.
Commercial banks

Diversification in forms of financing

 Term lending

 Underwriting of new issues of corporate securities by industrial enterprise

Enlargement of functional coverage

 Small scale industries – credit guarantee scheme (CGS)

 Exports – export credit and guarantee corporation (ECGC)

 Agriculture finance –

• Agriculture Finance Corp. (AFC) for financing agriculture projects and help Banks.
Lead Districts (580) Service Area Approach. Scrapped in 2006.

• ARC (1963) Agriculture Refinance Corp. for refinance of medium & long term
loans.

Commercial banks

Innovative Banking

 Social control –

 Organisational changes: reconstitution of board of banks

 National credit council (NCC): assess the credit priorities on all India basis,
coordinate investing and lending policies of commercial banks

 Agriculture Finance Corporation Ltd: for financing agri projects

 Nationalization – 14 major banks with individual deposits of Rs. 50 crore were

 Bank credit to priority sectors

iPu blic ownership of Financial Institution

Commercial Banks

 Continued old way of Deposit – Banking & short term credit to trade

 Selective Credit Control (Control through quantum, rate of interest margin etc).

 Extensive Branch Expansion. (4000 in 1969 now over 5,00,000)

 Refinance Facility to share risk & also cost of Banks’ funds (Nationalisation. Objectives of Madame Indira
Gandhi)

 Better needs of Economic development

 Create job opportunities

 Fulfilment of Plan objectives

 Servicing maximum population by Branch expansion

 Setting up Committees. Tandon (1974) to regulate Bank Credit & follow-up

 Bank Credit to Priority Sector. (substantial increase)

LIC

Mobilised massive long term funds & single largest organisation with large long term savings. Dominant role
in underwriting issues and direct push of industrial activities.

LIC helped in price stabilization during downswing (e.g. mid 2008 when market faced crisis due to turmoil in
global finance market).

Premium Amount (Rs. in Crs.) Rs. 87108 Crs.*

Life Insurance Policies Nos. 5.09 Crs.

Nos. of Agents/Selling fore 10,00,000+

Rent Income Rs. 7000 Crs. p.a.

* The largest Pvt. Sector ICICI prudential is Rs. 6813 Crs. (less than 10%)
PROTECTION TO INVESTORS

 Building up confidence of investors shattered due to distrust in Pvt. Ltd.

 Redesigning Legal & Administrative set up of Companies.

* Ban on Forward Trading

* Abolition of Managing Agency System

STEPS TAKEN (LEGAL/ADMINISRTATIVE)

 Companies Act 1956 to regulate Companies, Capital Structure.

 Capital Issues (Control) Act, 1947 implemented through CCI in MOF to regulate Capital Issues & Foreign
Investment (repealled in 1992)

 Securities Contract (Regulation) Act, 1956 enforced through Directorate of Stock Exchange under MOF
to regulate Capital Market.

 MRTPA (1970) to avoid (a) concentration of economic power and (b) Control monopolistic and
restrictive trade practices.

FERA (1973) to regulate foreign investment & foreign business

Participation of Corporate Management

 By Financial Institutions (IDBI, IFCI, ICICI)

 By LIC

 By GIC

 Through conversion of Loans into Equity.

(i) Institutional Structure

* Banks, LIC, UTI, Collected Savings directly from investors

* DFI/PFI like IDBI, IFCI, ICICI, SFCs etc. got funds from sponsers like RBI/GOVT.

* Term Finance moved to Big Industries

(ii) Distributive Mechanism

FIs were incapable of handling growing needs of industries

(iii) Form of Financing

* Term Loan (Debt) was main part of financial structure with little part of equity
Capital

* Sometimes Institution became more sympathetic & permitted more than desired
finance in case of strain / default.

* Position of IFCI, IDBI, ICICI, & most of the SFCs became precarious.

Organizational Deficiencies

Small & New Enterprises

* System was unable to meet the financial requirements.

* Very costly to raise funds from the market.

New Issues Marketing / Management

Absence of right – type Merchant Banking Institutions.

Development Financial Institutions : (DFIs)

 Started providing Working Capital also

 Set up CREDIT RATING AGENCIES

CRISIL(IPO IN 1993-94; standard & poor acquires 9.68% in 1996-97 S & P acquires
shares / holding upto 58.46%)

ICRA Set up in 1991 by leading FIs/Banks/Fin. Ser. Cos. And Moody’s CARE Set-up by
IFCI/Banks.

FITCH a 100% subsidiary of FITCH Group.

 Privatisation of DFI

Reduction in Govt. holding & Public Participation e.g. IFCI Ltd., IDBI Ltd., ICICI Ltd.

 Conversion into Banking / Merger into Banking Companies IDBI Bank & ICICI Bank

 Issuance of Bond by DFIs without Govt.’s Guarantees to mobilise resources.

 Reduction in holding of Govt. in Banks, i.e. Public Participation / Listing

 Rise & Growth of Service Sector industries.

 Reliance & Dependance on technology.

 E-mail & mobile made sea-change in communication, data collection etc.

 Computerisation – a catch phrase and inevitable need of an hour.

 Dependent on Capital Market rather than only Debts dependancy.

 Scalability of operations through globally competitive size.

 Broad basing of Board.

 Professional Management.

NBFC

 NBFC under RBI governance to finance retail assets and mobilise small/medium sized savings.

 Very large NBFCs are emerging (Shri Ram Transport Finance, Birla, Tata Finance, Sundaram Finance,
Reliance Finance, DLF, Religare etc.

Commercial Bank

 Govt. holding reduced even by upto 40%

 Setting up of Universal Banks (from CASA to Corp. Finance)

 One-stop Banking.

 Capital Adequacy. (Basel II accepted) 9%

 Assets classification (Regular, Problem, Anxiety, Causing, Non-Performing) and Provisioning

 NPA classification – substandard, Doubtful & Loss Assets.

 Focus on Non-Fund Business like L/C, Guarantees, Acceptance, FOREX etc.

 Promoting Signature-based and consultancy services like Project Counselling, Merchant Banking,
New Issues Management, Capital Market related activities, Merger & Acquisitions, debt
syndication, trusteeship of debts, sponsoring Mutual Funds, Wealth Management, Sales &
Services of insurance (both life & non-life) products etc.

 New Private Sector Banks (AXIS, YES, HDFC, KOTAK MAHINDRA etc.)

 CAMELS’ Rating (C-Capital Adequacy, A-Asset Quality, M-Management, E-Earning, L-Liquidity, &
S-Systems & controls).
Mutual Funds

 Bifurcation of UTI and UTI (AMC) put under SEBI.

 Banks, Broking Houses, Finance Companies Insurance Companies, Pvt. Sector in Foreign
collaboration, FII and Merchant Banks set up Mutual Funds with a varieties of schemes.

 Helps small investors in big way

 Backbone of Capital Markets

Mutual Funds,

 AIG, Baroda Pioneer, Birla Sunlife, Canara Robeco, DBS Chola, Edelweiss, Fidelity, Fortis, Franklin,
HSBC, HDFC, ICICI Prudential, IDFC, ING, JM, Kotak, LIC, Magnum, Mirae, Morgan, Quantum,
Reliance, Religare, Sahara, Sundaram BNP, Tata Tourus, UTI etc.

 Mutual Funds Investment Schemes (over 1000 in Nos.)

Equity Balanced Funds

Equity Diversified Hybrid – Equity Oriented

Equity Index Hybrid – Debt Oriented

Equity Tax Planning Hybrid – Asset Allocation

Equity Banking Hybrid Arbitrage

Equity FMCG Bond Funds

Equity Pharma Debt Medium Term/Short Term

Equity Technology Debt Medium Term/Short Term Institutional

Equity Speciality Hybrid Monthly Income

Cash Funds Gilt Medium & Long Term

Debt Liquid Plus

Primary Market

- Phenominal increase in number of investors.

- New intermediatories i.e. Merchant Bankers, Lead Manager & Book-Builders, Underwriters, Bankers
to Issue, Registrar to Issue, Share Transfer Agents, Portfolio Managers, Depositories, FIIs, Custodians,
Rating Agencies, etc. are playing important role.

- FIIs are allowed to invest & participate in public issues of Debt & Equities within sectoral limits fixed
by the Govt.

Secondary Market

- Over 90% Securities Dematerialised.

- Depository Act 1996; 2 Depositories NSDC & CDSL.

- Settlement Cycle reduced from 15 days to T + 2.

- Clearing & Settlement by Clearing Corp.

- Securities related derivatives introduced.

- Future, Option, Arbitrage, Hedging permitted.

- Primary Dealers

- Money Market Mutual Funds came up

- Call/Notice Market

- Treasury Bills Market

- Commercial Paper Market (CP)

- Certificate of Deposit Market (CD)

- Repo Market

- FOREX Market

Investor protection – SEBI

 Functions:

 Protect the interest of the investors in securities

 Promote the development of securities market

 Regulate the securities market

 SEBI exercises powers under:

 The SEBI Act

 The Securities Contracts (Regulations) Act

 The Depositories Act

 The delegated powers under the Companies Act

Indian Financial System – An Overview

1951 to 1990

Moneylenders ruled till 1951. No worth-while Banks at that time. Industries depended upon
their own money. 1951 onwards 5 years PLAN commenced.

PVT. SECTORS TO PUBLIC SECTOR – MIXED ECONOMY

1st 5 year PLAN in 1951 – Planned Economic Process. As part of Alignment of Financial Systems
– Priorities laid down by Govt. – Policies.

MAIN Elements of Fin. Organisations

i. Public ownership of Financial Institution

ii. Strengthening of Institutional Structure

iii. Protection to Investors

iv. Participation in Corporate Management

v. Organisational Deficiencies.