Indian Financial System Structure

Structure of Indian Financial System

• The system includes multiple components and a structure that clarifies rules and policies for investment and savings.
• It consists of two elements: organized and unorganized markets.
• It is related to institutions involving financial markets and services, facilitating finance and accounts management.
• The structure provides aspects related to financial institutions and their intervention.
• An ordinary system includes money, financial instruments, institutions, and central banks.
• Institutions within have maintained profit-making public sector undertakings since 1969.

Components of the Indian Financial System

• Financial institutions mediate between lenders and borrowers.
• Commercial markets intensify savings for lenders.
• They are known for establishing safe investment-related ideas.
• The financial institution has two types that have major involvement in society, banking and non-banking sectors.

Financial Assets

• Call money: Assurance of next-day payment on a lent loan.
• Notice money: Lending format for over 1 day but less than 14 days.
• Term money: Mature money that matures within 14 days of the deposit date.
• Treasury bills: Maturity in less than a year, with the deposit belonging to the government.
• Deposit certificate: Manages electronic funds for deposit and withdrawal.
• Commercial proofs: Used for corporate sectors for short-term debt.

Financial Service

• The main objective of the financial service is related to counseling for convincing people about selling and purchasing a property.
• Banking: Includes account opening, loans, and debit/credit card distribution.
• Insurance: Different insurances for sales, purchases, and brokerage deals.
• Investment: Involves asset investment and deposits.
• Foreign exchange: Deals with currency exchanges and fund transfers.

Financial Market

• Deals with bond exchange, shares, and investments.
• India has 4 types of financial markets.
• Capital market: Deals with trade transactions.
• Includes corporate, government securities, and long-term loans.
• Money market: Deals with short-term investments.
• Includes organized and unorganized sectors.
• Foreign exchange market: Responsible for foreign money management.
• Credit market: Involves individuals and organizations for loans.
• Money: Involved with purchase and sales factors.

Regulatory Framework and Financial Institutions in India

• Regulators are independent agencies responsible for regulatory and supervisory activities.
• Regulatory bodies ensure stability and integrity.
• Objectives include financial stability, consumer protection, and reducing financial crime.

Major Regulatory Bodies in India

• The Reserve Bank of India (RBI) is the apex monetary institution, established under the RBI Act of 1934.
• The Securities and Exchange Board of India (SEBI) protects investor interests and regulates the securities market, established in 1992.
• The Insurance Regulatory and Development Authority of India (IRDAI) regulates insurance, established in 1999.
• The Pension Fund Regulatory and Development Authority (PFRDA) regulates the pension scheme and the National Pension Scheme (NPS).

Financial Institutions in India

• They are divided into Banks and Non-Banking Financial Institutions (NBFI).
• Banks accept demand deposits and issue cheques, while NBFIs cannot.
• Banks classified into commercial and cooperative banks.
• Commercial banks operate for profit, while cooperative banks serve members and society.
• Cooperative banks usually provide higher interest rates compared with commercial banks.
• Commercial banks of two categories: scheduled and non-scheduled.
• A scheduled bank is included in the 2nd schedule of the RBI Act 1934.
• A scheduled bank also had to be a corporation and the Paid-up capital for it should be at least Rs. 500 crores.
• Scheduled banks maintain reserve requirements with RBI as per the RBI Act 1934
• Non-Scheduled banks put some reserve requirements like SLR and CRR according to the Banking Regulation Act 1949.
• Co-operative Banks: Urban Co-operative banks (UCB) and Rural Co-operative banks.
• Urban Co-operative Banks (UCB) are known as Primary Co-operative Banks. They help communities, local workplace groups, and are set up in urban and semi-urban areas
• UCBS classified into Scheduled and Non-scheduled categories, which are then classified into single-state and multi-state.
• Public Sector Banks controlled by federal or state governments, with over 51% ownership.
• Nationalized Banks (private banks taken over by the government) nationalized in 1969 and 1980s, are also public sector banks due to government ownership of over 51%.
• Private Sector Banks owned by private individuals.
• Foreign Banks established and provide services in India but owned by foreign entities.
• Regional Rural Banks (RRBs) established in 1975, aim to develop the rural economy.
• RRBs provide credit to small farmers, laborers, artisans, and entrepreneurs, supervised by NABARD.
• NABARD also supervised RRBs.
• Local Area Banks (LAB) established in 1996 with government support to mobilize rural savings.
• Non-Scheduled Local Area Banks in India
• The RBI regulates three areas of the Non-Banking Financial Institutions (NBFIs) sector: All India Financial Institutions (AIFIs), Non-Banking Financial Companies (NBFCs), and Primary Dealers (PDs).
• Credit Information Companies (CIC) are non-banking financial organizations regulated by the Reserve Bank of India.
• AIFIs are institutional mechanisms delivering long-term finance; the RBI regulates four AIFIs (DFIs).
• NABARD was established in 1982 under the National Bank for Agriculture and Rural Development Act 1981.
• NABARD offers credit for agriculture, small industries, cottage, village industries, handicrafts, and other rural activities.
• NABARD extends assistance to government, RBI, and organizations for rural development and training.
• SIDBI was established in 1990 under the Small Industries Development of India Act 1989
• SIDBI serves to promoting, funding, and developing the Micro, Small, and Medium Enterprise (MSME) sector.
• SIDBI provides banking institutions with indirect financial support (refinancing) to lend to MSMEs.
• MUDRA (Micro Units Growth and Refinance Agency Ltd.) supports micro-enterprises.
• MUDRA Company, a non-banking finance company, is a subsidiary of SIDBI pending an act creating MUDRA Bank.
• MUDRA's provides funding to non-corporate (informal sector) small businesses in rural and urban areas with financing needs of up to Rs 10 lakhs.
• MUDRA refinances Last Mile Financiers, including Micro Financial Institutions, Non-Banking Finance Companies, Societies, Trusts, Companies, Co-operative Societies, Small Banks, Scheduled Commercial Banks, and Regional Rural Banks.
• The NBFC is governed by the Companies Act and deals with loans, shares, bonds, and debentures, but not agriculture or goods sale.
• Private sector institutions make up the NBFCs.
• Primary dealers are RBI-registered companies that buy and sell government securities.
• In the primary market, PDs purchase government securities directly from the government with intentions of resale.
• A CIC is a non-profit that accepts banks, NBFCs, and financial institutions as members.
• CICs collect data from individual customers and enterprises and tell banks whether a borrower is creditworthy on the basis of payment history.
• The RBI regulates and licenses credit information companies (CICs) under the Credit Information Companies (Regulation) Act 2005.

Payment Banks

• In August 2015, the Reserve Bank of India (RBI) approved 11 applications for Payment Bank licenses.
• RBI has capped deposits at Rs. 1 lakh per individual.
• Intended to target the poor, including migrant workers and low-income households.
• Payment banks cannot lend or issue credit cards, and only accept demand deposits.

Small Finance Banks

• In September 2015, the RBI granted licenses to 10 applicants.
• Aimed at financial inclusion.
• Primarily undertake basic banking activities of acceptance of deposits and lending to the unserved segments.
• Unserved segments include small business units, small and marginal farmers, micro and small industries, and unorganized sector entities.

Commercial Banks In India

• Classified into three categories: public sector, private sector, and foreign banks.
• Public Sector Banks :
  • Have at least 51% ownership held by the central government.
  • Managment control is also in hands of union government
• Private Sector Banks:
  • Majority shareholding is with corporations and individuals.
  • RBI allowed formation in 1993, leading to expansion.
• Foreign Banks:
  • Have headquarters abroad.
  • Perform banking functions through subsidiaries.
• Functions of commercial banks divided into primary and secondary.
• Accepting deposits and providing loans are primary, while overdraft and locker facilities are secondary.
• Commercial banks provide basic banking services and make money through service fees.
• Fees vary depending on products.
• Interest rates are higher on loans, lower on deposits.
• Commercial banks easily accessible and increasingly offer online services.
• State Bank of India is the largest commercial bank in India.
• The government of India holds 61.23% of the ownership of the bank as of March 2019.
• HDFC Bank is a leading private sector bank and started operations in 1994.
• ICICI Bank is a private-sector Commercial Bank and was established in 1994.
• Kotak Mahindra Bank Began operations in 2003.
• Bank of Baroda is a leading public sector bank and was established in 1908.
• Axis Bank is a private sector bank and started operations in 1993.
• IndusInd Bank began operations in 1994.
• Punjab National Bank started operations in 1894.
• Bank of India started operations in 1906.
• Canara Bank was founded in 1906.
• Credit rating agencies offer evaluations of credit risk.
• Ratings are crucial for financial opportunities, aiding in favorable borrowing terms.
• Creditworthiness affects access to better financial options.
• Credit rating agencies (CRAs) assess entities.
• Credit rating agencies assign ratings to organizations and entities.
• CRAs consider financial statements, debt levels, and repayment history.

Credit Information Companies (CIC)

• They are licensed by the Reserve Bank of India.
• CIBIL is the oldest and most well-known credit information company in India.
• TransUnion CIBIL: Credit bureau established in 2000 and a subsidiary of TransUnion.
• Experian: Credit bureau working with over 2900 financial institutions.
• Equifax: Credit bureau operating in India since 2010.
• CRIF Highmark: Credit bureau in India that was approved by the Reserve Bank of India and began operations in 2005.

Life Insurance: Products, Companies, and Regulation

• Life insurance guarantees a death benefit to the life assured's family upon their passing during the policy term.
• The insurance company selection is crucial.
• A decent life insurance provider gives you comprehensive coverage.
• Term Insurance Plans:
• Protect your family's financial future.
• A simple and affordable way to give financial cover.
• ULIPs - Unit Linked Insurance Plans:
  • A combination of insurance and investment.
  • It gives you the potential to create wealth through market-linked returns from systematic investments.
• Endowment Insurance Plans:
  • Ideal for guaranteed returns along with life insurance.
  • Enables you to receive a lump sum amount.
• Money Back Insurance Plans:
  • Rewards you periodically.
  • An endowment plan with systematic payouts.
• Whole Life Insurance Plans:
  • Gives you life coverage for 99 years.
  • Ensures protection for your family for an extended period of time.
• Child Insurance Plans: -Helps to build a corpus for your child's future. -They help you build significant sum for your child's education and marriage expenses.
• Retirement Insurance Plans:
  • Designed to help you build a sizable corpus for your post-retirement plans.
  • They help you gain financial independence in your non-working plans.
• Max Life Insurance Company has been established in 2000
• Give its subscribers appropriate financial stability.

Mutual Funds and Asset Management

• They play a large and decisive role in the valuation of tradable assets such as stocks and bonds.
• You own units based on the amount invested.
• Types of mutual fund schemes are based on the maturity period.
• Open Ended Scheme allows you to buy or sell units at any point in time.
• Close Ended Scheme has a stipulated maturity period and investors can invest only during the initial launch period.
• Interval Scheme operates as a combination of open and closed-ended schemes.
• Structure of Mutual Funds consists of three tiers: Fund Sponsor, Trust and Trustees.
• Portfolio Management Services are offered and wealth management.
• Wealth management offers consultation to individuals and businesses, specifically in managing various aspects.

Money Market

• Involves lending and borrowing of short-term funds, usually with maturity from overnight to one year.
• Short term investible funds are bid by borrowers to facilitate efficient fund allocation.
• Basic objectives of money market short-term include financing, low-risk benchmark, and stability.
• Two sectors.
• Orgainised
• Unorganised
• Banks of organized sector: SBI, RBI, Scheduled, Nationalised Banks.
• unorganized sector includes: Sarrafs, Mahajans, Sahukars.
• RBI has complete control of modern sector. Money Market Instruments: Treasury Bills, Repurchase Agreements are popular instruments.
• Money market instruments allow governments, fianacial organization.
• Liquidity - Money market instruments very liquid and fixed
• Safety - Issuers have strong credit rating. Discounting - Issued at below face value.

Indian Banking Sector

• The financial and economic conditions in the country are far superior to any other country in the world.
• Resilient banks.
• The Indian banking industry has recently witnessed the rollout of innovative banking models.
• Payments
• Small finance banks.
• India has also focused on increasing its banking sector. through:
• Pradhan Mantri Jan Dhan Yojana
• Post payment banks
• Fintech have credit the cycle.
• Indian banking system consists of:
• 12 public sector banks
• 22 private sector banks
• 46 foreign banks
• ATMs in India reached 14,74,548 as of March 2023.
• 100% of new bank account openings in rural India digitally.
• In 2022-23, total assets in the public and private banking sectors were US$ 1,553.57 billion and US$ 901.3 billion.

Non-Banking Financial Companies

• Digital lending has grown.
• NBFCs make lending digitally.
• NBFC provide to individual.
• offer loans,assets management.
• Offer loans.
• Investment management.
• Financial advice.

Digital Payments

• Ten methods of digital payments.
• Banking Cards* -Indians use Bankign cards or debit. Credit or cards as an alternatives to cash payments. -First credit card in 1981.
• Unstructured Supplementary Service Data*(USSD)
• For those section off which don t have access to banking and internet.
• Addnaar Enable payment system*(AEPS)
• Bank led model for digital payment system
• Unified Payment interface*(UPI)
• Payment system that banks for and transfer money with any parties.
• Use UPI to start a bank any ware.
• Digital payment in 2020.
• Mobile Wallets*
• Digital to use any cash to use in wallet.
• Bank Prepaid Cards* -Preallded bank is uesed and used as debit card issued.
• PoS Terminals*
• Known as location that sale happen with
• Most types of payment is debit and cards
• Internet Banking
• Used as onlike banking and allows banking websites of your payment
• E banking require internat

Foreign Exchange Market and International Trade

• The market exchanges For India and united state
• Indian rupee and dollar US dollar
• Sell the indian rupee whilst buyin the us dollar.
• The foreign exchange market in India started when in 1978 the government allowed banks to trade foreign exchange with one another Foreign Exchange Market in India operates under the Central Government of India India moved from a fixed exchange rate regime. A country's currency exchange rate is typically affected by the supply and demand Types of foreign market operations
• Spot Market -Forward market
• Exchange settlement and dealings. International Trade of India