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HL Commerce College (Autonomous) – Self Finance Programme B.S. Fintech Curriculum (2024-25) Semester – I Sub: Indian Financial System UNIT – I INDIAN FINANC...

HL Commerce College (Autonomous) – Self Finance Programme B.S. Fintech Curriculum (2024-25) Semester – I Sub: Indian Financial System UNIT – I INDIAN FINANCIAL SYSTEM AND FINANCIAL INSTITUTIONS IN INDIA 1.1 Overview of Indian financial system 1.2 Organizational Structure of Financial system and its Major components - Financial Markets, Financial Institutions / Intermediaries, Financial Instruments 1.3 Functions and role of financial system 1.4 Regulatory and Promotional Institutions: Objectives and functions of Reserve bank of India, Security Exchange Board of India, Insurance Regulatory Development Authority 1.5 Major recent reforms in Indian Financial System 1.1 Overview of Financial system Introduction The Indian Financial System is one of the most important aspects of the economic development of our country. This system manages the flow of funds between the people (household savings) of the country and the ones who may invest it wisely (investors/businessmen) for the betterment of both the parties. The Indian financial system is a complex and integrated network of financial institutions, markets, regulators, and intermediaries that facilitates the flow of funds from savers to borrowers and supports the overall economic development of the country. It plays a pivotal role in the allocation of resources and mobilization of savings for productive investments. Economic growth and development of any nation depends upon a well-developed financial system. The term financial system includes financial institution, financial markets, financial instruments and financial services which help in generation of savings leading to capital formation. A good financial system facilitates the transfer of economic resources between different sections of a nation. A well knit financial system should be characterized by the presence of an organised, specialised, integrated and regulated financial markets, financial institutions, instruments and CS KOMAL KEWALRAMANI Page 1 services that meets both short term and long term financial needs of both household and corporate sector of an economy. Both financial markets and financial institutions play a significant role in the financial system by operating in close combination with each other in order to render various financial services to the needy. A financial system acts as a link between savers and investors. It helps in mobilization of savings and promotion of investment in an effective manner. The financial system serves as a mediator between investors and institutions promoting investment leading to greater financial development which is essential for faster economic developments. Thus, a financial system plays a significant role in the economic growth of a nation by mobilising the surplus finds and channeling the savings into productive activity. Meaning of Finance The word finance is derived from the Latin word ‘finis’ which means money. Finance is an activity by which savings especially bank deposits or currency notes are pooled and then placed in the hands of the investors. In simple words, finance refers to the management of the flow of money through organisation. Finance is nothing but provision of money as and when required. Finance also refers to the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities. Finance consists of financial systems, which include the public, private and government spaces and the study of finance and financial instruments, which can relate to countless assets and liabilities. Meaning of Financial System Financial system refers to a set of complex and closely connected or inter-linked financial institutions or organised and unorganised financial markets, financial instruments and services which facilitate the transfer of funds. A financial system consists of institutional arrangements through which financial surplus in the economy are mobilised from units having surplus funds and is transferred to units having financial deficit. Financial system is a total of financial institutions, financial markets, financial services, financial practices and procedures. CS KOMAL KEWALRAMANI Page 2 In any economy, there are two types of economic units or entities—surplus-spending eco nomic units and deficit-spending economic units.  Surplus-spending Economic units These are units whose consumption and planned investment are less than their income. The surplus savings that they have is held in the form of cash balances or financial assets. The acquisition of financial assets or making of loans is, in fact, lending for productive investment. Such lending by the surplus-spending sector can be termed as demanding financial assets or supplying loanable funds. In India, the household sector is a net-surplus spending economic unit. The household and other sectors are discussed in detail in the flow of funds analysis.  Deficit-spending Economic units These are units whose consumption and planned investment exceeds income. The deficit-spending economic units have negative savings; they finance their needs by borrowing or by decreasing their stock of financial assets. Borrowing by deficit-spending units creates a supply of financial securities or demand for loanable funds. In India, the government and the corporate sector are deficit-spending economic units. The surplus savings of the surplus-spending household units have to be transferred to the deficit-spending economic units. A link in the form of a financial system is necessary to transfer surplus savings to deficit units. Definition of Financial System According to Robinson, “Financial system is the primary function of the system which is to provide a link between savings and investment for the creation of new wealth and to permit portfolio adjustment in the composition of the existing wealth”. CS KOMAL KEWALRAMANI Page 3 According to Van Horne, “Financial system is the purpose of financial markets to allocate savings efficiently in an economy to ultimate users either for investment in real assets or for consumption”. According to Christy, “Financial system is to supply funds to various sectors and activities of the economy in ways that promote the fullest possible utilization of resources without the destabilizing consequence of price level changes or unnecessary interference with individual desires”. According to Prof. Prasanna Chandra, “The financial system consists of variety of institutions, markets and instruments related in a systematic manner and provide the principal means by which savings are transformed into investments”. Features of the Indian Financial system:  It plays a vital role in the economic development of the country as it encourages both savings and investment  It helps in mobilising and allocating one’s savings  It facilitates the expansion of financial institutions and markets  Plays a key role in capital formation  It helps form a link between the investor and the one saving  It is also concerned with the Provision of funds KEY ELEMENTS OF A WELL-FUNCTIONING FINANCIAL SYSTEM  A strong legal and regulatory environment: Since finance is based on contracts, strong legal and regulatory systems that produce and strictly enforce laws alone can protect the rights and interests of investors. Hence, a strong legal system is the most fundamental element of a sound financial system.  Stable money: Stable money is an important constituent as it serves as a medium of exchange, a store of value (a reserve of future purchasing power), and a standard of value (unit of account) for all the goods and services we might wish to trade in. Large fluctuations and depreciation in the value of money lead to financial crises and impede the growth of the economy.  Sound public finances and public debt management: Sound public finance CS KOMAL KEWALRAMANI Page 4  includes setting and controlling public expenditure priorities and raising revenues adequate to fund them efficiently. Historically, these financing needs of the governments world over led to the creation of financial systems. Developed countries have sound public finances and public debt management practices, which result in the development of a good financial system.  A central bank: A central bank supervises and regulates the operations of the banking system. It acts as a banker to the banks, banker to the government, manager of public debt and foreign exchange, and lender of the last resort. The monetary policy of the central bank influences the pace of economic growth. An autonomous central bank paves the way for the development of a sound financial system.  Sound banking system: A good financial system must also have a variety of banks both with domestic and international opera tions together with an ability to withstand adverse shocks without failing. Banks are the core financial intermediaries in all countries. They perform diverse key functions such as operating the clearing and payments system, and the foreign exchange market. The banking system is the main fulcrum for transmit ting the monetary policy actions. Banks also undertake credit risk analysis, assessing the expected risk and return on the projects. The financial soundness of the banking system depends on how effectively banks perform these diverse functions.  Information system: Another foundational element is information. All the participants in a financial system require infor mation. A sound financial system can develop only when proper disclosure practices and networking of information systems are adopted.  Well-functioning securities market: Securities markets facilitate the issue and trading of securities, both equity and debt. Efficient securities markets promote economic growth by mobilizing and deploying funds into productive uses, lowering the cost of capital for firms, enhancing liquidity, and attracting foreign investment. An efficient securities market strengthens market discipline by exerting corporate control through the threat of hostile takeovers for underperforming firms. 1.2 Organisational Structure of Financial system The following is the structure of financial system: 1. Financial Institutions 2. Financial Markets 3. Financial Intermediaries 4. Financial Services CS KOMAL KEWALRAMANI Page 5 1. Financial Institutions Financial institutions are the intermediaries which facilitate smooth functioning of the financial system by making investors and borrowers meet. They mobilize savings of the surplus units and allocate them in productive activities promising a better rate of return. Financial institutions also provide services to entities seeking advice on various issues ranging from restructuring to diversification plans. They provide whole range of services to the entities who want to raise funds from the markets elsewhere. Financial institutions act as financial intermediaries because they act as middlemen between savers and borrowers, where these financial institutions may be banking or non-banking institutions. Financial institutions channel the flow of funds between investors and firms. Individuals deposit funds at commercial banks, purchase shares of mutual funds, purchase insurance protection with insurance premiums and contribute to pension plans. All of these financial institutions provide credit to firms by purchasing debt securities or providing loans or other credit products. In addition, all of these financial institutions except commercial banks purchase stocks issued by firms. Meaning of Financial Institutions CS KOMAL KEWALRAMANI Page 6 Financial institutions or financial intermediaries are those institutions, which provide financial services and products which customers needs. Financial institutions provide all those services, which a customer may not be able to get more efficiently on his own. Example: Customers not having skill to invest in equity market efficiently can invest money in Mutual Funds and can avail the benefits of capital market. Financial institutions provide all those financial services, which are available in financial system.  Banking Institutions:  Commercial Banks: These are profit-driven institutions that provide a wide range of services including accepting deposits, granting loans, managing payment systems, and offering financial products like credit cards and mortgages. They serve individual consumers, businesses, and governments. Examples include JPMorgan Chase, Bank of America, and HSBC.  Co-operative Banks: Member-owned institutions that focus on providing banking services to their members, who are typically part of a local community or profession. They often offer better interest rates and lower fees than commercial banks. Examples include credit unions and mutual savings banks.  Foreign Banks: These are banks that operate in countries outside their home country. They provide services similar to domestic banks but also facilitate international trade and investment. Examples include Citibank (USA) operating in India, and Standard Chartered (UK) operating in many countries worldwide. CS KOMAL KEWALRAMANI Page 7   Regional Rural Banks (RRBs): Established primarily to serve rural areas, these banks focus on providing financial services to small farmers, agricultural laborers, and rural artisans. Their goal is to promote rural development and financial inclusion. Examples include Prathama Bank and Andhra Pradesh Grameena Vikas Bank.  Non-Banking Institutions:  Non-Banking Finance Companies (NBFCs): These institutions provide financial services similar to banks but do not hold a full banking license. They offer loans, asset management, leasing, and hire-purchase services but cannot accept demand deposits. Examples include Bajaj Finance, LIC Housing Finance, and Mahindra Finance.  Development Finance Institutions (DFIs): These are specialized institutions that provide long-term finance for industrial and agricultural development. They play a crucial role in supporting large infrastructure projects and development initiatives. Examples include the Industrial Development Bank of India (IDBI) and the National Bank for Agriculture and Rural Development (NABARD).  Insurance & Housing Finance Companies:  Life Insurance Companies: Provide financial protection against the risk of death, offering policies that pay a specified amount to beneficiaries upon the policyholder's death. Examples include MetLife, Prudential, and LIC (Life Insurance Corporation of India).  General Insurance Companies: Offer protection against non-life risks such as property damage, liability, and personal injury. This includes auto, home, and travel insurance. Examples include Allstate, State Farm, and ICICI Lombard.  Re-insurance Companies: Provide insurance to other insurance companies, helping them manage risk and reduce the financial impact of large claims. Examples include Swiss Re, Munich Re, and General Re.  Health Insurance Companies: Offer coverage for medical expenses, including hospitalization, surgeries, and routine healthcare. Examples include UnitedHealthcare, Anthem, and Cigna.  Housing Finance Companies: Specialize in providing loans for purchasing, constructing, or renovating residential properties. Examples include HDFC (Housing Development Finance Corporation) and Dewan Housing Finance Corporation.  Mutual Funds: Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Managed by professional fund managers, these funds allocate the pooled funds to achieve specific investment objectives, such as growth, income, or capital preservation. Mutual funds offer investors benefits like diversification, professional management, and liquidity, making them a popular choice for both individual and institutional investors. Examples include CS KOMAL KEWALRAMANI Page 8  Vanguard, Fidelity, and BlackRock. Benefits of Financial Institutions The following benefits are enjoyed by an individual who invests through financial intermediaries than involving directly in financial market: (a) Economy of Scale: When financial institutions are carrying out their investment or other activities in large scale out of pooled funds, they can achieve economy of scale. (b) Lower Transaction Cost: Because of economy of scale the cost of each transaction is much lower than what it would have been, if that transaction is carried on by individual investor on his own. (c) Diversification: As financial institutions are dealing in huge amounts of pooled funds, they diversify their investments in such a way that the risk involved would reduce considerably. 2. Financial Markets Financial markets are vital components of the financial system, serving as platforms where financial instruments are traded. These markets facilitate the efficient allocation of resources, manage risk, provide investment opportunities, and help businesses and governments raise funds. Financial markets can be broadly classified into capital markets and money markets, each playing a distinct role in the economy. 1. Capital Market CS KOMAL KEWALRAMANI Page 9 The capital market is where long-term debt and equity securities are bought and sold. It is crucial for raising capital for businesses and governments and includes two primary segments: the primary market and the secondary market. Primary Market: The primary market, also known as the new issue market, is where new securities are issued and sold to investors for the first time. This market is essential for companies and governments to raise fresh capital for expansion, projects, and other funding needs. In the primary market, the issuer directly receives the funds from investors. Key activities and instruments in the primary market include:  Initial Public Offerings (IPOs): When a company offers its shares to the public for the first time, it is known as an IPO. This allows the company to raise equity capital from a broad base of investors.  Private Placements: Companies can raise capital by selling securities directly to a select group of investors, such as institutional investors or wealthy individuals, rather than through a public offering.  Rights Issues: Existing shareholders are given the opportunity to buy additional shares at a discounted price before the company offers them to the public. This method helps companies raise capital while giving existing shareholders a preferential right to maintain their ownership percentage.  Debt Offerings: Companies and governments issue bonds and other debt instruments to raise funds. Investors buy these securities, providing the issuer with the capital needed, while investors receive periodic interest payments and the return of principal upon maturity. Secondary Market: The secondary market is where previously issued securities are traded among investors. This market provides liquidity, enabling investors to buy and sell securities quickly and efficiently. Key features and components of the secondary market include:  Stock Exchanges: Organized and regulated platforms where stocks, bonds, and other securities are traded. Examples include the New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange, and Tokyo Stock Exchange. These exchanges ensure transparency, fair pricing, and efficient matching of buy and sell orders.  Over-the-Counter (OTC) Markets: Decentralized markets where securities not listed on formal exchanges are traded directly between parties. OTC markets often handle trading in smaller or less liquid securities, as well as certain types of debt instruments.  Market Participants: The secondary market involves a wide range of participants, including individual investors, institutional investors (such as mutual funds, pension CS KOMAL KEWALRAMANI Page 10  funds, and insurance companies), market makers, brokers, and dealers. These participants facilitate trading, provide liquidity, and help discover fair market prices. 2. Money Market The money market is a segment of the financial market where short-term borrowing, lending, buying, and selling of instruments with maturities of one year or less take place. It plays a crucial role in managing liquidity and meeting the short-term funding needs of governments, financial institutions, and corporations. The money market includes various instruments, each serving specific purposes: Market Instruments:  Treasury Bills (T-Bills): Short-term debt instruments issued by the government to meet its short-term funding requirements. T-Bills are considered risk-free investments since they are backed by the government. They are issued at a discount to their face value and mature within one year, with investors receiving the face value at maturity. The difference between the purchase price and the face value represents the investor's return.  Commercial Paper (CP): Unsecured, short-term promissory notes issued by large corporations to finance their short-term liabilities, such as inventory and accounts receivable. CP typically has a maturity period of up to 270 days and is issued at a discount. It offers a higher yield than T-Bills, reflecting the higher credit risk of corporate issuers.  Call Money: Short-term funds borrowed and lent in the interbank market, typically for a period of one day. The call money market is crucial for maintaining liquidity in the banking system, allowing banks to manage their short-term cash needs. The interest rate in the call money market, known as the call rate, is highly sensitive to changes in demand and supply for short-term funds.  Certificates of Deposit (CDs): Negotiable, short-term instruments issued by banks with fixed maturity dates and interest rates. CDs are time deposits that cannot be withdrawn before the maturity date without incurring a penalty. They are considered low-risk investments and offer higher interest rates than regular savings accounts, reflecting the commitment of funds for a specified period.  Commercial Bills: Short-term, negotiable instruments issued by businesses to finance their trade receivables. Commercial bills are usually drawn by a seller on the buyer of goods and accepted by a bank, making them tradable in the money market. They help businesses manage their working capital needs by providing immediate cash flow against future payments. Finance is a prerequisite for modern business and financial institutions play a vital role in an economic system. It is through financial markets the financial system of an economy works. The main objectives of financial markets are: CS KOMAL KEWALRAMANI Page 11  1. To facilitate creation and allocation of credit and liquidity. 2. To serve as intermediaries for mobilization of savings. 3. To assist process of balanced economic growth. 4. To provide financial convenience. 3. Financial Instruments Financial instruments are essential components of the financial system, representing contracts that are tradable and can be categorized as assets or liabilities. They facilitate the transfer of capital and risk, providing mechanisms for investment, financing, and hedging. Financial instruments are broadly classified based on their characteristics, such as their nature (debt or equity), duration (short-term or long-term), and complexity (simple or complex). Types of Financial Instruments 1. Debt Instruments Debt instruments represent a loan made by an investor to a borrower (typically corporate or governmental). These instruments oblige the borrower to pay back the principal amount along with interest over a specified period. Types of debt instruments include:  Bonds: Long-term debt securities issued by corporations, municipalities, or governments to raise capital. Bonds pay periodic interest (coupon payments) and return the principal amount at maturity. Examples include government bonds (e.g., U.S. Treasury bonds) and corporate bonds.  Debentures: Unsecured debt securities backed only by the creditworthiness and reputation of the issuer. They typically pay a fixed rate of interest and are used by companies to raise medium to long-term capital.  Treasury Bills (T-Bills): Short-term government debt instruments issued at a discount and maturing in less than one year. They are considered risk-free investments since they are backed by the government.  Commercial Paper (CP): Short-term unsecured promissory notes issued by corporations to finance their short-term liabilities. They are typically issued at a discount and mature within 270 days.  Certificates of Deposit (CDs): Time deposits issued by banks with fixed maturity dates and interest rates. They are negotiable and can be traded in the secondary market. 2. Equity Instruments Equity instruments represent ownership in a company. They provide investors with a claim on the company's assets and earnings. Types of equity instruments include:  Common Stock: Shares representing ownership in a company, giving shareholders voting rights and a claim on dividends. Common stockholders are last to be paid in the event of liquidation, after debt holders and preferred shareholders. CS KOMAL KEWALRAMANI Page 12   Preferred Stock: Shares that have preferential rights over common stock in terms of dividend payments and claims on assets in the event of liquidation. Preferred shareholders typically do not have voting rights but receive fixed dividends before common shareholders. 3. Derivative Instruments Derivative instruments derive their value from an underlying asset, index, or interest rate. They are used for hedging risk, speculating on price movements, and leveraging positions. Types of derivative instruments include:  Options: Contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) within a certain period. There are two types of options: call options (right to buy) and put options (right to sell).  Futures: Standardized contracts obligating the buyer to purchase, or the seller to sell, an underlying asset at a predetermined price at a specified future date. Futures contracts are traded on exchanges and are used for hedging or speculating.  Forwards: Customized contracts between two parties to buy or sell an asset at a specified price on a future date. Unlike futures, forwards are traded over-the-counter (OTC) and are not standardized.  Swaps: Contracts in which two parties agree to exchange cash flows or other financial instruments. Common types include interest rate swaps, where parties exchange fixed- rate and floating-rate interest payments, and currency swaps, where parties exchange principal and interest payments in different currencies. 4. Hybrid Instruments Hybrid instruments combine features of both debt and equity, offering characteristics of each. Types of hybrid instruments include:  Convertible Bonds: Bonds that can be converted into a predetermined number of shares of the issuing company's common stock. They provide the benefits of fixed interest payments and potential for capital appreciation.  Preferred Convertible Stock: Preferred shares that can be converted into a predetermined number of common shares. They offer fixed dividends and potential for conversion to common equity. 5. Money Market Instruments Money market instruments are short-term debt securities that provide liquidity and safety of principal. They are typically issued by governments, financial institutions, and corporations. Types of money market instruments include:  Treasury Bills (T-Bills): Short-term government securities issued at a discount and maturing in less than one year.  Commercial Paper (CP): Unsecured short-term promissory notes issued by corporations. CS KOMAL KEWALRAMANI Page 13   Certificates of Deposit (CDs): Time deposits issued by banks with fixed maturity dates and interest rates.  Repurchase Agreements (Repos): Short-term borrowing agreements where a seller sells securities to a buyer with an agreement to repurchase them at a higher price at a later date.  Banker's Acceptances: Short-term credit instruments guaranteed by a bank, used in international trade. 6. Other Financial Instruments Other financial instruments include specialized products used for various purposes, such as risk management, investment, and fundraising. Examples include:  Asset-Backed Securities (ABS): Securities backed by a pool of assets, such as loans, leases, or receivables. Investors receive payments derived from the cash flows generated by the underlying assets.  Mortgage-Backed Securities (MBS): A type of ABS backed by a pool of mortgage loans. Investors receive payments derived from the mortgage payments made by homeowners.  Exchange-Traded Funds (ETFs): Investment funds traded on stock exchanges, holding a diversified portfolio of assets, such as stocks or bonds. They offer the benefits of mutual funds combined with the liquidity of stocks. 4. Financial Services Financial services are the economic services provided by the finance industry, which encompasses a broad range of organizations that manage money, including credit unions, banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. Efficiency of emerging financial system largely depends upon the quality and variety of financial services provided by financial intermediaries. The term financial services can be defined as “activities, benefits and satisfaction connected with the sale of money that offers to users and customers, financial related value”. Financial services can be broadly categorized into two main types based on how institutions generate income: Fee-Based Services and Fund-Based Services. CS KOMAL KEWALRAMANI Page 14  Fee-Based Services: These services involve charging a fee for providing specific financial services without directly involving the deployment of funds. They mainly focus on advisory, facilitation, and support functions in the financial sector. 1. Credit Rating o Credit rating agencies evaluate the creditworthiness of a borrower, including individuals, corporations, and governments. This evaluation is based on the borrower's financial history, current assets and liabilities, and future financial projections. Examples: Standard & Poor's, Moody's, Fitch Ratings. o Credit ratings help investors assess the risk associated with investing in a particular entity's debt instruments. 2. Depository o Depositories hold securities in electronic form, facilitating the trading and transfer of securities. They ensure the safe custody of financial instruments, reducing the risk of theft, loss, or damage. Examples: National Securities Depository Limited (NSDL), Central Depository Services Limited (CDSL). o Depositories enhance the efficiency and security of the securities market by dematerializing paper-based securities and streamlining settlement processes. 3. Custodial Services CS KOMAL KEWALRAMANI Page 15  o Custodians safeguard financial assets, including securities, for institutional and individual investors. They handle various administrative tasks, such as settlement of transactions, collection of dividends and interest, and providing regular reporting. Examples: Bank of New York Mellon, JP Morgan Chase Custody Services. o Custodial services provide peace of mind to investors by ensuring their assets are securely managed and properly accounted for. 4. Merchant Banking o Merchant banks provide financial advisory services to companies for raising capital, mergers and acquisitions, and corporate restructuring. They assist in the issuance of equity and debt securities and offer strategic advice. Examples: Goldman Sachs, Morgan Stanley. o Merchant banking services are crucial for businesses seeking to grow, expand, or restructure by providing expert financial guidance and access to capital markets. 5. Securitisation o Securitisation involves converting illiquid assets, such as loans or receivables, into tradable securities. This process enhances liquidity for the originator and spreads the risk among investors. Examples: Mortgage-backed securities (MBS), asset-backed securities (ABS). o Securitisation provides financial institutions with a way to manage their balance sheets, improve liquidity, and diversify their funding sources. Fund-Based Services These services involve the deployment of funds and include various types of financing and investment services. They are directly involved in the provision and management of capital. 1. Leasing o Leasing involves renting assets or equipment for a specified period in exchange for periodic payments. The lessor retains ownership of the asset while the lessee enjoys its use. Types: Financial Lease, Operational Lease. o Leasing provides businesses with access to essential equipment without the need for significant upfront capital expenditure. 2. Hire Purchase CS KOMAL KEWALRAMANI Page 16  o Hire purchase is a form of financing where the buyer pays for goods in installments over a period. Ownership of the goods is transferred to the buyer after the final payment is made. Examples: Consumer durables financing, automobile financing. o Hire purchase arrangements make it easier for consumers to afford expensive items by spreading the cost over time. 3. Factoring and Forfaiting o Factoring: Factoring involves selling accounts receivable to a third party (factor) at a discount to obtain immediate cash. The factor assumes the risk of collection. o Forfaiting: Forfaiting is the sale of medium to long-term receivables, usually related to international trade, at a discount. The forfaiter assumes the risk of non-payment. o Both factoring and forfaiting provide businesses with immediate cash flow, improving liquidity and reducing credit risk. 4. Mutual Funds o Mutual funds pool money from multiple investors to invest in a diversified portfolio of securities, such as stocks, bonds, and money market instruments. Professional fund managers manage these funds. Examples: Equity funds, bond funds, money market funds. o Mutual funds offer investors the benefits of diversification, professional management, and liquidity. 5. Insurance o Insurance involves providing financial protection against various risks in exchange for premium payments. It includes life insurance, health insurance, property insurance, and more. Examples: Life insurance, health insurance, property insurance. o Insurance mitigates financial losses from unforeseen events, providing security and peace of mind to individuals and businesses. 6. Housing Finance o Housing finance involves providing loans for the purchase, construction, or renovation of residential properties. These loans are typically long-term and secured by the property itself. Examples: Mortgage loans, home improvement loans. CS KOMAL KEWALRAMANI Page 17  o Housing finance enables individuals to own homes and stimulates economic growth through the real estate sector. 7. Venture Capital o Venture capital involves investing in early-stage, high-potential growth companies in exchange for equity. Venture capitalists provide not only funding but also strategic guidance and mentorship. Examples: Seed funding, series A/B/C funding. o Venture capital supports innovation and entrepreneurship by providing the necessary resources for startups to grow and succeed. 8. Bill Discounting o Bill discounting involves purchasing bills of exchange or promissory notes at a discount before they are due. The discounting entity provides immediate cash to the holder of the bill. Examples: Invoice discounting, trade bill discounting. o Bill discounting improves cash flow for businesses by allowing them to access funds tied up in receivables. 1.3 FUNCTIONS AND ROLE OF FINANCIAL SYSTEM Functions and role of a Financial System:  Mobilize and allocate savings: One of the important functions of a financial system is to link the savers and investors and, thereby, help in mobilizing and allocating the savings efficiently and effectively. By acting as an efficient conduit for allocation of resources, it permits continuous upgradation of technologies for promoting growth on a sustained basis.  Monitor corporate performance: A financial system not only helps in selecting projects to be funded but also inspires the operators to monitor the performance of the investment. Financial markets and institutions help to monitor corporate performance and exert corporate control through the threat of hostile takeovers for underperforming firms.  Provide payment and settlement systems: It provides a payment mechanism for the exchange of goods and services and transfers economic resources through time and across geographic regions and industries. Payment and settlement systems play an important role to ensure that funds move safely, quickly, and in a timely manner. An efficient payment and settlement system contributes to the operating and allocation CS KOMAL KEWALRAMANI Page 18  efficiencies of the financial system and thus, overall economic growth. Payment and settlement systems serve an important role in the economy as the main arteries of the financial sector. Banks provide this mechanism by offering a means of payment facility based upon cheques, promissory notes, credit and debit cards. This payment mechanism is now increasingly through electronic means. The clearing and settlements mechanism of the stock markets is done through depositories and clearing corporations.  Optimum allocation of risk-bearing and reduction: One of the most important functions of a financial system is to achieve optimum allocation of risk bearing. It limits, pools, and trades the risks involved in mobilizing savings and allocating credit. An efficient financial system aims at containing risk within acceptable limits. It reduces risk by laying down rules governing the operation of the system. Risk reduction is achieved by holding diversified port folios and screening of borrowers. Market participants gain protection from unexpected losses by buying f inancial insurance services. Risk is traded in the financial markets through financial instruments such as derivatives. Derivatives are risk shifting devices, they shift risk from those who have it but may not want it to those who are willing to take it.  Disseminate price related information: A financial system also makes available price-related information which is a valuable assistance to those who need to take economic and financial decisions. Financial markets disseminate information for enabling participants to develop an informed opinion about investment, disinvestment, reinvestment, or holding a particular asset. This information dissemination enables a quick valuation of financial assets. Moreover, by influencing the market price of a firm’s debt and equity instruments, this process of valuation guides the management as to whether their actions are consistent with the objective of shareholder wealth maximization. In addition, a financial system also minimises situations where the information is asymmetric and likely to affect motivations among operators when one party has the information and the other party does not. It also reduces the cost of gathering and analysing information to assist operators in taking decisions carefully.  Offer portfolio adjustment facility: A financial system also offers portfolio adjustment facilities. These are provided by financial markets and financial intermediaries such as banks and mutual funds. Portfolio adjustment facilities include services of providing a quick, cheap and reliable way of buying and selling a wide variety of financial assets.  Lower the cost of transactions: A financial system helps in the creation of a financial structure that lowers the cost of transactions. This has a beneficial influence on the rate of return to savers. It also reduces the cost of borrowing. Thus, the system generates an impulse among the people to save more.  Promote the process of financial deepening and broadening: A well- CS KOMAL KEWALRAMANI Page 19  functioning financial system helps in promoting the process of financial deepening and broadening. Financial deepening refers to an increase of financial assets as a percentage of the Gross Domestic Product (GDP). Financial depth is an important measure of financial system development as it measures the size of the financial intermediary sector. Depth equals the liquid liabilities of the financial system (currency plus demand and interest-bearing liabilities of banks and non-bank financial intermediaries divided by the GDP). Financial broadening refers to building an increasing number and variety of participants and instruments. 1.4 Regulatory and Promotional Institutions: Objectives and functions of Reserve bank of India, Security Exchange Board of India, Insurance Regulatory Development Authority In India, regulatory and promotional institutions such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Insurance Regulatory and Development Authority of India (IRDAI) collectively play vital roles in shaping the country's financial landscape. The RBI, as the central bank, oversees monetary policy, banking regulation, and currency management to maintain stability and facilitate economic growth. SEBI regulates the securities market, ensuring investor protection, market integrity, and orderly conduct of capital market activities. IRDAI regulates the insurance sector, promoting development, consumer protection, and financial stability of insurers. Together, these institutions uphold transparency, enforce regulations, foster market confidence, and drive inclusive growth across India's financial and insurance sectors. Reserve Bank of India: The Reserve Bank of India (RBI) serves as the central bank of India. It was established through the Reserve Bank of India Act, 1934, and commenced operations on April 1, 1935. Since 1937, its central office has been located in Mumbai. Initially privately owned, the RBI was nationalized in 1949 and is now fully owned by the Government of India.  Objectives of the Reserve Bank The preamble of the RBI Act outlines the primary objectives of the RBI: 1. Monetary Stability: Ensuring monetary stability within the country. 2. Currency and Credit System: Operating the currency and credit system to the nation's advantage. These objectives aim to maintain price stability and ensure adequate credit availability to support economic activities. CS KOMAL KEWALRAMANI Page 20   Organization of the Reserve Bank  Central Board of Directors: The RBI is managed by a central board of directors, appointed by the central government for a four-year term. The board comprises:  Official Directors: The governor and up to four deputy governors, who are full-time directors.  Non-Official Directors: Fifteen directors, including ten nominated by the government from various fields, one government official, and four directors from the local boards. The central board is responsible for the general superintendence and direction of the bank’s affairs.  Local Boards: There are four local boards, one for each region (Mumbai, Kolkata, Chennai, and New Delhi). Each local board has five members appointed by the central government for a four-year term. Their functions include advising the central board on local matters, representing regional economic interests, and other functions delegated by the central board.  Offices and Training Establishments: The RBI has 22 regional offices, mainly in state capitals. It also operates six training establishments:  College of Agricultural Banking: Provides training in agricultural banking.  Banker’s Training College: Offers training to bankers.  Reserve Bank of India Staff College: Provides training to RBI staff.  National Institute for Bank Management (NIBM): An autonomous institute for training and research in banking.  Indira Gandhi Institute for Development Research (IGIDR): An autonomous research institution.  Institute for Development and Research in Banking Technology (IDRBT): An autonomous institute focused on banking technology.  Subsidiaries The RBI has three fully-owned subsidiaries: 1. National Housing Bank (NHB): Promotes housing finance institutions and regulates the housing finance sector. 2. Deposit Insurance and Credit Guarantee Corporation of India (DICGC): Provides deposit insurance and credit guarantees. 3. Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL): Manages the printing of banknotes.  Legal Framework CS KOMAL KEWALRAMANI Page 21  The RBI's operations are governed by several acts:  Umbrella Acts: o The Reserve Bank of India Act, 1934: Governs the RBI's functions. o The Banking Regulation Act, 1949: Governs the financial sector.  Acts Governing Specific Functions: o The Public Debt Act, 1944/The Government Securities Act (proposed): Governs the government debt market. o The Securities Contract (Regulation) Act, 1956: Regulates the government securities market. o The Indian Coinage Act, 1906: Governs currency and coins. o The Foreign Exchange Regulation Act, 1973/The Foreign Exchange Management Act, 1999: Governs the foreign exchange market.  Acts Governing Banking Operations: o The Companies Act, 1956: Governs banks as companies. o The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to the nationalization of banks. o The Banker’s Books Evidence Act: Pertains to banking records as evidence. o The Banking Secrecy Act: Relates to the confidentiality of banking transactions. o The Negotiable Instruments Act, 1881: Governs negotiable instruments like cheques and promissory notes.  Acts Governing Individual Institutions: o The State Bank of India Act, 1954: Governs the State Bank of India. o The Industrial Development Bank of India Act: Governs the Industrial Development Bank of India. o The Industrial Finance Corporation of India Act: Governs the Industrial Finance Corporation of India. o The National Bank for Agriculture and Rural Development Act: Governs the National Bank for Agriculture and Rural Development (NABARD). o The National Housing Bank Act: Governs the National Housing Bank. o The Deposit Insurance and Credit Guarantee Corporation Act: Governs the DICGC.  Main Functions of the RBI  Monetary Policy: Formulation: The RBI formulates monetary policy to achieve macroeconomic objectives such as controlling inflation, promoting economic growth, and ensuring stability in the currency and financial system. This CS KOMAL KEWALRAMANI Page 22  involves analyzing economic indicators, such as inflation rates, GDP growth, and employment data, to set policy rates like the repo rate, reverse repo rate, and cash reserve ratio (CRR). Implementation: Once monetary policy decisions are made, the RBI implements them through open market operations (OMOs), repo and reverse repo operations, and other instruments to regulate liquidity in the banking system. It uses these tools to influence short-term interest rates and money supply, thereby impacting economic activity. Monitoring and Review: The RBI continuously monitors economic developments and reviews the effectiveness of its policy measures. It adjusts its policy stance as needed to respond to changing economic conditions and achieve its objectives of price stability and sustainable economic growth.  Banking Operations: Regulation and Supervision: As the regulator of the banking sector, the RBI formulates regulations and guidelines for banks to ensure their soundness and stability. It conducts inspections, audits, and supervisory reviews to assess compliance with these regulations and mitigate risks such as credit risk, liquidity risk, and operational risk. Lender of Last Resort: During financial crises or liquidity shortages, the RBI acts as a lender of last resort to provide emergency liquidity assistance to banks and financial institutions. This role helps maintain financial stability and confidence in the banking system. Payment and Settlement Systems: The RBI oversees payment and settlement systems in India to ensure efficient, secure, and timely clearing and settlement of transactions. It promotes the adoption of electronic payment systems and fintech innovations to enhance the efficiency of financial transactions.  External Trade and Payment: Foreign Exchange Management: The RBI manages the foreign exchange market to facilitate external trade and payments. It regulates foreign exchange transactions, determines exchange rate policies, and intervenes in the foreign exchange market to maintain stability in the exchange rate and foreign reserves. Facilitation of Trade: By promoting orderly development and maintenance of the foreign exchange market, the RBI supports international trade and investment flows. It facilitates currency convertibility and ensures compliance with international regulations and agreements related to foreign exchange transactions. CS KOMAL KEWALRAMANI Page 23   Currency Issuance: Currency Management: The RBI is responsible for the issuance, distribution, and management of currency and coins in India. It ensures an adequate supply of currency to meet the demand of the economy while maintaining the quality and integrity of banknotes and coins in circulation. Currency Distribution: Through its network of currency chests and bank branches, the RBI manages the distribution and circulation of currency across the country. It monitors and controls the supply of cash to prevent counterfeiting, money laundering, and other illegal activities. Coinage: The RBI also oversees the minting and distribution of coins of various denominations. It determines the specifications for coins and ensures their availability for everyday transactions in the economy.  Promotional Functions: Financial Inclusion: The RBI promotes financial inclusion by expanding access to banking and financial services to underserved and unbanked segments of the population. It encourages banks to open branches in rural and remote areas and promotes initiatives like Jan Dhan Yojana to increase financial literacy and awareness. Developmental Role: Through its developmental functions, the RBI supports national objectives such as inclusive growth, sustainable development, and social welfare. It fosters the development of priority sectors like agriculture, MSMEs (Micro, Small, and Medium Enterprises), and infrastructure through targeted lending and refinancing schemes.  Merchant Banking: Government Securities: The RBI acts as a merchant banker and advisor to the central and state governments for managing their public debt and raising funds through issuance of government securities. It facilitates the auction and sale of government bonds and treasury bills to meet fiscal requirements and manage public finances. Financial Advisor: In its role as a financial advisor to the government, the RBI provides expert guidance on financial matters, fiscal policy formulation, and economic management. It collaborates with government agencies and stakeholders to ensure effective coordination and implementation of financial policies.  Bank Accounts: CS KOMAL KEWALRAMANI Page 24  Banker to Banks: As the banker and custodian of reserve funds for banks, the RBI maintains accounts of scheduled banks and acts as a banker's bank. It provides clearing and settlement services, facilitates interbank transactions, and manages the statutory liquidity ratio (SLR) and CRR requirements to maintain liquidity in the banking system. Financial Stability: By overseeing and regulating banking operations and maintaining banking accounts, the RBI ensures the stability and resilience of the financial system. It promotes confidence among depositors and investors, enhances financial market efficiency, and fosters sustainable economic growth. Securities and Exchange Board of India (SEBI): SEBI is the statutory regulatory body established under the Securities and Exchange Board of India Act, 1992. It serves as the regulator for the securities market in India, overseeing various aspects to ensure investor protection, market integrity, and the development of the securities market. Objectives of SEBI: SEBI operates with the following primary objectives: 1. Ensuring Market Integrity: SEBI aims to maintain the integrity of the securities market by preventing fraudulent and unfair trade practices. It enforces strict regulations to curb insider trading, market manipulation, and other malpractices that could undermine market confidence. 2. Promoting Fair Market Practices: SEBI promotes fair and transparent practices among market participants, including listed companies, intermediaries, and investors. It sets standards for disclosures, corporate governance, and financial reporting to enhance market transparency and accountability. 3. Encouraging Market Efficiency: SEBI strives to enhance the efficiency of the securities market by facilitating smooth trading, settlement, and clearing processes. It encourages the adoption of advanced technology and best practices to reduce transaction costs and improve liquidity. 4. Protecting Investor Interests: One of SEBI's primary objectives is to protect the interests of investors, both retail and institutional. It ensures that investors receive accurate and timely information about securities, enabling informed investment decisions. SEBI also regulates collective investment schemes and ensures the safety of investors' funds. 5. Facilitating Capital Formation: SEBI plays a crucial role in facilitating capital formation by regulating primary and secondary markets. It oversees the issuance of CS KOMAL KEWALRAMANI Page 25  securities, including initial public offerings (IPOs), rights issues, and bond offerings, to ensure compliance with regulatory norms and investor protection. 6. Promoting Financial Inclusion: SEBI promotes financial inclusion by encouraging broader participation in the securities market, especially among underserved and rural populations. It supports initiatives to educate and empower investors, enhancing their access to investment opportunities and financial services. Organization and Governance: SEBI's governance structure includes a board of directors headed by a chairman, who is appointed by the Government of India. The board comprises members from various backgrounds, including finance, law, economics, and public administration. SEBI operates through its headquarters in Mumbai and regional offices across major cities in India, ensuring decentralized operational effectiveness and compliance oversight. Main Functions of SEBI: 1. Regulation of Securities Market: SEBI regulates the securities market to ensure transparency, fairness, and investor protection. It formulates rules, regulations, and guidelines for various market participants, including stock exchanges, brokers, merchant bankers, and mutual funds. 2. Monitoring and Surveillance: SEBI monitors market activities through advanced surveillance systems to detect and prevent market manipulation, insider trading, and other fraudulent practices. It conducts investigations and takes enforcement actions against violators of securities laws. 3. Regulation of Intermediaries: SEBI regulates market intermediaries such as stockbrokers, sub-brokers, depositories, custodians, and credit rating agencies. It sets standards for their conduct, qualifications, and operational norms to maintain market integrity. 4. Investor Education and Awareness: SEBI undertakes initiatives to educate investors about market risks, investment opportunities, and their rights and responsibilities. It conducts investor awareness programs, publishes informative materials, and promotes financial literacy to empower investors. 5. Development of Market Infrastructure: SEBI facilitates the development of robust market infrastructure, including trading platforms, clearing corporations, and depositories. It encourages the adoption of technology-driven solutions to enhance market efficiency and reduce transaction costs. 6. Policy Formulation and Advocacy: SEBI plays an active role in policy formulation related to the securities market. It collaborates with government agencies, regulatory CS KOMAL KEWALRAMANI Page 26  bodies, and international organizations to develop and implement regulatory frameworks aligned with global best practices. 7. Market Research and Development: SEBI conducts market research and analysis to assess market trends, risks, and opportunities. It publishes reports and studies on market developments, investor behavior, and regulatory impact to support evidence- based policymaking and market reforms. 8. Resolution of Investor Grievances: SEBI operates an investor grievance redressal mechanism to address complaints related to securities transactions and market activities. It facilitates dispute resolution through mediation, arbitration, and adjudication, ensuring prompt and fair resolution of investor grievances. Legal Framework: SEBI operates under the SEBI Act, 1992, and various regulations issued thereunder, including the Securities Contracts (Regulation) Act, 1956. These legislative frameworks empower SEBI with extensive powers to regulate and supervise activities in the securities market effectively. Role and Impact: SEBI's role is pivotal in maintaining market confidence, promoting investor trust, and ensuring the orderly functioning of India's securities market. By enforcing stringent regulations, fostering market development, and protecting investor interests, SEBI contributes significantly to the overall stability and growth of the financial system. Insurance Regulatory and Development Authority of India (IRDAI): The Insurance Regulatory and Development Authority of India (IRDAI) is the apex regulatory body governing the insurance sector in India. Established under the Insurance Regulatory and Development Authority Act of 1999, IRDAI plays a crucial role in ensuring the growth, stability, and fairness of the insurance industry, while safeguarding the interests of policyholders and promoting financial inclusion across the country. Objectives of IRDAI: 1. Regulatory Oversight and Compliance: IRDAI's foremost objective is to regulate and supervise insurance companies, intermediaries, and related entities. It formulates and enforces regulatory frameworks, guidelines, and norms to ensure compliance with statutory requirements and ethical standards. By maintaining market discipline, IRDAI aims to protect the interests of policyholders and promote a fair and transparent insurance market. 2. Promoting Market Development: IRDAI is committed to fostering the development and expansion of the insurance market in India. It encourages CS KOMAL KEWALRAMANI Page 27  innovation in insurance products, distribution channels, and service delivery models to cater to diverse consumer needs and enhance market competitiveness. By facilitating growth-oriented policies and regulatory frameworks, IRDAI aims to bolster investor confidence and attract investments into the insurance sector. 3. Consumer Protection and Education: Protecting the rights and interests of policyholders is a core mandate of IRDAI. It ensures that insurers adhere to fair business practices, provide transparent information on insurance products, and handle claims efficiently and fairly. IRDAI also promotes consumer education and awareness through initiatives aimed at enhancing financial literacy, educating consumers about insurance products, and empowering them to make informed decisions. 4. Financial Stability and Solvency: IRDAI plays a pivotal role in safeguarding the financial stability of insurance companies. It monitors their solvency positions, sets prudential norms, and establishes capital adequacy requirements to ensure that insurers maintain sufficient financial reserves to honor their obligations to policyholders. By promoting sound risk management practices and financial discipline, IRDAI enhances the overall stability and resilience of the insurance sector. 5. Promoting Financial Inclusion: IRDAI is committed to promoting financial inclusion by expanding access to insurance products and services among underserved and marginalized segments of society. It encourages insurers to develop affordable and customized insurance solutions tailored to the needs of rural and low-income populations. Through initiatives like micro-insurance and community-based insurance programs, IRDAI aims to mitigate risks, improve social security, and promote economic resilience among vulnerable communities. Functions of IRDAI: 1. Regulatory Framework Development: IRDAI formulates policies, guidelines, and regulatory frameworks governing various aspects of the insurance industry. It continuously reviews and updates these frameworks to align with evolving market dynamics, technological advancements, and international best practices. By establishing robust regulatory standards, IRDAI aims to enhance market efficiency, promote healthy competition, and ensure systemic stability within the insurance sector. 2. Supervision and Monitoring: IRDAI exercises supervision and monitoring over insurance companies, intermediaries, and related entities to ensure compliance with regulatory requirements. It conducts inspections, audits, and reviews to assess the financial soundness, business conduct, and operational efficiency of insurers. Through proactive supervision, IRDAI mitigates risks such as solvency concerns, market misconduct, and non-compliance with consumer protection norms. CS KOMAL KEWALRAMANI Page 28  3. Market Conduct Oversight: IRDAI oversees market conduct to prevent unethical practices, mis-selling of insurance products, and unfair trade practices. It promotes transparency in insurance operations, ensures disclosure of key policy terms and conditions to policyholders, and monitors compliance with customer service standards. By enforcing ethical business conduct and fair market practices, IRDAI enhances consumer trust and confidence in the insurance industry. 4. Promotion of Innovation and Technology Integration: IRDAI encourages innovation in insurance products, distribution channels, and service delivery mechanisms. It supports initiatives that leverage technology, digitalization, and data analytics to enhance operational efficiency, customer engagement, and risk management practices within the insurance sector. By fostering a culture of innovation, IRDAI promotes industry resilience, competitiveness, and adaptability to evolving market trends. 5. Consumer Education and Awareness Programs: IRDAI conducts consumer education initiatives, awareness campaigns, and financial literacy programs to educate policyholders about insurance products, rights, and responsibilities. It empowers consumers to make informed decisions, understand policy features, and effectively navigate the insurance marketplace. Through educational outreach, IRDAI aims to bridge knowledge gaps, improve insurance penetration rates, and promote a financially literate population. 6. International Cooperation and Collaboration: IRDAI engages in international cooperation, collaboration, and knowledge-sharing with global regulatory bodies, industry associations, and stakeholders. It participates in international forums, exchanges best practices, and contributes to the development of global insurance standards and regulations. By fostering international partnerships, IRDAI strengthens regulatory frameworks, promotes cross-border cooperation, and enhances India's position in the global insurance landscape. 7. Dispute Resolution and Grievance Redressal: IRDAI operates a robust grievance redressal mechanism to resolve disputes between insurers and policyholders in a fair and timely manner. It facilitates mediation, arbitration, and adjudication processes to address consumer complaints, ensure prompt resolution of grievances, and uphold consumer rights. By promoting effective dispute resolution mechanisms, IRDAI enhances consumer protection, builds trust in insurance products, and maintains industry credibility. 8. Developmental Initiatives and Sectoral Growth: IRDAI initiates developmental programs and initiatives aimed at promoting sustainable growth, inclusion, and resilience within the insurance sector. It supports capacity building, skill development, and training programs for insurance professionals to enhance industry expertise and professionalism. IRDAI also facilitates research, policy advocacy, and collaborative initiatives to address sectoral challenges, promote best practices, and foster long-term growth and stability. CS KOMAL KEWALRAMANI Page 29 1.5 Major recent reforms in Indian Financial System 1. Insolvency and Bankruptcy Code (IBC), 2016 Objective:  Consolidate and amend laws relating to reorganization and insolvency resolution.  Establish a time-bound process for insolvency resolution to maximize asset value. Key Features:  Single Law: Replaced multiple laws dealing with insolvency and bankruptcy.  Insolvency Resolution Process: Initiated by creditors or debtors, with a time- bound process (180 days, extendable by 90 days).  Insolvency Professionals: Licensed professionals manage the insolvency resolution process.  Adjudicating Authorities: National Company Law Tribunal (NCLT) for companies and Debt Recovery Tribunal (DRT) for individuals and partnerships.  Insolvency and Bankruptcy Board of India (IBBI): Regulatory body overseeing the implementation of the IBC. Impact:  Improved recovery rates for creditors.  Enhanced investor confidence by providing a predictable and transparent process.  Accelerated resolution of bad debts, helping banks to clean their balance sheets. 2. Goods and Services Tax (GST), 2017 Objective:  Unify India’s indirect tax structure to simplify tax administration and compliance.  Eliminate the cascading effect of taxes. Key Features:  Single Tax: Replaced multiple central and state taxes like VAT, service tax, excise duty, etc.  Input Tax Credit: Businesses can claim credit for the tax paid on inputs.  GST Council: Governing body comprising representatives from the central and state governments. Impact: CS KOMAL KEWALRAMANI Page 30   Simplified tax regime, reducing compliance burden.  Increased tax revenue due to better compliance.  Enhanced interstate trade by removing check posts and reducing logistics costs. 3. Digital Payments Initiatives Unified Payments Interface (UPI):  Objective: Enable seamless, real-time mobile-based payments.  Features: Instant money transfer, interoperability among banks, support for multiple bank accounts.  Impact: Revolutionized digital payments, with exponential growth in transactions and user adoption. Aadhaar Payment Bridge System (APBS):  Objective: Use Aadhaar as a financial address for direct benefit transfers (DBT).  Impact: Improved efficiency and transparency in subsidy transfers, reducing leakage and ensuring timely payments to beneficiaries. 4. Financial Inclusion Efforts Pradhan Mantri Jan Dhan Yojana (PMJDY), 2014:  Objective: Provide universal access to banking facilities.  Features: Zero-balance accounts, RuPay debit cards, accidental insurance cover, and overdraft facility.  Impact: Over 430 million bank accounts opened, increased financial literacy, and broader access to financial services. Micro Units Development and Refinance Agency (MUDRA) Yojana:  Objective: Provide loans to micro and small enterprises.  Impact: Enhanced credit access for small businesses, fostering entrepreneurship and employment. 5. Banking Sector Reforms Merger of Public Sector Banks:  Objective: Create larger, stronger banks to improve efficiency and competitiveness.  Key Mergers: Oriental Bank of Commerce and United Bank of India merged with Punjab National Bank; Syndicate Bank merged with Canara Bank, etc.  Impact: Reduced operational costs, enhanced lending capacity, and streamlined governance. CS KOMAL KEWALRAMANI Page 31  Introduction of Small Finance Banks (SFBs) and Payments Banks:  Objective: Extend banking services to underserved and unbanked populations.  Features: SFBs focus on small loans to underbanked segments; Payments Banks offer simple deposit and payment services.  Impact: Promoted financial inclusion and increased access to formal banking services. 6. Insurance Sector Reforms Increase in Foreign Direct Investment (FDI) Limit:  Objective: Attract foreign capital and expertise in the insurance sector.  Key Change: Raised the FDI limit from 49% to 74% in 2021.  Impact: Boosted foreign investment, enhanced competition, and brought in global best practices. IRDAI Reforms:  Simplification of Processes: Eased norms for policy issuance and claim settlement.  Health Insurance Regulations: Introduced standard health insurance products to simplify choices for consumers.  Impact: Improved customer experience, increased insurance penetration, and promoted sector growth. 7. Mutual Fund Sector Reforms Categorization and Rationalization of Mutual Fund Schemes:  Objective: Simplify and standardize mutual fund offerings for investors.  Key Changes: Defined clear categories and characteristics for mutual fund schemes.  Impact: Enhanced transparency and made it easier for investors to compare and choose funds. Total Expense Ratio (TER) Reduction:  Objective: Lower the cost of investing in mutual funds.  Key Change: Reduced the maximum permissible TER.  Impact: Reduced investment costs for investors, potentially enhancing returns. Introduction of Direct Plans:  Objective: Provide investors with a low-cost option to invest directly with the fund house.  Impact: Increased investor options and reduced distribution costs, promoting informed investment decisions. CS KOMAL KEWALRAMANI Page 32