An overview of Indian Financial System
The word system implies a set of complex and interrelated factors organized in a particular form. These factors are mostly interdependent but not always mutually exclusive. The financial system of any country consists of several ingredients. It includes financial institutions, markets, financial instruments, services, transactions, agents, claims and liabilities in the economy.
Financial system‘sato canalize the funds from the surplus units to the deficit UnitsDeficit. units‗‘ a iscase where current expenditure exceeds their current income. There are other entities whose current income Surplusexceeds Units‗.
An efficient financial system not only encourages savings and investments, it also efficiently allocates resources in different investment avenues and thus accelerates the rate of economic development. The financial system of a country plays a crucial role of allocating scarce capital resources to productive uses. Its efficient functioning is of critical importance to the economy.
1 FINANCIAL SYSTEM:
•It is a system for the efficient management and creation of finance. According to Robinson, financial system provides a link between savings and investment for the creation of new wealth and to permit portfolio adjustment in the composition of the existing wealth. According to Van Horne, financial system is defined as the purpose of financial markets to allocate savings efficiently in an economy to ultimate users –either for investment in real assets or for consumption. Thus the financial system mainly stands on three factors
Money‘sthe unit of exchange or medium of payment. It represents the value of financial transactions in qualitative terms.
2. Credit’, on the other hand, is a debt or loan which is to be returned normally with interest.
3. Finance‘ is monetary wealth of the state, an institution or a person. Comprising these factors in a systematic order forms a financial system.
The objectives of the financial system are
1. Accelerating the growth of economic development.
2. Encouraging rapid industrialization
3. Acting as an agent to various economic factors such as industry, agricultural sector, Government etc.
4. Accelerating rural development
5. Providing necessary financial support to industry
6. Financing housing and small scale industries
7. Development of backward areas, infrastructure and livelihood
8. Imposing price control in need
9. Protecting environment. Functions of financial system are distributed from creation of money to efficient Management. It is the sum total of the functions of the various intermediaries.
The functions of financial system can be classified into two broad categories:
1. Controlling functions
2. Promotional functions.
3 Components of Financial System:
Financial system Institutions Markets Financial Institutions Instruments Services Structure of
Commercial Banks Classification of Commercial Banks
Ø Financial Institutions
Ø Non Banking
Ø Non Banking
Ø Financial companies
Ø Central Bank
Ø Non Banking
Ø Joint Stock companies
Classification of Co-operative Banks NON BANKING FINANCIL INTERMEDIARIES Classification of Non Banking Financial Intermediaries (B) FINANCIAL MARKETS: Components of Financial Market Co-operative Banks
Ø State Co-operative
Ø Apex Banks
Ø State Co-operative Urban
Ø Co-operative Land
Ø Central Co-operative
Ø Banks Primary Co-operative
Ø Land Development
Ø Primary Co-operative
4. Limitations of the financial system in India
The following are the limitations of the Indian financial system. • The Indian Financial system has failed to meet the financial needs of small scale Industries. It has rather patroned the big industrial houses who are already well off. • The mushrooming of financial institutions has deteriorated the quality and effectiveness of the sector to some extent. • In many cases, it could not impose adequate control towards financial irregularities and frauds, often influenced by politically and economically organized pressure groups. • The Indian financial system fails to create a well defined and organized capital market. • It fails to motivate economically marginal or small entrepreneurs by providing micro credit to them. • The Indian financial system is not flexible at the desired level. It takes abnormal time to cope with the changing situation.
Ø Factoring Asset Liability Management
Ø Leasing Housing Finance
Ø Forfeiting Portfolio Finance
Ø Hire Purchase Finance Underwriting
Ø Credit Card Credit rating
Ø Merchant Banking Interest and Credit Swap
Ø Book Building Mutual fund
Securities and Exchange Board of India (Merchant Bankers) Rules, 1992 ― A merchant banker has been defined as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory services in relation to such issue management.
Random House Dictionary ―Merchant banker is rwritesan securitiesorganizatifor corporations, advices such clients on mergers and is involved in the ownership of commercial ventures. These organizations are sometime banks which are not merchants and sometimes merchants who are not banks and sometimes houses which are neither merchants nor banks.
Charles P. Kindleberger ―Merchant banking is the developme which frequently encountered a prolonged intermediate stage known in England originally as merchant banking. The Notification of the Ministry of finance defines A merchant banker as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to the securities as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management.
Ø Channelizing the financial surplus of the general public into productive investments avenues
Ø Co-coordinating the activities of various intermediaries like the registrar, bankers, advertising agency, printers, underwriters, brokers, etc., to the share issue
Ø Ensuring the compliance with rules and regulations governing the securities market.
5 Functions of merchant Banking: Merchant banking functions in India is the same as merchant banks in UK and other European countries. The following are the functions of merchant bankers in India.
Ø Corporate counseling
Ø Project Counseling
Ø Capita l Structuring
Ø Portfolio Management
Ø Issue Management
Ø Credit Syndication
Ø Working capital
Ø Venture Capital
Ø Lease Finance
Ø Fixed Deposits
(i) Corporate counseling: Corporate counseling covers counseling in the form of project counseling, capital restructuring, project management, public issue management, loan syndication, working capital fixed deposit, lease financing, acceptance credit etc., The scope of corporate counseling is limited to giving suggestions and opinions to the client and help taking actions to solve their problems. It is provided to a corporate unit with a view to ensure better performance, maintain steady growth and create better image among investors.
(ii) Project counseling Project counseling is a part of corporate counseling and relates to project finance. It broadly covers the study of the project, offering advisory assistance on the viability and procedural steps for its implementation.
a. Identification of potential investment avenues.
b. A general view of the project ideas or project profiles.
c. Advising on procedural aspects of project implementation d. Reviewing the technical feasibility of the project
e. Assisting in the(TechnicalselectionConsultancyOrganizations)of forTCO‗spreparing project reports
f. Assisting in the preparation of project report
g. Assisting in obtaining approvals, licenses, grants, foreign collaboration etc., from government
h. Capital structuring
i. Arranging and negotiating foreign collaborations, amalgamations, mergers and takeovers.
j. Assisting clients in preparing applications for financial assistance to various national and state level institutions banks etc.,
k. Providing assistance to entrepreneurs coming to India in seeking approvals from the Government of India.
(iii) Capital Structure Here the Capital Structure is worked out i.e., the capital required, raising of the capital, debt-equity ratio, issue of shares and debentures, working capital, fixed capital requirements, etc.,
(iv) Portfolio Management It refers to the effective management of Securities i.e., the merchant banker helps the investor in matters pertaining to investment decisions. Taxation and inflation are taken into account while advising on investment in different securities. The merchant banker also undertakes the function of buying and selling of securities on behalf of their client companies. Investments are done in such a way that it ensures maximum returns and minimum risks.
(v) Issue Management: Management of issues refers to effective marketing of corporate securities viz., equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it. The issue function may be broadly divided in to pre issue and post issue management.
a. Issue through prospectus, offer for sale and private placement. b. Marketing and underwriting
c. pricing of issues
(vi) Credit Syndication: Credit Syndication refers to obtaining of loans from single development finance institution or a syndicate or consortium. Merchant Banks help corporate clients to raise syndicated loans from commercials banks. Merchant banks helps in identifying which financial institution should be approached for term loans. The merchant bankers follow certain steps before assisting the clients approach the appropriate financial institutions. a.
Merchant banker first makes an appraisal of the project to satisfy that it is viable b. He ensures that the project adheres to the guidelines for financing industrial projects. c. It helps in designing capital structure, determining the promoter‗s amount of term loan to be raised. d. After verifications of the project, the Merchant Banker arranges for a preliminary meeting with financial institution. e. If the financial institution agrees to consider the proposal, the application is filled and submitted along with other documents.
(vii) Working Capital: The Companies are given Working Capital finance, depending upon their earning capacities in relation to the interest rate prevailing in the market.
(viii)Venture Capital: Venture Capital is a kind of capital requirement which carries more risks and hence only few institutions come forward to finance. The merchant banker looks in to the technical competency of the entrepreneur for venture capital finance.
(ix). Fixed Deposit: Merchant bankers assist the companies to raise finance by way of fixed deposits from the public. However such companies should fulfill credit rating requirements.
•Treasury Management- Management of short term fund requirements by client companies.
•Stock broking- helping the investors through a network of service units
•Servicing of issues- servicing the shareholders and debenture holders in distributing dividends, debenture interest.
•Small Scale industry counseling- counseling SSI units on marketing and finance
•Equity research and investment counseling –merchant banker plays an important role in providing equity research and investment counseling because the investor is not in a position to take appropriate investment decision.
•Assistance to NRI investors - the NRI investors are brought to the notice of the various investment opportunities in the country.
•Foreign Collaboration: Foreign collaboration arrangements are made by the Merchant bankers.