Financial Services - Part I

Depository

A depository is a facility such as a building, office, or warehouse in which something is deposited
for storage or safeguarding. It can refer to an organization, bank, or institution that holds
securities and assists in the trading of securities

There are two sorts of depositories in India.

National Securities Depository Limited (NSDL)

Central Depository Service (India) Limited (CDSL).









Payment Banks Vs Commercial Banks





























The future of Indian
Financial Instiutions

• Shayne Elliott, the chief executive of
Australia New Zealand Banking Group
Ltd, said it is not fintech firms, but big
technology companies, such as
Facebook and Amazon, which pose a
threat to the banking space.

Indian Policy Indian Financial
System – An
Overview





Indian Financial System – An Overview 82

Pre 1951

1. Control of Money Lenders
2. No Laws / Total Private Sector
3. No Regulatory Bodies
4. Hardly any industrialization
5. Banks – Traditional lenders for Trade and that too short term
6. Main concentration on Traditional Agriculture
7. Narrow industrial securities market (i.e. Gold/Bullion/Metal but largely

linked to London Market)
8. Absence of intermediatory institutions in long-term financing of industry
9. Industry had limited access to outside saving/resources

Indian Financial System – An Overview 83

1951 to 1990
Moneylenders ruled till 1951. No worth-while Banks at
that time. Industries depended upon their own money.
1951 onwards

5 years PLAN commenced.
PVT. SECTORS TO PUBLIC SECTOR – MIXED ECONOMY
1st 5 year PLAN in 1951 – Planned Economic Process. As
part of Alignment of Financial Systems – Priorities laid
down by Govt. – Policies.

Phases

Indian Financial System – An Overview 85
1951-1990

Nationalisation

RBI 1948

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

LIC 1956 (Merges of over 250 Life Insurance Companies)

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

1980 (6 more Banks)

Insurance 1972 (General Insurance Corp. GIC by New India,
Oriental, united and National

Indian Financial System – An Overview

1951-1990 i. Pu blic ownership of Financial Institution

ii. Strengthening of Institutional Structure 86
iii. Protection to Investors
iv. Participation of Corporate Management
v. Organisational Deficiencies.

Development

Directing the Capital in confirmity with Planning priorities
Encouragement to new entrepreneurs and small set-ups
Development of Backward Region
IFCI (1948)
State Finance Corporation (1951) Purely Mortgage institution
IDBI (1964) As subsidiary of RBI to provide Project / Term Finance
ICICI (1966) Channellising of Foreign Currency Loan from World Bank

to Pvt. Sector and underwriting of Capital issues.
SIDC’s & SIIC State Level Corporations for SME sector
UTI (1964) to enable small investors to share Industrial Growth

Indian Financial System – An Overview

87

NCC (1968) National Credit Council to assess the demand of Credit & determine priorities
for grant of Loans, advances, investment & requirements of priority sector (presently 40%)

Credit Guarantee Scheme (1960) for SSI Finance upto 75% of defaulted amount or guarantee
amount whichever is lower with ceiling of Rs. 7.5 Lacs for W/Cap & Rs. 2.5 Lacs for T/L per
borrower.

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

• ARC (1963) Agriculture Refinance Corp. for refinance of medium & long term loans.
• ECGC (1964) FOR Export Performance

Indian Financial System – An Overview

Commercial Banks 88

Continued old way of Deposit – Banking & short term credit to trade
Selective Credit Control (Control through quantum, rate of interest margin etc).
Extensive Branch Expansion. (4000 in 1969 now over 6,00,000)
Refinance Facility to share risk & also cost of Banks’ funds
Better needs of Economic development

Create job opportunities
Fulfilment of Plan objectives
Servicing maximum population by Branch expansion
Setting up Committees. Tandon (1974) to regulate Bank Credit & follow-up
Bank Credit to Priority Sector. (substantial increase)

Indian Financial System – An Overview

89

STEPS TAKEN (LEGAL/ADMINISRTATIVE)

Companies Act 1956 to regulate Companies, Capital Structure. (Amended in

2013)

Capital Issues (Control) Act, 1947 implemented through CCI in MOF to

regulate Capital Issues & Foreign Investment (repealled in 1992)

Securities Contract (Regulation) Act, 1956 enforced through Directorate of

Stock Exchange under MOF to regulate Capital Market.

MRTPA (1970) to avoid (a) concentration of economic power and (b)

Control monopolistic and restrictive trade practices.

FERA (1973) to regulate foreign investment & foreign business.

90

Indian Financial System – An Overview

91

POST 1990s

Development Financial Institutions : (DFIs)
Started providing Working Capital also
Set up CREDIT RATING AGENCIES

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

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

FITCH a 100% subsidiary of FITCH Group.

Indian Financial System – An Overview
POST 1990

92

INDUSTRIES

Rise & Growth of Service Sector industries.
Reliance & Dependance on technology.
 E-mail & mobile made sea-change in communication, data collection etc.
Computerisation – a catch phrase and inevitable need of an hour.
Dependent on Capital Market rather than only Debts dependancy.
Scalability of operations through globally competitive size.
Broad basing of Board.
Professional Management.

NBFC

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

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

Indian Financial System – An Overview 93
POST 1990

Commercial Bank

Govt. holding reduced even by upto 40%
Setting up of Universal Banks (from CASA to Corp. Finance)
Capital Adequacy. (Basel II accepted) 9%
Focus on Non-Fund Business like L/C, Guarantees, Acceptance, FOREX etc.
Promoting Signature-based and consultancy services like Project Counselling,

Merchant Banking, New Issues Management, Capital Market related
activities, Merger & Acquisitions, debt syndication, trusteeship of debts,
sponsoring Mutual Funds, Wealth Management, Sales & Services of insurance
(both life & non-life) products etc.
New Private Sector Banks (AXIS, YES, HDFC, KOTAK MAHINDRA etc.)
CAMELS’ Rating (C-Capital Adequacy, A-Asset Quality, M-Management, E-
Earning, L-Liquidity, & S-Systems & controls).

Indian Financial System – An 94
Overview

Securities/Capital Market

Primary Market

- Phenominal increase in number of investors.

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

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

Indian Financial System – An Overview 95

Secondary Market

- Over 90% Securities Dematerialised.
- Depository Act 1996; 2 Depositories NSDC & CDSL.
- Settlement Cycle reduced from 15 days to T + 2.
- Clearing & Settlement by Clearing Corp.
- Securities related derivatives introduced.
- Future, Option, Arbitrage, Hedging permitted.

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