banking and financial institutions-1

8/6/2019 Banking and Financial Institutions-1

1/40

PIBM

BANKING AND FINANCIAL

INSTITUTIONS20.01.2011

AJIT SINHA


2/40

FINANCIAL SYSTEMS

Financial systems are of crucial significance

to capital formation-

The main function of financial systems is thecollection of savings and their distribution

for industrial investment thereby

stimulating the capital formation and

accelerating the process of economic

growth.


3/40

FINANCIAL SYSTEMS

The process of capital formation involvesthree activities-

Savings the ability by which claims toresources are set aside and becomeavailable for other purposes

Finance- the activity by which claims toresources are either assembled fromthose released by domestic savings,obtained from abroad or created as bankdeposits or notes and then placed in thehands of the investors


4/40

FINANCIAL SYSTEMS

Investments-The activity by which the resources are

actually committed to production.

The effective mobilization of savings, theefficiency of the financial

organization/system and the

channelization of these savings into the

most productive forms of investment have

a great bearing on the contribution of

capital formation to economic

development.


5/40


6/40

Financial Intermediaries

Banks

Mutual funds

Insurance organization

NBFCs-

Asset finance companies

Housing finance companies

Venture capital funds

Stock Broking Firms


7/40

Financial Markets

Financial markets perform a crucial function inthe savings-investment process as facilitatingorganizations. They are not sources of finance

but they are a link between the savers andinvestors both individual as well asinstitutional.

Financial Markets-

Money markets

Capital /Securities markets


8/40

Financial Assets/Instruments

Financial instruments represent claims on a

stream of income and assets of another

economic unit and are held as a store of value

and for the return that is expected.

Equity shares

Debentures


9/40


10/40


11/40

INDIAN FINANCIAL SYSTEM- AN

OVERVIEWPhase 1-

The organization of the Indian FinancialSystem before 1951 had a close resemblancewith the theoretical model of a financialorganization in a traditional economy.

Industry had very limited access to outside

savings. Financial system was not responsive to

opportunities for industrial investment


12/40


13/40

INDIAN FINANCIAL SYSTEM- ANOVERVIEW

The main elements of the financial organizationin planned economic development could becategorized into four broad groups-

Public /Government ownership of financialinstitutions

Fortification of the institutional resources

Protection to investors Participation of financial institutions in

corporate management


14/40

INDIAN FINANCIAL SYSTEM- AN

OVERVIEWPublic ownership of Financial Institutions-

Important segments of the financialmechanism were assigned to the direct

control ofPublic authorities through

nationalization measures as well through the

creation of entirely new institutions in the

public sector


15/40

Nationalization

The nationalisation of the Reserve Bank of India

in 1948 marked the beginning of the transfer

of important financial intermediaries toGovernment control. This was followed in

1956 by the setting up of the State Bank of

India by taking over the then Imperial Bank ofIndia.


16/40

Nationalization

In 1956 ,245 Life insurance companies were

nationalized and merged in to the state owned

Life Insurance Corporation of India (LIC).

In 1969 fourteen commercial banks were brought

under the direct ownership of the Government of

India, six more commercial banks were brought

under the public ownership. General insurance corporation (GIC) was set up in

1972


17/40

New Institutions

In addition to nationalisation ,the control of

public authorities on the sources of credit and

finance led to the creation of a number of newinstitutions in the Public Sector.

Setting up of national/regional Development

banksCreation of an investment trust- the Unit Trust

of India


18/40

Fortification of Institutional

StructureDevelopment Banks- The setting up of the

structure of development finance/Banking/term

lending institutions was the most outstandingdevelopment in this area.

In quantitative terms they grew into a massive

source of industrial finance and as the most

important supplier of capital during that period.


19/40

Fortification of InstitutionalStructure

The role of Development banks had a qualitativedimension also which refers to their role asinstruments of state policy, of directing capital

into chosen areas of industry in conformitywith planning priorities.

The setting up of the Industrial Financecorporation of India (IFCI) in 1948 marked thebeginning of the era of Development bankingin India.


20/40

Fortification of InstitutionalStructure

The Government of India set up the Refinance

corporation of India (RCI) Ltd in 1958 to

provide refinance to the banks against term

loans granted by them to medium/small

enterprises. The RCI subsequently merged

with the Industrial Development Bank of

India(IDBI) in 1964.


21/40

Fortification of Institutional

Structure

Establishment of IDBI in 1964 is considered to be

the most important event in the sphere of

development banking in India. IDBI was

established as a subsidiary of the Reserve

Bank of India. It represented a step towards

evolving an integrated structure of financing

institutions in India.


22/40


23/40


24/40

POST NINETIES

ORGANISATIONMajor economic policy changes implemented- Macro economic stabilization

Deli censing of Industries

Trade liberalization

Currency reforms

Reduction in subsidies

Financial sector/capital markets/Bankingreforms


25/40

POST NINETIESORGANISATION

Privatization/disinvestments in public sectorunits

Tax reforms

Company law reforms

All of the above helped in capital market orienteddevelopments/reforms. The capital markettherefore emerged as the main agency for the

allocation of resources and all segments of theIndian economy like the Public sector, Privatesector, State Governments started competing toraise resources in the capital markets.


26/40

POST NINETIESORGANISATION

The notable developments in the organization of

the organization of the Indian Financial system

in Phase III can be briefly summarized as-

Privatization of Financial Institutions

Reorganization of institutional resource

Investor protection


27/40

Life Insurance Corporation of

IndiaLIC ,in 1956, was formed after amalgamation of245 life insurance companies into a single state

owned organisation.The setting of the LIC was a notable feature in

the evolution of the post 1951 organisation of

industrial financing in India.The LIC emerged as the single largest reservoir

of long term savings in India.


28/40

RBI

Establishment

The Reserve Bank of India wasestablished on April 1, 1935 .

The Central Office of the Reserve Bankwas initially established in Calcutta butwas permanently moved to Mumbai in1937. The Central Office is where the

Governor sits and where policies areformulated.

Though originally privately owned, sincenationalization in 1949, the Reserve Bank

is fully owned by the Government of India.


29/40

RBI

The Preamble of the Reserve Bank of Indiadescribes the basic functions of the

Reserve Bank as:"...to regulate the issue of Bank Notes andkeeping of reserves with a view tosecuring monetary stability in India and

generally to operate the currency andcredit system of the country to itsadvantage."


30/40

STATE BANK OF INDIA

First Five Year Plan

In 1951, when the First Five YearPlan waslaunched, the development of rural India was given

the highest priority. The commercial banks of thecountry including the Imperial Bank of India had tillthen confined their operations to the urban sectorand were not equipped to respond to the emergent

needs of economic regeneration of the rural areas.In order, therefore, to serve the economy in generaland the rural sector in particular, the All India Rural


31/40

STATE BANK OF INDIA

Credit Survey Committee recommendedthe creation of a state-partnered and state-sponsored bank by taking over the

Imperial Bank of India, and integrating withit, the former state-owned or state-associate banks. An act was accordinglypassed in Parliament in May 1955 and the

State Bank of India was constituted on 1July 1955.


32/40

STATE BANK OF INDIA

More than a quarter of the resources of theIndian banking system thus passed underthe direct control of the State. Later, the

State Bank of India (Subsidiary Banks) Actwas passed in 1959, enabling the StateBank of India to take over eight formerState-associated banks as its subsidiaries

(later named Associates).


33/40

STATE BANK OF INDIA

The State Bank of India was thus born with a newsense of social purpose aided by the 480 officescomprising branches, sub offices and threeLocal Head Offices inherited from the Imperial

Bank. The concept of banking as mererepositories of the community's savings andlenders to creditworthy parties was soon to giveway to the concept of purposeful banking subserving the growing and diversified financial

needs of planned economic development.


34/40

STATE BANK OF INDIA

The State Bank of India was destined to act as

the pacesetter in this respect and lead the

Indian banking system into the exciting field of

national development.


35/40

Nationalized Banks

The broad aim of Nationalization were-

To control the heights of the economy and

meet progressively and serve better the needsof development of the economy in conformity

with national policy and objectives.

14 major banks with individual deposits

exceeding Rs.50 crore were nationalized on 19

July 1969


36/40

Nationalized Banks

Objective-

It was expected that the nationalized banks

would Endeavour to ensure that the needs

of productive efforts of diverse kinds,irrespective of size and social status of the

borrowers and in particular those of

farmers, small scale industries and selfemployed professional groups, are met in

increasing measure and to create fresh

opportunities for backward areas in the

different parts of the country.


37/40

Privatization of Financial

InstitutionsWhile practically the entire financial system was

under the state ownership and control till the

mid eighties ,steps were initiated during the

phase III to privatize major financial

institutions.

Conversion of IFCI into a public company IFCI

Ltd

IDBI also offered its equity to private investors


38/40

Foreign Banks

RBI allowed the entry of foreign banks as

branches subject to reciprocity and other

prudential considerations. Foreign

banks/companies have also been permitted to

invest up to 20 percent as a technical

collaborator (with overall 40 percent ceiling) in

a new private sector banks, subject togovernment approval, provided they do not

have presence in India.


39/40

Foreign Banks

Foreign equity in new Indian private banks are

allowed in accordance with the foreign

investment policy.

Since 1992 , around 19 new foreign banks with

47 branches have been allowed.

It is mandatory for the foreign banks to achieve

the minimum target of 32 percent in priority

sector lending


40/40

PIBM

THANK YOU

AJIT SINHA

[email protected]

M-8007999816

banking and financial institutions-1

Documents