Unit 5 c) B.Com The Financial Sector
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The document outlines the structure, performance, and reforms in the financial sector of India, focusing on the money and capital markets. It details various financial instruments, market characteristics, and reforms implemented since 1991 under different committees to enhance banking efficiency and competition. Key areas include changes in regulatory practices, prudential measures, and the introduction of technology in financial transactions.
Unit 5 c) B.Com The Financial Sector
- 1. Financial Sector Structure, Performance and Reforms Prof. Mahendra Kumar Ghadoliya
- 2. Contents • Introduction • Structure of the Financial Market • The Money Market • The Capital Market • Performance of the Financial Market • Reforms in the financial Market
- 3. • The Money Market: What is a 'Money Market' Market where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper". This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.
- 4. Money market instruments • Call/Notice/Term money market- The call money market deals in short term finance repayable on demand, with a maturity period varying from one day to 14 days. • Repurchase Agreement (Repo & Reverse Repo) market- When banks have any shortage of funds, they can borrow it from Reserve Bank of India or from other banks. The rate at which the RBI lends money to commercial banks is called repo rate, • Treasury bill market- Treasury bills are instrument of short-term borrowing by the Government of India, issued as promissory notes under discount. They have assured yield and negligible risk of default. • Certificate of deposit – Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions. • Commercial paper – Short term promissory notes issued by company at discount to face value and redeemed at face value
- 5. Structure of the Financial Market
- 6. The structure of Capital Market in India
- 7. Capital Market Instruments 1.Preference shares 2. Equity shares 3. Non-voting equity shares 4. Cumulative convertible preference shares 5. Company fixed deposits 6. Warrants 7. Debentures 8. Bonds 9. Mutual fund 10. Derivatives 11. Commodities 12. Currency exchange
- 8. Reforms in Capital Market 1. Security Market Major Source of Finance after 1991 2. Access to global Capital Market- 1992-93 issue of Foreign Currency Convertible Bonds (FCCBs)/Equity Shares under the Global Depository Mechanism. 3. growing dependence on security market for capital requirement 4. Efficient and safe. 5. SEBI is the regulator of the capital market 6. Dematerialisation of Securities-1997 7. Screen Based Trading-2003
- 9. Banking Sector Reforms • Competition Enhancing Measures • Measures Enhancing Role of Market Forces • Prudential Measures • Institutional and Legal Measures • Supervisory Measures • Technology Related Measures
- 10. Competition Enhancing Measures: • Operational autonomy to Public Sector banks • Reduction in public ownership of public sector banks – Can raise capital from equity market up to 49% of paid up capital • Transparent Norms related to entry, mergers /amalgamation and governance issues for Indian private sector, foreign and joint-venture joint- banks, NBFC’s and insurance companies • Permission for foreign investment in the financial sector in the form of Foreign Direct Investment (FDI) as well as portfolio investment • Permission to banks to diversify product portfolio and business activities
- 11. Banking Sector Reforms • Reduction in SLR • End of Administered Interest Rate Regime • Prudential Norms: High Capital Adequacy Ratio • Competitive Financial System • Non-Performing Assets (NPA) and Income Recognition Norm • Elimination of Direct Credit Controls • Promoting Micro-Finance to Increase Financial Inclusion • Termination of Automatic Monetisation of Budget Deficits • Pension Reforms
- 12. Prudential Measures • Introduction and phased implementation of international best practices and norms related to:- CRAR, Income recognition, Provisioning and Exposure • Strengthen risk management :- – • 'Know Your Customer‘ norms – • 'Anti Money Laundering' guidelines – • Graded provisioning for NPA’s – Capital charge for market risk • Guidelines for ownership and governance, securitization and debt restructuring mechanisms norms, etc
- 13. Prudential Measures • Roadmap for Basel II Measures:- • • Implementing Basel II with effect from March 31, 2007 • Standardized Approach for credit risk and Basic Indicator Approach for operational risk (First Phase) • Migrate to the Internal Rating Based (IRB) Approach after adequate skills are developed (Second Phase) • Basel II will require more capital for banks in India – Presently CRAR is over 12 per cent – New and Innovative Funding options Perpetual debt instruments and non- non- cumulative preference shares Redeemable cumulative preference shares and hybrid debt instruments
- 14. Narasimham committee 1991 • The salient recommendations are: 1. Four tier Banking System should be introduced in the country • I tier 3 or 4 International Banks • II tier 8 to 10 National Banks • III tier Regional Banks • IV tier Rural Banks 2. Branch licensing system for opening new bank branches should be abolished. 3. A liberal view should be adopted for allowing foreign banks in the country. Both domestic and foreign banks should be treated at par.
- 15. Narasimham committee 1991---- contd-1 4. SLR for banks should be curtailed to the level of 25% within next 5 years. CRR should also be curtailed in various phases. 5. Banks should be given more autonomy and the directed credit should be abolished. 6. Primary targets for credit should be redefined and such credits should not be more than 10% of total credit. 7. Computerisation in banks should be promoted. 8. Banks should be authorised to appoint banking officials at their own discretion. 9. The duel control RBI and Finance Ministry on banks should be abolished and RBI should function only as a regulatory authority of banking system in the economy.
- 16. Narasimham committee 1991---- contd-2 10. RBI’s representative should not be included in the management board of banks. Only Government representative should be there. 11. Granting resources to development finance institutions on concessional rates of interest should be abolished in phases within next three years. These institutions should be allowed to mobilize resources from the open market on competitive rates. Quick and effective liberal attitude should be adopted in the policy related to 12. Quick and effective liberal attitude should be adopted in the policy related to the capital market. The system of getting prior permission by the companies for their new share issues should be abolished.
- 17. Institutional and Legal Measures • Setting up of Lok Adalats (people’s courts), debt recovery tribunals, asset reconstruction companies, settlement advisory committees, corporate debt restructuring mechanism, etc. • Promulgation of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 and its subsequent amendment to ensure creditor rights • Setting up of Credit Information Bureau of India Limited (CIBIL) for information sharing on defaulters as also other borrowers • Setting up of Clearing Corporation of India Limited (CCIL) to act as central counter party for facilitating payments and settlement system relating to fixed income securities and money market instruments
- 18. Supervisory Measures • Board for Financial Supervision as the apex supervisory authority for Risk based supervision • Introduction of CAMELS supervisory rating system (i.e., capital adequacy, asset quality, management, earning, liquidity and system and control). • Consolidated supervision of financial conglomerates • Recasting of the role of statutory auditors with increased internal control through strengthening of internal audit • Strengthening corporate governance • Fit and proper tests for directors along-with enhanced due diligence on important shareholders
- 19. Technology Related Measures • • INFINET as the communication backbone for the financial sector • Negotiated Dealing System (NDS) for screen-based trading in government securities • Real Time Gross Settlement (RTGS) System True test of the success of the banking reforms would be the extent of NPA’s ***