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Contribution of Financial Intermediaries to Indian Financial System
INTRODUCTION
The term "finance" in our simple understanding it is perceived as equivalent to 'Money'. We read about Money and banking in Economics, about Monetary Theory and Practice and about "Public Finance". But finance exactly is not money, it is the source of providing funds for a particular activity. Thus finance can be defined as, "The science of the management of money and other assets."
INTRODUCTION TO FINANCIAL SYSTEM

The economic scene in the post independence period has seen a sea change; the end result being that the economy has made enormous progress in diverse fields. There has been a quantitative expansion as well as diversification of economic activities. The experiences of the 1980s have led to the conclusion that to obtain all the benefits of greater reliance on voluntary, market-based decision-making, India needs efficient financial systems. The financial system is possibly the most important institutional and functional vehicle for economic transformation. Finance is a bridge between the present and the future and whether it be the mobilisation of savings or their efficient, effective and equitable allocation for investment, it is the success with which the financial system performs its functions that sets the pace for the achievement of broader national objectives. The economic development of a nation is reflected by the progress of various economic units, broadly classified into the corporate sector, government and household sector. While performing the activities, these units will be placed in surplus/deficit/balanced budgetary situations. These are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from areas of surplus to areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.
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SIGNIFICANCE AND DEFINITION

The term financial system is a set of inter-related activities/services working together to achieve some predetermined purpose or goal. It includes different markets, the institutions, instruments, services and mechanisms which influence the generation of savings, investment capital formation and growth.
Van Horne defined the financial system 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. Christy has opined that the objective of the 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 Robinson, the primary function of the system 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."
From the above definitions, it may be said that the primary function of the financial system is the mobilisation of savings, their distribution for industrial investment and stimulating capital formation to accelerate the process of economic growth.
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INTER-RELATIONSHIP IN THE FINANCIAL SYSTEM

A financial system provides services that are essential in a modern economy. The use of a stable, widely accepted medium of exchange reduces the costs of transactions. It facilitates trade and, therefore, specialization in production. Financial assets with attractive yield, liquidity and risk characteristics encourage saving in financial form. By evaluating alternative investments and monitoring the activities of borrowers, financial intermediaries increase the efficiency of resource use. Access to a variety of financial instruments enables an economic agent to pool, price and exchange risks in the markets. Trade, the efficient use of resources, saving and risk taking are the cornerstones of a growing economy. In fact, the country could make this feasible with the active support of the financial system. The financial system has been identified as the most catalyzing agent for growth of the economy, making it one of the key inputs of development.
LIBERALISATION OF THE FINANCIAL SYSTEM

A radical restructuring of the economic system consisting of industrial deregulation, liberalisation of policies relating to foreign direct investment, public enterprise reforms, reforms of taxation system, trade liberalisation and financial sector reforms have been initiated in 1992-93. Financial sector reforms in the area of commercial banking, capital markets and non-banking finance companies have also been undertaken.
The focus of reforms in the financial markets has been on removing the structural weaknesses and developing the markets on sound lines. The money and foreign exchange market reforms have attempted to broaden and deepen them. Reforms in the government securities market sought to smoothen the maturity structure of debt, raising of debt at close-to-market rates and improving the liquidity of government securities by developing an active secondary market. In the capital market the focus of reforms has been on strengthening the disclosure standards, developing the market infrastructure and strengthening the risk management systems at stock exchanges to protect the integrity and safety of the market. Elements of the structural reforms in various market segments are introduction of free pricing of financial assets such as interest rate on government securities, pricing of capital issues and exchange rate, the enlargement of the number of participants and introduction of new instruments.
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Improving financial soundness and credibility of banks is a part of banking reforms undertaken by the RBI, a regulatory and supervisory agency over commercial banks under the Banking Companies Regulation Act 1949. The improvement of financial health of banks is sought to be achieved by capital adequacy norms in relation to the risks to which banks are exposed, prudential norms for income recognition and provision of bad debts. The removal of external constraints in norms of pre-emption of funds, benefits and prudential regulation and recapitalisation and writing down of capital base are reflected in the relatively clean and healthy balance sheets of banks. The reform process has, however, accentuated the inherent weaknesses of public sector dominated banking systems. There is a need to further improve financial soundness and to measure up to the increasing competition that a fast liberalising and globalising economy would bring to the Indian banking system.
In the area of capital market, the Securities and Exchange Board of India (SEBI) was set up in 1992 to protect the interests of investors in securities and to promote development and regulation of the securities market. SEBI has issued guidelines for primary markets, stipulating access to capital market to improve the quality of public issues, allotment of shares, private placement, book building, takeover of companies and venture capital. In the area of secondary markets, measures to control volatility and transparency in dealings by modifying the badla system, laying down insider regulations to protect integrity of markets, uniform settlement, introduction of screen-based online trading, dematerialising shares by setting up depositories and trading in derivative securities (stock index futures). There is a sea change in the institutional and regulatory environment in the capital market area.
In regard to Non-Bank Finance Companies (NBFCs), the Reserve Bank of India has issued several measures aimed at encouraging disciplined NBFCs which run on sound business principles. The measures seek to protect the interests of depositors and provide more effective supervision, particularly over those which accept public deposits. The regulations stipulate an upper limit for public deposits which NBFCs can accept. This limit is linked to credit rating by an approved rating agency. An upper limit is also placed on the rate of interest on deposits in order to restrain NBFCs from offering incentives and mobilising excessive deposits which they'" may not be able to service. The heterogeneous nature, number, size, functions (deployment of funds) and level of managerial competence of the NBFCs affect their effective regulation.
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Since the liberalisation of the economy in 1992-93 and the initiation of reform measures, the financial system is getting market-oriented. Market efficiency would be reflected in the wide dissemination of information, reduction of transaction costs and allocation of capital to the most productive users. Further, freeing the financial system from government interference has been an important element of economic reforms. The economic reforms also aim at improved financial viability and institutional strengthening.
CONPONENTS OF INDIAN FINANCIAL SYSTEM
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FINANCIAL MARKETS
A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of financial assets.
Classification of Financial Markets

Markets can be classified into different categories depending on the characteristic of the market or instrument used to create categories. Securities created by institutions in the markets normally pay an interest on the nominal amount (the amount shown on the certificate or contract).
MONEY MARKET
The money market is a wholesale debt market for low-risk, highly-liquid, short term instruments. Funds are available in the market for periods ranging from a single day up to a year. The market is dominated mostly by government, banks and financial institutions.
CAPITAL MARKET
The capital market is designed to finance the long-term investments. The transactions taking place in this market will be periods over a year.
FOREX MARKET
The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is of the most developed and integrated market across the globe.
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CREDIT MARKET
Credit Market is a place where banks, financial institutions and NBFCs provide short, medium and long-term loans to corporate and individuals.
FINANCIAL INSTRUMENTS
A real or virtual document representing a legal agreement involving some sort of monetary value. Financial instruments can be thought of as easily tradable packages of capital, each having their own unique characteristics and structure. The wide array of financial instruments in today's marketplace allows for the efficient flow of capital amongst the world's investors.
Classification of Financial Instruments

MONEY MARKET
The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost.
Call/notice Money Market

Call/notice money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as call (overnight) money. Thus money, borrowed on a day and repaid on the next working day, is call money. When money is borrowed or lent for more than a day and up to 14 days , it is notice money.
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Inter-Bank Term Money

Inter bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entities are not allowed to lend beyond 14 days.
Treasury Bills
Treasury bills r short term (upto 1 year) borrowing instruments of the union government. It is a promised by the government to pay a stated sum after expiry of the stated period from the date of issue. They are issued at a discount to the face value, and on maturity the face value is paid to the holder.
Certificate of Deposits
Certificate of deposit is a negotiable money market instrument issued in a dematerialized form for funds deposited at a bank or other eligible financial institution for a specified time period. Guideline for issue of certificate of deposits r presently governed by various directives issued by the reserve bank of India, as amended from time to time.
Commercial Papers
Commercial paper is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. Commercial paper is thus an unsecure promissory note privately placed with investors at a discount rate to face value determined by market forces. Commercial paper is freely negotiable by endorsement and delivery.
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CAPITAL MARKET INSTRUMENTS

The capital market generally consists of the following long term period. i.e more than one year period, financial instruments; in the equity segment equity shares , preference shares , convertible preference shares , non convertible preference shares etc and in the debt segment debentures , zero coupon bonds , deep discount bonds etc.
HYBRID INSTRUMENTS
Hybrid instruments have both the features of equity and debenture. This kind of instrument is called as hybrid instruments. Examples are: convertible debentures, warrants etc.
FINANCIAL INTERMEDIARIES
A financial intermediary is typically an institution that facilitates the channelling of funds between lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution (such as bank), and that institution gives those funds to spenders (borrowers). This may be in the form of loans, mortgages etc. A financial intermediary is an entity that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that transforms bank deposits into bank loans. Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money (savers) to those who do not have enough money to carry out a desired activity (borrowers). While some investors make their own investment decisions and invest while many others seek financial and investment advice from an investment professional or financial intermediary.
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Financial Intermediaries are broadly classified into two major categories: 1. Fee-based or Advisory Financial Intermediaries 2. Asset Based Financial Intermediaries.
Fee Based/Advisory Financial Intermediaries: These Financial Intermediaries/ Institutions offer advisory financial services and charge a fee accordingly for the services rendered. Their services include: IssueManagement Underwriting Portfolio Management Corporate Counseling Stock Broking Syndicated Credit Arranging Foreign Collaboration Services Mergers and Acquisitions Debentive Trusteeship Capital Restructuring
Asset-Based Financial Intermediaries: These Financial Intermediaries/Institutions finance the specific requirements of their clientele. The required infra-structure, in the form of required asset or finance is provided for rent or interest respectively. Such companies earn their incomes from the interest spread, namely the difference between interest paid and interest earned.
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ADVANTAGES OF FINANCIAL INTERMEDIARIES

There are 2 essential advantages from using financial intermediaries: 1. Cost advantage over direct lending/borrowing 2. Market failure protection the conflicting needs of lenders and borrowers are reconciled, preventing market failure
The cost advantages of using financial intermediaries include: Reconciling conflicting preferences of lenders and borrowers Risk aversion intermediaries help spread out and decrease the risks Economies of scale using financial intermediaries reduces the costs of lending and borrowing Economies of scope intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs).
The financial institutions may be regulated by various regulatory authorities, or may be required to disclose the qualifications of the person to potential clients. In addition, regulatory authorities may impose specific standards of conduct requirements on financial intermediaries when providing services to investors. Financial intermediaries may include banks, broker-dealers, investment advisers and financial planners. Because of the important role these parties play in the process of investment decision making by investor, regulatory authorities may regulate these financial intermediaries in a number of ways. Regulation may encompass requirements that financial intermediaries meet certain competency standards such as qualification and training criteria. These criteria may include a specified level of education, financial or investment experience, professional examinations, membership of professional or other organizations, and continuing education requirements.
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The financial markets today encompass not only traditional banking institutions, but also many other financial entities such as insurance companies, pension funds, mutual funds, venture capital funds and stock and commodity exchanges that perform the function of financial intermediation. This development has been accompanied by the advent of marketbased instruments of the stock and bond markets, financial products such as asset-backed securities, financial futures and derivative instruments. While reducing the dependence of investors on bank credit to fund their investments, these have also contributed to reallocation of risks and putting of capital to more efficient use. Financial markets also serve the need for greater financial inclusion. The recent experience from the global financial crisis, has however, shown that, despite the variety of instruments and the sophistication of the markets, they may not remain immune to crisis, if the investors/institutions do not pay adequate attention to the fundamentals or if the pricing of risk and the ratings for these instruments are not transparent, and if the regulatory oversight is poor. An efficient and healthy financial market, should therefore avoid the shortcomings as gleaned from the experience of the global financial market in the last couple of years. The deepening and broadening of financial markets also underscores the importance of institutional safeguards for monitoring and analyzing the domestic as well as external developments to ensure that the regulatory system is efficient and effective. Households wish to have a secure method of saving. Those households and companies that wish to borrow or invest need a secure source of funds. In general, it is suggested that households wish to lend short (that is, keep their funds liquid) so that they have access to their funds, although this may be true for only part of a households portfolio. Firms need to finance their activities through longer-term borrowing and they do so through bank loans, bonds and equity. Hicks described the feature of an unintermediated financial system, where households wish to have access to their funds but where firms wish to borrow over long periods, as a constitutional weakness. Financial intermediaries resolve this weakness by creating liquidity for savers: that is they create a financial liability of the form a saver wishes to hold (bank deposit, mutual fund units etc). Financial intermediaries then take the funds invest them in financial assets which form the liabilities of firms (e.g. bank loans to firms or equities and bonds issued by firms).
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We will ignore here borrowing by the government sector although many of the same issues regarding term of borrowing and lending still apply. The financial liability created by firms enables them to borrow long term. As noted above, these liabilities include bank loans and securities. Securities provide liquidity for the ultimate saver because they can be traded on secondary markets (household who need funds can sell their claims on a companys capital to another householder). Bank lending creates liquidity as a result of the intermediation function of banks in managing liquidity, based on the assumption that not all households will want to liquidate their savings at the same time: an application of the law of large numbers principle. Firms use these funds to invest in capital which, ultimately leads to returns that provides interest to debt holders and bank lenders or profits for equity holders. Thus financial intermediation can be seen as the process through which the savings of households are transformed into physical capital. It can be understood as a chain. At one end of the chain, you have households giving up consumption and saving. They then save these funds through financial institutions or intermediaries such as banks, pension funds and insurance companies. The investment normally takes through the purchase of financial products. These institutions then either lend directly to corporations (generally banks) or purchase securities in corporations (normally done by pension funds, insurance companies or mutual funds): thus buying assets which offer a financial return. Corporations then use the money raised from the issue of securities to invest in capital to run their business. The returns from capital are then passed back down the chain, through paying returns to the holders of securities (or interest on bank loans) and the institutions which hold securities then pay returns to their savers on their saving products.
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FUNCTIONS OF FINANCIAL INTERMEDIARIES

All intermediaries, such as banks, insurance companies and pension funds hold financial assets (lending to firms) to meet financial liabilities (issued to households). However, this basic function of financial intermediaries has a number of facets discussed below. Financial intermediaries must add value or in a market economy, they would not exist. They add value in the following ways: Transform risk by risk spreading and pooling: Households can spread risk across a range of institutions. Institutions can pool risk by investing in a range of firms or projects. An individual household investing his own savings, on the other hand, could only invest in a few investment projects. Enable risk to be screened efficiently: It is more efficient for investment projects to be screened on behalf of individuals by institutions than all individuals screen the risk and return prospects of projects independently. If you invest through institutions, all the investor has to do is analyse the soundness of the institution and not the underlying investments. Transform liquidity i.e. to allow assets which are ultimately invested in illiquid projects to be transferred to other savers in exchange for liquid assets. Reduce transaction costs by providing convenient and safe places to store funds and by creating standardized and sometimes tax-efficient forms of securities. Banks also perform money transmission functions (that is, one can purchase goods and services by transferring money from one person to another by the means of a bank instruction). Insurance companies and pension funds and sometimes banks are involved in asset transformation, whereby the financial liability held by the institution is of a different financial form from the asset held (for example, insurance company liabilities are contingent due to the insurance services they provide yet the assets are not subject to the
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same type of contingency). Actuaries tend to exist in these sorts of institutions. In fact, their skills are useful in any financial intermediary which is managing financial assets to meet financial liabilities. Historically, they have tended to work in institutions which sell contingent products, although that is changing. Financial institutions provide a mechanism for transferring economic resources across time and across geographic regions. This point is so fundamental to all financial intermediation, it does not, in fact, distinguish financial institutions. It will therefore not be considered further, despite its importance. Without financial institutions households with cash to save would have to seek households/firms who needed cash to invest this would be an extraordinarily inefficient process. There are significant practical differences between the functions banks and non-banks which explains their separate development hitherto. It is helpful to understand more about their specific functions, in order to help us understand how the functions of financial intermediaries are becoming closer.
INTERMEDIATING FUNCTIONS OF BANKS

The commercial and retail functions of a bank tend to involve intermediating functions that spread risk, screen risk efficiently and monitor loans on a continual basis, transform liquidity and provide money transmission services, as well as facilitating the transfer of resources over time. There is no asset transformation unless lending and borrowing is undertaken on different terms (for example floating-rate borrowing financing fixed-rate lending). However, it should be said that, in recent years, banks have become more complex so this explanation pertains to the traditional functions of a retail bank that takes deposits and makes personal and business loans.
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INTERMEDIATING FUNCTIONS OF LIFE INSURERS

Insurance companies concentrate on fulfilling the insurance needs of the community, both for life and non life insurance. With the globalization of the Indian economy, a large number of private players have entered into this field, offering products that allow investors to select the kind of policies to suit their financial planning needs. Many of these organizations are formed as subsidiaries of banks that enable the banks to cross sell insurance products to their existing customers. Banks benefit by way of fee income through referrals and enhanced relationships with insurance companies for their banking needs.
INTERMEDIATING FUNCTIONS OF MUTUAL FUNDS

Mutual funds generally perform pure investment functions and hold securities (some mutual funds invest directly in property). As such, they perform risk screening and spreading and risk pooling functions, as well as the basic intermediation function of transferring economic resources across time. In markets for non-securitized investments, mutual funds also provide liquidity. They allow large numbers of investors to pool funds with the intermediary who can allow buyers and sellers to trade units without having to deal in the underlying investments. There are limits to the extent to which this function can be performed: if there are not equal number of buyers and sellers of the units, the investments underlying the units have to be sold by the funds manager; in some mutual funds there are redemption clauses which allow a moratorium before units can be redeemed. Money-market mutual funds also provide money transmission services. They will normally invest in securitized loans which form a portfolio in which investors buy units. In some cases, such funds are simply used as a savings vehicle (providing risk screening, spreading and pooling functions) but, in some cases, such funds are used for money transmission functions, with unit holders making payments by transferring units across to those receiving payment using a cheque book.
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In general, mutual funds pass risks back to unit holder s, although there will be a reputational risk from not performing intermediating functions well. Defined contribution schemes do not provide asset transformation, unlike defined benefit pension funds. They are generally just savings vehicles providing no insurance function. However, they may sometimes provide insurance functions, for example, guaranteeing investment returns, annuity rates or expenses.
INTERMEDIATING FUNCTIONS OF PENSION FUNDS

Pension funds may be defined as forms of institutional investor, which collect pool and invest funds contributed by sponsors and beneficiaries to provide for the future pension entitlements of beneficiaries. They thus provide means for individuals to accumulate saving over their working life so as to finance their consumption needs in retirement, either by means of a lump sum or by provision of an annuity, while also supplying funds to end-users such as corporations, other households (via securitized loans) or governments for investment or consumption.
BANKS, INSURANCE COMPANIES AND PENSION FUNDS: THE FUNDAMENTAL SIMILARITIES AND DIFFERENCES
The money transmission function can be regarded as distinct from the other functions as it does not involve the mobilisation of capital as a factor of production. In an economy with no savings or investment and no borrowing or lending, money transmission would still be required. It is perhaps this function which makes banks intrinsically different from other financial institutions, although, as will be discussed below, other intermediaries are also beginning to perform money transmission functions. The feature that makes insurance companies and pension funds different from banks is that they face insurance risks due to the difficulty of estimating the amount and timing of liabilities and because of the contingent nature of the liabilities. Banks do not face these types of risks on the liability side but banks do face similar risks to other financial institutions in estimating their asset cash flows and face risks from the contingent nature of their asset cash flows. There are similarities, in principle, between credit risks in banks and insurance risks in
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non-banks. In principle, there is a prima facie case for assuming that many of the same solvency and risk management techniques could be used for both banks and non-banks. If we classify the institutions by the intermediation risks that they undertake rather than by whether they are banks or non-banks, we see many similarities which may otherwise be obscured. Nevertheless, there are practical differences between banks and non-banks which lead to the use of different risk management techniques. These are in relation to the fundamental differences relating to the money transmission functions of banks and the insurance functions of non-banks.
THE NEEDS OF INVESTORS

From this analysis we should be able to see that the functions of financial institutions are driven by the needs of the end savers households. End savers themselves will have different motivations for investment and different risk profiles. Households will generally want a certain proportion of their savings in the form of liquid assets (perhaps held in banks) but will also use other financial institutions for long-term investment and savings as well as for insurance-based products. Different households will have different preferences for the shape of their savings portfolio. In turn, the investment policy of institutions will be driven by the sort of savings, investment and insurance products they are providing households as the liabilities of financial institutions will depend on the type of policies that they have written. In turn, that will depend on the needs of the households that have bought the policies. Thus, institutional investors differ in terms of their time horizons. A pension fund, for example, may have a very long investment time horizon and be attracted to less liquid investments that give rise to long-term certainty of return. A short-term investor, such as a non-life insurance company, will be attracted to investments with greater capital value security and that are more liquid.
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THE ROLE OF INVESTMENT BANKING FIRMS

So far, we have considered intermediation as a chain that transforms household saving into physical capital. Banks have been considered as institutions that lend money thereby providing risk monitoring services, diversification and so on. However, other institutions are connected with this chain of intermediation that do not necessarily hold financial assets and liabilities. For example, consulting actuaries advise pension funds on their risk management and investment policy. Investment banks are also important (though for various reasons investment banks will also perform other functions perhaps through subsidiaries such as retail and wholesale banking, mutual fund management etc). Broadly, investment banks perform the following functions:
When a firm makes a new issue of securities, that will be bought by households (directly)
and institutions, an investment bank will advise on the price at which the issue should take place.
An investment bank can handle the marketing of the new issue to the public and to other
institutions.
An investment bank can check and certify the quality of the information offered when the
new issue takes place.

An investment bank can design the package of securities that will be most attractive to
potential investors. Different investors have different appetites for risk, different liabilities, different tax positions etc. When a business requires capital, it can use the services of an investment bank to design securities in such a way that maximizes the value of the issue to the business. This, of course, involves making the issues as attractive as possible to investors. Businesses will want to raise capital to finance the business at the lowest possible cost. The efficient structuring of securities issues by investment banks can lower the cost of capital to businesses.
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The research, broking and dealing part of an investment bank can provide advice to
institutions on securities as well as provide market-making functions to facilitate the purchase and sale of large amounts of securities.
Intermediary Stock Exchange Investment Bankers Underwriters Registrars, Depositories, Custodians Primary Dealers Satellite Dealers Forex Dealers
Role Secondary Market to securities Corporate advisory services, Issue of securities Subscribe to unsubscribed portion of securities Issue securities to the investors on behalf of the company and handle share transfer activity Market making in government securities Ensure exchange ink currencies
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STATEMENT OF PROBLEM:
The report Contribution of Financial Intermediaries to Indian Financial System aims to assimilate data about various aspects of Indian Financial Intermediaries to analyse its contribution and role in Indian Financial System.
OBJECTIVES OF THE STUDY:

To study the Indian Financial System and Intermediaries
To study the industry that delivers financial services Explore the services and products offered by the Financial Intermediaries To understand the functioning of various Financial Institutions.
RESEARCH METHODOLOGY:
RESEARCH DESIGN
Method of research design used under study is descriptive research. Descriptive research is the study of existing facts to come to a conclusion. The data was collected on the basis of Primary as well as Secondary sources.
DATA COLLECTION
PRIMARY DATA
Primary data is collected by the investigator himself for a specific inquiry or study. Such data is original in character. Primary data is the information collected for research purpose at hand. Primary data will be collected by interacting with the players involved in financial markets & financial intermediaries. The Primary data is collected also through discussions, personal interaction.
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SECONDARY DATA
Secondary data is data which has already been collected by others. The sources of secondary data are in the form of published materials such as Company records, textbooks, Internet, Magazines, books, etc. The Secondary data will be collected from the annual reports of the Company, journals, magazines, various websites, and articles. Various books and other published matter will also be referred to for collection and analysis of data.
PLAN OF ANALYSIS:
A research design is a method and procedure for acquiring information needed to solve the problem and basic plan that helps in the data collection or analysis. It specifies the type of information to be collected and sources of data collection procedure. The collected data will be classified, tabulated, analysed and interpreted in an organised manner. Inferences will be drawn carefully and methodically with supportive guidance to avoid any error or mistake in the survey.
LIMITATIONS OF THE STUDY

The study concentrates only on financial intermediaries. The study is based on the latest availabile data. Non financial qualitative factors are not considered.
SCOPE OF THE STUDY:

The study focuses on the financial markets, functioning of different financial intermediaries and financial instruments. It also focuses on various money market instruments.
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REVIEW OF LITERATURE:
A financial institution that accepts money from savers or investors and loans those funds to borrowers, thus providing a link between those seeking earnings on their funds and those seeking credit. Financial intermediaries include savings and loan associations, building and loan associations, savings banks, commercial banks, life insurance companies, credit unions and investment companies. Financial institution, such as a commercial bank or savings and loan association, which accepts deposits from the public and makes loans to those needing credit. By acting as a middleman between cash surplus units in the economy (savers) and deficit spending units (borrowers), a financial intermediary makes it possible for borrowers to tap into the vast pool of wealth in federally insured deposits-accounting for more than half the financial assets held by all financial service companies-in banks and other depository financial institutions. The movement of capital from surplus units through financial institutions to deficit units seeking bank credit is an indirect form of financing known as intermediation-consumers are net suppliers of funds, whereas business and government are net borrowers. A bank gives its depositors a claim against itself, meaning that the depositor has recourse against the bank (and, if the bank fails, the deposit insurance fund protecting insured deposits), but has no claim against the borrower who takes out a bank loan.
1. Prasanna Chandra., Investment Analysis & Portfolio Management Tata McGraw Hill Publication, 2010 2. Zabiulla, R Shanmugam,Investment Analysis & Management Kalyani Publishers 2010
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BANKING FINANCIAL INSTITUTION

Banking operations started in India as early as 1870 with the establishment of the Bank of Hindustan, considered as the first bank in India. The second development in the banking sector happened with the incorporation of the Bank of Calcutta, the Bank of Bombay and the Bank of Madras in accordance with the Presidency Bank's Act, 1876. All these banks joined hands to form the Imperial Bank of India which is now known as State Bank of India. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers.
Bank of Bengal
Bank of Bombay
Imperial Bank of India
State Bank of India
Bank of Madras
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DEFINITION OF COMMERCIAL BANKS

Banking Regulation Act 1949 defines banks as Accepting for the purpose of lending or investment of deposit from the public repayable on demand or otherwise on maturity or withdrawable by orders, cheques. While commercial banks offer services to individuals, they are primarily concerned with receiving deposits and lending to businesses. This sub sector can broadly be classified into: 1.Public sector 2 Private sector 3.Foreign banks
PUBLIC SECTOR
It is the part of economic and administrative life that deals with the delivery of goods and services by and for the government, whether national, regional or local/municipal.
PRIVATE BANKS
These are banks that are not incorporated. A non-incorporated bank is owned by either an individual or a general partner(s) with limited partner(s). In any such case, the creditors can look to both the "entirety of the bank's assets" as well as the entirety of the soleproprietor's/general-partners' assets.
FOREIGN BANKS
These are organized under foreign law.
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STRUCTURE OF INDIAN BANKING SYSTEM
Reserve Bank of India
Scheduled Banks
Non-Scheduled Banks
Co-Operative Banks
Commercial Banks
State Cooperative Banks
Urban Cooperative Banks
Indian Banks
Foreign Banks
Regional Rural Banks
Public Sector Banks
Private Sector Banks
SBI & subsidiaries
Other Nationalised Banks
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The commercial banking structure in India consists of: Scheduled Commercial Banks in India Unscheduled Banks in India.
Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. "Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".
ROLE OF COMMERCIAL BANKS

Mobilisation of saving Facilitate trade and commerce Balanced regional development Provision of finance to backward communities Development of agriculture and other priority sector Management of reserves
ACTIVITIES OF COMMERCIAL BANKS:

The modern Commercial Banks in India cater to the financial needs of different sectors. The main functions of the commercial banks comprise of transfer of funds, acceptance of deposits and then offering those deposits as loans for the establishment of industries, purchase of houses, equipments, capital investment purposes etc. The banks are allowed to act as trustees. On account of the knowledge of the financial market of India the financial companies are attracted towards them to act as trustees to take the responsibility of the security for the financial instrument like a debenture. The Indian Government presently hires the commercial banks for various purposes like tax collection and refunds, payment of pensions etc.
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MODERN BANKING TECHNIQUES

The immense growth of the IT sector is reflected in the banking operation of the Commercial Banks in India. Presently, the IT companies are engaged in the creating software packages to facilitate, accelerate, and organize the banking operations. The Rangarajan Committee and the Reserve Bank of India has played a major role in the popularizing the concept of computer application in banking activities. The computerization process has reached its peak in the present scenario with the use of Total Branch Automation Packages.
PRODUCTS AND SERVICES OFFERED BY COMMERCIAL BANKS IN INDIA

The Commercial Banks in India offer variety of products and services like Investment Advisory Services, Tax Advisory services, Cash Management services, debit cards, ATM cards, credit cards, personal loans, education loans, housing loans, car loans, Investment Advisory Services, and consumer durable loans.
FUNCTIONS OF COMMERCIAL BANKS

The functions of commercial banks are divided into two categories: i. ii. Primary functions Secondary functions including agency functions.
I) PRIMARY FUNCTIONS:
The primary functions of a commercial bank include: a) Accepting deposits; and b) Granting loans and advances;
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a) Accepting deposits-The most important activity of a commercial bank is to mobilize deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank. b) Grant of loans and advances-The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies depending upon the purpose, period and the mode of repayment. The difference between the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a banks income. Loans - A loan is granted for a specific time period. Generally, commercial banks grant short-term loans. But term loans, that is, loan for more than a year, may also be granted. The borrower may withdraw the entire amount in lump sum or in instalments. However, interest is charged on the full amount of loan. Loans are generally granted against the security of certain assets. A loan may be repaid either in lumpsum or in instalments. Advances - An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day to day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.
Discounting of Bills - Banks provide short-term finance by discounting bills, that is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.
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II) SECONDARY FUNCTIONS

Besides the primary functions of accepting deposits and lending money, banks perform a number of other functions which are called secondary functions. These are as follows a. Issuing letters of credit, travellers cheques, circular notes etc. b. Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers c. Providing customers with facilities of foreign exchange d. Transferring money from one place to another and from one branch to another branch e. Standing guarantee on behalf of its customers, for making payments for purchase of goods, Machinery, vehicles etc. f. Collecting and supplying business information g. Issuing demand drafts and pay orders h. Providing reports on the credit worthiness of customers
Historically, banks have played the role of intermediaries between the savers and the investors. However, in the last few decades, the importance and nature of financial intermediation has undergone a dramatic transformation the world over. The dependence on bank credit to fund investments is giving way to raising resources through a range of market based instruments such as the stock and bond markets, new financial products and instruments like mortgage and other assets backed securities, financial futures and derivative instruments like swaps and complex options. Besides transferring resources from savers to investors, these instruments enable allocation of risks and re-allocation of capital to more efficient use. The increase in the breadth and depth of financial markets has also coincided with a pronounced shift among the ultimate lenders who have moved away from direct participation in the financial markets to participation through a range of intermediaries. These developments in international financial markets have been mirrored in the financial market in India. This chapter summarizes the main developments in this sector in India in the last year and highlights the various policy challenges.
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Bank credit to productive sectors of the economy has a critical role in sustaining the growth process. While the spread of banking network is a continuous process, the effectiveness of the banking network also depends on the expansion in the scale of operations and the deepening of the credit facilities.
INDIAN BANKING SYSTEM

The Rs 64 trillion (US$ 1.22 trillion) Indian banking industry has made exceptional progress in last few years, even during the times when the rest of the world was struggling with financial meltdown. Even today, financial institutions across the world are facing the repercussions of the turmoil but the Indian ones are standing stiff under the regulator's watchful eye and hence, have emerged stronger. The sector has undergone significant developments and investments in the recent past. Some of them are discussed hereafter along with the key statistics:
According to the Reserve Bank of India (RBI)'s Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks', March 2011, Nationalised Banks, as a group, accounted for 53.0 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 21.6 per cent. The share of new private sector banks, Old private sector banks, Foreign banks and Regional Rural banks in aggregate deposits was 13.4 per cent, 4.6 per cent, 4.4 per cent and 3 per cent respectively.
With respect to gross bank credit also, nationalised banks hold the highest share of 52.8 per cent in the total bank credit, with SBI and its associates at 22.1 per cent and New Private sector banks at 13.2 per cent. Foreign banks, Old private sector banks and Regional Rural banks held relatively lower shares in the total bank credit with 4.9 per cent, 4.6 per cent and 2.4 per cent respectively.
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RBI has revealed that bank advances grew 19.3 percent (23.9% in corresponding previous year) as on March, 2012 while bank deposits rose 17.40 percent (14.9 % in corresponding previous year).
Investment of the banks has also grown from 7.1 percent to 16.1 percent as on December 16, 2011.
RBI data shows that India raised US$ 1.6 billion through external commercial borrowings (ECBs) in November 2011 for new projects.
India's foreign exchange reserves stood at US$ 292 billion as on January 31, 2012.
SECTORAL DEPLOYMENT of CREDIT

Credit to the priority sector grew by 9.2 percent in November 2011 as compared to 13.5 per cent in March 2011. Among the priority sub-sectors, agriculture recorded a growth of 7.3 per cent (10.6 per cent in March 2011), credit to micro and small enterprises (MSEs) (including service-sector enterprises) recorded a growth of 16.1 per cent in November 2011 as compared to 21.8 percent in March 2011. Credit to industry (medium and large) was 22.1 percent as against 25.9 percent in March 2011. Credit to wholesale trade recorded a growth of 18.7 per cent as compared to 19.9 percent in March 2011. Credit to other sector (housing, tourism, consumer durables, etc) was 19.2 per cent as compared to 23.3 per cent in March 2011.
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MICRO-FINANCE
Though there are different models for purveying micro-finance, the Self-Help Group (SHG)Bank Linkage Programme has emerged as the major micro-finance programme in the country. It is being implemented by commercial banks, regional rural banks (RRBs), and cooperative banks. Under the SHG-Bank Linkage Programme as on 31 March 2011, 74.62 lakh SHGs held savings bank accounts with total savings of Rs. 7,016 crore as against 69.53 lakh SHGs with savings of Rs. 6,199 crore as on 31 March 2010. By December 2011, another 2.98 lakh SHGs have come under the ambit of the Programme, taking the cumulative number of savings-linked groups to 77.60 lakh SHGs. As on 31 March 2011, 47.87 lakh SHGs had outstanding bank loans of Rs. 31,221 crore, as against 48.5 lakh SHGs with bank loans of Rs. 28,038 crore as on 31 March 2010. This represents a decline of 1.3 per cent in the number of SHGs and a growth of 11.4 per cent in bank loans outstanding to SHGs. During 2011-12 (up to December 2011), 4.51 lakh SHGs have been financed with an amount of 6,791.46 crore. As per NABARD data, as on 31 March 2011, gross non-performing assets (NPAs) in respect of SHGs were 4.7 per cent of the bank loans outstanding.
FINANCIAL INCLUSION
The development of the financial sector is critically dependent on financial inclusion, which is seen as an important determinant of economic growth. The objective of Financial Inclusion is to extend financial services to the large hitherto unserved population of the country to unlock its growth potential.
In addition, it strives towards a more inclusive growth by making financing available to the poor in particular. Government of India has been actively pursuing the agenda of Financial Inclusion, with key interventions in four groups, viz. Expanding banking infrastructure, offering appropriate financial products, making extensive and intensive use of technology and through advocacy and stakeholder participation.
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Detailed Strategy and Guidelines on Financial Inclusion have been issued by the Government to banks on 21 October 2011 which inter-alia provides emphasis on:
i.
setting up more brick and mortar branches with the objective to have a bank branch within a radial distance of 5 km.
ii.
to open bank branches by Sept 2012 in all habitations of 5,000 or more population in under banked districts and 10,000 or more population in other districts.
iii.
to provide a Business Correspondent within a radial distance of 2 km.
iv.
to cover villages of 1,000 and more population in 10 smaller States/UTs by September 2012.
v.
to consider Gram Panchayat as a unit for allocation of area under Service Area Approach to bank branch and BC etc.
NON-BANKING FINANCIAL INSTITUTIONS (NBFIs)

While banks account for a major share of the Indian financial system, NBFIs also play an important role in providing a wide range of financial services. While banks have an edge in providing payment- and liquidity-related services, NBFIs tend to offer enhanced equity and risk-based products. The major intermediaries that are included in the NBFI group are financial institutions (FIs), insurance companies, non-banking financial companies (NBFCs), primary dealers (PDs) and capital market intermediaries such as mutual funds. The NBFIs provide medium- to long-term finance to different sectors of the economy.
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FINANCIAL INSTITUTIONS
Financial sector plays an indispensable role in the overall development of a country. The most important constituent of this sector is the financial institutions, which act as a conduit for the transfer of resources from net savers to net borrowers, that is, from those who spend less than their earnings to those who spend more than their earnings. The financial institutions have traditionally been the major source of long-term funds for the economy. These institutions provide a variety of financial products and services to fulfil the varied needs of the commercial sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to the industries established in backward areas. Thus, they have helped in reducing regional disparities by inducing widespread industrial development. The Government of India, in order to provide adequate supply of credit to various sectors of the economy, has evolved a well developed structure of financial institutions in the country. These financial institutions can be broadly categorised into All India institutions and State level institutions, depending upon the geographical coverage of their operations. At the national level, they provide long and medium term loans at reasonable rates of interest. They subscribe to the debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred payments, etc. Though, the State level institutions are mainly concerned with the development of medium and small scale enterprises, but they provide the same type of financial assistance as the national level institutions.
NATIONAL LEVEL INSTITUTIONS

A wide variety of financial institutions have been set up at the national level. They cater to the diverse financial requirements of the entrepreneurs. All-India Development Banks (AIDBs):Includes those development banks which provide institutional credit to not only large and medium enterprises but also help in promotion and development of small scale industrial units. Eg. EXIM, NHB, SIDBI, NABARD.
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Specialised Financial Institutions (SFIs):These are the institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing, etc. Eg. IVCF, ICICI Venture Funds Ltd, TFCI.
Investment Institutions:They are the most popular form of financial intermediaries, which particularly catering to the needs of small savers and investors. They deploy their assets largely in marketable securities. Eg. LIC, GIC, UTI.
STATE LEVEL INSTITUTIONS

Several financial institutions have been set up at the State level which supplements the financial assistance provided by the all India institutions. They act as a catalyst for promotion of investment and industrial development in the respective States. State Financial Corporations (SFCs) :SFCs are the State-level financial institutions which play a crucial role in the development of small and medium enterprises in the concerned States. They provide financial assistance in the form of term loans, direct subscription to equity/debentures, guarantees, discounting of bills of exchange and seed/ special capital, etc. SFCs have been set up with the objective of catalysing higher investment, generating greater employment and widening the ownership base of industries. They have also started providing assistance to newer types of business activities like floriculture, tissue culture, poultry farming, commercial complexes and services related to engineering, marketing, etc. There are 18 State Financial Corporations (SFCs) in the country. Eg. Delhi Financial Corporation, Karnataka Stat Financial Corporation.
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State Industrial Development Corporations (SIDCs) :These have been established under the Companies Act, 1956, as wholly-owned undertakings of State Governments. They have been set up with the aim of promoting industrial development in the respective States and providing financial assistance to small entrepreneurs. They are also involved in setting up of medium and large industrial projects in the joint sector/assisted sector in collaboration with private entrepreneurs or wholly-owned subsidiaries. They are undertaking a variety of promotional activities such as preparation of feasibility reports; conducting industrial potential surveys; entrepreneurship training and development programmes; as well as developing industrial areas/estates. Eg. Gujarat Industrial Development Corporation, Karnataka State Industrial Investment & Development Corporation Ltd. Resources raised by FIs during 2010-11 were considerably higher than those during the previous year. While long-term resources and foreign currency resources raised witnessed a sharp rise during 2010-11, short-term resources declined substantially. NABARD mobilized the largest amount of resources, followed by EXIM Bank and SIDBI. Total sources/deployment of funds of FIs decreased modestly by 1.6 per cent to 2,97,784 crore during 2010-11. A major part of the funds was raised internally (54.8 per cent), followed by external sources (40.0 per cent) and other sources (5.2 per cent). A large part of the funds raised was used for fresh deployments (58.7 per cent), followed by repayment of past borrowings (28.2 per cent). Other deployments including interest payments formed a comparatively small part of the funds of FIs.
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INSURANCE AND PENSION FUNDS INSURANCE

The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries. This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector. The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein, among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies should be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders interests.
Today there are 24 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 23 life insurance companies operating in the country.
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The insurance sector is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the countrys GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.
INDIAN INSURANCE INDUSTRY

The Rs 2.9 trillion (US$ 58.7 billion)-Indian life insurance industry has emerged as the mainstay of entire insurance space. With over 35 crore life insurance policies in force, the industry has registered remarkable growth since its privatisation in 2000.
LIFE INSURANCE
From being the sole provider for life insurance till financial year 1999-2000, LIC is today competing in an industry with 23 private-sector insurers who have commenced operations over the period 2000-10. The industry which reported an annual growth rate of 19.8 per cent during the period 1996-97 to 2000-01 has, post opening up of the sector, reported an annual growth rate of 24.3 per cent during 2001-02 to 2010-11. There has been an average growth of 34 per cent in the first year premium in the insurance sector between 2001-02 and 2010-11.
The life insurers underwrote new business of Rs.1,26,381 crore during financial year 2010-11 as against Rs.1,09,894 crore during the year 2009-10, recording a growth of 15.0 per cent. Of the new business premium underwritten, LIC accounted forRs. 87012.35 crore (68.9 per cent market share) and private insurers accounted for Rs. 39368.65 crore (31.1per cent market share). The market share of these insurers was 65.1 per cent and 34.9 per cent respectively in the corresponding period of 2009-10.
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NON-LIFE INSURANCE
The industry which reported a growth rate of around 10 per cent during the period 1996-97 to 2000-01 has, post opening up of the sector, reported average annual growth of 15.85 per cent over the period 2001-02 to 2010-11. In addition, the specialized insurers Export Credit Guarantee Corporation and Agriculture Insurance Company (AIC) are offering credit guarantee and crop insurance respectively. AIC, which was initially offering coverage under the National Agriculture Insurance Scheme (NAIS), has now started providing crop insurance cover on commercial lines as well. It has introduced several innovative products such as weather insurance and specific crop-related products.
The premium underwritten by the non-life insurers during 2010-11 was Rs. 42,576 crore as against Rs. 34,620 crore in 2009-10. The growth was satisfactory, particularly in view of the across the broad cuts in the tariff rates. The private insurers underwrote premium of Rs. 17,424.6 crore as against Rs. 13,977 crore in 2009-10, reporting growth of 24.7 per cent visa-vis 13.4 per cent in 2009-10. The public-sector insurers, on the other hand, underwrote a premium of Rs. 25,151.8 in 2010-11 as against Rs. 20,643.5 crore in 2009-10, i.e. a growth of 21.8 per cent as against 14.5 per cent in 2009-10. The non-life insurers underwrote a premium of Rs. 42,576 crore in financial year 2010-11 as against Rs. 35,620 crore in 200910, recording a growth of 23.0 per cent. The market share of the public and private insurers at 60 and 40 per cent in 2010-11 remained the same as in the previous year.
INSURANCE PENETRATION
The growth in the insurance sector is internationally measured based on the standard of insurance penetration. Insurance penetration is defined as the ratio of premium underwritten in a given year to the gross domestic product (GDP). The Indian insurance business has in the past remained under-developed with low levels of insurance penetration. Post liberalization, the sector has succeeded in raising the levels of insurance penetration from 2.3 (life 1.8 and non-life 0.7) in 2000 to 5.1 (life 4.4 and non-life 0.7) in 2010.
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PENSION
Pension-sector reforms were initiated in India to establish a robust and sustainable social security arrangement in the country seeing that only about 12-13 per cent of the total workforce was covered by any formal social security system. The New Pension System (NPS) was introduced by the Government from January 1, 2004 for new entrants to the Central Government service, except the Armed Forces, and was extended to the general public from May 1,2009 on a voluntary basis. The features of the NPS design are selfsustainability, portability and scalability. Based on individual choice, it is envisaged as a lowcost and efficient pension system backed by sound regulation. The NPS provides various investment options and choices to individuals to switch over from one option to another or from one fund manager to another, subject to certain regulatory restrictions. Although the NPS is perhaps one of the cheapest financial products available in the country, in order to make it affordable for economically disadvantaged people, the Pension Fund Regulatory and Development Authority (PFRDA) in September 2010 introduced a lower cost version of the NPS, known as Swavalamban, which enables groups of people to join the NPS at a substantially reduced cost.
The Government is extremely concerned about the old age income security of the working poor and is focused on encouraging and enabling them to join the NPS. To encourage workers in the unorganized sector to save voluntarily for their old age, an initiative called the Swavalamban Schemewas launched on 26 September 2010. It is a cocontributory pension scheme whereby the central government would contribute a sum of Rs. 1,000 per annum in each NPS account opened having a saving of Rs. 1,000 to Rs. 12,000 per annum.
The Swavalamban Scheme was initially announced for three years for beneficiaries who enrolled themselves in 2010-11. It has now been extended to five years for beneficiaries enrolled in 2010-11 and 2011-12. Recently the incentive on per subscriptions basis for aggregators and Points of Presence (PoPs) has been increased. A total of 3,01,920 subscribers during 2010-11 and 90,256 during 2011-12 (up to 30 December 2011) have been enrolled under the scheme.
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NON-BANKING FINANCIAL COMPANIES (NBFCs)

Non-banking financial companies (NBFCs) are fast emerging as an important segment of Indian financial system. It is an heterogeneous group of institutions (other than commercial and co-operative banks) performing financial intermediation in a variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc. They raise funds from the public, directly or indirectly, and lend them to ultimate spenders. They advance loans to the various wholesale and retail traders, small-scale industries and self-employed persons. Thus, they have broadened and diversified the range of products and services offered by a financial sector. Gradually, they are being recognised as complementary to the banking sector due to their customer-oriented services; simplified procedures; attractive rates of return on deposits; flexibility and timeliness in meeting the credit needs of specified sectors; etc. The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI)within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) and the directions issued by it under the Act. As per the RBI Act, a 'non-banking financial company' is defined as:- (i) a financial institution which is a company; (ii) a non banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii) such other non-banking institution or class of such institutions, as the bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.
TYPES OF NON-BANKING FINANCIAL COMPANIES

The NBFCs fall under different categories on the basis of their activities. They are: Asset Finance Company (AFC) Investment Company Loan Company NDFC Micro Finance Institution
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ROLE OF NON-BANKING FINANCIAL COMPANIES

Promotes utilization of saving Provides easy, timely and unusual credit Investing funds in productive purpose Provide housing finance Provide investment advice Increase in standard of living Accept deposit in various form Promote economic growth
Commercial Bank versus Non-banking Financial Companies

While commercial banks and non-banking financial companies are both financial intermediaries (middleman) receiving deposits from public and lending them. Commercial bank is called as Big brother while the NBFC is called as the Small brother. But there are some important differences between both of them, they are as follows: An NBFC cannot accept demand deposits, and therefore, cannot write a checking facility. It is not a part of payment and settlement system which is precisely the reason why it cannot issue cheques to its customers. Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks. SARFAESI Act provisions have not currently been extended to NBFCs. Besides the above, NBFCs pretty much do everything that banks do.
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No. 1
Commercial Banks. Issue of cheques:
Non Bank Financial Companies.
In case of commercial banks, a cheque can In case of NBFCs there is no facility to be issued against bank deposits. 2 Rate of interest: Commercial bank offer lesser rate of NBFCs offer higher rate of interest on interest on deposits and charge less rate of deposits and charge higher rate of interest interest on loans as compared to NBFCs. on loans as compared to Commercial banks. 3 Facilities provided by them: Commercial banks can enjoy the benefit NBFCs are not given such facilities. of certain facilities like deposit insurance cover facilities, refinancing facilities, etc. issue cheques against bank deposits.
Law which governs them: NBFCs are regulated by different
Commercial banks are regulated by regulation such as SEBI, Companies Act, Banking Regulation Act 1949 and RBI. National Housing Bank, Unit Fund Act and RBI. 5 Scope of business Scope of business for banks is limited by sec 6 (1) of the BR Act 6 Foreign Investment Upto 74% allowed to private sector banks 7 Priority sector lending requirements Certain minimum exposure to priority sector required Priority sector norms are not applicable to banks There is no bar on NBFCs carrying activities other than financial activities Upto 100% allowed
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NUMBER OF NBFCS REGISTERED WITH THE RBI:
The following table shows the number of NBFCs registered with the Reserve Bank of India.
End June
Number of registered NBFCs
Number of NBFCs-D
Number of NBFCsND-SI
2006 2007 2008 2009 2010 2011
13014 12968 12809 12740 12630 12409
428 401 364 336 308 297
149 173 189 234 260 330
NBFCs account for 12.3 per cent of assets of the total financial system. There are two broad categories of NBFCs based on whether they accept public deposits, namely deposit-taking NBFCs (NBFCs-D) and non-deposit-taking NBFCs (NBFCs-ND). Total number of NBFCs registered with RBI, consisting of NBFCs-D and NBFCs-ND, declined from 12,630 at end June 2010 to 12,409 at end June 2011. The number of NBFCs-D declined from 308 to 297, mainly due to the exit of many NBFCs-D from deposit-taking activity, while non-deposit taking systemically important NBFCs (NBFCs-ND-SI with asset size 100 crore and above) increased from 260 to 330 during the same period. Under the NBFCs-D category there are two residuary non-banking companies (RNBCs).
Profile of NBFCs-D The ratio of deposits of reporting NBFCs (including RNBCs) to the aggregate deposits of CBs dropped to 0.21 per cent as on 31 March 2011 from 0.36 per cent in the previous year, mainly due to decline in deposits of RNBCs. Total assets of NBFCs-D (including RNBCs) increased to 1,16,897 crore as on 31 March 2011 from 1,12,131 crore in the preceding year. Public deposits held by NBFCs-D and RNBCs together declined by 31.1 per cent to 11,964 crore as on 31 March 2011 from 17,352 crore in the previous year.
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The consolidated balance sheet of NBFCs-D (excluding RNBCs) recorded 11.9 per cent growth for the year ended March 2011 (22.2 per cent in the previous year). Borrowings, which is the major source of funds for NBFCs-D, increased by 9.0 per cent during the year, while public deposits increased sharply by 43.5 per cent largely due to increase in public deposits of three NBFCs-D. On the assets side, loans and advances witnessed a growth of 9.5 per cent while investments increased by 14.1 per cent (primarily on account of increase in SLR investments) for the year ended March 2011. Asset finance companies (AFCs) held the largest share in total assets/liabilities (70.2 per cent) of NBFCs-D (excluding RNBCs), while loan companies accounted for 29.8 per cent for the year ended March 2011. The increase in assets/liabilities of AFCs was mainly on account of reclassification of NBFCs, initiated in December 2006. Of the total deposits held by all NBFCs-D, AFCs held the largest share of 89.3 per cent, followed distantly by loan companies with a 10.7 per cent share.
Profile of NBFCs-ND-SI The balance sheet size of the NBFCs-ND-SI sector increased by 24.0 per cent to 7,30,366 crore as on 31 March 2011 (against 5,88,806 crore on 31 March 2010). Significant increase in balance sheet size of the NBFCs-ND-SI sector is mainly attributed to sharp increase in owned funds, debentures, and bank borrowings. Owned funds (which accounted for 25.4 per cent of total liabilities) increased by 13.6 per cent during 2010-11. Total borrowings (secured and unsecured) of the sector increased sharply by 29.9 per cent to 5,00,938 crore and formed 68.6 per cent of total liabilities as on 31 March 2011. The pattern of deployment of funds by the NBFCs-ND-SI sector for the year ended March 2011 remained broadly in line with the pattern witnessed in the previous year. Secured loans continued to constitute the largest share (45.5 per cent of total assets), followed by unsecured loans with a share of 17.2 per cent, hire purchase assets (6.8 per cent), investments (18.6 per cent), cash and bank balances (4.1 per cent) and other assets (7.7 per cent) during the year ended March 2010. The financial performance of the NBFCs-NDSI sector improved as reflected in the increase in net profit of 15,619 crore during 2010-11 (as compared to 12,231 crore in the previous year). ROA (net profit as a percentage to total assets) of the sector stood at 2.1 per cent as on 31 March 2011.
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MUTUAL FUNDS
According to SEBI, Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with the objectives as disclosed in offer document. A mutual fund is a portfolio of stocks, bonds or other securities that is collectively owned by hundreds or thousands of investors and managed by a professional investment company. Financial sector development can be viewed as a process that enhances four critical attributes of the financial system: efficiency, stability, transparency and inclusion. The emergence of intermediation mechanisms and products that help improve on one or more of these without causing others to weaken are, therefore, a meaningful indicator of financial development. From this perspective, Mutual Funds play an important role in the development of the financial system. First, they pool the resources of small investors together, increasing their participation in financial markets, which helps both inclusion and the efficient functioning of markets themselves, as a result of larger volumes. Second, Mutual Funds, being institutional investors, can invest in market analysis generally not available or accessible to individual investors, thereby providing services based on informed decisions to small investors. Decisions made on the basis of deeper understanding of risks and returns contribute to financial stability, besides helping to mitigate market risk for this group of investors. Third, transparency in investment strategies and outcomes, though typically mandated by regulators, is relatively easy to deliver on, so that investors can find out exactly where they stand with regard to their investments at any point of time. As far as regulation is concerned, Mutual Funds cut across domains. The Reserve Bank of India regulates three categories of financial markets; money markets, government securities markets and foreign exchange markets. Mutual Funds have a presence in the first two and the Reserve Bank is therefore interested in the role that they play in developing them. The capital market in India is now playing a very major role in the mobilization of savings and allocation of capital. There has been a phenomenal growth in the market capitalization and the number of companies listed. There has been a steady dramatic increase in amount raised to through the capital market. In the context, it is observed that mutual funds are also
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becoming the major channel for the mobilization of savings. The shares of the mutual funds as a percentage of gross fixed capital formation have grown from 2.3% in 1981-82 to 16.3% in 1991-92. Mutual fund is a non-depository, non-banking financial intermediary that acts as an important vehicle for bringing wealth holders and deficit units together indirectly. Mutual funds are financial intermediaries which pool the savings of numerous individuals and invest the money thus raised in a diversified portfolio of securities, including equity, bonds, debentures, and other instruments, thus spreading and reducing the risk. The object is to maximize the return to the investor who participates in equity indirectly through mutual funds. As per SEBI Regulation, mutual fund means a fund established in the form of trust to raise moneys through the sale of units to the public or a section of the public under the one or more schemes for investing in securities, including money market instruments. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund. The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).
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CLASSIFICATION OF MUTUAL FUNDS

Mutual funds can be classified into following categories:
i.
OPEN ENDED MUTUAL FUNDS: It is a scheme in which a investor can buy and sell units on daily basis, where in the scheme have perpectual existence and a flexible ever changing corpus. Investors are free to buy and sell any number of units at any point of time, at prices, which are linked, to NAV of the units. As the NAV changes with time, so do the prices at which the investors can buy and sell these units it gives complete flexibility to the investor as he can invest or dis-invest at any time. The fund is not listed in the stock market. The investor can buy and sell these units form and to the mutual fund. In accordance with the recent changes, the fund manager has the option to list the fund in the stock market in addition to repurchase and resale.
ii.
CLOSE ENDED MUTUAL FUND: It is a fund where in it has a fixed corpus and operates for fixed duration at the end of which the entire corpus is disinvested and proceeds are distributed to the various unit holders in proportion of their holdings. The fund can also make interim payments if it so decides. Thus it ceases the exits after final distribution. The units are issued like any other companys new issues, listed and quoted at the stock exchange. The units of close-ended funds are not always redeemable at their NAV. Market prices are determined by demand and supply and not solely by NAV. If the fund manager so chooses, he can offer repurchase facility. So also he can resume resale to the extent of repurchase. All the schemes discussed below are either open ended or close ended.
iii.
BOND FUNDS: They provide fixed returns for those who desire safety and steady income. The Fund is invested in Government securities and Bonds. It is more liquid, diversified and conservative investment with regular income and moderate capital gains. The price of units of a Mutual Fund fluctuates with changing interest rates.
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iv.
STOCK FUNDS: They are mainly those who are willing to accept risk in the hope of a high Return. These are called Common Stock Fund. They are of two types Growth Funds and Go-Go Funds. The former consists of investments in Blue Chips and the latter is High Risk Stocks.
v.
INCOME FUNDS: They are mainly to maximize the current income of investors. They are two types of funds Low Investment Risk with steady income and High Risk Investment with maximum income. Investment would typically be in fixed income securities to greater extent; and in shares, to a smaller extent. Capital appreciation in such schemes may be limited. It is ideal for retired people and others with a need for capital stability and regular income, and investors who need some income to supplement their earnings. As most of Investors prefer income Funds, the sales of this fund had dominated the other types of funds.
vi.
MONEY MARKET MUTUAL FUNDS: Investments are predominantly in Money Market Instruments like, Certificate of Deposits, Commercial Paper, Treasury Bills etc. They are short term in tenure, highly liquid with high safety. This fund is an alternative to saving account of high bracket savers. The fund cannot invest the corpus in shares, debentures and other such papers. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market.
vii.
SPECIALISED FUNDS: These funds invest in securities of certain industries/ specific set of or specific income producing securities. They carry more risk due to lack of diversification.
viii.
LEVERAGE FUNDS: The funds borrow money in order to increase the size of the corpus and thereby increase the benefit to the Unit Holders by operating with a larger corpus than the money collected. Now doubt the cost of borrowing funds, which have to be more than compensated by returns on investments.
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ix.
BALANCE FUNDS: Here the assets are made up of a judicious mixture of industries, Stock and Bonds. To secure reasonable rate of return, the funds are employed in high-grade common stock and conservative fixed income securities like debentures, bonds and preference shares. In a rising stock market, the NAV of these schemes may not normally keep pace or fall equally when the market falls. It is ideal for investors looking for a combination of income and moderate growth.
ADVANTAGES OF MUTUAL FUND: i.

PROFESSIONAL MANAGEMENT: Qualified professionals manage your money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise, which will add value to your investment. Fund managers are in a better position to manage your investments and get higher returns. ii. DIVERSIFICATION: Diversification lowers your risk of loss by spreading your money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds spread your investment across only one industry so they are less diversified and therefore generally more volatile. iii. MORE CHOICE: Mutual funds offer a variety of schemes that will suit your needs over a lifetime. When you enter a new stage in your life, all you need to do is sit down with your financial advisor who will help you to rearrange your portfolio to suit your altered lifestyle.
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iv.
AFFORDABILITY: As a small investor, you may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis.
v.
TAX BENEFITS: Investments held by investors for a period of 12 months or more qualify for capital gains and will be taxed accordingly (10% of the amount by which the investment appreciated, or 20% after factoring in the benefit of cost indexation, whichever is lower). These investments also get the benefit of indexation.
vi.
LIQUIDITY: With open-end funds, you can redeem all or part of your investment any time you wish and receive the current value of the shares. Funds are more liquid than most investments in shares, deposits and bonds. Moreover, the process is standardized, making it quick and efficient so that you can get your cash in hand as soon as possible.
MUTUAL FUNDS AND MARKET DEVELOPMENT

Mutual Funds have contributed significantly in broadening and deepening of different segments of the Money Market and, to some extent, the Government Securities market. Money Market Mutual Funds (MMMFs) were introduced in India in April 1991 to provide an additional short term investment avenue to investors and to bring money market instruments within the reach of individuals.
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The guidelines for MMMFs were announced by the Reserve Bank in April 1992. The Reserve Bank had made several modifications in the scheme to make it more flexible and attractive to banks and financial institutions. These guidelines were subsequently incorporated into the revised SEBI regulations. In October 1997, MMMFs were permitted to invest in rated corporate bonds and debentures with a residual maturity of up to one year, within the ceiling existing for Commercial Paper (CPs). The minimum lock-in period was also reduced gradually to 15 days, making the scheme more attractive to investors. MMMFs have witnessed phenomenal growth over the period. As on May 31, 2011, the total assets under management of the MMMFs was placed at Rs.1,83,622 crore, 26 per cent of the aggregate assets under management of the Mutual Funds. Mutual Funds occupy a large share of the primary market of Certificates of Deposit (CDs) and CPs. As on June 10, 2011, the total holdings of Mutual Funds in CDs and CPs remained at Rs.2,95,164 crore (66 per cent of the aggregate outstanding) and Rs.82,951 crore (65 per cent of the aggregate outstanding) respectively. Mutual Funds have also provided substantial liquidity to the secondary market segments of CPs and CDs. Their increased activity in the secondary market corresponds to their growing portfolio of money market investments. During the last six months, MFs' share in the daily turnover the secondary market of CDs and CPs stood at around 41 per cent and 46 per cent respectively. During 2011-12 (up to 30 November 2011), MFs mobilized 1,00,338 crore from the market as compared to 49,406 crore liquidation in 2010-11. The market value of assets under management stood at 6,81,655 crore as on 30 November 2011 compared to 6,65,282 crore as on 31 March 2011, indicating an increase of 2.5 percent.
CAPITAL MARKETS PRIMARY MARKET

During financial year 2011-12 (up to 31 December 2011) resource mobilization through the primary market witnessed a sharp decline over the year 2010-11. The cumulative amount mobilized as on 31 December 2011 through equity public issues stood at Rs. 9,683 crore as compared to Rs. 48,654 crore in 2010-11. During 2011-12, (up to 31 December 2011), 30 new companies (initial public offersIPOs) were listed at the National Stock Exchange
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(NSE) and Bombay Stock Exchange (BSE) amounting to Rs. 5,043 crore as against 53 companies amounting to Rs. 35,559 crore listed in 2010-11. The mean IPO size for the year 2011-12 was Rs. 168 crore as compared to Rs. 671 crore in 2010-11. Further, only Rs. 4,791 crore was mobilized through debt issue as compared to Rs. 9,451 crore in 2010-11.
The amount of capital mobilized through private placement in corporate debt in 2011-12 (April-December) was Rs. 1,88,530 crore as compared to Rs. 2,18,785 crore in 2010-11.
SECONDARY MARKET
As on 31 December 2011, Indian benchmark indices, BSE Sensex and Nifty, decreased by 20.4 per cent and 20.7 per cent respectively over the closing value of 2010-11. Nifty Junior and BSE 500 also decreased by 22.6 per cent and 26.1 per cent respectively during the same period.
The free float market capitalization of Nifty, Sensex, Nifty Junior, and BSE 500 stood at Rs. 14,05,066 crore, Rs. 12,66,639 crore, Rs. 2,47,531 crore, and Rs. 21,66,947 crore respectively in 2011-12 (upto 31 December 2011), indicating a decrease of 20.0 per cent, 18.6 per cent, 21.8 per cent, and 22.0 per cent, respectively over 2010-11.
FOREIGN INSTITUTIONAL INVESTORS (FIIs)

At the end of December 2011, there were 1,767 registered FIIs as compared to 1,722 on 31 March 2011. The number of registered sub-accounts also increased to 6,278 from 5,686 during the same period. In the Indian equity market, FIIs withdrew Rs. 213 crore during 2011-12 (April-December) compared to Rs. 110,121 crore investments in 2010-11. During the same period they invested Rs. 30,590 crore in the debt segment as compared to Rs. 36,317 crore in 2010-11. During 2011-12, (up to 31 December 2011), total investment in equity and debt by FIIs stood at Rs. 30,376 crore as compared to Rs. 146,438 crore in 201011.
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Table 1. Credit flow from Scheduled Commercial Banks

(Rs Crore) Outstanding as on 17 Dec, 2010 Percent (20102011) Outstanding as on 16 Dec, 2011 Percent (20112012)
Aggregate Deposit Bank Credit Investment
4806227
14.9
5672592
17.4
3644569 1445544
23.9 7.1
4266982 1678851
19.3 16.1
Figure. 1
6000000
5000000
4000000 Aggregare Deposit 3000000 Bank Credit Investment 2000000
1000000
0 2010-2011 2011-2012
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Interpretation:
Growth in aggregate deposits during 2011-12 was higher at 17.4 per cent (14.9 per cent during the corresponding period of 2010-11). During 2011-12 (up to end December 2011), deposit rates of SCBs have increased across various maturities. Interest rates offered by SCBs on deposits of one to three year maturity were placed in the 3.50-10.50 per cent range in December 2011, as compared to 3.50-10.10 per cent in March 2011, while those on deposits of maturity of above three years were placed in the 4.25-10.10 per cent range as compared to 3.50-10.00 per cent in March 2011.
During financial year 2011-12, growth in bank credit extended by SCBs stood at 19.3 per cent as on 16 December 2011 (23.9 per cent in the corresponding period of previous year). The base rates of SCBs were placed in the 6.25-11.25 per cent range in December 2011 as compared to 6.25-10.00 per cent in March 2011. Due to lower credit off take, commercial banks investment in government and other approved securities was higher at 16.1 per cent as compared to 7.1 per cent in the previous year. Consequently, the investment-deposit ratio increased from 28.8 per cent at end March 2011 to 29.6 per cent on 16 December 2011.
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Table 2. Flow of Institutional Credit to Agriculture and Allied Activities
(Rs Crore)
Agency
2007-08
2008-09
2009-10
2010-11
2011-12*
Cooperative Banks
48,258
46,192
63,497
70,105
53,187
% share
19
15
17
16
20
RRBs
25,312
26,765
35,218
43,968
29,073
% share
10
10
11
Commercial Banks
1,81,088
2,28,951
2,85,799
3,32,706
1,79,869
% share
71
76
74
74
69
Total
2,54,658
*Up to 30 October 2011.
3,01,908
3,84,514
4,46,779
2,62,129
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Figure. 2
80 70 60 50 Cooperative Banks 40 30 20 10 0 2007-08 2008-09 2009-10 2010-11 2011-12 RRBs Commercial Banks
INTERPRETATION:
The public, private sector and foreign banks, had achieved the overall priority sector lending targets. The Indian banking system disbursed credit of Rs. 4,46,779 crore to the agricultural sector as against a target of Rs. 3,75,000 crore in 2010-11, thereby exceeding the target by around 19 per cent. The credit flow to agriculture during 2011-12 by commercial banks, cooperative banks, and RRBs together was Rs. 2,62,129 crore till October 2011, amounting to 55 per cent of the annual target of Rs. 4,75,000 crore.
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Table 3.Number of Non Banking Financial Companies Registered with RBI
End June
Number of registered NBFCs
Number of NBFCs-D
2007 2008 2009 2010 2011
12968 12809 12740 12630 12409
401 364 336 308 297
Figure. 3
14000 12000 10000 8000 6000 4000 2000 0 2007 2008 2009 2010 Number of NBFCs-D 2011 Number of Regestered NBFCs 401 364 336 308 297 12968 12809 12740 12630 12409
INTERPRETATION:
NBFCs account for 12.3 per cent of assets of the total financial system. Total number of NBFCs registered with RBI, consisting of NBFCs-D and NBFCs-ND, declined from 12,630 at end June 2010 to 12,409 at end June 2011. The number of NBFCs-D declined from 308 to 297, mainly due to the exit of many NBFCs-D from deposit-taking activity.
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Table 4. Progress under Self Help Group-Bank Linkage
New Self Help Groups financed by banks
(Rs Crore)
New SHGs Financed by Banks During the Year
Bank Loan Outstanding as on 31 March 2011
Year
No.(Lakh)
Amount (Rs. Crore)
Growth (%)
No.(Lakh)
Amount (Rs.Crore)
Growth (%)
2007-08
12.28
8849.26
36.26
16,999.90
2008-09
16.09
12,256.51
38.50
42.24
22,679.85
33.41
2009-10
15.87
14,453.30
16.90
48.52
28,038.28
23.62
2010-11
11.97
14,547.73
0.65
47.87
31,221.17
11.35
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Figure. 4
11.35 2008-09
33.41
2009-10
23.62
2010-11
Interpretation:
Under the SHG-Bank Linkage Programme as on 31 March 2011, 74.62 lakh SHGs held savings bank accounts with total savings of Rs. 7,016 crore as against 69.53 lakh SHGs with savings of Rs. 6,199 crore as on 31 March 2010. By December 2011, another 2.98 lakh SHGs have come under the ambit of the Programme, taking the cumulative number of savingslinked groups to 77.60 lakh SHGs.
As on 31 March 2011, 47.87 lakh SHGs had outstanding bank loans of Rs. 31,221 crore, as against 48.5 lakh SHGs with bank loans of Rs. 28,038 crore as on 31 March 2010. This represents a decline of 1.3 per cent in the number of SHGs and a growth of 11.4 per cent in bank loans outstanding to SHGs. During 2011-12 (up to December 2011), another 4.51 lakh SHGs have been financed with an amount of Rs. 6,791.46 crore.
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Table 5. Resource Mobilization Through Primary Market

(Rs Crore) Mode 1. Debt 2. Equity of which, IPOs Number of IPOs Mean IPO size 3. Private placement 2008-09 1,500 2,082 2,082 21 99 1,73,281 2009-10 2,500 46,736 24,696 39 633 2,12,635 2010-11 9,451 48,654 35,559 53 671 2,18,785 2011-12# 4,791 9,683 5,043 30 168 1,88,530
Total
# as on 31 December 2011.
1,76,864
2,61,871
2,76,890
2,03,005
Figure. 5
250000
200000
150000 Debt Equity 100000 Private Placement
50000
0 2008-09 2009-10 2010-11 2011-12
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Interpretation:
During financial year 2011-12 (up to 31 December 2011) resource mobilization through the primary market witnessed a sharp decline over the year 2010-11. The cumulative amount mobilized as on 31 December 2011 through equity public issues stood at Rs. 9,683 crore as compared to Rs. 48,654 crore in 2010-11. During 2011-12, (up to 31 December 2011), 30 new companies (initial public offers-IPOs) were listed at the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) amounting to Rs. 5,043 crore as against 53 companies amounting to Rs. 35,559 crore listed in 2010-11. The mean IPO size for the year 2011-12 was Rs. 168 crore as compared to Rs. 671 crore in 2010- 11. Further, only Rs. 4,791 crore was mobilized through debt issue as compared to Rs. 9,451 crore in 2010-11. The amount of capital mobilized through private placement in corporate debt in 2011-12 (April- December) was Rs. 1,88,530 crore as compared to Rs. 2,18,785 crore in 2010-11.
Table 6. Flow of Institutional Credit to Priority Sector

(Rs Crore)
March 2009
March 2010
March 2011
Public Sector Banks
7,24,150
8,63,777
10,28,614
Private Sector Banks
1,87,849
2,14,669
2,48,827
Foreign Banks
55,483
59,959
66,527
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Figure. 6
1200000 1000000 800000 600000 400000 200000 0 2008-2009 Public Sector Banks 2009-2010 Private Sector Banks 2010-2011 Foreign Banks
Interpretation:
The outstanding priority sector advances of public sector banks increased from Rs. 8,63,777 crore as on March 2010 to Rs. 10,28,614 crore as on March 2011, showing a growth of 19.1 per cent. Public-sector banks as a group had achieved the overall priority-sector lending target as on March 2011. The outstanding priority sector advances of private sector banks increased from Rs. 2,14,669 crore on March 2010 to Rs. 2,48,827 crore on March 2011, showing a growth of 15.9 percent. Private sector banks as a group had achieved the overall lending target as on March 2011. The outstanding priority sector advances of foreign banks increased from Rs. 59,959 crore on March 2010 to Rs. 66,527 crore on March 2011, showing a growth of 11.0 per cent. Foreign banks as a group also achieved the overall priority sector lending target as on March 2011.
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Table 7. Resources Mobilized by Financial Institutions

(Rs Crore)
Long Term
Short Term
Foreign Currency
Total
Financial Institutions
20092010
20102011
20092010
20102011
20092010
20102011
20092010
20102011
EXIM Bank
8150
11132
5052
1538
5193
11456
18395
24126
NABARD
16
9741
12330
15882
48
12346
25671
NHB
7518
7537
10306
3380
17824
10917
SIDBI
13253
11744
11500
5958
987
1700
25740
19402
Total
28937
40154
39188
26758
6180
13204
74305
80116
Long-term rupee resources comprise borrowings by way of bonds/ debentures; and short-term resources comprise commercial papers (CPs), term deposits, indexed certificates of deposit (ICDs), certificates of deposit (CDs) and borrowing from term money. Foreign currency resources largely comprise bonds and borrowings in the international market.
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Figure. 7
90000 80000 70000 60000 50000 40000 30000 20000 10000 0 2009-2010 2010-2011 Foreign Currency Short Term Long Term
Interpretation:
Resources raised by FIs during 2010-11 were considerably higher than those during the previous year. The resource mobilized by Financial Institutions in year 2010-11 was Rs. 80,116 crore compared to Rs. 74,305 crore in 2009-2010. While long-term resources and foreign currency resources raised witnessed a sharp rise during 2010-11, short-term resources raised declined substantially. NABARD mobilized the largest amount of resources, followed by EXIM Bank and SIDBI.
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Table 8. Trends in resource mobilization (net) by Mutual funds

(Rs Crore) Sector UTI Public Sector Private Sector Total 2007-08 10,677 9,820 1,33,304 1,53,802 2008-09 -3,659 9,380 -34,018 -28,296 2009-10 15,653 12,499 54,928 83,080 2010-11 -16,636 -13,555 -19,215 -49,406 2011-12# 5,323 3,035 91,980 1,00,338
Note : # As on 30 November, 2011
Figure. 8
160000 140000 120000 100000 80000 60000 40000 20000 0 -20000 -40000 -60000 UTI Public Sector Private Sector 2007-08 10677 9820 133304 2008-09 -3659 9380 -34018 2009-10 15653 12499 54928 2010-11 -16,636 -13,555 -19215 2011-12 5323 3035 91980
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Interpretation:
UTI, Public-sector and Private-sector mutual funds, which had witnessed heavy redemption pressure in 2010-11, recorded a turnaround with total net resource mobilization by MFs amounting Rs 1,00,338 crore in 2011-2012 from the market as compared to Rs. 49,406 crore liquidation in 2010-11. The market value of assets under management stood at Rs. 6,81,655 crore as on 30 November 2011 compared to Rs. 6,65,282 crore as on 31 March 2011, indicating an increase of 2.5 per cent.
Table 9. Total Investment by FIIs

(Rs Crore)
2009-10 Number of FIIs Number of sub-accounts 1635 5015
2010-11 1722 5686
2011-12# 1767 6278
Equity market activity
-47,706
1,10,121
-213
Debt market activity
1,895
36,317
30,590
Total activity
Note : # As on 31 December 2011.
-45,811
1,46,438
30,377
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Figure. 9
200000 150000 100000 50000 0 2009-10 -50000 -100000 2010-11 2011-12
Equity market activity
Debt market activity
Total activity
Interpretation:
At the end of December 2011, there were 1,767 registered FIIs as compared to 1,722 on 31 March 2011. In the Indian equity market, FIIs withdrew Rs. 213 crore during 2011-12 (AprilDecember) compared to Rs. 1,10,121 crore investment in 2010-11. During the same period they invested Rs. 30,590 crore in the debt segment as compared to Rs. 36,317 crore in 201011. During 2011-12, (up to 31 December 2011), total investment in equity and debt by FIIs stood at Rs. 30,376 crore as compared to Rs. 1,46,438 crore in 2010-11.
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Table 10. Investment by LIC

(Rs Crore)
Sector - Wise Year 2006-07 2007-08 2008-09 2009-10 2010-11 Public 4,33,810.3 5,02,288.4 5,72,050.3 6,78,374.5 7,75,992.5 Private 84,294 1,28,467.8 1,87,140.7 2,36,134.7 2,65,798.3 75.2 73.7 71.1 70.9 82.1 Joint Co-operative 3,555.1 3,817.6 3,628.9 3,336.5 3,666.6 Total 5,21,734.6 6,35,747.5 7,62,891.7 9,17,916.5 10,45,539.4
Figure. 10
1200000 1000000 800000 600000 400000 200000 0 2006-07 2007-08 2008-09 2009-10 2010-11 Investment by LIC
Interpretation:
Investments made by LIC during 2010-11 were considerably higher than those during the previous year. The amount invested by LIC in year 2010-11 was Rs. 10,45,539 crore compared to Rs. 9,17,916 crore in 2009-2010. Investment made in all the sector witnessed a rise during the year 2010-11.
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Table 11. Financial Performance of NBFCs

(Rs Crore)
Year 2006-07 2007-08 2008-09 2009-10 2010-11
Net Profit 504 1,912 2,073 1,482 2,861
Total Assets 48,554 74,562 77,128 94,212 1,05,431
Figure. 11
3500 3000 2500 2000 1500 1000 500 0 2006-07 2007-08 2008-09 2009-10 2010-11 Net Profit
Interpretation:
Profit made by NBFCs witnessed a sharp increase to Rs. 2,861 crore in 2011-12 as compared to Rs. 1,482 in 2010-11. The total assets have also increased over the years.
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SUMMARY OF FINDINGS
1. Bank deposits rose 17.40 percent during year 2011-12 as compared to 14.9 per cent in corresponding previous year 2010-11.
2. During 2011-12, bank credit expanded by 19.3 per cent only, as compared to a growth of 23.9 per cent in corresponding previous year 2010-11. 3. India's foreign exchange reserves stood at US$ 292 billion as on January 2012.
4. The public sector, private sector and foreign banks, have achieved the overall priority sector lending target. 5. Credit to the priority sector grew by 9.2 percent in November 2011 as compared to 13.5 per cent in March 2011. Loans to agriculture & allied activities grew at the rate of 7.3 per cent in November 2011 compared to 10.6 per cent as on March 2011. 6. Credit to industry (comprising of large, medium and small scale sector) grew at 22.1 percent during 2011-2012 (as of November, 2011) compared to 25.9 per cent (as of March, 2011). 7. The gross NPAs (GNPAs) to gross advances ratio declined to 2.3 per cent in 2010-11 from 2.4 per cent in the previous year. 8. As on March 2011, 47.87 lakh SHGs held savings bank accounts with total savings of Rs 31,221.17 crore as against 48.52 SHGs with savings of Rs 28,038.28 crore as on March 31, 2010. This represents a decline of 1.3 per cent in the number of SHGs and a growth of 11.4 per cent in bank loans outstanding to SHGs. During 2011-12 (up to December 2011), 4.51 lakh more SHGs have been financed with an amount of Rs. 6,791.46 crore.
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9. As per NABARD data, as on 31 March 2011, gross non-performing assets (NPAs) in respect of SHGs were 4.7 per cent of the bank loans outstanding. 10. The consolidated balance sheets of SCBs, expanded by 19.2 per cent as in end March 2011. 11. Total number of NBFCs has declined marginally from 12,630 to 12,409. The number of NBFCs declined, mainly due to the exit of many NBFCs-D from deposit-taking activity. 12. During financial year 2011-12 (upto 31 December 2011) total resources mobilized through the primary market witnessed a sharp decline over the year 2010-11. The cumulative amount mobilized as on December 2011 through equity public issue stood at Rs. 9,683 crore as compared to Rs. 48,654 crore in 2010-11. 13. 30 new companies (initial public offers-IPO) were listed at National Stock Exchange and Bombay Stock Exchange amounting to Rs. 5,043 crore. 14. Net resources mobilized by Mutual Funds during 2011-12 have increased to Rs. 1,00,338 crore as compared to Rs. 49,406 crore liquidation in 2010-11. The market value of assets under management also indicates an increase of 2.5 per cent. 15. Resources raised by FIs during 2010-11 were considerably higher than those during the previous year. The resource mobilized by Financial Institutions in year 2010-11 was Rs. 80,116 crore compared to Rs. 74,305 crore in 2009-2010. 16. Total numbers of Foreign Institutional Investors (FIIs) has increased. Total investment in equity and debt witnessed a sharp decline in the year 2011-12. 17. Today there are 24 general insurance companies and 23 life insurance companies operating in the country. 18. Together with banking services, insurance services add about 7% to the countrys GDP.
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19. The insurance sector penetration, both in life and non-life segments, has improved post liberalization. 20. Only about 12-13 per cent of the total workforce was covered by any formal social security system. 21. QFIs were allowed to directly invest in the Indian equity market in January 2012. This was done to widen the class of investors, attract more foreign funds, reduce market volatility, and deepen the Indian capital market.
22. Lower levels of financial literacy, particularly among workers in unorganized sector,
non-availability of even moderate surplus, etc are the major challenges to universal inclusion of poorer sections of Indian society into the pension network.
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CONCLUSION
Financial intermediaries play an important economic function by facilitating the productive use of the communitys surplus money. The continuous use of such resources by an economy will foster greater demand for goods and services and in generation of incomes and employment in an economy. The financial system today encompass not only traditional banking institutions, but also many other financial entities such as insurance companies, pension funds, mutual funds, venture capital funds and stock and commodity exchanges that perform the function of financial intermediation. Financial institutions (intermediaries) perform the vital role of bringing together those economic agents with surplus funds who want to lend, with those with a shortage of funds who want to borrow. In doing this they offer the major benefits of maturity and risk transformation. It is possible for this to be done by direct contact between the ultimate borrowers, but there are major cost disadvantages of direct finance. Indeed, one explanation of the existence of specialist financial intermediaries is that they have a related (cost) advantage in offering financial services, which not only enables them to make profit, but also raises the overall efficiency of the economy. The other main explanation draws on the analysis of information problems associated with financial markets. Financial Intermediaries in India have acquired greater depth and liquidity over the years. Steady reforms since 1991 have led to growing linkages and integration of the Indian economy and its financial system with the global economy. Weak global economic prospects and continuing uncertainties in the international financial markets therefore, have had their impact on the emerging market economies. This chapter summarizes the developments in the financial sector in India in the last year, which has remained relatively immune to the global financial turbulence through a proactive response to the challenges. Financial intermediaries appear to have a key role in the financial stability of a country.
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RECOMMENDATIONS
1. The adaptation of technological solutions can particularly be useful in expanding the business network in a cost-effective manner. It can also being utilised to design and provide innovative banking services that enhance the efficiency and help reduce the cost of financial intermediation. Out of 98 per cent of the branches of public sector banks which are fully computerized, almost 10 per cent are still not equipped with the core banking platform.
2. Writing-off of the outstanding gross non-performing loans can help in limiting the growth of gross non-performing loans of the banks.
3. Keeping in view the risks involved in NBFCs associating themselves with partnership firms, RBI should prohibit NBFCs from contributing capital to any partnership firm or to be partners in partnership firms.
4. Provisioning of standard assets can be introduced to NBFCs to ensure that they create a financial buffer and to protect them from the effect of economic downturns.
5. Infrastructure development is the key to long term sustainable growth of the economy. However, infrastructure finance remains a constraining factor with heavy dependence on bank financing. Development of the corporate bond market therefore is the key to infrastructure development. While, the introduction of CDS is expected to help in the process, innovative steps are needed to bring the corporate bond market centre stage of infrastructure financing.
6. Pension Fund Regulatory and Development Authority (PFRDA) faces the challenge of covering the unorganized sector under the New Pension Scheme (NPS), empowering the subscribers to take appropriate investment decisions based on their risk and return profile, provide safety and optimum returns, and to improve financial literacy levels. The success of pension reforms will not only help in facilitating the flow of long-term savings for investments and for infrastructure development, but also help establish a credible and sustainable social security system in the country.
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7. The development of the financial sector is critically dependent on financial inclusion, which is seen as an important determinant of economic growth. Banks need to take into account various behavioural and motivational attributes of potential consumers for a financial inclusion strategy to succeed.
8. Besides, access to financial products is constrained by lack of awareness, unaffordable products, high transaction costs, and products which are not customized and are of low quality. These constrains should be removed.
9. Inter-linkages between the insurance and banking sectors are a matter of concern, with many insurance companies being part of financial conglomerates. Any financial stability issue regarding banks in the conglomerate may have an amplifying effect on the insurer. Efforts therefore have to be made towards building firewalls to prevent contagion from one sector to another, especially in times of stress. 10. The recent global financial turmoil raised many issues about governance of financial intermediaries and awareness of investors. Investor awareness is a prerequisite for investor protection. Greater effort therefore is needed for investor education and promoting investors protection. 11. There is scope for expansion of mutual fund industry. 12. The retail investor participation, which is presently estimated at 15 percent, is expected to increase in the years to come as availability of products and investor education improve and the industry takes steps towards transparency and sound corporate governance practices to generate investor confidence.
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BIBLIOGRAPHY
Text books/reference books Financial Markets and Intermediaries Mohammed Arif Pasha Investment Analysis and Portfolio Management -Prasanna Chandra Laws and Practice of Banking- Maheshwari and Maheshwari
News papers & magazines: Business Standard Economic Times Business line Business world
Annual Reports: Annual reports issued by RBI, financial intermediaries.
Web sites: www.rbi.org.in www.sebi.gov.in www.irdaindia .org www.investopedia.com www.tradingeconomics.com www.ibef.org
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Contribution of Financial Intermediaries to Indian Financial System

INTRODUCTION TO FINANCIAL SYSTEM

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

SIGNIFICANCE AND DEFINITION

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

INTER-RELATIONSHIP IN THE FINANCIAL SYSTEM

LIBERALISATION OF THE FINANCIAL SYSTEM

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

CONPONENTS OF INDIAN FINANCIAL SYSTEM

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

Classification of Financial Markets

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

Classification of Financial Instruments

Call/notice Money Market

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

Inter-Bank Term Money

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

CAPITAL MARKET INSTRUMENTS

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

ADVANTAGES OF FINANCIAL INTERMEDIARIES

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

FUNCTIONS OF FINANCIAL INTERMEDIARIES

Contribution of Financial Intermediaries to Indian Financial System

INTERMEDIATING FUNCTIONS OF BANKS

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

INTERMEDIATING FUNCTIONS OF LIFE INSURERS

INTERMEDIATING FUNCTIONS OF MUTUAL FUNDS

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

INTERMEDIATING FUNCTIONS OF PENSION FUNDS

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

THE NEEDS OF INVESTORS

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

THE ROLE OF INVESTMENT BANKING FIRMS

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CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

OBJECTIVES OF THE STUDY:

CMR Centre for Business Studies

Contribution of Financial Intermediaries to Indian Financial System

LIMITATIONS OF THE STUDY