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Introduction
INTRODUCTION
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 th
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.
1.1 S IGNIFICANCE AND D EFINITION
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.
The financial system or the financial sector of any country consists of:-
(a) specialized & non specialized financial institution
(b) organized &unorganized financial markets and
(c) Financial instruments & services which facilitate transfer of funds.
Procedure & practices adopted in the markets, and financial inter relationships
are also the parts of the system. These parts are not always mutually exclusive.
For example, the financial institution operate in financial market and are,
therefore a part of such market. The word system in the term financial system
implies a set of complex and closely connected or inters mixed institution,
agents practices, markets, transactions, claims, & liabilities in the economy. The
financial system is concerned about money, credit, & finance the terms
intimately related yet some what different from each other. Money refers to the
current medium of exchange or means of payment. Credit or Loan is a sum of
money to be returned normally with Interest it refers to a debt of economic unit.
Finance is a monetary resources comprising debt & ownership fund of the state,
company or person.
FEATURES OF FINANCIAL SYSTEM -:
The role of the financial system is to promote savings & investments in the
economy. It has a vital role to play in the productive process and in the
mobilization of savings and their distribution among the various productive
activities. Savings are the excess of current expenditure over income. The
domestic savings has been categorized into three sectors, household,
government & private sectors.
RRBs setup
1980s 1990s
1970s
1947 1960s
In view of the above, it was decided to nationalize the banking sector so that
credit allocation could take place in accordance in plan priorities.
Nationalization took place in two phases, with a first round in 1969 followed by
another in 1980.
By the mid-seventies it was felt that commercialized banks did not have
sufficient expertise in rural banking and hence in 1975 Regional Rural Banks
(RRBs) were set up to help bring rural India into the ambit of the financial
network. This effort was capped in 1980 with the formation of National Bank
for Agriculture and Rural Development (NABARD), which was to function as
an apex bank for all cooperative banks in the country, helping control and guide
their activities. NABARD was also given the remit of regulating rural credit
cooperatives.
Following with the logic of specialization, the 1980s saw other DFIs with
specific remits being set up e.g. The EXIM Bank for export financing, the
Small Industries Development Bank of India (SIDBI) for small scale industries
and the National Housing Bank (NHB) for housing finance.
Long term finance for the private sector came from DFIs and institutional
investors or through the capital market. However both price and quantity of
capital issues was regulated by the Controller of Capital Issues.
Therefore the deepening of financial intermediation had occurred with an
increase in the draft by both the commercial sector and the government on
financial resources mobilized.
At the end of the 1980s then the Indian financial system was characterized by
segmented financial markets with significant restrictions on both the asset and
liability side of the balance sheet of financial intermediaries as well as the price
at which financial products could be offered.
The impetus for change came from one expected and one unexpected quarter -
first, the importance of prudential capital adequacy ratios was underlined by the
announcement of BaselI norms (see Error: Reference source not found Error:
Reference source not found) That banks were expected to adhere to; second the
macroeconomic crisis of 1990-91.
The reform process that followed accelerated the process of liberalization
already begun in the 1980s and began a series of measured and deliberate steps
to integrate India into the global economy, including the global financial
network.
Briefly however, given the problems facing the financial system and keeping in
mind the institutional changes necessary to help India financially integrate into
the global economy, financial reform focused on the following: improving the
asset quality on bank balance sheets in particular and operational efficiency in
general; increasing competition by removing regulatory barriers to entry;
increasing product competition by removing restrictions on asset and liability
sides of financial intermediaries; allowing financial intermediaries freedom to
set their prices; putting in place a market for government securities; and
improving the functioning of the call money market.
The government security market was particularly important not only because it
was decided the RBI would no longer monetize the fiscal deficit, which would
now be financed by directly borrowing from the market, but also monetary
policy would be conducted through open market operations and a large liquid
bond market would help the RBI sterilise, if necessary, foreign exchange
movements.
INDIAN FINANCIAL SYSTEM FROM 1950 TO 1980
Indian Financial System During this period evolved in response to the objective
of planned economic development. With the adoption of mixed economy as a
pattern of industrial development, a complimentary role was conceived for
public and private sector. There was a need to align financial system with
government economic policies. At that time there was government control over
distribution of credit and finance. The main elements of financial organization
in planned economic development are as follows:-
3. Protection of Investors
Lot many acts were passed during this period for protection of investors in
financial markets. The various acts Companies Act, 1956 ; Capital Issues
Control Act, 1947 ; Securities Contract Regulation Act, 1956 ; Monopolies and
Restrictive Trade Practices Act, 1970 ; Foreign Exchange Regulation Act,
1973 ; Securities & Exchange Board of India, 1988.
3. Investors Protection
SEBI is given power to regulate financial markets and the various
intermediaries in the financial markets.