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A Project Report On

Role of Financial Institutions in Indian Financial Market


Compiled By:
Swati Srivastava Saumayo Jyoti Seal Neha Srivastava Bhanu Bhargava


Sl.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Particulars Introduction to the Financial Markets Basic Functions of the Indian Financial Market Major Players In Indian Financial Markets. Components of Financial Market. Brief history of the Indian Financial Market Financial Institutions Growth of FIIs in India State Level Institutions National Level Institutions Role of Financial Institutions Financial Regulations Problems and Challenges What are the Solutions Trends and Updates Summary

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Economic development of a nation is reflected by the progress of the various

economic units, broadly classified into corporate sector, government and household sector. While performing their activities, these units will be placed in a surplus/deficit/balanced budgetary situations. There 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 the areas of surplus to the 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.


Financial Market, in very crude terms, is a place where the savings from various
sources like households, government, firms and corporates are mobilized towards those who need it. Alternatively put, financial market is an intermediary which directs funds from the savers (lenders) to the borrowers. In other words, financial market is the place where assets like equities, bonds, currencies, derivatives and stocks are traded.


Financial Institution are establishment that focuses on dealing with financial

transactions, such as investments, loans and deposits. Conventionally, financial institutions are composed of organizations such as banks, trust companies, insurance companies and investment dealers. Almost everyone has deal with a financial institution on a regular basis. Everything from depositing money to taking out loans and exchange currencies must be done through financial institutions.

Basic Functions of the Indian Financial Market:

Financial markets have emerged as one of the biggest markets in the world. It is engaged in a wide range of activities that cater to a large group of people with diverse needs. The Six Functions of the Financial Markets are:

Borrowing & Lending: Financial market transfers fund from one economic agent (saver/lender) to another (borrower) for the purpose of either consumption or investment. Financial markets channel funds from households, firms, governments and foreigners that have saved surplus funds to those who encounter a shortage of funds. Determination of Prices: Prices of the new assets as well as the existing stocks of financial assets are set in financial markets. Assimilation and Co-ordination of Information: It gathers and co-ordinates information regarding the value of financial assets and flow of funds in the economy. Liquidity: The asset holders can sell or liquidate their assets in financial market. Risk Sharing: It distributes the risk associated in any transaction among several participants in an enterprise. Trade in financial markets is partly motivated by the transfer of risk from lenders to borrowers who use the obtained funds to invest. Efficiency: It reduces the cost of transaction and acquiring information.






A financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities(such as precious metals or agricultural goods), and other fungible items of value at low traction cost and at prices that reflect the efficient-market hypothesis. There function is to facilitate people economy in one way or the other exist.

Major Players In Indian Financial Markets.

The Main participants in the Indian financial markets are as Follows:

BANKS: Largest provider of funds to business houses and corporates through accepting deposits. INSURANCE COMPANIES: Issue contracts to individuals or firms with a promise to refund them in future in case of any event and thereby invest these funds in debt, equities, properties, etc. FINANCE COMPANIES: Engages in short to medium term financing for businesses by collecting funds by issuing debentures and borrowing from general public. MERCHANT BANKS: Funded by short term borrowings; lend mainly to corporations for foreign currency and commercial bills financing. COMPANIES: The surplus funds generated from business operations are majorly invested in money market instruments, commercial bills and stocks of other companies. MUTUAL FUNDS: Acquire funds mainly from the general public and invest them in money market, commercial bills and shares. GOVERNMENT: Authorized dealers basically look after the demandsupply operations in financial market. Also works to fill in the gap between the demand and supply of funds.

FOREIGN INSTITUTIONAL INVESTORS : An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. DEPOSITORY PARTICIPANT: They are intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made under the Depositories Act. A DP can offer depositoryrelated services only after obtaining a certificate of registration from SEBI. STOCK EXCHANGES : A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities.

Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies,unit trusts, derivatives, pooled investment products and bonds.

Components of Financial Market.

The Financial Market can be classified into several categories:


CAPITAL MARKET. A market where both government and companies raise long term funds to trade securities on the bond and the stock market. It consists of both the primary market where new issues are distributed among investors, and the secondary markets where already existent securities are traded. COMMODITY MARKET : India commodity market consists of both the retail and the wholesale market in the country. The commodity market in India facilitates multi commodity exchange within and outside the country based on requirements. Commodity trading is one facility that investors can explore for investing their money. MONEY MARKET : The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgage-and assetbacked securities. It provides liquidity funding for the global financial system. Money markets and capital markets are parts of financial markets. DERIVATIVES MARKET : A derivative is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties. INSURANCE MARKET :. The Indian insurance market conventionally focused around life insurance until recently, a various range of other insurance policies covering sectors like medical, automobile, health and other classes falling under general insurance came up, generally provided by the private companies. FOREIGN EXCHANGE MARKET : Specializes in trading of foreign exchange and international currencies.







Indian Financial market is one of the oldest in the world and is considered to be
the fastest growing and best among all the markets of the emerging economies. The history of Indian capital markets dates back 200 years toward the end of the 18th century when India was under the rule of the East India Company. The development of the capital market in India concentrated around Mumbai where no less than 200 to 250 securities brokers were active during the second half of the 19th century. The economic reform process that began in 1991 took place amidst acute crises involving the financial sector: The balance of payments crisis that threatened the international credibility of the country and pushed it to the brink of default; and The grave threat of insolvency confronting the banking system which had for years concealed its problems with the help of defective accounting policies. Large scale pre-emption of resources from the banking system by the government to finance its fiscal deficit; Excessive structural and micro regulation that inhibited financial innovation and increased transaction costs; The financial market in India today is more developed than many other sectors because it was organized long before with the securities exchanges of Mumbai, Ahmadabad and Kolkata were established as early as the 19th century A remarkable feature of the growth of the Indian economy in recent years has been the role played by its securities markets in assisting and fuelling that growth with money rose within the economy. This was in marked contrast to the initial phase of growth in many of the fast growing economies of East Asia that witnessed huge doses of FDI (Foreign Direct Investment) spurring growth in their initial days of market decontrol. During this phase in India much of the organized sector has been affected by high growth as the financial markets played an all-inclusive role in sustaining financial resource mobilization. Many PSUs (Public Sector Undertakings) that decided to offload part of their equity were also helped by the well-organized securities market in India.


Financial Institution are establishment that focuses on dealing with financial

transactions, such as investments, loans and deposits. Conventionally, financial institutions are composed of organizations such as banks, trust companies, insurance companies and investment dealers. Almost everyone has deal with a financial institution on a regular basis. Everything from depositing money to taking out loans and exchange currencies must be done through financial institutions. Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are regulated by the government. Broadly speaking, there are three major types of financial institutions:

Deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies Insurance companies and pension funds; and Brokers, underwriters and investment funds

2. 3.

Financial institutions provide service as intermediaries of financial markets. They are responsible for transferring funds from investors to companies in need of those funds. Financial institutions facilitate the flow of money through the economy. To do so, savings a risk brought to provide funds for loans. Such is the primary means for depository institutions to develop revenue. Should the yield curve become inverse, firms in this arena will offer additional fee-generating services including securities underwriting. Financial institutions can be categorized as follows:

Deposit Taking Institutions Finance and Insurance Institutions Investment Institutions Pension Providing Institutions Risk Management Institutions


At the time of independence in 1947, India's capital market was relatively underdeveloped. Although there was significant demand for new capital, there was a dearth of providers. Merchant bankers and underwriting firms were almost nonexistent and commercial banks were not equipped to provide long-term industrial finance in any significant manner. It was difficult for industry in general to procure sufficient longterm funds in the capital markets. There were no other institutions to supply long-term finance to industry. Traditionally, only short term finance could be availed from commercial banks. SFIs were established to ensure that industry get sufficient long-term funds and in the desired sectors in accordance with planned priorities. Certain particular sections of the industry faced greater difficulties than others in procuring long-term finance. These included (a) Small and medium sized concerns, (b) New concerns set up by new entrepreneurial groups, (c) Specific industries, such as cotton and jute, which required funds for modernization, (d) Concerns involved in innovation and new technological developments, (e) Concerns requiring extra-ordinarily large amounts of finance with a long gestation period, (f) Concerns in backward regions. SFIs were established to meet the long-term financial requirement of such concerns, on economic and social ground. In general it can be said that the gap between the demand for and supply of industrial finance is sought to be filled through term loans by development financial institutions. Due to this role, they have been called gap-fillers. It is against this backdrop that the government established The Industrial Finance Corporation of India (IFCI) on July 1, 1948, as the first Development Financial Institution in the country to cater to the long-term finance needs of the industrial sector. The newly-established DFI was provided access to low-cost funds through

the central bank's Statutory Liquidity Ratio or SLR which in turn enabled it to provide loans and advances to corporate borrowers at concessional rates. By the early 1990s, it was recognized that there was need for greater flexibility to respond to the changing financial system. It was also felt that IFCI should directly access the capital markets for its funds needs. It is with this objective that the constitution of IFCI was changed in 1993 from a statutory corporation to a company under the Indian Companies Act, 1956. Subsequently, the name of the company was also changed to "IFCI Limited" with effect from October 1999.. 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. The revolution of the equity market The equity and income scandal of 1992, and the desire of policy makers to encourage foreign investors in the Indian equity market, in the early 1990s, helped in reopening long-standing policy questions about the equity market. From 1993 to 2001, the Ministry of Finance and SEBI led a strong reforms report aiming at a fundamental transformation of the equity market. The changes on the equity market from December 1993 to June 2001 were quite dramatic. India's starting condition, in the early 1990s, was one with an almost entirely government-owned banking system, where entry by foreign or private banks was blocked. In this environment, an important experiment in easing entry barriers took place from 1994 to 2004, where a total of 12 `new private banks' were permitted to come into being.

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. They include all India development banks like IDBI, SIDBI, IFCI Ltd, IIBI; specialised financial institutions like IVCF, ICICI Venture Funds Ltd, TFCI ; investment institutions like LIC, GIC, UTI; etc.

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.

Industrial Development Bank of India (IDBI):- was established in July 1964 as an apex financial institution for industrial development in the country. It caters to the diversified needs of medium and large scale industries in the form of financial assistance, both direct and indirect. Direct assistance is provided by way of project loans, underwriting of and direct subscription to industrial securities, soft loans, technical refund loans, etc. While, indirect assistance is in the form of refinance facilities to industrial concerns. Industrial Finance Corporation of India Ltd (IFCI Ltd):- was the first development finance institution set up in 1948 under the IFCI Act in order to pioneer long-term institutional credit to medium and large industries. It aims to provide financial assistance to industry by way of rupee and foreign currency loans, underwrites/subscribes the issue of stocks, shares, bonds and debentures of industrial concerns, etc. It has also diversified its activities in the field of merchant banking, syndication of loans, formulation of rehabilitation programmes, assignments relating to amalgamations and mergers, etc. Small Industries Development Bank of India (SIDBI):- was set up by the Government of India in April 1990, as a wholly owned subsidiary of IDBI. It is the principal financial institution for promotion, financing and development of small scale industries in the economy. It aims to empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process

of economic growth, employment generation and balanced regional development.

Industrial Investment Bank of India Ltd (IIBI):- was set up in 1985 under the Industrial reconstruction Bank of India Act, 1984, as the principal credit and reconstruction agency for sick industrial units. It was converted into IIBI on March 17, 1997, as a full-fledged development financial institution. It assists industry mainly in medium and large sector through wide ranging products and services. Besides project finance, IIBI also provides short duration non-project assetbacked financing in the form of underwriting/direct subscription, deferred payment guarantees and working capital/other short-term loans to companies to meet their fund requirements.


Specialised Financial Institutions (SFIs):- 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.

IFCI Venture Capital Funds Ltd (IVCF):- formerly known as Risk Capital & Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative product/process/technology. Initially, it started providing financial assistance by way of soft loans to promoters under its 'Risk Capital Scheme' . Since 1988, it also started providing finance under 'Technology Finance and Development Scheme' to projects for commercialisation of indigenous technology for new processes, products, market or services. Over the years, it has acquired great deal of experience in investing in technology-oriented projects. ICICI Venture Funds Ltd:- formerly known as Technology Development & Information Company of India Limited (TDICI), was founded in 1988 as a joint venture with the Unit Trust of India. Subsequently, it became a fully owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project

finance for new technology ventures. The industrial units assisted by it are in the fields of computer, chemicals/polymers, drugs, diagnostics and vaccines, biotechnology, environmental engineering, etc.

Tourism Finance Corporation of India Ltd. (TFCI):- A specialised financial institution set up by the Government of India for promotion and growth of tourist industry in the country. Apart from conventional tourism projects, it provides financial assistance for non-conventional tourism projects like amusement parks, ropeways, car rental services, ferries for inland water transport, etc.


Investment Institutions:- 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.

Life Insurance Corporation of India (LIC):- was established in 1956 as a wholly-owned corporation of the Government of India. It was formed by the Life Insurance Corporation Act,1956 , with the objective of spreading life insurance much more widely and in particular to the rural area. It also extends assistance for development of infrastructure facilities like housing, rural electrification, water supply, sewerage, etc. In addition, it extends resource support to other financial institutions through subscription to their shares and bonds, etc. The Life Insurance Corporation of India also transacts business abroad and has offices in Fiji, Mauritius and United Kingdom . Besides the branch operations, the Corporation has established overseas subsidiaries jointly with reputed local partners in Bahrain, Nepal and Sri Lanka. Unit Trust of India (UTI):- It was set up as a body corporate under the UTI Act, 1963, with a view to encourage savings and investment. It mobilises savings of small investors through sale of units and channelises them into corporate investments mainly by way of secondary capital market operations. Thus, its primary objective is to stimulate and pool the savings of the middle and low income groups

and enable them to share the benefits of the rapidly growing industrialisation in the country. In December 2002, the UTI Act, 1963 was repealed with the passage of Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002, paving the way for the bifurcation of UTI into 2 entities, UTI-I and UTI-II with effect from 1st February 2003.

General Insurance Corporation of India (GIC) :- was formed in pursuance of the General Insurance Business (Nationalisation) Act, 1972(GIBNA ), for the purpose of superintending, controlling and carrying on the business of general insurance or non-life insurance. Initially, GIC had four subsidiary branches, namely, National Insurance Company Ltd ,The New India Assurance Company Ltd , The Oriental Insurance Company Ltd and United India Insurance Company Ltd . But these branches were delinked from GIC in 2000 to form an association known as 'GIPSA' (General Insurance Public Sector Association).

State Level Institutions Several financial institutions have been set up at the State level which supplement
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. They broadly consist of 'State financial corporations' and 'State industrial development corporations'.

State Financial Corporations (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:-

State Industrial Development Corporations (SIDCs) :- 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.


Financial institutions play an extremely important role in economic development.

Financial institutions cater to important needs of society such as taking care of small savings at reasonable rates. Everyday working men and women have the option of putting their savings into a number of alternatives such as Government small saving schemes, deposits into a saving account provided by their bank, recurring, deposits, time deposits and also the alternative option of investing in mutual funds or stocks. Financial institutions also undertake modern functions that could not have been done 20 years or so ago. The relatively new invention of Internet banking allows customers to access their saving and current accounts, manage their money and even make payments without ever having to set foot in the banks building. This and ATMs have completely revolutionized the way that people can access their money. Online payments can also be made which saves the customers time and energy. In the modern day economy when people with hectic lifestyles dont have the time to stand in payment queues all day, financial institutions can only be commended for providing this convenient way of payment. Financial institutions must also offer an extremely efficient service by developing themselves to make the best use of the credit in their systems. A decent financial institution must make sure that they cater to the all the needs of investors by making high amounts of capital for the big and expensive projects that are being undertaken by the industrial and service sectors. Although it is not just the big people that the financial institutions need to be backing. The small companies and independent businesses must also have credit backing them if they are to expand and grow for the good of the countrys economy. This makes the subject of credit availability by financial institutions an extremely important issue.

The Role of Financial Institutions can be categorized as:

As Risk Management Institutions:

There are number of reasons which motivate management to concern itself with risk and embark upon a careful assessment of both the level of risk associated with any financial product and potential risk mitigation techniques. Due to managerial self-interest, tax effects, the cost of financial distress, capital market imperfections. In each case, the volatility of profit leads to a lower value to at least some of the firms stakeholders.

As a Pension Fund Provider

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. The financial institutions can form long-term relationships with borrowers, which reduce information asymmetry and hence moral hazard. Apart from economies of scale (which apply equally to institutional investors) these considerations have arisen in the literature mainly for debt finance and for banks. Whereas the importance of information asymmetries and incomplete contracts is equally recognized for equity finance.

As Investment Institutions
The main role of the financial institutions in India in respect to foreign investments is to aid foreign investors in investment activities in India. The funds from overseas countries come in two forms: Foreign direct Investments and Joint Ventures of the foreign companies with Indian companies. SFIs are institutions set up mainly by the government for providing medium and long-term financial assistance to industry. As these institutions provide developmental finance, that is, finance for investment in fixed assets, they are also known as development banks or development financial institutions.

Finance and Insurance Institutions

When purchasing insurance from an insurance company, taking out an installment loan on your new car from a finance company, buying a share of common stock with the help of a broker, or contributing to the pension fund with FNPF, you are dealing with NBFIs. In our economy, NBFIs also play an important role in mobilizing financial savings. However, such institutions differ from commercial banks in that they are not authorized to accept or demand deposits from the public that can be withdrawn by cheques.

Financial Regulations
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or non-government organization. The aims of financial regulators are usually:

To prevent cases of market manipulation, such as insider trading. To ensure competence of providers of financial services. To protect clients, and investigate complaints. To maintain confidence in the financial system. To reduce violations under laws.


In most cases, financial regulatory authorities regulate all financial activities. But in some cases, there are specific authorities to regulate each sector of the finance industry, mainly banking, securities, insurance and pensions markets, but in some cases also commodities, futures, forwards, etc:


The Reserve Bank of India is the main regulator for the money market. It controls and regulates the G-Secs market. RBI also fulfills several other important objectives such as managing the borrowing programme for the Government of India, controlling inflation, ensuring adequate credit at reasonable costs to various sectors of the economy, managing the foreign exchange reserves of the country and ensuring a stable currency environment. RBI controls the issuance of new banking licences to banks. It controls the manner in which various scheduled banks raise money from

depositors. Further, it controls the deployment of money through its policies on CRR, SLR, priority sector lending, export refinancing, guidelines on investment assets, etc. RBI also administers the interest rate policy. Its regulatory involvement in the Indian Capital Markets is primarily of debt management through primary dealers, foreign exchange control and liquidity support to market participants. The RBI regulates participants in the securities markets when a foreign transaction is involved. Transactions which include Indian issuers issuing of security outside India, such as GDRs and ADRs, and Financial Institutional Investors (FIIs) or Foreign Brokers selling, buying or dealing in Indian Securities need the permission of RBI. Over the years, RBI has moved slowly towards a regime of marketdetermined controls.


The regulator for the Indian corporate debt market is the Securities and Exchange Board of India (SEBI). SEBI controls the bond market in cases where entities, especially corporates, raise money from public through public issues. It regulates the manner in which money is raised and to ensure a fair play for the retail investor. It forces the issuer to make the retail investor aware of the risks inherent in the investment and its disclosure norms. SEBI is also a regulator for the mutual funds and regulates the entry of new mutual funds in the industry. It also regulates the instruments in which these mutual funds can invest. SEBI also regulates the investments of Foreign Institutional Investors.

Functions of SEBI:

Regulates Capital Market

Checks Trading of securities. Checks the malpractices in securities market. It enhances investor's knowledge on market by providing education. It regulates the stockbrokers and sub-brokers. To promote Research and Investigation

3. Forward Markets Commission (FMC)

The Forward Markets Commission (FMC) is the chief regulator of forwards and futures markets in India. It is headquartered in Mumbai and unusually for a financial regulatory agency is overseen by the Ministry of Consumer Affairs. The functions of the Forward Markets Commission are as follows:

To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952. To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act. To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods; To make recommendations generally with a view to improving the organization and working of forward markets;

To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considers it necessary.


Insurance Regulatory and Development Authority (IRDA)

The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. Mission of IRDA as stated in the act is "to protect the interests of the Policyholders, to regulate, promote and ensure orderly growth of the Insurance industry and for matters connected therewith or incidental thereto." The regulating function of IRDA includes regulating investment of funds by insurance companies; regulating maintenance of margin of solvency; adjudication of disputes between insurers and intermediaries or insurance intermediaries; supervising the functioning of the Tariff Advisory Committee; specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause, specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and exercising such other powers as may be prescribed from time to time.


Pension Fund Regulatory and Development Authority (PFRDA)

Pension Fund Regulatory and Development Authority was established by the Government of India on 23rd August 2003 to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto.


Foreign Exchange Management Act (FEMA)

The Foreign Exchange Management Act was passed in 1999 by the parliament of India. The Foreign Exchange Management Act applies to all residents of the country of India and is regulated by the Reserve Bank of India. It also applies to residents of India who live outside of the country conducting relevant transactions under the law's purview.

The Foreign Exchange Management Act regulates (through the Reserve Bank of India) actions ranging from the transfer of foreign securities by residents of India to borrowing or lending done on a foreign exchange to deposits between citizens of India and outside residents. Penalties for misconduct under the Foreign Exchange Management Act can be up to three times the monetary value of the offending transaction.


The major problems and challenges concerning the financial sector are:

The level of Non-performing assets of public sector banks in March 2012, as a proportion of advances, was estimated at 14.3 per cent gross and 7.4 per cent net which was very high as compared with other countries. The magnitude of the problem can be identified from the fact that there are more than 1,50,000 Crore nonperforming assets in the entire banking sector and is increasing.

Education and lack of awareness has boosted up the problem for the financial institutions. Moreover more than 41% of the Indians do not have bank accounts which is a live example about the Lack of awareness among the masses.

A recent report by Crisil has highlighted that while Indian banks are taking steps towards improved disclosures which meet the RBI regulatory requirements, Indian banks have a long way to go to come up to International Best Practices. A few banks are attempting to achieve international disclosure standards in the context of their plans to raise capital from international markets.

Since the government is not willing to provide capital to some banks, only the relatively strong banks will be able to raise capital from the market and, therefore, those banks will grow at a faster pace than the weaker banks and the banking system would eventually become stronger.

Public ownership- Roughly 80% of banking, 95% of insurance and 100% of pensions is held in public sector .Within insurance, it is possible to establish a private insurance company with no more than 26% of foreign ownership.

What are the Solutions ? Critical financial infrastructure is a special middle zone between government
and ordinary private competitive financials. It includes exchanges, depositories, clearing corporations, and the payments system. These require a combination

of top end management capabilities to achieve high technology and innovation, alongside a very high mission criticality both in terms of technological and in terms of governance failures. The traditional implementation by government monopolies yields poor results, both because governments lack the operational capabilities for effectively running these complex organisations, because there is a conflict of interest between service provision by the government and Private Bodies. This suggests that the primary focus in banking should be upon improving competition by removing entry barriers. This requires addressing six dimensions of entry barriers in banking: 1. Barriers against dedicated ATM network companies, 2. Barriers against formation of new private banks, 3.Barriers against branch expansion of private and foreign banks, 4.Barriers against a greater role for new technologies of mobile phones and the Internet in retail payments, 5. Barriers against money market mutual funds, 6. Barriers against securitisation.

Trends and Reports

There is a general economic decline during recession. The economy has a tremendous setback. The purchase of the people comes down due to low salaries or

lack of sufficient income. This results in slump in market with goods and services not being availed of by people. Production slows down and in turn prices go up. In fact during recession, many firms are forced to sell their products at throw-away prices and suffer from losses as a result. Recession is something to be dreaded by producers as well as consumers. Both suffer during these hard times. Both need each other. In case, consumers do not have the purchasing power, then production suffers. Less production means less profits for producers who will find it difficult to run their business houses. The economic scenario during recession is pathetic. It is interesting to note how the economy suffers during such traumatic times as it affects us all.

Recession impact on the economy

Slump in the market Goods and services are difficult to be sold as the purchasing power of the people comes down. Stock prices come down Investment suffers. The industrial production is badly affected as investors avoid investing in companies that might suffer losses during recession. Bigger companies are able to withstand the setbacks but smaller companies have a tough time and some may end up closing down. Increase in unemployment People are thrown out of jobs. They are left in the lurch. They are unable to meet both ends. Many goods and services are not within their reach. Depression Recession causes depression if it persists for a long time. Negative trends are visible in the stock market and rapid unemployment is there. Companies need to be bailed out by the government. Public spending suffers a setback. National debts on the rise Increase in national debts means less money can be spent by the government on development. Money gets diverted in bailing out companies. The recent recession in the U.S. indicates how banks have to depend upon federal aid for their survival. Taxpayers money is being spent in giving these banks a boost.

Recession is definitely bad for economic growth and development. It slows down the economy. Investors hesitate to invest, and producers are unable to churn out

products. Consumer lack the necessary money due to unemployment and cannot therefore buy goods available in the market.