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FINANCIAL SYSTEMS
Financial systems are of crucial significance to capital formationThe main function of financial systems is the collection of savings and their distribution for industrial investment thereby stimulating the capital formation and accelerating the process of economic growth.
FINANCIAL SYSTEMS
The process of capital formation involves three activities Savings the ability by which claims to resources are set aside and become available for other purposes Finance- the activity by which claims to resources are either assembled from those released by domestic savings, obtained from abroad or created as bank deposits or notes and then placed in the hands of the investors
FINANCIAL SYSTEMS
InvestmentsThe activity by which the resources are actually committed to production. The effective mobilization of savings, the efficiency of the financial organization/system and the channelization of these savings into the most productive forms of investment have a great bearing on the contribution of capital formation to economic development.
ORGANISATION
The organization/structure of the financial system consists of the following Financial intermediaries Financial markets Financial assets/Instruments
Financial Intermediaries
Banks Mutual funds Insurance organization NBFCs Asset finance companies Housing finance companies Venture capital funds Stock Broking Firms
Financial Markets
Financial markets perform a crucial function in the savings-investment process as facilitating organizations. They are not sources of finance but they are a link between the savers and investors both individual as well as institutional. Financial Markets Money markets Capital /Securities markets
Financial Assets/Instruments
Financial instruments represent claims on a stream of income and assets of another economic unit and are held as a store of value and for the return that is expected. Equity shares Debentures
After the early nineties responding to the requirements of liberalised/deregulated/globalised economic environment.
Nationalization
The nationalisation of the Reserve Bank of India in 1948 marked the beginning of the transfer of important financial intermediaries to Government control. This was followed in 1956 by the setting up of the State Bank of India by taking over the then Imperial Bank of India.
Nationalization
In 1956 ,245 Life insurance companies were nationalized and merged in to the state owned Life Insurance Corporation of India (LIC). In 1969 fourteen commercial banks were brought under the direct ownership of the Government of India, six more commercial banks were brought under the public ownership. General insurance corporation (GIC) was set up in 1972
New Institutions
In addition to nationalisation ,the control of public authorities on the sources of credit and finance led to the creation of a number of new institutions in the Public Sector. Setting up of national/regional Development banks Creation of an investment trust- the Unit Trust of India
RBI
Establishment The Reserve Bank of India was established on April 1, 1935 . The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
RBI
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."
Nationalized Banks
The broad aim of Nationalization wereTo control the heights of the economy and meet progressively and serve better the needs of development of the economy in conformity with national policy and objectives. 14 major banks with individual deposits exceeding Rs.50 crore were nationalized on 19 July 1969
Nationalized Banks
ObjectiveIt was expected that the nationalized banks would Endeavour to ensure that the needs of productive efforts of diverse kinds, irrespective of size and social status of the borrowers and in particular those of farmers, small scale industries and self employed professional groups, are met in increasing measure and to create fresh opportunities for backward areas in the different parts of the country.
Foreign Banks
RBI allowed the entry of foreign banks as branches subject to reciprocity and other prudential considerations. Foreign banks/companies have also been permitted to invest up to 20 percent as a technical collaborator (with overall 40 percent ceiling) in a new private sector banks, subject to government approval, provided they do not have presence in India.
Foreign Banks
Foreign equity in new Indian private banks are allowed in accordance with the foreign investment policy. Since 1992 , around 19 new foreign banks with 47 branches have been allowed. It is mandatory for the foreign banks to achieve the minimum target of 32 percent in priority sector lending
PIBM
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