2.1 Financial Systems of India
- Introduction to FS
- Definition: network of financial institutions
- crucial roles: mobilize savings, distributing credit
- Unique Aspects (about india)
- Challenges
- Financial inclusion
- regional disparity
- regulation
- Evolution
- RBI 1935
- Comm banks, NBFCs etc later came out
- Importance
- Support rural and urban sectors
- Facilitate buziness growth
- helps implement govt policies
- ensures access
- Key Institutions
- RBI
- Monetary authority: control inflation and ensure liquidity
- Regulators of Banks: oversees functions of FIs
- Currency Issuers: All currency notes except coins issued by RBI
- Foreign Exhcange Manager: Manage foreign exchange reserves
- Ensure financial stability
- Commercial banks
- Main source of financial services
- Public Sector
- Owned by govt
- SBI, PNB, Bank of Baroda
- Extensive network. especially in rural and semi-urban
- Private Sector
- HDFC,
- efficiency, use of tech
- Importance
- Gives a lot of features
- mobilize savings, and provide credit to individual business
- Giving access to those who don't
- NBFC
- don't have a banking license
- underserved by traditional banks
- grown in microfinance, vehicle loans
- Cannot accept demand deposits
- They rely on borrowings to fund activities
- Insurance Companies
- manage risk
- regulated by IRDAI (Ins Regulatory and Dev authority in India)
- Life insurance
- in the event of death, savings and investment plans
- Non-life
- health, vehicle, property
- Bajan Allianz
- underpenetrated in India
- Provides a safety-net (financial stability)
- Capital Markets
- Raise long-term capital from money
- SEBI (securities and exchange board of India)
- BSE
- NSE
- 1992 est
- Electronic Trading
- Growth of India's corporate sector
- IPO has seen significant activity
- SEBI's role
- Corporate Banks and Regional Rural banks
- rural and semi-urban
- agricultural
- Corporate banks
- RRB
- Promote financial inclusion
- sponsored by larger comm bansk
- mandated to serve rural comm
- Banking System in India
- Structure and types of banks
- Commercial banks (saving acc loans, reg by RBI)
- Cooperative banks (operate in rural and semi-urban areas) regulated by RBI and state government
- RRB (1975 by govt)
- Development banks
- Long term finance: infra, agro, industry
- NABARD
- sidbi
- Foreign Banks
- serve high net worth individuals
- maintain global standards
- Payment Banks
- Paytm & airtel payments bank
- Cannot lend money
- Public vs private
- Public sector banks
- Owned and operated by the government
- Injects capital into government when dealing with non-performing assets
- dominate in terms of share size and outreach
- Private sector banks
- more competitive and consumer focused
- use of tech
- dominate in terms of profitability and innovation
- Role of foreign banks in India
- Cater to high net worth indiv, MNCs
- Citibanks etc
- Trade finance, wealth management, investment banking with global best practicies
- Don't have a large outreach
- Importance of Financial Inclusion
- PMJDY, 2014 (millions of bank accounts opened)
- Access to credit,
- saved from informal money lenders
- Recent reforms
- to improve efficiency
- Bank Consolidations
- Marge weakter public sector banks with its more stable ones
- Bad Bank Proposal
- Transfer bad loans from Comm banks to Loan recovery entity
- Free up comm banking to focus on fresh lending and growth
- Digitization of Banking services
- UPI (NPCI): peer-to-peer and merchant payments
- Challenges
- NPAs
- Overdue for 90 days or more.
- Causes
- poor lending practices
- Overexposure to high risk structures
- delays in project executions
- econ slowdown
- political interference and weak govt structures
- Example: Gross NPAs of banks crossed ₹10 trillion in 2018
- Impact:
- limit lending ability
- increase fiscal burden
- defaulted loans and reduced banks' ability to lend
- On-going battle Govt + RBI
- Technological Disruption
- Cybersecurity threats
- Maintain dat privacy
- Regulatory Compliance
- RBI, SEBI, IRDAI
- Fragmented
- Lack of coordination
- e.g. Overlap SEBI and RBI (confusion about division of responsibities)
- Impact:
- stifle inovation
- lack of trust
- striking right balance between growth and compliance
- Financial Inclusion
- Why?
- large portion is outside.
- PMJDY
- but fails due to financial illetracy
- poor infrastructure
- reliance on informal credit systems
- Example
- WBG Findex Database (2021)
- 20% of India's adult pop is unbanked
- Impact: hampers econ growth,
- vulnerable to financial instability
- Need innovation
- still not there yet
- Fintech disruptions & Cyber risk
- Outpace regulatory frameworks: cybercrime and privacy is a real deal
- Impact:
- Vulnerable & operational risks exists
- Critical to be addressed for sustainable growth
- Global Integration & Volatility
- external shocks: trump
- depends on Foreign investments
- E.g.
- 2013 Sharp depreciation of Re. (Taper Tantrum)
- COVID-19 Pandemic caused global financial markets to plunge
- need to develope mechanisms for managing shocks
- strengthen domestic boand market.
- Opportunities
- Digital transformation & Fintech growth
- innovations like blockchain can transform
- microlending
- aadhar and UPI
- e.g.
- PayTM and PhonePe grew a lot
- Continious innovation can reduce transaction cost and improve efficiency
- Strengthening the coporate bond market
- remains underdevleoped compared to other countries
- diversify financial ecosystem
- Enhance capital access, improve foreign investment
- Impact:
- stress and foster inclusive growth
- Financial Inclusion govt schemes
- Expand reach of financial services
- Leverage tech to offer low-cost savings
- PMJDY: 430 mil bank accounts
- innovations in digital lending
- reduce poverty, improve overall econ stability