India’s Financial System
In any modern financial system, there are 6 broad types of institutions. They are
1. Commercial banks
2. Specialized banking institutions
3. Mutual credit organizations
4. Informal financing organizations
5. Organized securities exchanges
6. Insurance and pension funds
India’s financial system is similar to those found in most Commonwealth countries with all financial institutions licensed by the central government agencies.
1. Commercial Banks
The banks are divided into 2 groups, the more significant public-sector banks and the important private-sector banks. They are not limited to transactions within their respective domains.
There are about 224 dominant public-sector banks with a large number of branches throughout the country, which account for 2/3 of the total banking activities. 196 of them are regional rural banks and cooperative banks. Reserve Bank of India (RBI), India’s central bank, has direct responsibility for the licensing and supervision of banks in general. It also has the responsibility for the smooth functioning of the entire financial system. The other 1/3 of the total banking activities is accounted for by 53 private-sector banks.
2. Specialized Banking Institutions
These institutions specialized in the financing activities for the development, trade and agricultural sectors. Examples are the largest Industrial Development Bank of India and second largest Industrial Credit and Investment Corp of India (ICICI).
3. Mutual Credit Organizations
Non-banking financial companies have registered phenomenal growth like the government-controlled Unit Trust of India (UTI). This public sector for mutual funds grew at a healthy rate of approximately 8% from 1989 to 1990.
The private mutual funds sector, which is dominated by foreign firms and is making a large dent in the huge market share of the public funds. Some foreign banks, such as ANZ Grindlays and ABN Amro, have themselves entered the asset-management business. Others have tied up with Indian institutions, such as IDBI, a development bank and HDFC, a mortgage bank. Several foreign insurance companies such as Sun Life, Zurich, Prudential, Principal and Standard Life are also keen to enter the Indian asset management business.
4. Informal Financing Organizations
Informal financing enterprises include many lending institutions, which are traditional sources of funds for commercial enterprises. They are concerned with mobilizing savings, intermediation and maturity transformation. Their transparency and efficiency increases the orderly working of the economy and the reforms put in place from 1992-1994 are aimed at achieving transparency for investor protection, enhancing efficiency and upgrading customer services.
5. Organized Securities Exchanges
There are 14 organized exchanges for money, bills, bonds and stocks in India. They are Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad, Madhya Pradesh, Bangalore, Cochin, Pune, Uttar Pradesh, Ludhiana, Guivahati and Mangalore.
Citibank has launched a large country fund to take advantage of this sector’s growth potential. However, due to poor market sentiment throughout the world, the fund retreated by 7% in the early 1995. As of August 1994, the share market capitalization was US$150 billion which makes it the 4th largest emerging market after Korea, Taiwan and Malaysia, in this order. A return of 35.4% over the period 1986 to 1992 made it an attractive market for country diversification.
6. Insurance and Pension Funds
A large chunk of household savings of about 3.7 trillion rupees is in postal savings and pension funds, on which the government guarantees a high fixed return. However, the burden of providing that subsidy is now proving to be too heavy and further aggravating India’s fiscal deficit.
