Indian Financial System
Financial Institutions
- Banking
- Non-banking Finance
- Investment
- Insurance
- Pension Fund
- IFSC Units
Financial Markets
- Capital Market
- Money Market
Financial Instruments
- Cash Instruments
- Derivative Instruments
Financial Services
- Asset Based
- Fee Based
Regulators
- Ministry of Finance
- Ministry of Corporate Affairs
- RBI
- SEBI
- IRDA
- PFRDA
- IFSCA
Ministry of Corporate Affairs:
- i. relief of poverty,
- ii. education,
- iii. advancement of religion and
- iv. other purposes beneficial to the community not coming under any of the preceding heads.
Indian Financial System
Ministry of Finance and Reserve Bank of India
Reserve Bank of India - Regulator of Money Market
| Attribute | Details |
|---|---|
| Name | Reserve Bank of India (RBI) |
| Established | 1st April 1935, under the Reserve Bank of India Act, 1934 |
| Headquarters | Mumbai |
| Origin | Set up based on recommendations of the Hilton Young Commission |
| Governor | [Current Governor] |
| Preamble | It is expedient to constitute a Reserve Bank for India to regulate the issue of Bank notes and the 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. |
Ministry of Finance - Departments
- Department of Economic Affairs
- Budget Division
- Economic Division
- Financial Market Division (Oversees SEBI, IFSCA)
- Department of Revenue
- Department of Expenditure
- Department of Investment and Public Asset Management
- Department of Financial Services
- Banking
- Insurance
- Pension
- Department of Public Enterprises
Acts Administered by the RBI
1. Reserve Bank of India Act, 1934
PREAMBLE – It is expedient to constitute a Reserve Bank for India to regulate the issue of Bank notes and the 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.
Public Debt Act, 1944
An Act to consolidate and amend the law relating to Government securities and to the management by the Reserve Bank of India of the public debt of the Government.
Government Securities Act, 2006
An Act to consolidate and amend the law relating to Government securities and its management by the Reserve Bank of India.
Foreign Exchange Management Act, 1999
An Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
Banking Regulation Act, 1949
An Act to consolidate and amend the law relating to banking
Deposit Insurance and Credit Guarantee Corporation Act, 1961
An Act to provide for the establishment of a corporation for the purpose of insurance of deposits and guaranteeing of credit facilities.
Export-Import Bank of India Act, 1981
An Act to establish a corporation to be known as the Export-Import Bank of India for providing financial assistance to exporters and importers, and for functioning as the principal financial institution for co-ordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country’s international trade.
National Bank for Agriculture and Rural Development Act, 1981
An Act to establish a development bank to be known as the National Bank for Agriculture and Rural Development for providing and regulating credit and other facilities for the promotion and development of agriculture [micro-enterprises, small enterprises and medium enterprises, cottage and village industries, handlooms], handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting integrated rural development and securing prosperity of rural areas.
National Housing Bank Act, 1987
An Act to establish a bank to be known as the National Housing bank to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support to such institutions.
National Bank for Financing Infrastructure and Development Act, 2021
An Act to establish the National Bank for Financing Infrastructure and Development to support the development of long term non-recourse infrastructure financing in India including development of the bonds and derivatives markets necessary for infrastructure financing and to carry on the business of financing infrastructure.
THE SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA ACT, 1989
An Act to establish the Small Industries Development Bank of India as the principal financial institution for the promotion, financing and development of industry in the small-scale sector and to co-ordinate the functions of the institutions engaged in the promotion, financing or developing industry in the small-scale sector.
Payment and Settlement Systems Act, 2007
An Act to provide for the regulation and supervision of payment systems in India and to designate the Reserve Bank of India as the authority for that purpose.
Factoring Regulation Act, 2011
An Act to provide for and regulate assignment of receivables by making provision for registration there for and rights and obligations of parties to contract for assignment of receivables.
Credit Information Companies (Regulation) Act, 2005
An Act to provide for regulation of credit information companies and to facilitate efficient distribution of credit and for matters connected therewith or incidental thereto.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
An Act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a Central database of security interests created on property rights.
(CERSAI is an online platform that facilitates the registration and tracking of transactions related tosecurity interests in movable and immovable properties.)
Functions of the Reserve Bank:
Monetary policy
Monetary policy refers to the use of monetary instruments under the control of the central bank to influence variables, such as interest rates, money supply and availability of credit, with a view to achieving the objectives of the policy.
2. Market operations
Market operations of the RBI are divided in two sections-
Monetary Policy Operations
The objective of monetary policy operations is to enable the transmission of monetary policy to the financial system
b) Foreign Exchange Operations of India
The Rupee exchange rate is determined by the forces of market demand and supply. The objective and purpose of exchange rate management is to ensure that economic fundamentals are reflected in the external value of the rupee.
Regulation and supervision of the banking and non-banking financial institutions, including credit information companies
Regulation of money, forex and government securities markets as also certain financial derivatives
The Money market, Government Securities market, Foreign Exchange market, certain elements of the Corporate Debt market and derivatives relating to interest rate, credit and foreign exchange fall under the regulatory domain of the Reserve Bank
Payment and settlement systems
The PSS Act, 2007 provides for the regulation and supervision of payment systems in India and designates the Reserve Bank of India (Reserve Bank) as the authority for that purpose and all related matters. RBI Play three main roles in the Payment and Settlement Systems viz. service provider, regulator and user.
Currency management
Under Section 22 of the RBI Act, 1934 “Right to Issue Bank notes”, RBI has the sole right to issue bank notes of various denominations except one rupee notes, which is issued by the Government of India. Currency includes the bank notes issued by RBI in various denominations from time to time ranging between ₹2 to ₹10,000 (Section 24 of RBI Act) and Rupee coins in the denominations of 1 (including ₹1 notes), 2, 5 ,10 and 20 issued by the Government of India through RBI. The responsibility for minting coins vests with the Government of India, the coins are issued for circulation only through the Reserve Bank of India under the provisions of Section 38 and Section 39 of RBI Act, 1934.
Banker to banks and Banker to the Central and State Governments
Banker to Banks
As a banker to banks, the Reserve Bank fulfills this role. While discharging this role, RBI focusses on
enabling smooth, swift and seamless clearing and settlement of inter-bank transactions
- providing an efficient means of funds transfer for banks.enabling banks to maintain their accounts with the Reserve Bank for statutory cash reserve requirements and
- maintenance of transaction balances. acting as a lender of last resort in case of need.
As a lender of last resort, it can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank Note – Current accounts are opened in the E-Kuber system (CBS) at the Regional Offices of RBI.
Banker to Governments
RBI acts as a bank to both the central as well as the state government. It provides them the short-term loan whenever necessary. The government deposit accounts are also maintained by the RBI. On behalf of the government, it collects the receipts of the funds and makes the payment.
Debt and cash management for Central and State Governments
As a debt manager to the Governments Reserve Bank undertakes to float loans and manage them on behalf of the Governments. It provides Ways and Means Advances to the Governments, to meet temporary mismatches in their receipts and payments. It also arranges for investments of surplus cash balances of the Governments.
Management of public debt on behalf of the Central and the State Governments involves issue of new rupee loans, payment of interest and repayment of these loans and other operational matters such as debt certificates and their registration.
Foreign exchange management—current and capital account management
As enshrined in the Preamble of the Act, the objective of FEMA (Foreign Exchange Management Act (FEMA) 1999) is to facilitate external trade and payments and to promote orderly development and maintenane of foreign exchange market in India.
Foreign exchange transactions into two broad categories
A “capital account transaction” is a transaction which
- • Alters the assets and liabilities outside India of a person resident in India or
- • Alters the assets and liabilities in India of a person resident outside India.
- • Liabilities include contingent liabilities also.
- • Example – Foreign Direct investment, Foreign Portfolio Investment External Commercial Borrowings, Non-resident deposits, investment in immovable property, etc.
- A “current account transaction” is transaction other than a capital account transaction i.e. mostly of a revenue nature.
- Example – Exports, Imports, Personal remittances, Gift, Income etc.
Management of foreign exchange reserves
The Reserve Bank of India Act 1934 contains the enabling provisions for the RBI to act as the custodian of foreign exchange reserves, and manage reserves with defined objectives.
Forex Reserves are the end consequence of current account and capital account dynamics.
Financial Inclusion and Development
“Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost”.
Development of Institutions
The Reserve Bank’s developmental role includes ensuring credit to productive sectors of the economy, creating institutions to build financial infrastructure, and expanding access to affordable financial services.
Research, Surveys and Data Dissemination
The RBI disseminates research analysis carried out by its own employees through RBI Bulletin, RBI Occasional Papers and RBI Working Paper series.
Securities and Exchange Board of India:
Securities and Exchange Board of India (SEBI) was first established in 1988 as a non-statutory body for regulating the securities market. (Administrative Resolution of the Government)
It became an autonomous body on 30 January 1992 and was accorded statutory powers with the passing of the SEBI Act 1992 by the Indian Parliament.
SEBI – Securities and Exchange Board of India
Est. – 12th April, 1992 (Securities and Exchange Board of India Act, 1992.)
Headquarters – Mumbai
Committee – Narasimham Committee
Chairman –
PREAMBLE – An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market.
Acts related to functioning of securities Market
1. Securities and Exchange Board of India Act, 1992
An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market.
2. Companies Act,2013
As per section 24 of Companies Act’2013 – Power of Securities and Exchange Board to regulate issue and transfer of securities, etc. The provisions of Companies Act’2013, related to PROSPECTUS AND ALLOTMENT OF SECURITIES,
SHARE CAPITAL AND DEBENTURES and in Section 127(Punishment for failure to distribute dividends)
- shall,
- (a) in so far as they relate to
- (i) issue and transfer of securities; and
- (ii) non-payment of dividend,
- by listed companies or those companies which intend to get their securities listed on any recognised
- stock exchange in India be administered by the Securities and Exchange Board.
- (b) in any other case, be administered by the Central Government (Ministry of corporate affairs)
- 3. Securities Contracts (Regulation) Act, 1956
- “securities” include-
- i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of like nature in or of any incorporated company or other body corporate;
ia) derivative
- ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes
ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;]
- id) units or any other such instrument issued to the investors under any mutual fund scheme
- ii) Government securities;
- iii) such other instruments as may be declared by the Central Government to be securities; and
- iv) rights or interest in securities
Depositories Act 1996
An Act to provide for regulation of depositories in securities.
“depository” means a company formed and registered under the Companies Act and which has been granted a certificate of registration under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992.
Notes –
- i. A Depository refers to an entity that holds financial securities in a dematerialized form.
- ii. Dematerialization (DEMAT) is the move from physical certificates to electronic bookkeeping.
- “registered owner” means a depository whose name is entered as such in the register of the issuer.
- “beneficial owner” means a person whose name is recorded as such with a depository;
Securities Laws (Amendment) Act, 2014
An Act further to amend the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996.
Functions of SEBI
As per section 11 of SEBI Act’1992 – Functions of SEBI
- (a) regulating the business in stock exchanges and any other securities markets;
- (b) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, registrars to an issue, trustees of trust deeds, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner;
- (ba) registering and regulating the working of the depositories, participants, custodians of securities, foreign
- institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf;
- (c) registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds;
- (d) promoting and regulating self-regulatory organisations;
- (e) prohibiting fraudulent and unfair trade practices relating to securities markets;
- (f) promoting investors’ education and training of intermediaries of securities markets;
- (g) prohibiting insider trading in securities;
- (h) regulating substantial acquisition of shares and take over of companies;
- (i) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self- regulatory organisations in the securities market;
- calling for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act which, in the opinion of the Board, shall be relevant to any investigation or inquiry by the Board in respect of any transaction in
- securities;]
- calling for information from, or furnishing information to, other authorities, whether in India or outside India, having functions similar to those of the Board, in the matters relating to the prevention or detection of violations in respect of securities laws, subject to the provisions of other laws for the time being in force in this regard:
- Provided that the Board, for the purpose of furnishing any information to any authority outside India, may enter into an arrangement or agreement or understanding with such authority with the prior approval of the Central Government;
- (j) performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), as may be delegated to it by the Central Government;
- (k) levying fees or other charges for carrying out the purposes of this section;
- (l) conducting research for the above purposes;
- (la) calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions
The Insurance Regulatory and Development Authority
IRDA – The Insurance Regulatory and Development Authority
Act passed on. – 29th Dec – 1999 (Insurance Regulatory and Development Authority Act, 1999)
- ➢ Provisions of Act became applicable on:19th April, 2000 (IRDA established)
- ➢ Headquarters – Hyderabad
- ➢ Committee – RN Malhotra Committee
- ➢ Chairman –
- ➢ PREAMBLE – An Act to provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalisation) Act, 1972.
- ➢ Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury.
Acts related to functioning of Insurance Sector :
THE INSURANCE ACT, 1938
- An Act to consolidate and amend the law relating to the business of insurance. THE LIFE INSURANCE CORPORATION ACT, 1956
- An Act to provide for the nationalisation of life insurance business in India by transferring all such business to a Corporation established for the purpose and to provide for the regulation and control of the business of the Corporation.
- An Act to provide for the acquisition and transfer of shares of Indian insurance companies and undertakings of other existing insurers in order to serve better the needs of the economy by securing the development of general insurance business in the best interests of the community and to ensure that the operation of the economic system does not result in the concentration of wealth to the common detriment, for the regulation and control of such business.
- An Act to provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalisation) Act, 1972
The Actuaries Act, 2006
- The Institute of Actuaries of India (IAI) is a statutory body established by an Act of Parliament, viz. The Actuaries Act, 2006 for regulating the profession of Actuaries in India. The nodal ministry for the Institute is Department of Financial Services, Ministry of Finance.
Functions of IRDA
Section 14 of IRDA Act – Duties, powers and functions of Authority.
1. Duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business.
Powers and functions of authority shall Include.
a. issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration;
b. protection of the interests of the policy-holders in matters concerning assigning of policy,nomination by policy-holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance
c. specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents
d. specifying the code of conduct for surveyors and loss assessors
e. promoting efficiency in the conduct of insurance business
f. promoting and regulating professional organisations connected with the insurance and re- insurance business;
g. levying fees and other charges for carrying out the purposes of this Act;
h. calling for information from, undertaking inspection of, conducting enquiries and investigations
including audit of the insurers, intermediaries, insurance intermediaries and other organisations connected with the insurance business;
i. specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries;
j. regulating investment of funds by insurance companies
k. 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 life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector;
Central Government had introduced the National Pension System (NPS) with effect from January 1, 2004 (except for armed forces)
- On 23rd August, 2003, Interim Pension Fund Regulatory & Development Authority (PFRDA) was established through a resolution by the Government of India to promote, develop and regulate pension sector in India.
- Act – PFRDA Act, 2013 passed on 18th sept 2013
- Provisions of Act became applicable on:1st Feb, 2014
- Headquarters – New Delhi
- Based on the recommendations of the Old Age Social and Income Security Project(OASIS) report
PREAMBLE – An Act to provide for the establishment of an Authority to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds
Acts related to functioning of Pension Sector
THE PENSION FUND REGULATORY AND DEVELOPMENT AUTHORITY ACT, 2013
An Act to provide for the establishment of an Authority to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds
Section 12 of PFRDA Act’13 – Extent and application –
(1) This Act shall apply to—
- a) the National Pension System;
- b) any other pension scheme not regulated by any other enactment.
THE EMPLOYEES’ PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952
An Act to provide for the institution of provident funds, pension fund and deposit-linked insurance fund for employees in factories and other establishments.
Note – The employees’ provident funds and miscellaneous provisions act, 1952 is administered by Ministry of Labour and Employment, Government of India
Functions of PFRDA
As per section 14 of PFRDA Act’13- Duties, powers and functions of Authority
The Authority shall have the duty, to regulate, promote and ensure orderly growth of the National Pension System and pension schemes to which this Act applies and to protect the interests of subscribers of such System and schemes.
- a) regulating the National Pension System and the pension schemes to which this Act applies;
- b) approving the schemes, the terms and conditions thereof and laying down norms for the management of the corpus of the pension funds, including investment guidelines under such schemes;
- c) registering and regulating intermediaries;
- d) issuing to an intermediary a certificate of registration and renewing, modifying, withdrawing, suspending or cancelling such registration;
- e) protecting the interests of subscribers by—
- (i) ensuring safety of the contribution of subscribers to various schemes of pension funds to which this Act applies;
- (ii) ensuring that the intermediation and other operational costs under the National Pension System are economical and reasonable;
- f) establishing mechanism for redressal of grievances of subscribers to be determined by regulations;
- g) promoting professional or organisations connected with the pension system;
- h) adjudication of disputes between intermediaries and between intermediaries and subscribers;
- i) collecting data and requiring the intermediaries to collect such data and undertaking and commissioning studies, research and projects;
- j) undertaking steps for educating subscribers and the general public on issues relating to pension, retirement savings and related issues and training of intermediaries;
- k) standardising dissemination of information about performance of pension funds and performance
- benchmarks;
- l) regulating the regulated assets;
- m) levying fees or other charges for carrying out the purposes of this Act;
- n) specifying by regulations the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by intermediaries;
- o) calling for information from, undertaking inspection of, conducting inquiries and investigations including audit of, intermediaries and other entities or organisations connected with pension funds;
- p) exercising such other powers and functions as may be prescribed.
International Financial Services Centres Authority
- ➢ IFSCA – International Financial Services Centres Authority
- ➢ Act passed on 19th December, 2019.
- ➢ Established: April 27, 2020 (International Financial Services Centres Authority Act, 2019)
- ➢ Headquarters – GIFT City, Gandhinagar in Gujarat
- ➢ Chairman –
- ➢ PREAMBLE – An Act to provide for the establishment of an Authority to develop and regulate the financial services market in the International Financial Services Centres in India.