Rise of American Accounts. "Hollywood. "

Central Bank

Introduction

Economic growth and development of any country depends upon a well-knit financial system. Financial System comprises, a set of sub-systems of financial institutions financial markets, financial instruments and services which help in the formation of capital. It provides a mechanism by which savings are transformed into investments. Thus, a financial system can be said to play a significant role in the economic growth of a country by mobilising the surplus funds and utilising them effectively for productive purposes.

The financial system is characterised by the presence of an integrated, organised and regulated financial markets , and institutions that meet the short term and long term financial needs of both the household and corporate sector. Both financial markets and financial institutions play an important role in the financial system by rendering various financial services to the community. They operate in close combination with each other.

ROLE/FUNCTIONS OF FINANCIAL SYSTEM.

A financial system performs the following functions :

1. It serves as a link between savers and investors. It helps in utilising the mobilised savings of the scattered savers in more efficient and effective manner. It channelises flow of savings into productive investment.

2. It assists in the selection of the projects to be financed and also reviews the performance of such projects periodically.

3. It provides a payment mechanism for the exchange of goods and services.

4. It provides a mechanism for the transfer of resources acroos geographic boundaries.

5. It provides a mechanism for managing and controlling the risk involved in mobilising savings and allocating credit.

6. It promotes the process of capital formation by bringing together the supply of savings and the demand for investible funds.

7. It helps in lowering the cost of transactions and increase returns. Reduced cost motivates people to save more.

8. It provides detailed information to the operators/players in the market such as individuals , business houses , government etc.

Components/Constituents of Indian Financial System

The following are the four major components that comprise the Indian Financial Systems :

1. Financial Institutions.

2. Financial Markets.

3. Financial Instruments/Assets/Securities.

4. Financial Services.

The structure of each component is detailed in Chart 1 and the role and significance of each component is discussed below.

Financial Institutions.

Financial institutions are the intermediaries who facilitate smooth functioning of the financial system by making investors and borrowers meet . They mobilise savings of the surplus units and allocate them in productive activities promising a better rate of return. Financial institutions provide services to entities( individuals,business,government ) seeking advice on various issues ranging from restructuring to diversification plans. They provide whole range of services to the entities who want to raise funds from the markets or eleswhere.

Financial Institutions are also termed as financial intermediaries because they act as middleman between the savers ( by accumulating funds from them ) and borrowers ( by lending these funds ). Banks also acts as intermediaries because they accept deposits from a set of customers ( savers ) and lend these funds to another set of customers ( borrowers ). Like-wise investing institutions such as GIC , LIC , mutual funds etc. also accumulate savings and lend these to borrowers , thus performing the role of financial intermediaries.

Financial institution's role as intermediary differs from that of a broker who acts as an agent between buyer and seller of a financial instrument ( equity shares , preference , debt ) , thus financial intermediaries mobilise savings of the surplus units and lend them to the borrowers in the form of loans and advances ( i.e by creating a financial asset ). They earn profit from the difference between rates of interest charged on loans and rate of interest paid on deposits (savings) . In short , they repackage the depositor's savings into loans to the borrowers . As and provide liquidity to the savers . Deposits are payable on demand by the customers. Banks are in a pisition to avoid the situation of illiquidity while borrowing for short periods and lending for long term by mobilising savings from diversified set of depositors. RBI also has made it mandatory for the banks to keep a certain percentage of deposits as cash reserves with itself to avoid the situation of ill-liquidity.

TYPES OF FINANCIAL INSTITUTIONS.

Financial institutions can be classified into two categories :

A. Banking Institutions.

B. Non-Banking Financial Institutions.

A. Banking Institutions.

Indian banking industry is subject to the control of the Central Bank ( i.e Reserve Bank of India ). The RBI as the apex institution organises, runs , regulates and develops the monetary system and the financial system of the country . The main legislation governing commercial banks in India is the Banking Regulation Act , 1949 . The Indian banking institutions can be broadly classified into two categories :

1. Organised Sector.

2. Unorganised Sector.

1. Organised Sector.

The organised sector consists of commercial banks , cooperative banks and the regional rural banks.

(a) Commercial Banks. The commercial banks may be scheduled banks or non-scheduled banks. At present only one bank is a non-scheduled bank. All other bank are scheduled banks. The commercial banks consist of 27 public sector banks , private sector banks and foreign banks . Prior to 1969 , all major banks with the exception of State Bank of India were in the private sector. An important step towards public sector banking was taken in July , 1969 , when 14 major private banks with a deposit base of Rs 50 crores or more were nationalised. Later in 1980 another 6 nationaliseld bringing up the total number of banks nationalised to twenty . One of the objective of nationalisation of banks was to make the banking system mass oriented. As a result there was massive branch expansion and high rate of growth . The total number of scheduled banks stood at 92 in 1951 which rose to 273 in 1986 and further to 297 in June ,1997. Commercial banking system in India consisted of 297 scheduled banks ( including foreign banks ) and one non-scheduled bank at the end of December 2000.

Traditionally, commercial banks accepted deposits and met the short and medium term funding needs of the industry. But now , since 1990's, banks are also funding the long term needs of the industry particularly the infrastructure sector . The liberalisation measures initiated in the Indian economy , led to the entry of large private sector banks in 1993. This has increased competition among public and private sector banks and quality of services has improved. A major development in the Indian banking industry was the entry of major banks in merchant banking. The merchant bankers are financial intermediaries providing a range of financial services to the corporates and investors. Some of the merchant banker's activities include issue management and underwriting , project counselling and finance , mergers and acquisition advice, portfolio management services etc. Structure of commercial banks , their investment policies etc. have been discussed at length in "Commercial Banking " in this book.

(b) Co-operative Banks. An important segment of the organised sector of Indian banking is the co-operative banking. The segment is represented by a group of societies registered under the Acts of the States relating to co-operative societies. In fact, co-operative societies may be credit societies or non-credit societies.

Different types of co-operative credit societies are operating in the Indian economy. These institutions can be classified into two broad categories : (a) Rural credit societies which are primarily agricultural , (b) Urban credit societies which are primarily non-agricultural . For the purpose of agricultural credit there are different co-operative credit institutions to meet different kinds of needs. For example, short and medium term credit is provided through three tier federal structure . At top is the apex body i.e., state co-operative bank, in the middle there are district co-operative banks or central co-operative banks , at the grass root level i.e., village level there are primary agricultural credit societies . For medium to long term loans to agriculture, specialised co-operatives societies have been formed. These are called 'Land Development Banks' . The land Development Banks movement started in 1929. In the beginning they were named 'Central Land Mortgage Banks '. Land development banking is a two-tier structure. At the state level there are state or central land development banks . At local level there are branches of these banks and primary land development banks. These land development banks deal with agriculturists directly and also through primary land development banks . At the national level they have formed All-India Land Development Banks' Union.

(c) Regional Rural Banks (RRBs). Regional Rural Banks were set by the state government and the sponsoring commercial banks with the objective of developing the rural economy. Regional rural banks provide banking services and credit to small farmers, small enterpreneurs in the rural areas. The regional rural banks were set up with a view to provide credit facilities to weaker sections. They constitute an important part of the rural financial architecture in India. There were 196 RRBs at the end of June 2002, as compared to 107 in 1981 and 6 in 1975.

RBI extends refinance assistance at a concessional rate of 3 percent below the bank rate. IDBI, NABARD and SIDBI are also required to provide managerial and financial assistance to RRBs under the Regional Rural Bank Act.

Government decided to restructure the RRBs on the recommendation of Bhandari Committee in 1994-95. As a result, an amount of Rs 360 crores was allocated towards the restructuring programme . The State Bank of India took several measures of managerial and financial restructuring including enhancement of issued capital and placements of officers of proven ability to head the RRBs. The Government of India released Rs 1867.65 crores bemtween 1994-98 for the recapitisation of RRBs. 175 out of total of 196 RRBs were fully recapitalised by 1998-99.

NABARD took several policy measures such as quarterly/half yearly review of RRBs by the sponsors banks, framing of Appointment and Promotion Rules (1998) for the staff of RRBs , introduction of Kissan Credit Cards, introduction of self-help groups etc. for improving the overall performance of RRBs.

(d) Foreign Banks. Foreign Banks have been in India from British days. ANZ Grindlays Banks has its presence in number of places with 56 branches. The Standard of Chartered Bank has 24 branches and Hongkong Bank 21. All other foreign banks have branches less than 10. Obviously, these banks have concentrated on corporate clients and have been specialising in areas relating to international banking. With the deregulation of banking in 1993, a number of foreign banks are entering India or have got the licenses.

2. Unorganised Sector.

In the unorganised banking sector are the indigenous bankers, money lenders, seths , sahukars carrying out the function of banking.

(a) Indigenous Bankers. Indigenous bankers are the forefathers of modern commercial banks. These are the individuals or partnership firms performing the banking functions. They also act as financial intermediaries . As the term indigenous indicates, they are the local bankers. The geographical area covered by the indigenous bankers is much larger than the area covered by commercial banks. They can be found in all parts of the country although their names, styles of functioning and the functions performed by them may differ. In West India they may be known as Gujarati shroffs or Marwari, in South India , they may be called as Chettiars, in North India they may be called sahukars, etc.

The history of indigenous banking in India dates back to ancient times. The dominance of indigenous bankers can be seen from the fact that they not only provided credit to trade and commerce but at times to the government of the day also . However, with the arrival of the Britishers , the European bankers with the patronage of the rulers started dominating. With the advent of joint stock commercial banking and co-operative banking, the area of operation of indigenous bankers shrank further. Still there are thousands of families consisting mainly of particular communities who are in the business of indigenous banking.

According to the Indian Central Banking Enquiry Committee (1931) , an indigenous banker is any individual or private firm receiving deposits and dealing in hundies or lending money . Although deposit side is emphasised , these banks do not necessarily depend upon this source entirely, like modern commercial banks. Many among them also use large funds of their own. As against this, money lenders are those whose primary business is money lending, such essential banking functions as receiving of deposits and dealing in hundies are outside their operations.

It may be clarified here that although in common parlance indigenous bankers and money lenders are considered to be the same, the two should not be confused. Money lenders are not the bankers, their business is money lending only ,i.e., a pure money lender lends only from his own funds, whereas an indigenous banker raises funds from the public also.

There is no certainty about the exact number of indigenous bankers operating all over India. While the Banking Commission , 1972 , estimated their number around 2,000 to 2,500 , Tinberg and Aiyer estimated their number to be more than 20,000 in 1980. This figure does not include the indigenous bankers of Central and Eastern India but includes the bankers of Calcutta city.

Taken together money-lenders and indigenous bankers function to lend money to various categories of borrowers and under varying conditions . Money lenders, though also found in urban areas, predominate in villages and themselves conduct agriculture, trade and retail business. Loans are extended to villagers of small means, etc. Loans, if small, are given on the basis of a mere entry in their account books or even on verbal promise , but if large , promissory notes or mortgage of crops or land , or ornaments , etc., are insisted upon. Interest rates are generally very high. Since many loans are for unproductive purposes , these pile up into big indebtedness , involving burden from generation to generation. Despite attempts at regulating them, restricting their operations and lately of liquidating them, they continue to keep their hold on agriculturists and small borrowers . However, their importance is sure to decline as and when such modern institutions as co-operative societies, commercial banks , regional rural banks, etc., are able to make their facilities available easily and in a simple and flexible manner.

Indigenous bankers provide finance for productive purposes directly to trade and industries, and indirectly, though money-lenders and traders to agriculturists with whom they find it difficult to establish direct relations. They keep in touch with traders and small industrialists and finance marketing on a sizeable scale . Lending is conducted on the basis of promissory notes, or receipts signed by borrowers acknowledging loans, and stating the agreed rate of interest, or bonds written out on stamped legal forms, or though signing of bankers' books by borrowers . For large loans land, houses or other property are held as mortgage .

(b) Money Lenders. Money lenders depend entirely on their own funds for the working capital. Money lenders may be rural or urban, professional or non-professional. They include large farmers ,merchants, traders, arhitas , goldsmiths, village shopkeepers, sardars of labourers, etc. The methods and areas of operation differ from money lender to money lender. The main characteristics of money lenders are the following.

1. Their funds are own funds.

2. Their clients are mainly the weaker sections of society.

3. Their loans are highly exploitative. They charge very high rates of interest.

4. Their operations are entirely unregulated.

5. The credit is prompt and flexible.

They are able to exploit the weaker sections because of their dependence on them. They enjoy monopoly in their areas of operation.

B. Non-Banking Institutions.

The non-banking institutions may be categorised broadly into two groups.

(a) Organised Financial Institutions

(b) Unorganised Financial Institutions

(a) Organised Financial Institutions.

The organised non-banking financial institutions include :

(1) The institutions like IDBI, ICICI, IFCI, IIBI, IRDC, at all India level.

(2) State Finance Corporations (SFCs) , State Industrial Development Corporations (SIDCs) at the state level.

(3) Agriculture Development Finance Institutions as NABARD, LDBS etc.

Development banks provide medium and long term finance to the corporate and industrial sector and also takes up promotional activities for economic development of the country.

2. Investment Institutions. It includes those financial institutions which mobilise savings of the public at large through various schemes and invest these funds in corporate and government securities . These include LIC, GIC, UTI and mutual funds.

The non-banking financial institutions (in the organised sector) have been discussed at length in detail in separate chapter of this book.

(b) Unorganised Financial Institutions.

The unorganised non-banking financial institutions include number of non-banking financial companies (NBFCs) providing whole range of financial services. These include hire-purchase and consumer finance companies, leasing companies, housing finance companies, factoring companies, credit rating agencies, merchant banking companies etc. NBFCs mobilise public funds and provide loanable funds. There has been remarkable increase in the number of such companies since 1990s. The regulatory framework of NBFCs as prescribed by RBI has been discussed in detail in a separate chapter on ' Non-Banking Financial Institutions '.

. Financial markets.

Finance is the pre-requisite for modern business and financial institutions play a vital role in the economic system. It is through financial markets and institutions that the financial system of the economy works. Financial markets refer to the institutional arrangements for dealing in financial assets and credit instruments of different types such as currency, cheques, bank deposits, bills, bonds,etc.

Financial markets may be broadly classified as negotiated loan markets and open markets. The negotiated loan market is a market in which the lender and the borrower personally nogotiate the terms of the loan agreement, e.g., a businessmen borrowing from a bank or from a small loan company. On the other hand, the open market is an impersonal market in which standardized securities are treated in large volumes. The stock market is an example of an open market. The financial markets, in a nutshell, are the credit markets catering to the various credit needs of the individuals, firms and institutions. Credit is supplied both on a short as well as a long term basis.

Functions.

The main functions of the financial markets are :

(1) to facilitate creation and allocation of credit and liquidity .

(2) to serve as intermediaries for mobilisation of savings.

(3) to assist the process of balanced economic growth.

(4) to provide financial convenience, and

(5) to cater to the various credit needs of the business houses.

TYPES OF FINANCIAL MARKET

On the basis of credit requirement for short-term and long term purposes, financial markets are divided into two categories:

1. Money Market

2. Capital Market

money market

The term money market is used in a composite sense to mean financial institutions which deal with short-term funds in the economy. It refers to the institutional arrangements facilitating borrowing and lending of short-term funds. The money market brings together the lenders who have surplus shory term investible funds and the borrowers who are in need of shory-term funds. In a money market , funds can be borrowed for a short period varying from a day, a week , a month, or 3 to 6 months and against different types of instruments, such as bill of exchange, banker's acceptances, bonds, etc., called 'near money'. Thus money market has been defined by Crowther as, " the collective name given to the various firms and institutions that deal in the various grades of near money''.

The Reserve Bank of India describes the money market as, " the centre for dealings, mainly of a short-term character, in monetary assets, it meets the short-term requirements of borrowers and provides liquidity or cash to the lenders." The borrowers in the money market are generally merchants, traders, manufacturers, business concerns, brokers and even government institutions. The lenders in the money market , on the other hand , include the Central Bank of the country, the commercial banks, insurance companies and financial concerns.

The organisation of the money market is formed. There is no definite place or location where money is borrowed and lent by the parties concerned , it is not necessary for the borroers and the lenders to have a personal contact with each other. Negotiations between the parties may be carried through telephone, telegraph or mail. Thus, money market is simply an arrangement that brings about a direct or inditect contact between the lender and the borrower.

Functions of the Money Market.

The money market performs the following functions :

1. The basic function of money market is to facilitate adjustment of liquidity position of commercial banks, business corporations and other non-bank financial institutions.

2. It provides outlets to commercial banks, business corporations, non-bank financial concerns and other investors for their short-term surplus funds.

3. It provides short-term funds to the various borrowers such as businessmen, industrialists, traders, etc.

4. Money market provide short-term funds even to the government institutions.

5. The money market constitutes a highly efficient mechanism for credit control. It serves as a medium through which the Central Bank of the country exercises control on the creation of credit.

6. It enables businessmen to invest their temporary surplus for a short-period.

7. It plays a vital role in the flow of funds to the most important uses.

capital market

The term 'capital market' refers to the institutional arrangements for facilitating the borrowing and lending of long-term funds. In the widest sense, it consists of a series of channels through which the savings of the community are made available for industrial and commercial enterprises and public authorities . It is concerned with those private savings, individual as well as corporate, that are turned into investments through new capital issues and also new public loans floated by government and semi-government bodies.

A capital market may be defined as an organised mechanism for effective and efficient transfer of money-capital or financial resources from the investing parties, i.e., individuals or institutional savers to the entrepreneurs ( individuals or institutions ) engaged in industry or commerce in the business either be in the private or public sectors of an economy.

Objectives and Importance of Capital Market

An efficient capital market is a pre-requisite of economic development. An organised and well developed capital market operating in a free market economy, (1) ensures best possible coordination and balance between the flow of savings on the one hand and the flow of investment leading to capital formation on the other, (2) directs the flow of savings into most profitable channels and thereby ensures optimum utilisation of financial resources.

Thus, an idea capital market is one where finance is used as a hand-made to serve the needs of industry. Finance is available at a reasonable rate if return for any proposition which offers a prospective yield sufficient to make borrowing worthwhile. The development of savings, proper organisation of intermediary institutions and the entrepreneurial qualities of the people. The capital market must facilitate the movement of capital to the point of highest yield. Thus a capital market strives for-(1) the mobilisation or concentration of national savings for economic development, and (2) the mobilisation and import of foreign capital and investment to augment the deficit in the required financial resources so as to maintain the expected rate of economic growth.

Function of Capital Market

The major functions performed by a capital market are :

(1) Mobilisation of financial resources on a nation-wide scale.

(2) Securing the foreign capital and know-how to fill up the deficit in the required resources for economic growth at a faster rate.

(3) Effective allocation of the mobilised financial resources, by directing the same to projects yielding or to the projects needed to promote balanced economic develipment.

Both money and capital markets are jointly called the financial markets. The money market is a market for short term loans where the period of borrowing and lending is one year or less. On the other hand, the capital market is a market for long term loans where the period of borrowing and lending is over one year. These two markets differ as far as their instruments are concerned. The money market deals with promissory notes, the bills of exchange, the tressury bills, etc. but the capital market deals with common stock shares, debentures and bonds. As far as financial institutions are concerned in the money market the bill brokers, discount houses and commercial banks form a part of it. On the other hand , the financial institutions under capital market are investment trusts, insurance companies, finance houses, etc. In under-developed countries since both the money and capital markets are unorganised, it is difficult to distinguish between them.

The capital market should be distinguished from money market. The capital market is the market for long-term funds. On the other hand money market is primarily the market for short-term funds. However, the two markets are closely related as the same institution many a times deals in both types of funds, i.e., short-term as well as long-term.

FINANCIAL INSTRUMENTS/ ASSETS/ SECURITIES

Another impotant constituent of financial system is financial assets/instruments. They represent a claim against the future income and wealth of others. In other words, a financial instrument is a claim, against a person or an institution, for the payment of a sum of money and periodic payment in the form of interest or dividend, at a specified future date. To suit their requirements, different types of securities are issued by the companies and financial institutions. In other words, financial markets/system promotes development of innovative financial products suited to the investment requirements of heterogenous investors.

Financial securities may be classified under two broad categories :

1. Primary Securities. These are also termed as 'direct securities' as these are issued directly by the ultimate borrowers of funds to the ultimate savers or investors. Primary securities include equity shares, preference shares and debentures.

2. Secondary Securities. These securities are also termed as 'indirect securities' as these are not issued directly by the ultimate borrowers, rather, these are issued by financial intermediaries to ultimate savers. Insurance policies, units of the mutual funds, bank deposits etc. are the examples of secondary securities.

Financial instruments perform a significant role in transfering funds from lenders to borrowers through financial markets and financial intermediaries. Each instrument differs from each other in terms of its marketability , risk, return, liquidity and transaction costs.

There has been tremendous growth in new financial instruments since 1990s issued by both the corporate and financial institutions.

FINANCIAL SERVICES

Efficiency of emerging financial system largely depends upon the quality and variety of financial services provided by financial intermediaries. The term financial services can be defined as "activities" , benefits and satisfactions, connected with the sale of money , that offer to users and customers, financial related value ". Financial service organisations render services to industrial enterprises and ultimate consumer markets. Within the financial services industry the main sector are banks, financial institutions and non-banking financial companies.

Characteristics of Financial Services.

The financial services have the following characteristics.

(1) Intangible. Financial services cannot appeal to a buyer's sense of touch, taste, smell, sight or hear. Thus an organisation engaged in providing financial services is largely dependent on the feedback from the public as to effectiveness, quality and attractiveness of the services rendered.

(2) Direct sale. Direct sale is the only possible channel of distribution. There are no middlemen in between . In order to ensure that services are available at the right time and at the right place, simultaneous production and distribution of financial services is undertaken by the service organisations.

(3) Heterogeneity. In order to cater a variety of financial and related needs of different customers in different areas, financial service organisations have to offer a wide range of products and services. They provide a special one-off management service for industrial customers and retail service covering insurance, money receipt or storage etc.

(4) Fluctuation in demand. The demand for certain categories of financial services e.g., life insurance , do fluctuate significantly, according to the level of general economic activity . This factor puts extra pressures on the roles and functions of marketing in insurance organisations.

(5) Protect customer's interest. The responsibility of any financial services organisation to protect customer's interest is important not just in banking and insurance , but also in other sectors of the financial services.

(6) Labour intensive. Personalised services versus automation, in fact, is an important issue in financial services. The financial services sector is highly labour intensive. It leads to increase in the costs of production and consequently affects the price of financial products. Because of high personnel costs involved and to enhance customer's convenience increased use of technology is being made.

(7) Geographical dispersion. Financial services musy have both appeal and wider application. To ensure this, the service providing organisations must have massive branch network so that benefits of convenience are enjoyed by international, national and local customers.

(8) Lack of special identity. Customers usually approach a nearby branch of a bank or financial Institution , because it is convenient to them. As the competing products offered by various service organisations are similar, the emphasis is more on the 'package' than the product. The package consists of branch location, staff, services, reputation, advertising and new services offered from time to time. Thus, major competitors offering similar services place more emphasis on the promotional aspects rather than on the inherent uniqueness of a particular financial institution's services. Each organisation must find a way of establishing its identity and implant this is the mind of public.

(9) Information based. Financial service industry is an information based industry. It involves creation, dissemination, and use of information. Information is an essential component in the production of financial services. Costs of processing information is quite relevant in the profitable production of financial services.

(10) Require quality labour. Financial services require huge amounts of high quality labour to deal with information and communication with the market. The types of labour range from workers performing simple tasks to those undertaking complex analysis and negotiations require years of training and experience. The importance of labour costs and the role of human inputs in financial service production can be realised from the salaries paid in this industry . Financial service firms have to make extra efforts to attract, motivate and retain the human resources they require in order to survive, grow and prosper in future.

KINDS OF FINANCIAL SERVICES.

Financial services provided by various financial institutions, commercial banks and merchant bankers can be broadly classified into two categories :

(1) Asset based/ fund based services.

(2) Fee based/ advisory services.

A. Asset/ fund based services.

The asset/fund based services provided by banking and non-banking financial institutions are discussed below briefly.

1.Equipment Leasing/Lease Financing.

Leasing has emerged as another important source of intermediate and long-term financing of corporate enterprises during the recent few decades. In India, leasing is a recent development and equipment leasing was introduced by First Leasing Company of India Limited in 1973 only. Since then, a number of medium to large-scale companies have entered the field of leasing. Leasing is an arrangement that provides a firm with the use and control over assets without buying and owning the same. It is a form of renting assets.

Once a firm had evaluated the economic viability of an asset as an investment and accepted/selected the proposal , it has to consider alternate methods of financing the investment. However, in making an investment, the firm need not own the asset. It is basically interested in acquiring the use of the asset. Thus, the firm may consider leasing of the asset rather than buying it. In comparing leasing with buying, the cost of leasing the asset should be compared with the cost of financing the asset through normal sources of financing , i.e., debt and equity. Since payment of lease rentals is similar to payment of interest on borrowings and lease financing is equivalent to debt financing, financial analysts argue that the only appropriate comparison is to compare the cost of leasing with that of cost of borrowing. Hence, lease financing decision relating to leasing or buying options primarily involve comparison between the cost of debt-financing and lease financing.

There is no exclusive law/legislation to govern equipment lease financing . The relevant provisions of a number of allied legislations constitute the legislative framework of lease transactions . The lease agreements provide for a number of obligations on the part of the lesse which do not form part of his implied obligations under the legislative framework. The legislative framework and the lease agreements provide the regulatory framework of lease financing in India.

Leasing industry in India is a growing business activity in the country.

2. Hire-Purchase and Consumer Credit.

Hire-purchase is an alternative to leasing as a source for equipment financing.

Hire purchase means a transaction where goods are purchased and sold on the terms that (1) payment will be made in instalments, (2) the possession of the goods is given to the buyer immediately, (3) the property (ownership) in the goods remains with the vendor till the last instalment is paid, (4) the seller can reposses the goods in case of default in payment of any instalment, and (5) each instalment is treated as hire charges till the last instalment is paid.

The main characteristics of a hire purchase agreement are as below :

1. The payment is to be made by the hirer (buyer) to the hiree, usually the vendor, in instalments over a specified period of time.

2. The possession of the goods is transferred to the buyer immediately.

3. The property in the goods remains with the vendor (hiree) till the last instalments is paid. The ownership passes to the buyer (hirer) when he pays all instalments.

4. The Hiree or the vendor can reposses the goods in case of default and treat the amount received by way of instalments as hire charged for that period.

5. The instalments in hire purchase include interest as well as repayments of principal.

6. Usually, the hiree charges interest on flat rate.

Consumer credit includes all asset based financing plans offered to individuals to help them acquire durable consumer goods. In a consumer credit transaction the individual/consumer/buyer pays a part of the cash purchase price at the time of the delivery of the asset and pays the balance with interest over a specified period of time. The consumer credit has emerged as an important asset based financial service in India. The main providers of consumer credit are foreign/multinational banks , commercial banks and finance companies and cover items such as cars, scooters, VCRs, TVs, refrigerators, washing machines, home appliances, personal computers, cooking ranges, food processors etc. There is, however, no specific legislation to regulate consumer credit in India.

3. Bill Discounting.

Discounting of bills of exchange is an attractive fund based financial service provided by the finance companies. Bill discounting has emerged as a profitable business for finance companies and represent a diversification in their activities. After the 1992 Scam, RBI imposed certain restrictions on bill discounting services provided by the banks.

According to the Indian Negotiable Instruments Act, 1881, " The Bill of Exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of that instrument ". The B/E is used for financing a transaction in goods which means that it is essentially a trade-related instrument. Discounting of bills is the most important form in which a bank lends without any collateral security. Present day commerce is built upon credit. The seller draws a bill of exchange on the buyer of goods on credit. Such a bill may be either a clean bill or a documentary bill which is accompanied by documents of title to goods such as a railway receipt. The bank purchases the bills payable on demand and credits the customer's account with the amount of bills less discount. At the maturity of the bills, bank presents the bill to its acceptor for payment. In case the bill discounted is dishonoured for non-payment , the bank recovers the full amount of the bill from the customer along with expenses in that connection.

The development of bill discounting as a financial service depends upon the existence of a full-fledged bill market. The RBI has been making constant efforts to develop a market for commercial bills. Although a bill market scheme was launched in 1952, but , in reality , the bill market grew in India after 1970. The RBI has now permitted banks to rediscount bill amongst themselves and with other financial institutions and finance companies. The finance companies act as bill brokers between the banks and business houses.

4. Venture Capital.

The term 'venture capital' represents financial investment in a highly risky project with the objective of earning a high rate of return. While the concept of venture capital is very old, the recent liberalisation policy of the government appears to have given a filip to the venture capital movement in India. In the real sense, venture capital financing is one of the most recent entrants in the Indian capital market. In the real sense, venture capital financing is one of the most recent entrants in the Indian capital market. There is a significant scope for venture capital companies in our country because of increasing emergence of technocrat entrepreneurs who lack capital to be risked. These venture capital companies provide the necessary risk capital to the entrepreneurs so as to meet the promoters' contribution as required by the financial institutions. In addition to providing capital, these VCFs (venture capital firms) take an active interest in guiding the assisted firms.

Venture capital financing involves a high degree of risk. Moreover the guidelines issued by the government for the setting up of venture capital companies are too restrictive and unrealistic and have come in the way of their growth. In addition to the venture capital companies, the Government of India has been instrumental in setting up a number of new financial agencies to serve the increasing needs of the entrepreneurs in the area of venture capital. These include:

(1) Venture Capital Scheme of IDBI.

(2) Venture Capital Scheme of ICICI.

(3) Risk Capital and Technology Corporation Ltd. (RCTC).

(4) Infrastructure Leasing and Financial Services Ltd. (IL and FS)

(5) Stock Holding Corporation of India LTD. (SHCIL) to provide help in the transfer of shares and debentures.

(6) The Credit Rating Information Services of India Ltd. (CRISIL) to undertake the rating of fixed deposit scheme , debentures/bonds , and provide credit assessment of companies.

5. Housing Finance

Till late 1970's the responsibility to provide finance for house building rested with the Government of India. But it emerged as a fund based financial services in the country with the setting up of National Housing Bank (NHB) by the RBI in 1988. NHB is an apex/principal housing finance institution in the country and is fully owned subsidiary of the RBI. Till now, a number of specialised financial institutions/companies in the public, private and joint sectors have entered in the field of housing finance such as HDFCs, SBIHF, Canfin Home, LIC Housing Finance, Ind Bank Housing, Citi Home, Gujrat Ambuja, ICICI Housing and so on. These companies have designed suitable schemes for individuals, corporates, builders and promoters. The HUDCO, and commercial and cooperative banks have designed schemes specifically for lower and middle income groups.

6. Insurance Services

Insurance is a contract where by the insurer (i.e., insurance company agrees/undertakes , in consideration of a sum of money (premium), to make good the loss suffered by the insured (policy holder) against a specified risk such as fire or compensate the beneficiaries (insured) on the happening of a specified event such as accident or death. The document containing the terms of contract, in black and white, between the insurer and the insured is called policy. The property which is insured is the subject-matter of insurance. The interest which the insured has the subject matter of insurance is known as insurable interest. Depending upon the subject matter, insurance services are divided into (1) life (2) general.

To cater to the varying needs of the insured, a variety of policies are offered by insurance organisations . The principal life insurance policies are endowment, whole life, joint life etc. The important fire insurance policies , offered by insurance companies are specific policy, comprehensive policy, value policy , third party insurance policy. Marine Insurance policies which insure against marine losses are voyage, time, mixed, value open and unvalued, and floating.

Until 1999, there were only two public sector organisations , namely Life Insurance Corporation of India (LIC) and General Insurance Corporation (GIC) and its four subsidiaries , rendering insurance services. LIC providing protection against risk of life and GIC providing protection against the accident , loss on account of fire and marine losses, theft etc. But with the setting up of the Insurance Regulatory and Development Authority (IRDA) in 1999, their monopoly has been dismantled and new players have entered the field e.g.., HDFC Life Insurance, Prudential ICICI Life Insurance, Max New York Life Insurance, SBI Life Insurance, Birla Sunlife Insurance etc.

7. Factoring.

Factoring, as a fund based financial service, provides resources to finance receivables as well facilities the collection of receivables. It is another method of raising short-term finance through account receivable credit offered by commercial banks and factors. A commercial bank may provide finance by discounting the bills or invoices of its customers. Thus, a firm gets immediate payment for sales made on credit. A factor is a financial institution which offers services relating to management and financing of debts arising out of credit sales. Factoring is becoming popular all over the world on account of various services offered by the institutions engaged in it. Factors render services varying from bill discounting facilities offered by commercial banks to a total take over of administration of credit sales including maintenance of sales ledger, collection of accounts receivables, credit control and protection from bad debts, provision of finance and rendering of advisory services to their clients. Factoring, may be on a resource basis, where the risk of bad debts is borne by the client, or on a non-recourse basis, where the risk of credit is borne by the factor.

At present, factoring in India is rendered by only a few financial institutions on a recourse basis. However, the Report of the Working Group on Money Market (Vaghul Committee) constituted by the Reserve Bank of India had recommended that banks should be encouraged to set up factoring divisions to provide speedy finance to the corporate entities.

Inspite of many services offered by factoring , it suffers from certain limitations. The most critical falls outs of factoring include (1) the high cost of factoring include (1) the high cost of factoring as compared to other sources of short-term finance, (2) the perception of financial weakness about the firm availing factoring services, and (3) adverse impact of tough stance taken by factor, against a defaulting buyer, upon the borrower resulting into reduced future sales.

At present , there are only two factoring organisations operating in the country namely, SBI Factors and Commercial Services Ltd. and CAN Bank Factors LTD.

B. FEE BASED ADVISORY SERVICES

(1) Merchant Banking.

'Fee based advisory services' includes all those financial services rendered by Merchant Bankers. Merchant bankers play an important role in the financial services sector. However, merchant banking , as an advisory financial services, emerged rather late. Grindlays Bank was the first one to set up Merchant Banking Division in 1969 in India with an objective of undertaking management of public issue and financial consultancy. It was followed by other foreign banks. Following the recommendations of the Banking Commission (1972) , State Bank of India also started merchant banking services in 1973. The Industrial Credit and Investment Corporation of India (ICICI) was the first development finance institution to initiate such service in 1974. After mid-seventies , tremendous growth in the number of merchant banking organisations has taken place. These include banks, financial institution , non-banking financial companies (NBFCs), brokers and so on. Financial Services provided by these organisations include loan syndication , portfolio management , corporate counselling, project counselling debenture trusteeship, mergers/ amalgamations and takeovers/acquisition etc.

(2) Credit Rating

Credit rating is the opinion of the rating agency on the relative ability and willingness of the issuer of a debt instrument to meet the debt services obligations as and when they arise. As a fee based financial advisory service, credit rating is useful to investors, corporates (borrowers), banks and financial institutions . For the investors, it is an indicator expressing the underlying credit quality of a (debt) issue programme. The investor is fully informed about the company as any effect of changes in business/economic conditions on the company is evaluated and published regularly.

The business enterprises can raise funds at a cheaper rate with a good rating. Lesser-known companies can also approach the market on the basis of their rating. The fund ratings are useful to the banks and other financial instititions when they decide on lending and investment strategies. Stock brokers have to make less efforts in persuading their clients to select an investment proposal of making investment in highly rated investment in highly rated instruments. A company will highly rated instruments has to make least efforts in raising funds through public . Rating facilities best pricing and timing of issues. In India, there are three major credit rating agencies namely:

.CRISIL ( Credit Rating Information Services of India Ltd.)

.ICRA ( Investment Information and Credit Rating Agency of India Ltd)

.CARE ( Credit Analysis And Research in Equities )

(3) Stock-Broking

Prior to the setting up of SEBI, stock exchanges were being supervised by the Ministry of Finance under the Securities Contracts Regulation Act (SCRA) and were operating more or less self-regulatory organisations. The need to reform stock exchanges was felt, when malpractices crept into trading and in order to protect investor's interest . SEBI was set up to ensure that stock exchanges perform their self-regulatory role properly. Since then, stock broking has emerged as a professional advisory service. Stock broker is a member of a recognised stock exchange who buys, sells or deals in shares/securities. It is a mandatory for each stock broker to get him/herself registered with SEBI in order to act as a broker . SEBI is empowered to impose conditions while granting the certificate of registrastion . As a member of a stock exchange, he will have to abide by its rules, regulations and by-laws, pay the prescribed fee and take adequate steps for redressal of investor's grievances with in one month of the receipt of the complaint and keep SEBI informed about the number , nature and other particulars of such complaints . SEBI has taken rigorous steps to regulate the working of brokers/sub-brokers in terms of compulsory registration with SEBI, code of conduct, duty to investors , brokers, general obligations and responsibilities, procedure for inspection , action in default, capital adequacy norms, relationship with clients etc.

INDIAN FINANCIAL SYSTEM-AN OVERVIEW

Economic growth and development of any country depends to a large extent on the efficiency of a developed financial system . Growth of financial sector is an indicator of an economic development of a country . With the liberalisation/deregulation and globalisation of the Indian economy, financial system has undergone massive change in its structure. The changes in the financial system can be studied into three stages :

1. Before Independence

2. After independence till 1990

3. After 1990

STAGE 1: BEFORE INDEPENDENCE

Pre-independence financial system was characterised by the following :

(1) The system was unorganised.

(2) Capital stock exchanges had very few industrial securities being traded in securities market.

(3) There was no separate issuing institution .

(4) Participation of financial intermediaries had almost been nil in long term financing of industries.

(5) Industry's access to outside savings was also restricted.

In the light of above, financial system was incapable of achieving high rate of industrial growth especially in the growth of new an innovating enterprises.

STAGE 2: AFTER INDEPENDENCE (1948-90)

Post-independence period stressed on planned economic development. Under the Directive Principles of State Policy, a scheme of planned economic development . Under the Directive Principles of State Policy, a scheme of planned economic development was evolved in 1951 with a view to achieve the broad economic and social objectives of the state. Indian Constitution also laid stress on the securing economic growth with social justice. As a result, five year plans were introduced. Both public and private sectors were to play an important role in the economy to achieve industrial growth and development. Planning required the distribution of resources by the financial system to be in confirmity with the priorities of the five year plans. The objective was to retain government control over distribution of credit and finance. Number of developments took place in the financial system which are listed below.

TRANSFER OF OWNERSHIP FROM PRIVATE TO PUBLIC SECTOR.

During the second phase , after independence , main thrust was to transfer the ownership from private to the public sector as well setting up of new institution in the public sector.

Nationalisation of RBI

The beginning of the transfer of ownership from private to government control took place when Reserve Bank was nationalised through Reserve Bank ( Transfer of Public Ownership ) Act, 1948. The entire share capital was acquired by Central Government.

Setting up of State Bank of India.

First Five Year Plan launched in 1951 aimed at the development of rural areas. All India Rural Credit Survey Committee, 1951, eastablished by RBI criticised the working of the Imperial Bank in its report submitted in December 1954. It suggested the setting up of a State Bank by taking over the Imperial Bank of India was constituted on July 1,1955 by taking over the control of the Imperial Bank of India under the State Bank of India Act, 1935, giving Reserve Bank of India 92.1% of the issued capital of the bank.

Nationalisation of Life Insurance Business

One of the important milestone in the economic development of the nation was the nationalisation of 245 life insurance companies in 1956. As a result, Life Insurance Corporation of India came into existence on 1st September , 1956 as a statutory institution incorporated under the LIC Act, 1956. Nationalisation of resulted in important changes in organisation such as field techniques , management and investment centres for the wide expansion of its operation.

Nationalisation of Commercial Banks

Another important step towards public control of private financial institution was taken in July 1969, when 14 commercial banks with a deposit base of Rs 50 crores or more were nationalised. Again in 1980 , six more private sector banks were nationalised bringing up the total number of banks nationalised to twenty.

Nationalisation of General Insurance Business

Yet another landmark was the nationalisation of general insurance business and setting up of General Insurance Corporation in 1972 by passing the General Insurance Business (Nationalisation) Act,1972. 107 insurers including branches of foreign companies operating in India, were amalgamated and grouped into four public sector companies, namely, The National Insurance Company Limited, The New India Assurance Company Limited, The Oriental Insurance Company Limited, and The United India Assurance Company Limited with its offices at Calcutta, Bombay, Madras and Delhi.

SETTING UP OF FINANCIAL INSTITUTIONS

Government control over the sources of credit and finance led to the eastablishment of many financial institutions in the public sector. The main objective was to provide medium and long-term industrial finance to the corporate sector.

These financial institutions included:

Development Finance Institutions

Development banks are the institutions engaged in the promotion and development of industry, agriculture and other key sectors. Number of development finance institutions at National/All India Level as well as Regional/State Level were set up.

The foreign rulers in India did not take much interest in the industrial development of the country. They were interested to take raw materials to England and bring back finished goods to India. The government did not show any interest for setting up institutions needed for industrial financing. The recommendation for setting up industrial financing institutions was made in 1931 by Central Banking Enquiry Committee but no concrete steps were taken. In 1949, Reserve Bank had undertaken a detailed study to find out the need for specialised institutions. It was in 1948 that the first development bank i.e., Industrial Finance Corporation of India (IFCI) was established. IFCI was assigned the role of a gap-filler which implied that it wad not expected to compete with the existing channels of industrial finance. It was expected to provide medium and long-term credit to industrial concerns only when they could not raise sufficient finances by raising capital or normal banking accomodation.

In view of the vast size of the country and needs of the economy it was decided to set up regional development banks to cater to the needs of the small and medium enterprises. In 1951, Parliament passed State Financial Corporation Act. Under this Act state governments could establish financial corporations for their respective regions. At present there are 18 State Financial Corporations (SFCs ) in India.

The IFCI and State Financial Corporations served only a limited purpose. There was a need for dynamic institutions which could operate as true development agencies. National Industrial Development Corporation (NIDC) was established in 1954 with the objective of promoting industries which could not serve the ambitious role assigned to it and soon turned to be a financing agency restricting itself to modernisation and reliabilitation of cotton and jute textile industries.

The Industrial Credit and Investment Corpoeation of India Ltd.(ICICI) was established in 1955 as a Joint Stock Company . ICICI was supported by Government of India, World Bank, Common Wealth Development Finance Corporation and other, foreign institutions. It provides term loans and take an active part in the underwriting of and direct investments in the shares of industrial units. Though ICICI was established in private sector but its pattern of shareholding and methods of raising funds gives it the characteristic of a public sector financisl institution. ICICI Ltd. has now merged into ICICI Bank.

Another institution, Refinance Corporation for Industry Ltd. (RCI) was set up in 1958 by Reserve Bank of India ,LIC and Commercial Banks. The purpose of RCI was to provide refinance to commercial banks and SFCs against term loans granted by them to industrial concerns in private sector. In 1964, Industrial Development Bank of India was set up as an apex institution in the area of industrial finance. RCI was merged with IDBI. IDBI was a wholly owned subsidiary of RBI and was expected to co-ordinate the activities of the institutions engaged in financing, promoting or developing industry.

However, it is no longer a wholly owned subsidiary of the Reserve Bank of India. Recently, it made a public issue of shares to increase its capital.

In order to promote industries in the state another type of instititions, namely, the State Industrial Development Corporations (SIDCs) were established in the sixties to promote medium scale industrial units. The state owned corporations have promoted a number of projects in the joint sector and assisted sector. At present there are 28 SIDCs in the country . The State Small Industries Development Corporations (SSIDC's) were also set up to cater to the needs of industry at state level. These corporations manage industrial estates, supply raw materials , run common service facilities and supply machinery on hire-purchase basis. Some states have established specialised corporations for the development of infrastructure, agro-industries ,etc.

Investing Instititions

A number of other institutions also participated in industrial financing by mobilising public savings through introduction of insurance schemes , mutual funds, units etc. These institutions also called investing institutions included Unit Trust of India (UTI) established in 1964, Life Insurance Corporation of India in 1956 and General Insurance Corpiration in 1973.

Other Institutions

Some more units were set up to provide help in specific areas such as rehabilitation of sick units, export finance, agriculture and rural development . Industrial Reconstruction Corporation of India Ltd. ( RCI) was set up in 1971 for rehabilitation of sick units. In 1982 the Export-Import Bank of India (Exim Bank) was established to provide financial assistance to exporters and importers. In order to meet credit needs of agriculture and rural sector , National Bank for Agriculture and Rural Development (NABARD) was set up in 1982. It is responsible for short term, medium-term and long-term financing of agriculture and allied activities. The institutions such as Film Finance Corporation. Tea Plantation Finance Scheme, Shipping Development Fund, Newspaper Finance Corporation, Handloom Finance Corporation, Housing Development Finance Corporation also provide financial and other facilities in various areas.

Changing Role of Commercial Banks

Initially, commercial banks performed the role of accepting deposits and financing short-term needs of trade and commerce. RBI though changes in credit control measures, diverted the bank credit to industrial sector in 1951. Gradually, commercial banks entered into the field of underwriting the issues of capital and term-lending. Refinance Corporate of Industry was set up as a subsidiary of RBI, with the objective of providing refinancing of term loans by the commercial banks. It merged with IDBI in 1964, who extended loans to small and medium scale industry.

With the increase in demand from the indistrial sector, bank credit became a scarce commodity. Gradually, share of corporate sector in total bank credit declined. Another development in bank financing of industry was entry of major banks in merchant banking, new issue management , corporate counselling, capital restructuring and portfolio management etc. A number of subsidiaries were set up by major banks such as Can Bank Financial Services Ltd ., industrial sector. Savings mobilised through mutual funds were also invested in industries. Even seventh plan laid emphasis on the develipment of capital market to finance industry. All these developments have brought significant changes in the role played by the commercial banks in Indian financial system.

STAGE 3: AFTER 1990's

Indian financial system has undergone massive changes since the announcement of new economic policy in 1991. Liberalisation/ globalisation/ deregulation has transformed Indian economy from closed to open economy. The corporate industrial sector structure has also undergone changes due to delicensing of industries, financial sector reforms or reforms in banking/capital market, disinvestment in public sector undertakings (PSU's) , reforms in taxation and Company Law etc. Government role in the distribution of finance and credit has declined over the years. Financial system is focusing more attention towards the development of capital market which is emerging as the main agency for the allocation of resources among the public, private sector and state government. Major developments that have taken place in the Indian financial system are briefly discussed below.

Entry of Private Sector

Since 90's Government control over financial institutions has diluted in a phased manner . Public/Development Financial Institutions have been converted into companies, allowing them to issue equity/bonds to the public. Government has allowed private sector to enter into banking and insurance sector. IFCI has been converted into a public company.

Changing Role of Development Finance Institutions (DFIs)

DFIs performed the role of term-lending institutions extending loans for project finance, underwriting, direct subscription, lease financing etc. They received funds from the Government and the RBI . But now, there is remarkable shift in the activities if DFIs :

(a) DFIs are engaged in non-fund based financial activities such as merchant banking , project counselling, portfolio management services, mergers and acquisitions, new issue management etc.

(b) DFIs raise funds through issue of bonds carrying floating rate of interests or bonds without government guarantee.

(c) Earlier, DFIs sponsored infrastructural institutions such as Technical Consultancy Organisation (TCOs) , Management Development Institute (MDI) and The Institute for Financial Management and Research (IFMR). Then, focus shifted to development of capital market. As a result, following institutions were promoted by the DFIs.

Emergence of Non-Banking Financial Companies (NBFCs)

In the unorganised non-banking sector, number of non-banking financial companies have emerged providing financial services partly fee-based and partl asset/fund based. Their activities include equipment leasing, hire-purchase finance , bills discounting , loans/investments, venture capital, housing finance etc. Fee based services include portfolio management, issue management, loan syndication , merger and acquisition etc.

Growth of Mutual Funds Industry.

Initially, UTI was the single organisation issuing the mutual fund units . But presently , the mutual funds are spinsored not only by UTI but also by banks, insurance organisations, FIIs, private sector. There are off-share/country funds being sponsored by FIIs and Indian FIs. Mutual funds are gaining popularity among the small investors due to :

(1) tax exemption on income from mutual funds.

(2) units of mutual funds if held for 12 months are to be treated as long-term asset, for the purpose of capital gains tax.

Minimum investment in units has been enhanced from Rs1000 to Rs 5000 in primary market.

Securities and Exchange Board of India (SEBI)

The Securities and Exchange Board Of India Was established under the SEBI Act, 1992 with the following purposes :

(1) to protect the interest of investors in securities .

(2) to promote the development of the securities market .

(3) to regulate the securities market, and

(4) for matters connected therewith or incidental thereto.

Developments in Secondary Market/ Stock Market.

Capital market had undergone tremendous change over the years. Number of developments have taken place, It includes :

(1) Issuance of regulations by SEBI in respect of brokers / sub brokers/dealers in trading/settlement.

(2) More transperancy in trading and settlement practices.

(3) Regulation of badla trading. Introduction of derivative market ( future/option trading ).

(4) Setting up of National Stock Exchange (NSE) and Over The Counter Exchange of India (OTCEI).

(5) Setting up of National Securities Depository Ltd. (NSDL) and Central Depository Services ( India ) ltd. ( CDSL ) and system of electronic trading through dematerialisation of shares etc.

Significant Changes in Financial System

Some of the significant changes that have taken place over the last few years and that may have implications on the Indian financial system are listed below .

1. The Unit Trust of India , the leading mutual fund organisation has been split into two parts as a consequence of the repeal of the UTI Act.

2. Private sector had been allowed in the insurance sector thus breaking the monopoly of LIC and GIC. GIC has been delinked from its four subsidiaries.

3. The introduction of derivative trading including index/stock/interest futures and options has also been one of the significant development having implications on the financial system.

4. The merger of the ICICI Ltd. and IDBI into ICICI Bank and IDBI Bank respectively and the proposed merger of IFCI into Punjab National Bank.

,.,,,.scary.,,,