Some serious attention was paid to the development of a sound financial system in India only after the launching of the planning era in the country. At the time of Independence in 1947, there was no strong financial institutional mechanism in the country. There was absence of issuing institutions and non-participation of intermediary financial institutions. The industrial sector also had no access to the savings of the community. The capital market was very primitive and shy. The private as well as the unorganized sector played a key role in the provision of ‘liquidity’. On the whole, chaotic conditions prevailed in the system. With the adoption of the theory of mixed economy, the development of the financial system took a different turn so as to fulfill the socio-economic and political objectives. The Government started creating new financial institutions to supply finance both for agricultural and industrial development and it also progressively started nationalizing some important financial institutions so that the flow of the finance might be in the right direction.
Nationalization of Financial Institution
As we know that the RBI is the leader of the financial system. But, it was established as a private institution in 1935. It was nationalized in 1948. It was followed by the nationalization of the Imperial Bank of India in 1956 by renaming it as State Bank of India. In the same year, 245 Life Insurance Companies were brought under Government control by merging all of them into a single corporation called Life Insurance Corporation of India. Another significant development in our financial system was the nationalization of 14 major commercial banks in 1969. Again, 6 banks were nationalized in 1980. This process was then extended to General Insurance Companies which were reorganized under the name of General Insurance Corporation of India. thus, the important financial institutions were brought under public control.
Starting of Unit Trust of India
Another landmark in the history of development of our financial system is the establishment of new financial institutions to strengthen our system and to supply institutional credit to industries.
The Unit Trust of India was established in 1964 as a public sector institution to collect the savings of the people and make them available for productive ventures. It is the oldest and largest mutual fund in India. It is governed by its own statues and regulations. However, since 1994, the schemes of UTI have to be approved by the SEBI. It has introduced a number of open-ended and close-ended schemes. It also provides re-purchase facility of units of the various income schemes of UTI are linked with stock exchanges. Its investment is confined to both corporate and non-corporate sectors. It has established the following subsidiaries:
(i) The UTI Bank Ltd., in April 1994.
(ii) The UTI Investor Service Ltd., to act as UTI’s own Registrar and Transfer agency.
(iii) The UTI Security Exchange Ltd.
Establishment of Development Banks
Many development banks were started not only to extend credit facilities to financial institutions but also to render advisory services. These banks are multipurpose institutions which provide medium and long term credit to industrial undertakings, discover investment projects, undertake the preparation of project reports, provide technical advice and managerial services and assist in the management of industrial units. These institutions are intended to develop backward regions as well as small and new entrepreneurs.
The Industrial Finance Corporation of India (IFCI) was set up in 1948 with the object of “making medium and long term credits more readily available to industrial concerns in India, particularly under circumstances where normal banking accommodation is inappropriate or recourse to capital issue method is impracticable”. At the regional level, State Financial Corporations were established under the State Financial Corporation Act, 1951 with a view to providing medium and long term finance to medium and small industries. It was followed by the establishment of the Industrial Credit and Investment Corporation of India (ICICI) in 1955 to develop large and medium industries in private sector, on the initiative of the World Bank. It adopted a more dynamic and modern approach in industrial financing. Subsequently, the Government of India set up the Refinance Corporation of India (RCI) in 1958 with a view to providing refinance facilities to banks against term loans granted by them to medium and small units. Later on it was merged with the Industrial Development Bank of India.
The Industrial Development Bank of India (IDBI) was established on July 1, 1964 as a wholly owned subsidiary of the RBI. The ownership of IDBI was then transferred to the Central Government with effect from February 16, 1976. The IDBI is the apex institution in the area of development banking and as such it has to co-ordinate the activities of all the other financial institutions. At the State level, the State Industrial Development Corporations (SIDCO)/State Industrial Investment Corporations were created to meet the financial requirements of the States and to promote regional development.
In 1971, the IDBI and LIC jointly set up the Industrial Reconstruction Corporation of India (IRCI) with the main objective of reconstruction and rehabilitation of sick industrial undertakings. The IRCI was converted into a statutory corporation in March 1985 and renamed as the Industrial Reconstruction Bank of India (IRBI). In 1997, the IRBI has to be completely restructured since it itself has become sick due to financing of sick industries. Now, it is converted into a limited company with a new name of Industrial Investment Bank of India (IIBI). Its objective is to finance only for expansion, diversification, modernization etc., of industries and thus it has become a development bank.
The Small Industries Development Bank of India (SIDBI) was set up as a wholly owned subsidiary of IDBI. It commenced operations on April 2, 1990. The SIDBI has taken over the responsibility of administrating the Small Industries Development Fund and the National Equity Fund.
Institution for Financing Agriculture
In 1963, the RBI set up the Agricultural Refinance and Development Corporation (ARDC) to provide refinance support to banks to finance major development projects such as minor irrigation, farm mechanization,, land development, horticulture, daily development, etc. However, in July 1982, the National Bank for Agriculture and Rural Development (NABARD) was established and the ARDC was merged with it. The whole sphere of agricultural finance has been handed over to NABARD. The functions of the Agricultural Credit Department and Rural Planning and Credit Cell of the RBI have been taken over by NABARD.
Institution for Foreign Trade
The Export and Import Bank of India (EXIM Bank) was set up on January 1, 1982 to take over the operations of International Finance wing of the IDBI. Its main objective is to provide financial assistance to exporters and importers. It functions as the principal financial institution for coordinating the working of other institutions engaged in financing of foreign trade. It also provides refinance facilities to other financial institutions against their export-import financing activities.
Institution for Housing Finance
The National Housing Bank (NHB) has been set up on July 9, 1988 as an apex institution to mobilize resources for the housing sector and to promote housing finance institutions both at regional and local levels. It also provides refinance facilities to housing finance institutions and scheduled banks. It also provides guarantee and underwriting facilities to housing finance institutions. Again, it co-ordinates the working of all agencies connected with housing.
Stock Holding Corporation of India Ltd. (SHCIL)
Recently in 1987 another institution viz., Stock Holding Corporation of India Ltd. was set up to tone up the stock and capital markets in India. Its main objective is to provide quick share transfer facilities, clearing services, Depository services, support services, management information services and development services to investors both individuals and corporates. The SHCIL was set up by seven All India financial institutions viz., IDBI, IFCI, ICICI, LIC, GIC, UTI and IRBI. : 26 :
Mutual Funds Industry
Mutual funds refer to the funds raised by financial service companies by pooling the savings of the public and investing them in a diversified portfolio. They provide investment avenues for small investors who cannot participate in the equities of big companies. Mutual funds have been floated by some public sector banks, LIC, GIC and recently by private sector also.
Venture Capital Institutions
Venture capital is another method of financing in the form of equity participation. A venture capitalist finances a project based on the potentialities of a new innovative project. Much thrust is given to new ideas or technological innovations. Indeed it is a long term risk capital to finance high technology projects. The IDBI venture capital fund was set up in 1986. The IFCI has started a subsidiary to finance venture capital viz., The Risk Capital and Technology Finance Corporation (RCTC). Likewise the ICICI and the UTI have jointly set up the Technology Development and Information Company of India Limited (TDICI) in 1988 to provide venture capital. Similarly many State Financial Corporations and commercial banks have started subsidiaries to provide venture capital. The Indus Venture Capital Fund and the Credit Capital Venture Fund Limited come under the private sector.
Credit Rating Agencies
Of late, many credit rating agencies have been established to help investors to make a decision of their investment in various instruments and to protect them from risky ventures. At the same time it has the effect of improving the competitiveness of the companies so that one can excel the other. Credit rating is now mandatory for all debt instruments. Similarly, for accepting deposits, non-banking companies have to compulsorily go for credit rating. Some of the credit rating agencies established re :
(i) Credit Rating and Information Services of India Ltd. (CRISIL)
(ii) Investment Information and Credit Rating Agency of India Ltd. (ICRA)
(iii) Credit Analysis and Research Ltd. (CARE)
(iv) Duff Phelps Credit Rating Pvt. Ltd. (DCR India)
The rating is confined to fixed deposits, debentures, preference shares and short term instruments like commercial paper. The establishment of various credit rating agencies will go a long way in stabilizing the financial system in India by supplying vital credit information about corporate customers.
Multiplicity of Financial Instruments
The expansion in size and number of financial institutions has consequently led to a considerable increase in the financial instruments also. New instruments have been introduced in the form of innovative schemes of LIC, UTI, Banks, Post Office Savings Bank Accounts, Shares and debentures of different varieties, Public Sector Bonds, National Savings Scheme, National Savings Certificates, Provident Funds, Relief Bonds, Indira Vikas Patra, etc. Thus different types of instruments are available in the financial system so as to meet the diversified requirements of varied investors and thereby making the system more healthy and vibrant.
Legislative Support
The Indian financial system has been well supported by suitable legislative measures taken by the Government then and there for its proper growth and smooth functioning. Though there are many enactments, some of them are very important. The Indian Companies Act was passed in 1956 with a view to regulating the function of companies from birth to death. It mainly aims at giving more protection to investors since there is a diversity of ownership and management in companies. It was a follow up to the Capital Issues Control Act passed in 1947. Again, in 1956, the Securities Contracts (Regulations) Act was passed to prevent undesirable transactions in securities. It mainly regulates the business of trading in the stock exchanges. This Act permitted only recognized stock exchanges to function.To ensure the proper functioning of the economic system and to prevent concentration of economic power in the hands of a few, the Monopolies and Restrictive Trade Practices Act was passed in 1970. In 1973, the Foreign Exchange Regulations Act was enacted to regulate the foreign exchange dealings and to control Indian investments abroad and vice versa.
The Capital Issue Control Act was replaced by setting up of the Securities Exchange Board of India. Its main objective is to protect the interest of investors by suitably regulating the dealings in the stock market and money market so as to achieve efficient and fair trading in these markets. When the Government adopted the New Economic Policy, many of these Acts were amended so as to remove many unwanted controls. Bank and financial institutions have been permitted to become members of the stock market in India. They have been permitted to float mutual funds, undertake leasing business, carry out factoring services etc.
Besides the above, the Indian Contract Act, The Negotiable Instruments Act, The Law of Limitation Act, The Banking Regulations Act, The Stamp Act etc., deserve a special mention. When the financial system grows, the necessity of regulating it also grows side by side by means of bringing suitable legislations. These legislative measures have re-organised the Indian financing system to a greater extent and have restored confidence in the minds of the investing public as well.
Nationalization of Financial Institution
As we know that the RBI is the leader of the financial system. But, it was established as a private institution in 1935. It was nationalized in 1948. It was followed by the nationalization of the Imperial Bank of India in 1956 by renaming it as State Bank of India. In the same year, 245 Life Insurance Companies were brought under Government control by merging all of them into a single corporation called Life Insurance Corporation of India. Another significant development in our financial system was the nationalization of 14 major commercial banks in 1969. Again, 6 banks were nationalized in 1980. This process was then extended to General Insurance Companies which were reorganized under the name of General Insurance Corporation of India. thus, the important financial institutions were brought under public control.
Starting of Unit Trust of India
Another landmark in the history of development of our financial system is the establishment of new financial institutions to strengthen our system and to supply institutional credit to industries.
The Unit Trust of India was established in 1964 as a public sector institution to collect the savings of the people and make them available for productive ventures. It is the oldest and largest mutual fund in India. It is governed by its own statues and regulations. However, since 1994, the schemes of UTI have to be approved by the SEBI. It has introduced a number of open-ended and close-ended schemes. It also provides re-purchase facility of units of the various income schemes of UTI are linked with stock exchanges. Its investment is confined to both corporate and non-corporate sectors. It has established the following subsidiaries:
(i) The UTI Bank Ltd., in April 1994.
(ii) The UTI Investor Service Ltd., to act as UTI’s own Registrar and Transfer agency.
(iii) The UTI Security Exchange Ltd.
Establishment of Development Banks
Many development banks were started not only to extend credit facilities to financial institutions but also to render advisory services. These banks are multipurpose institutions which provide medium and long term credit to industrial undertakings, discover investment projects, undertake the preparation of project reports, provide technical advice and managerial services and assist in the management of industrial units. These institutions are intended to develop backward regions as well as small and new entrepreneurs.
The Industrial Finance Corporation of India (IFCI) was set up in 1948 with the object of “making medium and long term credits more readily available to industrial concerns in India, particularly under circumstances where normal banking accommodation is inappropriate or recourse to capital issue method is impracticable”. At the regional level, State Financial Corporations were established under the State Financial Corporation Act, 1951 with a view to providing medium and long term finance to medium and small industries. It was followed by the establishment of the Industrial Credit and Investment Corporation of India (ICICI) in 1955 to develop large and medium industries in private sector, on the initiative of the World Bank. It adopted a more dynamic and modern approach in industrial financing. Subsequently, the Government of India set up the Refinance Corporation of India (RCI) in 1958 with a view to providing refinance facilities to banks against term loans granted by them to medium and small units. Later on it was merged with the Industrial Development Bank of India.
The Industrial Development Bank of India (IDBI) was established on July 1, 1964 as a wholly owned subsidiary of the RBI. The ownership of IDBI was then transferred to the Central Government with effect from February 16, 1976. The IDBI is the apex institution in the area of development banking and as such it has to co-ordinate the activities of all the other financial institutions. At the State level, the State Industrial Development Corporations (SIDCO)/State Industrial Investment Corporations were created to meet the financial requirements of the States and to promote regional development.
In 1971, the IDBI and LIC jointly set up the Industrial Reconstruction Corporation of India (IRCI) with the main objective of reconstruction and rehabilitation of sick industrial undertakings. The IRCI was converted into a statutory corporation in March 1985 and renamed as the Industrial Reconstruction Bank of India (IRBI). In 1997, the IRBI has to be completely restructured since it itself has become sick due to financing of sick industries. Now, it is converted into a limited company with a new name of Industrial Investment Bank of India (IIBI). Its objective is to finance only for expansion, diversification, modernization etc., of industries and thus it has become a development bank.
The Small Industries Development Bank of India (SIDBI) was set up as a wholly owned subsidiary of IDBI. It commenced operations on April 2, 1990. The SIDBI has taken over the responsibility of administrating the Small Industries Development Fund and the National Equity Fund.
Institution for Financing Agriculture
In 1963, the RBI set up the Agricultural Refinance and Development Corporation (ARDC) to provide refinance support to banks to finance major development projects such as minor irrigation, farm mechanization,, land development, horticulture, daily development, etc. However, in July 1982, the National Bank for Agriculture and Rural Development (NABARD) was established and the ARDC was merged with it. The whole sphere of agricultural finance has been handed over to NABARD. The functions of the Agricultural Credit Department and Rural Planning and Credit Cell of the RBI have been taken over by NABARD.
Institution for Foreign Trade
The Export and Import Bank of India (EXIM Bank) was set up on January 1, 1982 to take over the operations of International Finance wing of the IDBI. Its main objective is to provide financial assistance to exporters and importers. It functions as the principal financial institution for coordinating the working of other institutions engaged in financing of foreign trade. It also provides refinance facilities to other financial institutions against their export-import financing activities.
Institution for Housing Finance
The National Housing Bank (NHB) has been set up on July 9, 1988 as an apex institution to mobilize resources for the housing sector and to promote housing finance institutions both at regional and local levels. It also provides refinance facilities to housing finance institutions and scheduled banks. It also provides guarantee and underwriting facilities to housing finance institutions. Again, it co-ordinates the working of all agencies connected with housing.
Stock Holding Corporation of India Ltd. (SHCIL)
Recently in 1987 another institution viz., Stock Holding Corporation of India Ltd. was set up to tone up the stock and capital markets in India. Its main objective is to provide quick share transfer facilities, clearing services, Depository services, support services, management information services and development services to investors both individuals and corporates. The SHCIL was set up by seven All India financial institutions viz., IDBI, IFCI, ICICI, LIC, GIC, UTI and IRBI. : 26 :
Mutual Funds Industry
Mutual funds refer to the funds raised by financial service companies by pooling the savings of the public and investing them in a diversified portfolio. They provide investment avenues for small investors who cannot participate in the equities of big companies. Mutual funds have been floated by some public sector banks, LIC, GIC and recently by private sector also.
Venture Capital Institutions
Venture capital is another method of financing in the form of equity participation. A venture capitalist finances a project based on the potentialities of a new innovative project. Much thrust is given to new ideas or technological innovations. Indeed it is a long term risk capital to finance high technology projects. The IDBI venture capital fund was set up in 1986. The IFCI has started a subsidiary to finance venture capital viz., The Risk Capital and Technology Finance Corporation (RCTC). Likewise the ICICI and the UTI have jointly set up the Technology Development and Information Company of India Limited (TDICI) in 1988 to provide venture capital. Similarly many State Financial Corporations and commercial banks have started subsidiaries to provide venture capital. The Indus Venture Capital Fund and the Credit Capital Venture Fund Limited come under the private sector.
Credit Rating Agencies
Of late, many credit rating agencies have been established to help investors to make a decision of their investment in various instruments and to protect them from risky ventures. At the same time it has the effect of improving the competitiveness of the companies so that one can excel the other. Credit rating is now mandatory for all debt instruments. Similarly, for accepting deposits, non-banking companies have to compulsorily go for credit rating. Some of the credit rating agencies established re :
(i) Credit Rating and Information Services of India Ltd. (CRISIL)
(ii) Investment Information and Credit Rating Agency of India Ltd. (ICRA)
(iii) Credit Analysis and Research Ltd. (CARE)
(iv) Duff Phelps Credit Rating Pvt. Ltd. (DCR India)
The rating is confined to fixed deposits, debentures, preference shares and short term instruments like commercial paper. The establishment of various credit rating agencies will go a long way in stabilizing the financial system in India by supplying vital credit information about corporate customers.
Multiplicity of Financial Instruments
The expansion in size and number of financial institutions has consequently led to a considerable increase in the financial instruments also. New instruments have been introduced in the form of innovative schemes of LIC, UTI, Banks, Post Office Savings Bank Accounts, Shares and debentures of different varieties, Public Sector Bonds, National Savings Scheme, National Savings Certificates, Provident Funds, Relief Bonds, Indira Vikas Patra, etc. Thus different types of instruments are available in the financial system so as to meet the diversified requirements of varied investors and thereby making the system more healthy and vibrant.
Legislative Support
The Indian financial system has been well supported by suitable legislative measures taken by the Government then and there for its proper growth and smooth functioning. Though there are many enactments, some of them are very important. The Indian Companies Act was passed in 1956 with a view to regulating the function of companies from birth to death. It mainly aims at giving more protection to investors since there is a diversity of ownership and management in companies. It was a follow up to the Capital Issues Control Act passed in 1947. Again, in 1956, the Securities Contracts (Regulations) Act was passed to prevent undesirable transactions in securities. It mainly regulates the business of trading in the stock exchanges. This Act permitted only recognized stock exchanges to function.To ensure the proper functioning of the economic system and to prevent concentration of economic power in the hands of a few, the Monopolies and Restrictive Trade Practices Act was passed in 1970. In 1973, the Foreign Exchange Regulations Act was enacted to regulate the foreign exchange dealings and to control Indian investments abroad and vice versa.
The Capital Issue Control Act was replaced by setting up of the Securities Exchange Board of India. Its main objective is to protect the interest of investors by suitably regulating the dealings in the stock market and money market so as to achieve efficient and fair trading in these markets. When the Government adopted the New Economic Policy, many of these Acts were amended so as to remove many unwanted controls. Bank and financial institutions have been permitted to become members of the stock market in India. They have been permitted to float mutual funds, undertake leasing business, carry out factoring services etc.
Besides the above, the Indian Contract Act, The Negotiable Instruments Act, The Law of Limitation Act, The Banking Regulations Act, The Stamp Act etc., deserve a special mention. When the financial system grows, the necessity of regulating it also grows side by side by means of bringing suitable legislations. These legislative measures have re-organised the Indian financing system to a greater extent and have restored confidence in the minds of the investing public as well.
No comments:
Post a Comment