Unit-II: Indian Financial Systems Evolution and Structure of Indian Financial System. Elements of Indian Financial System— Markets, Institutions, and Environment. Money Market and the role of banking, Non-banking and Unorganized Sector. Regulatory function of RBI with special reference to Money market. Components of Capital Market—Primary, Secondary, Debt and Equity Market. Problems and Prospects of Indian Capital Market.

1. Business Environment
UNIT - 2
PRESENTED BY
K.BALASRI PRASAD
B.Sc(KU), M.B.A(OU), NET(UGC), (Ph.D)(MGU)
ASSISTANT PROFESSOR IN MANAGEMENT
VISHWA VISHWANI GROUP OF INSTITUTIONS

2. BBA/MBA 5 year Integrated Course II Year -III Semester
Paper No. 3.5 Business Environment
Unit -I: Business Environment and Analysis:
Nature, Composition and Scope of Business Environment. Business Environment and its impact on different kinds of business
decisions. Economic growth and Economic Development. Analysis of India’s National Income. Recent trend in the growth of
National Income and its important components: Saving, Investment, Industry, Agriculture and Tertiary Sectors.
Unit-II: Indian Financial Systems:
Evolution and Structure of Indian Financial System. Elements of Indian Financial System— Markets, Institutions, and Environment.
Money Market and the role of banking, Non-banking and Unorganized Sector. Regulatory function of RBI with special reference to Money
market. Components of Capital Market—Primary, Secondary, Debt and Equity Market. Problems and Prospects of Indian Capital
Market.
Unit-III: Economic Policies of India:
Industrial Environment and Policy. Role of SSUs, and MNCs. Policy of Public Sector and its role in the economy. Competition Law.
Polices on Foreign Investment and Trade (EXIM).
Unit-IV: Liberalisation, Privatisation, and Globalisation (LPG) in Indian Economy:
Concept of LPG, Process of LPG followed in India. Globalization and role of WTO. Regional Trading Blocks. India’s Foreign Trade
and Agreements with Trading Blocks.
Unit-V: Economic Survey and Union Budget:
Fiscal Policy and Present Tax Environment –Direct and Indirect Taxes. Concept of Value Added Tax. Current Year’s Economic Survey
and Union Budget.
References:
1. Justin Paul, 2010, “Business Environment”, McGraw-Hill Companies.
2. Misra and Puri V.K, 2010 “Indian Economy”, Himalaya Publishing House, Bombay.
3. Shaik Saleem, “Business Environment”, Pearson Edition.
4. K. Aswathappa, 2010, “Essentials of Business Environment”, HPH
5. VIvek Mittal, “Business Environment”, 2010, Excel Books, New Delhi.
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3. Unit-II: Indian Financial Systems
Evolution and Structure of Indian Financial
System.
Elements of Indian Financial System— Markets,
Institutions, and Environment.
Money Market and the role of banking, Non-banking
and Unorganized Sector.
Regulatory function of RBI with special reference to
Money market.
Components of Capital Market—Primary,
Secondary, Debt and Equity Market.
Problems and Prospects of Indian Capital Market.

4. Evolution of Indian Financial System
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Indian Financial System is a key tool which supports the overall
economic development of our country.
It is the one which facilitates the smooth flow of funds between the
households (savers) and businessmen (investors).
The financial system of the country is one which promotes
capital formation by channelizing the ideal lying resources
into useful means. This system acts as an intermediary between
the savers and investors.
The financial system has major functions that are
providing payment mechanism, depositing and
safeguarding people’s savings and providing loans
to individuals.

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This system comprises of 4 major components:
•Financial Institutions
•Financial Services
•Financial Assets
•Financial Markets.
Evolution of Indian Financial System
History of Indian financial system dates back even
before the period when India got independence in
the Year 1947
Evolution of Indian Financial system can be classified into 3 phases: –
1.Pre Independence Phase (Before 1947)
2.Post-Independence Phase (1947-1991)
3.The Liberalization era (1991 and beyond)

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1.Pre Independence Phase (Before 1947)
During this phase, there was a large number of banks present in
India which was around 600. Establishment of Bank of Hindustan
in the year 1770 in Calcutta marks the starting of the Indian
financial system. The bank discontinued its services in 1832.
There were various banks that evolved post to Hindustan banks such as
General Bank of India (1786-1791) and Oudh commercial bank (1881-
1958). However, these banks were not able to continue for a long.
Few banks of the 19th century are existing even today such as
Punjab National bank formed in 1894 and Allahabad bank formed
in 1865.
Three major banks of that time like Bank of Bengal, Bank of
Madras and Bank of Bombay were merged as one body which was
termed as Imperial Bank of India. This Imperial bank was later on
renamed to State Bank of India.

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During this phase, The Bombay Stock Exchange(BSE) also
established in 1875 it is Asia’s first stock exchange. The BSE has
helped develop India’s capital markets, including the retail debt
market, and has helped grow the Indian corporate sector.
Hilton Young Commission in year 1935 recommended the
establishment of Reserve bank of India.
This was a phase in which majority of small-sized banks
failed to function properly and were unable to gain
people’s confidence.
People were more involved with money
lenders and unregulated players.

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2. Post-Independence Phase (1947-1991)
Post-independence period is characterized by the nationalization of
banks. Majority of banks in India were privately owned at the time of
independence and were serving only the big corporates. Rural
population, small-scale industries and agriculture sector were still
dependent on local money lenders.
The government in order to overcome this situation decided to
nationalize the banks under the Banking regulation act, 1949. RBI
was nationalized in 1949 and later on, 14 commercial banks were
nationalized in July 1969 during the tenure of Indira Gandhi.
Narasimham committee in 1975 recommended the
establishment of RRBs (Regional Rural Banks) for
development of rural sector and providing services
to unserved ones.

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There were several other specialized banks which were
constituted during this period to support the development of
the economy.
These were like NABARB in 1982 for supporting agricultural-
related activities, National housing bank in 1988 for the
Housing sector, SIDBI in 1990 for assisting small-scale firms.
Nationalization was a remarkable step in the
banking industry of industry which boost the
country growth.
It was successful in gaining people’s confidence in
banking services and also smaller group were easily
able to access capital from financial institutions post
nationalization.

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3. The Liberalization era (1991 and beyond)
This was a phase which saw remarkable changes in the banking industry.
Government of India for regulating the activities and stabilizing the
profits of the banking industry set up a committee under the
chairmanship of Shri M. Narasimham for bringing various reforms.
During this period, government opened up the economy the granted
private player’s entry to banking industry. RBI granted license to 10
private sector banks out of which only few notables survived like Axis
Bank, HDFC Bank, DCB, ICICI and IndusInd Bank.
In 1992 National Stock Exchange Established to provide fully automated
electronic trading.
Narasimham committee again in 1998 recommended the entry
of more private entities in banking industry. Therefore, license
was provided to Kotak Mahindra in 2001 and Yes Bank in 2004
by RBI. Further in 2013-2014, a license was granted to Bandhan
and IDFC bank.

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There are several other measures also that were taken
during this phase:
- allowing the establishment of foreign banks in India
-equal treatment of both public and private sector bank by
government and RBI
-allowing joint ventures of foreign banks with Indian
banks
-the introduction of Payments banks
-setting up small finance banks and
disallowing any further nationalization of
banks.

12. Structure of Indian Financial System
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The financial system is the main part of running the economy
smoothly. financial system provides the flow of finance in the
economy. which leads to the development of the country financial
system show the strength of the country.
Indian Financial System is a combination of financial institutions, financial
markets, financial instruments and financial services to facilitate the transfer
of funds. Financial system provides a payment mechanism for the exchange
of goods and services. It is a link between saver and investor.
The following are the four major components that comprise the Indian Financial System:
1. Financial Institutions
2. Financial Markets
3. Financial Instruments/Assets/Securities
4. Financial Services

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1. Financial Institutions
Financial institutions are the intermediaries who
facilitate the smooth functioning of the financial
system by making investors and borrowers meet.
They mobilize savings of the surplus units and
allocate them in productive activities
promising a better rate of return.
Financial institutions can be classified into two
categories:
 Banking Institutions
 Non-Banking Financial Institutions

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2. Financial Markets
Financial markets may be broadly classified as
negotiated loan markets and open market.
The negotiated loan market is a market in which the lender
and the borrower personally negotiate the terms of the loan
agreement, e.g. a businessman borrowing from a bank or
from a small loan company.
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.

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On the basis of the credit requirement for short-term and long term
purposes, financial markets are divided into two categories,
 Money Market
 Capital Market
3. Financial Instruments/ Assets/ Securities
Financial instruments are monetary contracts between parties.
The products which are traded in a financial market are financial
assets, securities or other types of financial instruments.
Financial instruments can be real or virtual documents
representing a legal agreement involving any kind of monetary
value. Equity-based financial instruments represent ownership
of an asset. Debt-based financial instruments represent a loan
made by an investor to the owner of the asset.

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Types of Financial Instruments
Cash Instruments • Derivative Instrument
4. Financial Services
It consists of services provided by Asset Management
and Liability Management Companies.
They help to get the required funds and also make sure
that they are efficiently invested.
Types of Financial Services
 Banking
 Wealth Management
 Mutual Funds
 Insurance

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Money Market and the role of banking, Non-
banking and Unorganized Sector
The money market is a component of the economy
which provides short-term funds.
The money market deals in short-term loans,
generally for a period of a year or less.
The money market involves the purchase and sale of large
volumes of very short-term debt products, such as overnight
reserves or commercial paper.
An individual may invest in the money market by purchasing
a money market mutual fund, or opening a money market
account at a bank.

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Constituents of Money Market
Dr. Lavington divides the money market into inner and outer
spheres—the inner constituting “a nucleus of specialized institutions
such as the banks, the market for negotiable securities, the bill
brokers, the trust and finance companies, and the outer extending
beyond this Centre, including the work of solicitors, of brokers, of
securities and the entire system of trade and credit.”
The central bank, commercial banks, cooperative banks,
savings banks, discount houses, acceptance house, etc., are
the main constituents of a well developed money market.
The central bank usually occupies a pivotal
position in the money market. It is regarded as
the ‘presiding deity’ of the money market.

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In developing countries like India, the money
market is broadly divided into organized and
unorganized markets or sectors.
The unorganized segment is, by and large,
outside the control of the central bank and is
characterized by lack of uniformity and
formality in their business dealings.
In India, the indigenous bankers and
moneylenders are important constituents of
the unorganized money market.

21. FUNCTIONS OF MONEY MARKET
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The important functions of a well developed money market:
1.By providing various kinds of credit instruments suitable and
attractive for different sections, a money market augments the
supply of funds.
2.Efficient working of a money market helps to minimize the gluts
and stringencies in the money market due to the seasonal
variations in the flow of and demand for funds.
3. A money market helps to avoid wide seasonal
fluctuations in the interest rates.
4. A money market, by augmenting the supply of funds and
making them readily available to the legitimate borrowers,
helps in making funds available at cheaper rates.

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5. A well organized money market, through quick transfer
of funds from one place to another, helps to avoid the
regional gluts and stringencies of funds.
6. It enhances the amount of liquidity available to the
entire country.
7. A money market, by providing profitable investment
opportunities for short-term surplus funds, helps to
enhance the profit of financial institutions and individuals.
A money market functions like a dam-canal-
irrigation system. Like a reservoir, it collects and
augments the resources and channelizes it to
the various needed areas.

23. Money Market Instruments and Constituents
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The money market instruments in India mainly comprise: (i) call
money, (ii) certificates of deposit, (iii) treasury bills, (iv) other
short-term government securities transactions, such as, repos,
(v) bankers’ acceptances/commercial bills, (vi) commercial
paper, and (vii) inter-corporate funds.
Call/Notice Money Market: Call and notice money are money
dealt for one to 14 days. The period of term money ranges from 14
days to 90 days. This is sometimes a very volatile market and the
interest rate is determined by the market forces.
This market is of vital importance to banks and financial
institutions because of the avenue it provides for investing
surplus funds and meeting the deficits. The Inter-bank
lending is the major component of this market.

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Term Money Market: The term money market in India is still
not developed. Select financial institutions (IDBI, ICICI, IFCI,
IIBI, SIDBI, EXIM Bank, NABARD, IDFC and NHB) are permitted
to borrow from the term money market for 3-6 months
maturity, within stipulated limits for each institution.
Repos: Repo, is a money market instrument, which
enables collateralized short-term borrowing and lending
through sale/purchase operations in debt instruments.
Under a repo transaction, a holder of securities sells
them to an investor with an agreement to
repurchase at a predetermined date and rate.

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Treasury Bills: Treasury bills are promissory notes issued by the
Central Government to raise short-term funds to bridge short-
term mismatches between receipts and expenditures.
The RBI which issues the TBs on behalf of the Government does
not purchase them before maturity but investors can sell them
in the secondary market
Commercial Paper: Commercial papers are unsecured
promissory notes of short-term maturity of highly rated
companies, issued to meet working capital requirements.
The CP is subject to credit rating by any of the recognized
credit rating agencies in India.
As the CPs are tradable in the secondary market, including
National Stock Exchange, they are regarded liquid

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Certificates of Deposit: Certificates of Deposit (CD),
introduced in June 1989, are essentially securitized short-
term time deposits issued by banks during periods of tight
liquidity, at relatively high interest rates (in comparison
with term deposits).
Money Market Mutual Funds (MMMFs): In April 1992,
scheduled commercial banks and public financial
institutions were allowed to set up MMMFs, subject to
certain terms and conditions.
MMMFs are allowed to invest in rated corporate bonds and
debentures with a residual maturity of one year. The
minimum lock-in period for units of MMMFs was relaxed
from 30 days to 15 days in May 1998.

27. Regulatory function of RBI with special reference to Money market
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A well-functioning money market is a crucial link in
the chain of monetary policy transmission, apart
from being a basic necessity for pricing and liquidity
in other financial markets.
The Reserve Bank has issued regulations over time covering
different money market products – call money, repo,
commercial paper, certificates of deposit and other debt
instruments with original maturity less than one year, etc.
With the objective of bringing consistency across products
in terms of issuers, investors and other participants, it is
proposed to rationalize existing regulations covering
different money market products.

28. Regulatory function of RBI with special reference to Money market
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These directions would improve transparency and safety of
money markets.
“Draft Call, Notice and Term Money Markets (Reserve Bank)
Directions, 2020”
The following entities shall be eligible to participate in the call, notice
and term money market, both as borrowers and lenders:
a.Scheduled Commercial Banks;
b.Payment Banks;
c.Small Finance Banks;
d. Regional Rural Banks;
e. State Co-operative Banks, District Central Co-operative Banks and
Urban Co-operative Banks (hereinafter Co-operative Banks); and
f. Primary Dealers.

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General Guidelines
a.Interest Rates: Eligible participants are free to decide on interest rates in
the call, notice and term money markets.
b.Trading venue: Call, notice and term money transactions can be executed
in Over-the-Counter (OTC) markets, including on the NDS-CALL platform or
any other ETP approved for the purpose by the Reserve Bank.
c. Market timings: The market timing for call, notice and term money
transactions shall be from 9:00 AM to 5:00 PM on each business day or as
specified by the Reserve Bank from time to time.
d. Market practices and documentation: Eligible participants shall follow
standard market practices, methodologies and documentation prescribed by
Fixed Income Money Market and Derivatives Association of India (FIMMDA), in
consultation with RBI, from time to time.
Cancellation and Termination
a.A call, notice or term money transaction shall, normally,
not be cancelled.

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b. A term money transaction can be terminated before
maturity at a mutually agreed price.
c. Any cancellations or terminations shall be reported as set
out in paragraph 7 of these Directions.
Reporting requirements
a.All call, notice and term money transactions shall be reported to the NDS-
CALL platform within 15 minutes of execution (the time when price is
agreed), by each party to the transaction, or, by the concerned ETP, as the
case may be. For this purpose, all participants in the call, notice and term
money market shall obtain membership of NDS-CALL platform.
Participants who are not members of NDS-CALL on the date these Directions come into
effect will have a period of three months from that date for obtaining such membership.
b. Transactions executed on the NDS-CALL platform need not be separately reported.
c. Any cancellation or termination of call, notice and term money transactions shall be
reported to the NDS-CALL platform within 15 minutes of cancellation by each party to the
transaction or by the concerned ETP, as the case may be.

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d. In case of any misreporting or repeated reporting of OTC deals by a
party, the same should be immediately brought to the notice of Clearing
Corporation of India Limited and also to Financial Markets Regulation
Department, Reserve Bank of India, Central Office, Fort, Mumbai, either
through email (reportfmd@rbi.org.in), or through fax.
Obligation to provide information sought by the Reserve Bank: The
Reserve Bank may call for any information or seek any clarification
from eligible participants in the call, notice and term money markets
which in the opinion of the Reserve Bank is relevant and the
participant shall furnish such additional information and clarification.
Dissemination of data: Reserve Bank of India or any other
agency authorized by the Reserve Bank, may publish any
anonymized data related to transactions in call, notice and
term market.

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Violation of Directions: Reserve Bank may disallow any
entity that has violated any of these Directions from
participating in the call, notice and term money market for
a period not exceeding one month at a time after
providing reasonable opportunity to the entity to defend
its actions.
Any such action will be made public by the Reserve Bank.
These Directions shall apply to call, notice and term money
transactions entered into from the date the Directions come into
effect. Existing Directions will continue to be applicable to
transactions undertaken in accordance with the said Directions till
the expiry of those contracts.
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Components of Capital Market—Primary,
Secondary, Debt and Equity Market
 Capital Market is generally understood as the market for long-
term funds.
 The term Capital Market is used to refer to the market for long-
term loanable funds as distinct from the money market which
deals in short-term funds.
The capital market consists of a number of individuals and
institutions (including the government) that channelize the
supply and demand for long-term capital and claims on capital.
The stock exchanges, commercial banks, cooperative banks,
savings banks, development banks, insurance companies,
investment trust or companies, etc. are important constituents of
the capital market

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The capital market has three important
components,
The Suppliers of loanable funds,
The borrowers and
The intermediaries who deal with the lenders on
the one hand and the borrowers on the other.
The supply of funds comes from the individual and
corporate savings, institutional investors and
surplus of governments.
The demand for capital comes mostly from
agriculture, industry, trade and the government.

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Business firms can raise funds from the capital
market by issuing shares and credit instruments.
Capital market is not concerned solely with
the issue of claims.
Marketability of securities is an important
element in the efficient working of the capital
market, since investors would be reluctant
to make loans if their claims could not be
easily disposed of.

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The developed countries have comparatively well
developed money and capital markets.
But, in the developing countries, the capital
market, like the money market, is generally
underdeveloped.

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The main components of capital market are:
1. Primary Market
2. Secondary Market
1. Primary Market (New Issue Market):
 Primary market is also known as new issue market.
 As in this market securities are sold for the first time, i.e., new
securities are issued from the company.
 Primary capital market directly contributes in capital formation
because in primary market company goes directly to investors and
utilizes these funds for investment in buildings, plants, machinery etc.
The primary market does not include finance in the form of loan from
financial institutions because when loan is issued from financial institution
it implies converting private capital into public capital and this process of
converting private capital into public capital is called going public.
The common securities issued in primary market are equity shares,
debentures, bonds, preference shares and other innovative securities.

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Method of Floatation of Securities in Primary Market:
The securities may be issued in primary market by the following
methods:
a. Public Issue through Prospectus: Under this method company
issues a prospectus to inform and attract general public.
In prospectus company provides details about the purpose for which
funds are being raised, past financial performance of the company,
background and future prospects of company.
b. Offer for Sale:
Under this method new securities are offered to general public but not
directly by the company but by an intermediary who buys whole lot of
securities from the company.
So sale of securities takes place in two steps:
 First, when the company issues securities to the intermediary at face
value and
 Second, when intermediaries issue securities to general public at higher
price to earn profit.

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C . Private Placement:
The securities are sold by the company to an intermediary at a fixed price and in
second step intermediaries sell these securities not to general public but to
selected clients at higher price.
The intermediaries issue securities to selected clients such as UTI, LIC, General
Insurance, etc.
d. Right Issue (For Existing Companies):
The issue of new shares to existing shareholders.
It is called right issue because it is the pre-emptive right of shareholders that company must
offer them the new issue before subscribing to outsiders.
Each shareholder has the right to subscribe to the new shares in the proportion of shares
he/she already holds.
A right issue is mandatory for companies under Companies’ Act 1956.
e. E-IPOs, (electronic Initial Public Offer):
Issuing securities through on line system of stock exchange.
Company has to appoint registered brokers for the purpose of accepting
applications and placing orders.
The company issuing security has to apply for listing of its securities on any
exchange other than the exchange it has offered its securities earlier.

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2. Secondary Market (Stock Exchange):
The secondary market is the market for the sale and purchase of
previously issued or second hand securities.
In secondary market, securities are not directly issued by the
company to investors.
The securities are sold by existing investors to other investors.
Both the investors can meet in secondary market and exchange
securities for cash through intermediary called broker.
In secondary market, companies get no additional capital as
securities are bought and sold between investors only.

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52. Important Questions
1. Discuss Customer Value, Customer Expectation,
Customer Satisfaction?
2. Explain Customer Centricity, Customer Acquisition,
Customer Retention, Customer Loyalty?
3. Elaborate Customer Lifetime Value, Customer
Satisfaction Measurements, Web based Customer
Support?