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. Only after the launching of planning era some serious attention was paid to development of a sound financial system in India.
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 finance might be in the right direction.
The development of financial system in India can be discussed in following headlines. Nationalization of Financial Institutions: Reserve Bank of India, which was started as a private institution in 1935, was nationalized by the Government in 1948 and given the controlling authority of the financial system. Later on various other large financial institutions like banks and insurance companies were nationalized to avoid the concentration of economic power. Starting of Unit Trust of India: Another landmark in the development of Indian financial system was starting of UTI in 1964 as a public sector institution to mobilize small savings for corporate / large ventures. UTI is country’s largest and oldest mutual fund. Later on various financial institutions and private sector companies started mutual funds to mobilize public deposits.
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 were 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. Among them are IFCI (1948), ICICI (1955), RCI (1958), IDBI (1964), IRCI (1971), IRBI (1997) and SIDBI (1990) are important DFIs.
Institutions for Financing Agriculture, Foreign Trade and Housing: The Government took serious steps to provide sector specific finance facilities. RBI established ARDC (1963) and NABARD (1982), EXIM Bank (1982) and NHB (1988). Recently in 1987 Stock Holding Corp. of India Ltd. was set up to tone up the stock and capital markets in the country.
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. The IDBI venture capital fund was set up in 1986. The Risk Capital and Technology Finance Corp. was started by IFCI. Likewise ICICI and UTI jointly setup TDICI in 1988.
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.
Multiplicity of Financial Instruments: The expansion in size and number of FIs has consequently led to a considerable increase in the financial instruments also. Different types of instruments are available in the financial system so as to meet the diversified needs of the various people.
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. The Indian Companies Act, 1956, Securities Contacts (Regulation) Act, 1956, MRTP Act, 1970, SEBI Act are few examples of legislative support available to financial system. Apart from the above act,