DIFFERENCE BETWEEN INDIAN AND NEPALESE FINANCIAL SYSTEM

DIFFERENCE BETWEEN INDIAN AND NEPALESE FINANCIAL SYSTEM

Avishek Bansal

Financial System

• Financial system is the system that allows the transfer of money between savers (investors) and borrowers

• It consists of– Financial Market– Financial Intermediaries– Financial Instrument– Financial Services

Indian Financial System

Non- Organized Organized

Money lenders

Local bankers

Traders

Landlords

Pawn brokers

Chit Funds

Regulators

Financial Institutions

Financial Markets

Financial Intermediaries

Evolution of Nepalese Financial System

Nepalese financial system is categories into 3 different phases -

First phase is the pre NRB(Nepal Rastra Bank) period.

Second phase starts with NRB Act of 1955.

Third and ongoing phase starts after enactment of current NRB act of 2002.

1. First Phase

• Its corresponds with the initiation of formal banking system in Nepal.

• Establishment of Tejarath Adda in 1880 can be conceived as beginning of process of credit mobilization in Nepal.

• It was only with the establishment of Nepal Bank Ltd. (NBL) in 1937 the financial services were made available to the general public.

2. Second phase

• This phase commence with establishment of NRB in 1956 under the NRB Act 1955.

• With NRB process was made easier for establishment of banks and financial institute in the country.

• It is further divided into two sub periods. First period was the period of restriction.

• This period took different turn with the establishment of Nepal Arab Bank Ltd as the first joint venture bank in 1984 under government liberalisation policy.

• Later on many other government bank, joint venture bank and NGO for limited banking transaction started after 1992 under 3 major act –

Finance Company Act 1985 Company Act 1964 Development Bank Act 1996

3. Third phase

• Current NRB Act of 2002 make the initiation of currently ongoing third phase.

• This Act replace NRB act 1955.• As a process financial sector reform program all these

diversified act were grouped together under the “Bank & Financial Institution Act,2006”.

• The act is also known as Umbrella Act categorised all the banks & institution under four head i.e. Group A , Group B ,Group C and Group D.

Capital Market

• Capital markets facilitate the transfer of capital (i.e. financial) assets from one owner to another.

• They provide liquidity.– Liquidity refers to how easily an asset can be

transferred without loss of value.

• A side benefit of capital markets is that the transaction price provides a measure of the value of the asset.

Difference in Capital Market

INDIAN FINANCIAL SYSTEM

• 22 stock exchanges major being NSE and BSE.

• NSE was established in 1992 and BSE in 1875

• Securities are traded via NEAT system.

• SEBI regulates market.

NEPALESE FINANCIAL SYSTEM

• One stock exchange (NEPSE).

• NEPSE was founded in 1992

• Securities are traded via NATS system.

• SEBON(securities exchange board of Nepal)

Difference in Capital Market

INDIAN FINANCIAL SYSTEM

• Dematerialization of shares.

• Market capitalization of BSE was US$ 1037.83 billion

NEPALESE FINANCIAL SYSTEM

• No Dematerialization of Shares.

• Market capitalization of NEPSE was US$ 5674 million

Capital market……………..

– Index of NEPSE is 567, Index of BSE (SENSEX) 20547, Index of NSE (NIFTY) 6089 “as per 16 October 2013”.

Sub-Index of NEPSE

Market capitalization

NEPSE

BSE

Recent Reform in Capital Market

• Creation of market Regulators – SEBI in 1992• Screen based trading- 1994• Dematerialization of shares- depository act 1996 • Demutualization• Globalization• Direct Market access- 2008• Launch of Currency Futures• Launch of Interest Rate Futures

Money Market

• Market for short-term money and financial assets that are near substitutes for money. Short-Term - period up to one year near substitutes - any financial asset which

can be quickly converted into money with minimum transaction cost

MONEY MARKET IN INDIA

STRUCTURE OF INDIAN MONEY MARKET

• Call and Notice Money Market • Treasury Bill Market • Commercial Bills • Certificate of Deposits• Commercial Papers• Money Market Mutual Funds

MONEY MARKET IN NEPAL

STRUCTURE OF INDIAN MONEY MARKET

• Call and Notice Money Market • Treasury Bill Market • Commercial Bills • Certificate of Deposits• Commercial Papers

Comparing Nepal and India money market

• Similar to India, Nepal also have organized and unorganized market

• Similar to India, Organized market is run by Central Bank.

• Money market in Nepal was set up in 1989 but in India set up in 1992 AD.

• Money market in Nepal is limited in national only but in India broadly .

Call money

• Is an integral part of the Indian money market where day-to-day surplus funds (mostly of banks) are traded.

• The loans are of short-term duration (1 to 14 days). Money lent for one day is called ‘call money’; if it exceeds 1 day but is less than 15 days it is called ‘notice money’. Money lent for more than 15 days is ‘term money’

• The borrowing is exclusively limited to banks, who are temporarily short of funds.

Call money comparison India and Nepal

• Call loans are provided by Nepalese commercial banks and central bank ,similar to India.

• The main function of the call money market is to redistribute the pool of day-to-day surplus funds of banks among other banks in temporary deficit of funds but in nepal there is in initial stage.

• The call market helps banks economies their cash and yet improve their liquidity but in nepal it is in initial satage.

• It is a highly competitive and sensitive market but nepal has no braodly presented call money market.

Derivative Market

The derivative refers to product whose value is derived from the value of one or more basic variable, called

underlying. The underlying asset can be-

• Commodities including grains, coffee beans , orange juice etc

• Precious metal like gold and silver• Foreign exchange rates or currencies• Different kind of bonds• Short time securities like T- Bills etc…….

Derivative Market In India

• In the area of commodities , Bombay Cotton trade Association Started future trading way back in 1875.

• In 1952 The government of India banned cash settlement and option trade.

• The first step towards introduction of financial derivative trading in India was the amendment in Security Law Ordinance 1995, It provided for withdrawal of prohibition on option in securities.

• Derivative trading commenced in India In Jan 2000 after SEBI granted the final approval to this effect in May 2001 on the recommendation of L.C. Gupta Committee.


SEBI permitted the derivative segment of two Stock Exchange, NSE & BSE.

A. Products traded on Derivative Segments of the BSE-• Index Future – Sensex (June 9, 2000)• Index option – Sensex (June 1, 2001)• Stock Option on 109 Stocks (July 1, 2001)• Stock Future on 109 Stock (November 9, 2002)• Weekly Option on 4 Stocks (Sept 13, 2004)• Currency Future on Us Dollar Rupee (Oct 8, 2008)


B. Products traded on F&O Segments of the NSE –• Index Future – S&P CNX nifty (June12,2000)• Index Option – S&P CNX nifty (June 4, 2001)• Stock Option on 233 Stocks (July 2, 2001)• Stock Future on 233 Stocks (November 9, 2001)• Interest rate futures (June 23,2003)• CNX 100 Future & Option (June 1,2007)• Currency Future on USD Dollar Rupee (Aug 29,2008)

Status and growth of Derivative Market In India

• The Regulatory framework in India is based on the L.C. Gupta Committee Report , J.R. Verma Committee Report.

• It is mostly consistent with Internationa Organisation Of Securities commission (IOSCO) principles.

• The Equity Derivative market in India registered an explosive growth.

• NSE accounts for 99 % of the derivative trading.• Trading in derivative market gain popularity soon after its

introduction.

Status and growth of Derivative Market In India

• The turn over of NSE derivative market exceeded the

turnover NSE cash market. For example- In 2008 the value of NSE derivative market was Rs. 13,090,477 cr where as value of NSE cash market was only 3,551,038 cr.

• If we compare the trading figure of NSE and BSE , performance of BSE is not encouraging both in terms of volumes and no of contracts.

Derivative Market in Nepal

• Markets for futures trading were developed initially to help agricultural producers and consumers manage the price risks they faced harvesting, marketing and processing food crops each year..

• Today, futures exist not only on agricultural products, but also a wide array of financial, stock and forex markets.

• Electronic trading established in 2009.

• Commodity market is introduced by Commodities

Exchange Nepal Ltd (COMEN).

Types Derivative Market

• Two types of Derivative market1) Over the counter market.

privately traded between two parties i.e. no intermediary is required.

Swaps, Options and Forward are traded in OTC

Market participants of OTC are Investment funds, Hedge funds, Commercial Bank.

………………..

2) Exchange traded derivative market

Traded through specialized derivative exchange.

Here exchange act as intermediary.

Most used derivatives are economic derivative,

freight derivative, weather derivatives etc.

There are three commodities exchanges –

COMEN , MEX & NDEX.

Status and growth of Derivative Market In Nepal

• The growth of Nepal’s derivatives market‚ in absolute term‚ is somehow good

• The Nepalese Derivative Market is very young.• There is no regulating body in the Nepalese derivative

market.• Most of the investors find the derivative market as some

sorts of gambling place • This is also by the fact that Nepalese commodity

derivative exchanges are not certified bye the IOSCO and have not followed the principles of IOSCO in contract .

Economy Comparison…

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Reforms in Nepalese Financial System

• In Nepal process of financial liberalization was actually initiated on mid 1980s.

• Process of financial liberalization gained momentum in 1987/88 when Nepal Collaborated IMF.

• The NRB initiated regular auction of treasury bill since 1988/89 in order to introduce great flexibility in interest rate

• To reduce dependence of commercial bank for short term borrowing requirement ,a call money market was set up during 1988/89


• An array of measures pertaining to financial sector legislation included the enactment of new Nepal Rastra Bank Act 2002 & Debt Recover Act ,2002.

• Credit Information Bureau (CIB) was established in 1989 is the prime organization in the country acting as Depository of credit information.


• The financial system also encompasses area such as capital market and insurance. Security Exchange Centre converted into Nepal Stock Exchange (NEPSE) in 1993.

• NEPSE introduces fully automated screen based trading system on August 24 ,2007 Replacing open out cry system.

• Security Act come into effect on January 2007.• Security act further mandate Security Board Of Nepal

(SEBON) as the regulator of security market.

Economy & Finance

DIFFERENCE BETWEEN INDIAN AND NEPALESE FINANCIAL SYSTEM