Page 191 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes and internationally. Further, international competition is a reality since restrictions on the
entry of foreign financial institutions are being removed. Global banks can maintain extensive
distribution channels, develop new products and transfer risks around the globe. The trend in
disaggregation at national and international levels is likely to lead banks and other financial
institutions to become more specialized, niche players. The institutions will specialize only in
few areas and meet particular customer demands. Liberalisation of domestic capital markets
and of international capital flows since the early 1970s coupled with rapid gain in information
technology has been the catalyst for financial innovation and the growth in cross border capital
movements. These national financial markets have become increasingly integrated into a single
financial system.

9.2 Role of Exchanges

Global markets are integrated by the exchanges which link up across borders. This results in
reduction of costs, lower trading fee and longer trading hours. SIMEX and Chicago Mercantile
Exchanges are also relaxing membership criteria to expand participation by including off site
members. The switch from floor trading to screen based trading has also opened the door to
remote membership and broader participation. Broader membership means access to more
capital and less risk for clearing house and larger volume. Some exchanges (MATIF) are combining
floor trading with electronic trading by allowing some of each.

9.3 Financial Information Business

Facilitating globalisation-Reuters Holding, Bloomberg, Dow Jones Markets and Bridge
Information services are the four large firms. The line between information provision and
trading is becoming blurred in the race to provide globally accessible financial services.

9.3.1 Internet

Internet is breeding a host of niche players with connection to financial institutions and investors.

9.3.2 Market Oriented vs. Bank Oriented Financial Systems

The two systems of banking are the market-oriented financial system (Anglo Saxon) characterized
by a division of functions and the bank-oriented financial system (Central European) characterized
by universal banking. In a market-oriented financial system, specialized financial institutions
including banks, financial markets and market intermediaries cater to the different financial
needs. In a bank-oriented financial system, savings are largely transferred directly from those
who generate them to those wishing to use them by the intermediation of banks. Britain with its
functional specialisation represents a market-oriented financial system while Germany with
her tradition of universal banking as a bank-oriented financial system.

9.3.3 Branch vs. Unit Banking Systems

The unit and branch banking systems evolved around the central banking system which consists
of the central bank, commercial banks and other financial institutions. Unit banking consists of
provision of banking services by a single institution. The size as well as the area of operation is
small and far more limited than branch banking. However, the unit bank may have branches
within a strictly limited area. A third of banking offices in the United States are unit banks. Their
presence in USA is a result of law vested interests and the ability of this type of organization to
meet the demands of banking customers. It was also a practical method earlier because of

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