BANKING & FINANACE

8/7/2019 BANKING & FINANACE

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INTER INSTITUTE CREDITINTER INSTITUTE CREDITTRANSFER COURSETRANSFER COURSE

Dr.Dr. AnusreeAnusree PaulPaul



Structure of financial system

Structure of banking system

Money markets and Capital markets

Reserve Bank of India and its role

Commercial banking

Cooperative Banking

Non-Banking Financial Institutions and their role

Venture capital, Securitization of assets, portfolio management, risk andreturn.

Reforms in banking and finance

Banking Services: Remittances Safe Custody Safe Deposit Vaults Collection

Facility MICR Clearing ATMs Credit cards and Debit Cards Travellers

Cheques Gift Cheques Ombudsman and Customer Services FraudDetection and Control

Concept of Foreign Exchange (FE), FE transactions of Banks, Buying andSelling, Spot and Forward, Role of EXIM Bank, Convertibility: Capital andCurrent Accounts, RBI Mechanism for regulating foreign exchangemarkets

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3 components of Exam:

project : 40 marks

Presentation: 10 marksWritten Examination: 50 marks

Date of written exam:

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The economic development of a nation isreflected by the progress of the variouseconomic units, broadly classified into corporatesector, government and household sector. Whileperforming their activities these units will beplaced in a surplus/deficit/balanced budgetary

situations.

There are areas or people with surplus fundsand there are those with a deficit. A financialsystem or financial sector functions as an

intermediary and facilitates the flow of fundsfrom the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations andlaws, practices, money manager, analysts,transactions and claims and liabilities.

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An institutional framework existing in a country to

enable financial transactions

Three main parts

Financial assets (loans, deposits, bonds, equities, etc.)

Financial institutions (banks, mutual funds, insurance

companies, etc.)

Financial markets (money market, capital market, forex

market, etc.)Regulation is another aspect of the financial

system (RBI, SEBI, IRDA, FMC)

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The word "system", in the term "financialsystem", implies a set of complex and closelyconnected or interlined institutions, agents,practices, markets, transactions, claims, and

liabilities in the economy.The financial system is concerned about money,credit and finance-the three terms are intimatelyrelated yet are somewhat different from eachother.

Indian financial system consists of - financial market,

- financial instruments and

- financial intermediation.

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A Financial Market can be defined as the market in which financial assets are created ortransferred. As against a real transaction that

involves exchange of money for real goods orservices, a financial transaction involvescreation or transfer of a financial asset.

Financial Assets or Financial Instrumentsrepresents a claim to the payment of a sum of

money sometime in the future and /or periodicpayment in the form of interest or dividend.

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Defined as the market in which financialassets are created or transferred.

These assets represent a claim to thepayment of a sum of money sometime in

the future and/or periodic payment in theform of interest or dividend.

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Money Market- for short-term funds (lessthan a year)Organised (Banks)

Unorganised (money lenders, chit funds, etc.)

Capital Market- for long-term fundsStock Market

Bond Market Foreign Exchange Market

Credit Market

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The money market is a wholesale debt

market for low-risk, highly-liquid, short-

term instrument. Funds are available in

this market for periods ranging from a

single day up to a year. This market is

dominated mostly by government, banksand financial institutions.

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The capital market is designed to finance

the long-term investments. The

transactions taking place in this market

will be for periods over a year.

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The Forexh. market deals with the

multicurrency requirements, which are

met by the exchange of

currencies. Depending on the exchange

rate that is applicable, the transfer of

funds takes place in this market. This is

one of the most developed andintegrated market across the globe.

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C redit market is a place where banks, FIs

and NBFCs buy & sell short, medium and

long-term loans to corporate and

individuals.

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Having designed the instrument, the issuershould then ensure that these financial assetsreach the ultimate investor in order to garnerthe requisite amount. When the borrower of

funds approaches the financial market to raisefunds, mere issue of securities will not suffice. Adequate information of the issue,issuer and the security should be passed on totake place. There should be a proper channel

within the financial system to ensure suchtransfer. To serve this purpose, Financialintermediaries came into existence.

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This service was offered by banks, FIs, brokers,and dealers. However, as the financial systemwidened along with the developments takingplace in the financial markets, the scope of itsoperations also widened. Some of the important intermediaries operating ink the financialmarkets include; investment bankers,underwriters, stock exchanges, registrars,depositories, custodians, portfolio managers,

mutual funds, financial advertisers financialconsultants, primary dealers, satellite dealers,self regulatory organizations, etc.

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IntermediaryIntermediary Market Market RoleRole

Stock ExchangeStock Exchange Capital Market Capital Market Secondary Market toSecondary Market to

securitiessecurities

Investment BankersInvestment Bankers Capital Market, Credit Capital Market, Credit

Market Market

Corporate advisoryCorporate advisory

services, Issue of securitiesservices, Issue of securities

UnderwritersUnderwriters Capital Market, MoneyCapital Market, Money

Market Market

Subscribe to unsubscribedSubscribe to unsubscribed

portion of securitiesportion of securities

Registrars, Depositories,Registrars, Depositories,

CustodiansCustodians

Capital Market Capital Market Issue securities to theIssue securities to the

investors on behalf of theinvestors on behalf of the

company and handle sharecompany and handle share

transfer activitytransfer activityPrimary Dealers SatellitePrimary Dealers Satellite

DealersDealers

Money Market Money Market Market making inMarket making in

government securitiesgovernment securities

ForexForex DealersDealers Forex Market Forex Market Ensure exchange ink Ensure exchange ink

currenciescurrencies 18



Money Market Instruments:The money market can be defined as a market for short-term money

and financial assets that are near substitutes for money. The term short-

term means generally a period up to one year and near substitutes to

money is used to denote any financial asset which can be quickly

converted into money with minimum transaction cost.

Instruments in Money Market

Call money market

Treasury bills market

Markets for commercial paper

Certificate of deposits

Bills of Exchange

Money market mutual funds

Promissory Note

Market Repos19



Call money market

Bill Market

Treasury billsCommercial bills

Bank loans (short-term)

Organised money market comprises RBI,banks (commercial and co-operative)

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Banks borrow in the money market to:Fill the gaps or temporary mismatch of funds

To meet the CRR and SLR mandatory

requirements as stipulated by the central bank To meet sudden demand for funds arising out of large outflows (like advance tax payments)

Call money market serves the role of equilibrating the short-term liquidityposition of the banks

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

The loans are of short-term duration (1 to14 days). Money lent for one day is calledcall money; if it exceeds 1 day but is lessthan 15 days it is called notice money.Money lent for more than 15 days is term

moneyThe borrowing is exclusively limited tobanks, who are temporarily short of funds

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Call loans are generally made on a clean basis-i.e. no collateral is required

The main function of the call money market is to

redistribute the pool of day-to-day surplus fundsof banks among other banks in temporary deficit of funds

The call market helps banks economise theircash and yet improve their liquidity

It is a highly competitive and sensitive market

It acts as a good indicator of the liquidityposition

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Those who can both borrow and lend inthe market RBI , banks and primarydealers

Previously, selected financial institutionsviz., IDBI, UTI, Mutual funds wereallowed in the call money market only onthe lenders side.

These were phased out and call moneymarket is now a pure inter-bank market (since August 2005)

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Commercial Paper (CP) is an unsecured

money market instrument issued in theform of a promissory note.Introduced in 1990Corporates, primary dealers (PDs) and the

All-India Financial Institutions (FIs) areeligible to issue CP.CP can be issued for maturities between aminimum of 15 days and a maximum up toone year from the date of issue.

Issued subject to minimum of Rs. 5 lacs andin the multiple of Rs. 5 lacs after that.Issued at discount to the face value

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These bills are short-term liabilities (91-day, 182-day,364-day) of the Government of India

It is an IOU of the government, a promise to pay thestated amount after expiry of the stated period from thedate of issue

They are issued at discount to the face value and at theend of maturity the face value is paid

The rate of discount and the corresponding issue priceare determined at each auction

RBI auctions 91-day T-Bills on a weekly basis, 182-dayT-Bills and 364-day T-Bills on a fortnightly basis onbehalf of the central government

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Referred as note payable in accounting

It is a contract detailing the terms of a promiseby one party (the maker ) to pay a sum of money

to the other (the payee).

The obligation may arise from the repayment ofa loan or from another form of debt.

For example, in the sale of a business, thepurchase price might be a combination of animmediate cash payment and one or morepromissory notes for the balance.

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Defined as short term deposit by way of usancepromissory notes.

Greater flexibility to investors in the deployment of surplus funds.

Permitted by the RBI to banks

Maturity of not less than 3months and upto 1year.

Transferable in nature

Free negotiability and limited flexibility

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Invest primarily in money market instruments of very high quality.

RBI and public financial institution can set it either directly or through its existing subsidiaries.

MMMF Open Ended

Close Ended

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Repo (repurchase agreement) instruments enablecollateralised short-term borrowing through theselling of debt instruments

A security is sold with an agreement to repurchase it at a pre-determined date and rate

Reverse repo is a mirror image of repo and reflects theacquisition of a security with a simultaneouscommitment to resell

Average daily turnover of repo transactions (otherthan the Reserve Bank) increased from Rs.11,311

crore during April 2001 to Rs. 42,252 crore in June2006

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Capital Market Instruments :The capital market generally consists of thefollowing long term period i.e., more than oneyear period, financial instruments; In the equity

segment Equity shares, preference shares,convertible preference shares, non-convertiblepreference shares etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc.Hybrid Instruments

Hybrid instruments have both the features of equity and debenture. This kind of instrumentsis called as hybrid instruments. Examples areconvertible debentures, warrants etc

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Primary Markets Secondary Markets

When companies need financial resources forits expansion, they borrow money frominvestors through issue of securities.

The place where such securities are traded bythese investors is known as the secondarymarket.

Securities issued

a) Preference Shares

b) Equity Shares

c) Debentures

Securities like Preference Shares and

Debentures cannot be traded in thesecondary market.

Equity shares is issued by the under writers

and merchant bankers on behalf of thecompany.

Equity shares are tradable through a privatebroker or a brokerage house.

People who apply for these securities are:

a) High networth individual

b) Retail investors

c) Employees

d) Financial Institutions

e) Mutual Fund Housesf) Banks

Securities that are traded are traded by theretail investors.

One time activity by the company. Helps in mobilising the funds for theinvestors in the short run.

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Includes institutions and mechanismswhich

Affect generation of savings by the community

Mobilisation of savingsEffective distribution of savings

Institutions are banks, insurancecompanies, mutual funds-

promote/mobilise savingsIndividual investors, industrial and tradingcompanies- borrowers

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Central Bank (Reserve Bank of India)

Commercial banks (222)

Co-operative banks

Banks can be classified as:Scheduled (Second Schedule of RBI Act, 1934) - 218

Non-Scheduled - 4

Scheduled banks can be classified as:

Public Sector Banks (28

)Private Sector Banks (Old and New) (27)

Foreign Banks (29)

Regional Rural Banks (133)

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Individual bankers like Shroffs, Seths, Sahukars,Mahajans, etc. combine trading and otherbusiness with money lending.

Vary in size from petty lenders to substantialshroffs

Act as money changers and finance internaltrade through hundis (internal bills of exchange)

Indigenous banking is usually family ownedbusiness employing own working capital

At one point it was estimated that IBs met about 90% of the financial requirements of rural India

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IB should have their accounts audited by certified

chartered accountants

Submit their accounts to RBI periodically

As against these obligations the RBI promised toprovide them with privileges offered to

commercial banks including

Being entitled to borrow from and rediscount bills with RBI

The IBs declined to accept the restrictions as wellas compensation from the RBI

Therefore, the IBs remain out of RBIs purview

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Historically, close association between banksand some traditional industries- cotton textilesin the west, jute textiles in the east

Banking has not been mere acceptance of deposits and lending money; includeddevelopment banking

Lead Bank Scheme- opening bank offices in allimportant localities

Providing credit for development of the district

Mobilising savings in the district. Service areaapproach

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Nationalisation of banks in 1969: 14 bankswere nationalised

Branch expansion: Increased from 8260 in

1969 to 71177 in 2006Population served per branch has comedown from 64000 to 16000

A rural branch office serves 15 to 25villages within a radius of 16 kms

However, at present only 32,180 villages out of 5 lakh have been covered

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BANKING & FINANACE