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8/7/2019 money capital intro
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INTRODUCTION TOINDIAN FINANCIAL SYSTEM
Management Of Financial
Services(MFS)
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INTRODUCTIOJN TO INDIANFINANCIAL SYSTEM
POINTS TO BE COVERED
•
Meaning• Types of financial system
• Components
•
Functions• Key elements of good financial system
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Meaning/Components of financial system
It is Set of sub system:
i. Financial institution
ii. Financial marketsiii. Financial instruments
iv. Financial services
facilitates transfer of funds
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Types of financial system
• Formal
•
Informal
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COMPONENTS OF FINANCIALSYSTEM
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FINANCIAL MARKETS
It is link between saver and investor.
Types
1.Money market
2.Capital market
Primary market
Secondary market
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Financial Instruments
• Equity
• Debenture
•
Preference shares• MFs
• Insurance policies
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Financial Services
• Credit Rating
• Factoring
•
Leasing• Hire purchase
• Underwriting
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Evolution of Indian FinancialSystem
3 Phases:
i. Upto 1951
ii.1951 to Mid Eightiesiii.Post Nineties
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UPTO 1951
• Initiation of eco. Dev.
• Semi-organised,narrow security
market• Absence of participation by FIs in
financing industry
•
Low industrial growth,lessinvestment opportunity
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1951 TO MID EIGHTIES
• Planned economic dev initiated- 5year plans started
Public/Govt ownership of FI
Nationalisation of RBI,SBI,LIC Fortification of Institutional structure
DFIs were established
diversification of forms of financingenlargement of fin. coverage
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1951 TO MID EIGHTIES
Protection to investors
CO’s Act,1956
Cap.issue Act,1947(now SEBI)
MRTP Act,1970
FERA,1973
Participation of FIs in corporatemgmt.
through shareholding in Pvt. Cos
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POST NINETIES
New economic policy in 1991
Privatisation of FIs
Pvt.MFs were allowed
DFIs converted into Public co
IRDA was set up-foreign insurance cosallowed to enter
Pvt sector banks emerged
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POST NINETIES
Reorganisation of Institutional Structure
• FIs started providing service in addition tofinancing
• Changes in banking industrybranch expansion in rural and semi-urban areagrowth in deposits,priority sector lending
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Evolution-POST NINETIES
• Narsimham committee(1991)
framework regarding SLR, Int. rate,CAR(9%)
foreign bank entry, branch licensing
Investor Protection
SEBI got statutory status to :
monitor cap. Mkt.,regulate cap. Mkt.,
protect investor interest.
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RBI AND FINANCIAL SYSTEM
1. Financing Functionliquidity mgmt.,
issue currency,
banker to govt.2. Regulatory Function
protect depositor’s interest,
maintain public confidence in systemregulate banks thro Banking
Regulation Act,1949
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CONT…
3. Promotional/Dev. Function
Encourage to set up DFIs
encourage banks to open branches in
rural,less developed areasmade priority sector lending compulsory for
public & pvt sector banks
encourage agriculture finance,micro-credit
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CAPITAL MARKET
Management Of Financial
Services(MFS)
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A market for long term funds
Aids economic growth through capitalformation by: Issue of primary securities Issue of secondary securities Secondary market transactions
Capital Market
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Mobilise savings Provide risk capital Provide liquidity Lower costs Disseminate information Enable valuation of assets Provide operational efficiency
Develop integration among markets andsegments Channelise funds to productive sectors
Functions of a CapitalMarket
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A market for new issues
Leads to capital formation
Nature of fund raising
Domestic
• equity and debt issues
External
• GDRs, ADRs and ECBs• FDI, FII and NRI deposits
Primary Market
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• FDI
Foreign direct investment is investment of foreign assets into domestic structures,equipment, and organizations. It does notinclude foreign investment into the stock
market.
FDI and FII
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The FDIs may acquire 10% or more of the voting
power of an enterprise in an economy throughany of the following methods:
• by incorporating a wholly owned subsidiary orcompany.
• by acquiring shares in an associated enterprise
• through a merger or an acquisition of anunrelated enterprise
• participating in an equity JV with another investoror enterprise
Cont..
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Under British rule – Not organised and developed
Post independence – Small size and supervised by
CCI
In 1950s – Rampant speculation; Government enacted
Securities Contract (Regulations) Act and Companies Act,1956;Development of Financial Institutions.
In 1960s – Ban on badla, UTI set up in 1964
History of the Indian CapitalMarket
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In 1970s – Badla resumed; circulation of theDividend Restriction Ordinance – slump in BSEsensex; FERA issues revive stock markets
In 1980s– Small investor participation;
Introduction of PSU bonds; popularity of convertible debentures.
In 1990s – Capital Issues (Control) Actrepealed. Emergence of SEBI; Free pricing;entry of new players and new tradingmechanism; Capital market scams.
Cont…
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The 1991-92 Securities Scam (HarshadMehta Scam) Misuse of public sector banks,
mutual funds, bank receipts, and SGL
ledger accounts; a bank scam, repos banned
The 2001 Ketan Parekh Scam
Misuse of pay orders, private sector banksand cooperative banks; a securities scam;
badla banned.
Capital Market Scams
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Specialised Regulator
Emergence of specialised intermediaries
Entry to FIIs
Pricing of securities through book building
Access to international markets
Emphasis on corporate governance
Screen-based trading system
Reforms in the Capital Market
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Rolling settlement
Dematerialisation of securities
Derivatives trading
Comprehensive risk managementsystems
Cont…
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MONEY MARKET
Management Of financial
Services(MFS)
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Introduction
- Market for short term funds havingmaturity
< 1year
- No physical location
- Main players are RBI,mutualfunds,banks,NBFCs,primarydealers,corporate investors
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Functions
• mechanism to even out demand &supply of short term funds
• focal point for central bank intervention
for influencing liquidity and int. rate• provide access to suppliers and users of
short-term funds to fulfill their borrowing
and invt.requirements.
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Money Market Instruments
1. TREASURY BILLS(T-BILLS)
2. COMMERCIAL PAPERS(CPs)
3. COMMERCIAL BILLS(CBs)4. CERTIFICATE OF DEPOSITS(CDs)
5. CALL/NOTICE MONEY MARKET
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TREASURY BILLS(T-BILLS)
Meaning
Features
negotiable instrumenthighly liquid
absence of default risk
low transaction cost,assuredyield,eligible for inclusion in SLR
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Cont…
TYPES• Ad-hoc T-bills
• Auctioned T-bills
Participants RBI, banks, mutual funds, primarydealers, corporates,
Sale of T-bills (done thro
Auctions) Multiple-price Auction
Uniform-price Auction
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COMMERCIAL PAPERS(CPs)
An unsecured short-term promissory note issuedat a discount
Issuers
Creditworthy corporates
primary dealers All India financial institutions
Largest issuers of CPs–Leasing and Financecompanies
Usually privately placed with investors
Attracts stamp duty
Underwriting not mandatory
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Process for Issuing CP
A resolution to be passed by the Board of Directors
CP issue to be rated
Select an Issuing and Paying Agent forverification of documents
Arrange for dealers for placement of CP
Report to the RBI regarding the issue
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Guidelines Relating to CPs
Corporates, primary dealers and all India
financial institutions eligible to issue aCP
Minimum credit rating P2 of Crisil
Maturity period of minimum of 7 days andmaximum up to one year from the dateof issue
Minimum of Rs 5 lakh and multiples To be issued in demat form
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COMMERCIAL BILL
•
A short-term, negotiable and self liquidating instrument with low risk.
• Types
Demand bill
Usance bill
Clean bill
Documentary bill
Inland bill
Foreign bill Hundi
Derivative Usance Promissory Note
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CERTIFICATES OF DEPOSITS
A short- term tradable time deposit issued bycommercial banks and financial institutions.
Issued at a discount to face value.
Minimum amount Rs 1 lakh and in multiples
thereof Maturity period
7 days to one year for banks
1 to 3 years for FIs No lock-in period
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Cont…
Transferable by endorsement
Banks to maintain appropriate reserverequirement on issue of CDs.
Issued in demat form Key investors--Mutual Funds
CALL/NOTICE MONEY
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CALL/NOTICE MONEYMARKET
Banks borrow/lend money for a periodranging between 1 and 14 days.
No collateral security required
Highly liquid, risky, and volatile market
Banks trade money to adhere to CRRrequirement
F t I fl i C ll R t
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Factors Influencing Call RateVolatility
Liquidity conditions
Reserve requirement prescriptions
Structural factors
Liquidity changes and gaps in the foreignexchange market
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Collateralised Borrowing andLending Obligations (CBLO)
MEANING: IT IS• An obligation by the borrower to returnthe money borrowed, at a specified futuredate;
• An authority to the lender to receivemoney lent, at a specified future date withan option/privilege to transfer the authorityto another person for value received;• An underlying charge on securities held
in custody (with CCIL) for the amountborrowed/lent.
•
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CONT…
Launched by CCIL
To provide liquidity to non-bankentities
No lock-in period
Original tenure varies between oneday and one year
Trading volumes have grown
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Money Market Intermediaries
DFHI AND MMMsThe Discount and Finance House of
India--set up in 1988 by RBI.
Role is to stimulate activity in money
market.
DFHI is an recognised primary dealer.
Money Market Mutual Funds: Introduced
in April 1991. Mobilize savings from smallinvestors.
Invest in money market instruments
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Link Between Money Market andMonetary Policy in India
Objectives of the monetary policy Price stability
Growth
Instruments used to influence monetary
conditions
Direct instruments such as reserverequirements,limits on refinance,administrative interest rates, restrictions on
credit
Indirect instruments such as open marketoperation and repos
Tools of Managing Liq idit in the
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Tools of Managing Liquidity in theMoney Market
Reserve requirements: CRR & SL
Interest rates
Prime lending rate
Bank rate
Refinance from RBI Liquidity Adjustment Facility: operates through
repo and reverse repo auctions; coupled withOMOs and MSS provides RBI greater flexibilityin managing liquidity
Market stabilisation scheme (MSS): deals withenduring capital inflows without affecting short-term liquidity management role of LAF.
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CONT…
• Types of Repos: Interbank repos,
RBI repos: Reverse Repo (Borrowing of overnight funds by RBI)- rate 6% and
Repo (Lending to banks)- rate 7%(Short-term rates)
Refinance from RBI