INDIAN ECONOMY: TYBAF

REVISED SYLLABUS

M- 1 INTRODUCTION : FIVE CHAPTERS

M – 2 AGRICULTURAL SECTOR : SIX CHAPTERS

M – 3 INDUSTRIAL SECTOR : FOUR CHAPTERS

M – 4 SERVICE SECTOR : THREE CHAPTERS

M – 5 EXTERNAL SECTOR : FOUR CHAPTERS

M – 6 MONEY AND BANKING : FIVE CHAPTERS

REVISED PAPER PATTERN

NUMBER OF QUESTIONS = 06NUMBER OF QUESTIONS TO BE ANSWERED = 4

Q.1 – COMPULSORYQ.2 – COMPULSORY; OBJECTIVE TYPEQ.3 – ORQ.4Q.5 – ORQ.6 – SHORT NOTES

MODULE VI -MONEY & BANKING

MONEY MARKET

COMMERCIAL BANKING

RBI’S MONETARY MANAGEMENT

CAPITAL MARKET, SEBI & ITS FUNCTIONS

MONEY MARKET

FUNCTIONS

STRUCTURE

FEATURES/LIMITATIONS

REFORMS

MARKET FOR SHORT TERM FUNDS

UNIVERSITY QUESTIONS:FEATURES OF MONEY MARKET – SHORT NOTES (APR. 09, NOV 08 & 06) WHAT ARE THE DRAWBACKS OF MONEY MARKET (APRIL 07)EXPLAIN THE STRUCTURE OF MONEY MARKET (NOV 07)

LIKELY QUESTIONS

DISCUSS THE MONEY MARKET REFORMSWRITE A NOTE ON ORGANISED MONEY MARKETWRITE A NOTE ON T-BILLS

MONEY MARKET DEALS IN FUNDS AND INSTRUMENTS HAVING A MATURITY OF ONE DAY TO ONE YEAR

MARKET PLAYERS

RBI- REGULATOR, MERCHANT BANKER

GOVERNMENT – BIGGEST BORROWER

BANKS AND FINANCIAL INSTITUTIONS – LENDING & BORROWING

CORPORATES – BORROWERS

INSTITUTIONAL PLAYERS – ( M.F., FII ) AS PER RBI GUIDELINES

DISCOUNT HOUSES & PRIMARY DEALERS – INTERMEDIARIES, discounting & rediscounting T-BILLS, COMMERCIAL BILLS PRIMARY DEALERS (1995) – to develop active government securities market

FUNCTIONS OF MONEY MARKET1) It equates demand and supply of short term funds2) Helps effective implementation of monetary policy3) Consists of ample avenues of investments4) Increases supply of funds5) Helps allocation of short term funds6) Provided funds in non-inflationary way

STRUCTURE OF MONEY MARKET

ORGANISED UNORGANISED

All INDIA DEBT & INVESTMENT SURVEY 1991 36% OF LOANS IN RURAL AREA.

CALL / NOTICE MONEY MARKET:

1 to 14 days; at call money rate fixed by market forces.Participants: commercial banks, co-op banks , primary dealers (FI authorised by RBI) & DFHI,LIC,GIC,UTI etc. only as lendersLocation: MUMBAI, KOLKATA, CHENNAI etc.RBI function: provide additional funding to DFHI, increasing liquidity through REPO, mopping liquidity through REVERSE REPO, stabilizing call rates.

TREASURY BILL MARKET (TB) :

issued by RBI on behalf of central Govt., Main instrument of short term borrowing of Govt. Issued on auction, interest determined by market forcesEligible security to meet SLR, highly liquid, absence of risk of defaultOrdinary bills to bankers, but Ad-hoc for deficit financing(discontinued in 1997)Initially 182 days, recently 91,364 days bills are issued.Sold on discount are available for a minimum 25,000 Rupees & multiples of 25,000.Participants: commercial banks, primary dealers, MFs, corporates, FIs, pension funds etc.

COMMERCIAL BILL MARKET (CB):Drawn by one merchant firm on another & get liquidity from commercial banksInterest charged is at discount. Maturity upto 90 daysUndeveloped – a)cash credit b)no uniformity in drafting bills c) tedious procedure d) heavy stamp dutyShare of bill market has fallen fm 11% in 1993-94 to 6.5% in 2002-03

CERTIFICATE OF DEPOSIT (CDs)Introduced in 1989; issued by commercial banks & Development Financial InstitutionsAre marketable receipts of funds deposited in a bank for a fixed period at a specifiedRate of interest.Initially – in multiples of 25 lakh, min size 1 cr.,3 months maturity, 45 days lock inAfter reforms - min amount 1 lakh, multiples of 1 lakh, at discount rt of market, lock in 15 days, subject to CRR & SLR, scheduled banks other than RRBs fm 15 days to 1 year, financial institutions 1 year to 3 years maturity

COMMERCIAL PAPER (CPs) MARKETIntroduced in 1990, raising funds by corporatesIssuing company tangible net worth not less than 4 cr. & working capital no less than 4 cr.Min rating P2, 07 days to 1 year maturity period, min denomination 5 lakh & its multiplesFrom 2001 in DEMAT formDealing done by DFHI

REPO MARKETIntroduced in 1992. two parties transaction agreement of selling & buying backREPO – INJECTION REVERSE REPO – MOPPING LIQUIDITY (current repo- 7.50 R.Repo 6.50)Inter bank repo & RBI repo, rates are changed by RBIRepo of state & central govt. securities, PSU bonds, corporate bonds in DEMAT FORMcan be used for SLR, and liquidity control

MONEY MARKET MUTUAL FUNDS (MMMFs)April 1992, can be set up by scheduled commercial banks, public financial institutions,Lock in 15 days, regulated by SEBI. Enable small investors to participate in money market.

DISCOUNT AND FINANCE HOUSE OF INDIA (DFHI)Set up by RBI in 1988 – owned by RBI, public sector banks, all India financial institutionsThat have contributed in paid up capital. Developmental & stabilizing role; acts as a intermediary body

FEATURES / LIMITATIONS OF MONEY MARKETUnorganized market

Lack of Integration

Multiple interest rates

Inadequate funds

Seasonal stringency of money

Absence of bill market

Absence of well organized banking – U.S. 1200 people = 1 branch, India 15,000 = 1 branch

REFORMS OF MONEY MARKETRECOMMENDATIONS OF s. Chakravarty in 1985 & N. Vaghul in 1987

•Deregulation of Interest – in 1989

•Introduction of new instruments

•REPOs in 1996

•Liquidity Adjustment Facility through Repo to stabilize interest

•MMMFs in 1992

•DFHI

•Development of Call market; more participants are allowed (eg. MFs, NBFCs etc.)

•CCIL in 2001nwith SBI as a chief promoter to clear all transactions in govt. securities,•Repos. Rupees/dollar foreign exchange spot & forward deals.

RBIs MONETARY MANAGEMENTRefers to controlled changes in the stock of money to achieve well defined social objectives

INSTRUMENTS OF CREDIT CONTROL

CRITICAL EVALUATION OF MONETARY MANAGEMENT

RECENT CHANGES IN MONETARY MANAGEMENT

UNIVERSITY QUESTIONS:

EXPLAIN THE MONETARY POLICY OF RBI SINCE 1991 (APR. 06)

CRITICALLY EVALUATE THE MONETARY POLICY OF RBI IN POST REFORM PERIOD ( NOV.07)

LIKELY QUESTIONS:

DISCUSS THE VARIOUS INSTRUMENTS OF CREDIT CONTROL OF RBI

WRITE A NOTE ON QUANTITATIVE CREDIT CONTROL

OBJECTIVES OF MONETARY POLICY

1)Controlled expansion of money

2) Channelizing credit to desired sectors

3) Employment generation

4) External stability

5) Control of inequality

6) Mobilization of savings

INSTRUMENTS OF MONETARY MANAGEMENT IN INDIAGENERAL CREDIT CONTROL SELECTIVE CREDIT CONTROL

1) Bank Rate – 9% in 1998 6.5% in 2001 6% in 2006; current – 6%2) Reserve Requirement – CRR SLR3 TO 15% 25% to 40% High before 199114% 1994 38.5% 1991 7.5% 2001 25%4.5% 20035% 2006; current CRR =6% & SLR 24%

3) Open Market Operation

Margin Requirement

Ceiling on Credit

Moral Suasion

Discriminatory Interest Rate

Direct Action

Bank rate : 6 INR/USD: 45.1000, INR/EURO : 63/ 7500Repo rate: 7.50 LENDING /DEPOSIT (BASE RATE) : 9.25/ 10 DEPOSIT RT: 8.25 – 9.10Reverse repo: 6.50Crr: 6Slr: 24

RECENT CHANGES IN MONETARY MANAGEMENT

LAF (JUNE 2000); TO ADJUST DAILY LIQUIDITY WITH BANKSMICRO FINANCE DISCONTINUED AD-HOC TBsREDUCTION IN SLRREDUCTION IN CRRREDUCTION IN BANK RATEDEREGULATION OF INTEREST ON ADVANCES OF MORE THAN 2 LAKHREPO & REVERSE REPOMARKET STABILAZATION SCHEME ( APR. 04): issue TBs & other Govt. securitiesACTIVE GOVT. SECURITIES MARKET a) primary dealers system was introduced b) Liquidity support of RBI to mutual funds dealing in govt. securities c) Delivery vs. payment system d) greater transparency in market f)FII to invest in govt. securities g) new TBsGREATER FLEXIBILITY FOR BANKS

The enactment of the ,’ Securitisation Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 for helping banks to solve problems of NPAs, beyond 60 days possession of assets by creditor. Technology upgradation through the Electronic Fund TransferA standing committee on International Financial Stds & codes has been set up by RBI

EVALUATIONBUDGETARY DEFICITS

COVERAGE OF ONLY COMMERCIAL BANKS

UNORGANIZED MONEY MARKET

BLACK MONEY

PREDOMINANCE OF CASH

LESS ACCOUNTABILITY

LESS TRANSPERENCY

MORE VOLATILITY

PROGRESS OF COMMERCIAL BANKING IN INDIA

NATIONALIZATION

objectives

achievements

Limitations

NARASIMHAM COMMITTEE REFORMS

Development of banking post independence 1949 Banking Regulation Act – RBI

Before 1955 all commercial banks were private

1955 Imperial bank was nationalized & was converted into SBI

1969 Lead Bank System for underbanked areas

1969 14 commercial banks were nationalized

1975 RRBs were set up for rural India

OBJECTIVES OF NATIONALIZATION

1) DIVERSION OF FUNDS AT CONCESSIONAL RATES TO WEAKER SECTION FOR PRODUCTIVE PURPOSES2) TO PREVENT MONOPOLIES OF FEW ENTERPRISES3) TO PROMOTE BANKING FACILITIES TO UNBANKED AREAS4) TO EXPAND THE ROLE OF COMMERCIAL BANKING IN AGRICULTURAL CREDIT5) TO REDUCE REGIONAL DISPARITIES

ACHIEVEMENTS1) Branch Expansion : 8262 in 1969 – 67,283 in 2004; rural branches 22.2% in 1969 to 48.4% in 20032) Deposit mobilization: Rs.4,665 cr. in 1969 – Rs. 16,22,579 cr. In 20043) Bank Lending : Rs. 3.399 cr. In 1969 – 10,27,009 cr. In 20044) Advances to priority sector : 14% in 1969 to 29% in 19965) Contribution to employment generation & poverty eradication: loan to agri. SSI 2.5 lakh educated youth benefitted under Prime minister Rozgar Yojna 18 lakh benefitted under IRDP6) Indian Banks abroad: indian branches 97-98 during 96-97 ; foreign branches 161- 1807) Regional balance : upto 1969 only 5 states had more than half no. of bank offices by 1990 share of other states 80%

LIMITATIONS OF NATIONALIZATION

1) Inadequate bank facilities2) Regional imbalance3) Inadequate mobilization4) Lower efficiency5) Political interference6) Increasing expenditure

BANKING SECTOR REFORMSNarsimham committee under the chairmanship of M.Narsimham, an ex-governor of RBIIn 1991, second report on 26th Dec 1997

recommendations

1) End of dual control RBI & ministry2) More pvt & foreign banks to be allowed for competency3) Abolition of directed credit programme4) Reduce CRR to 5% from 15%5) Reduce SLR from 38.5% in 1991 to 25%6) Capital Adequacy Ratio 10% upto 1996

7) To set up asset reconstruction fund/ tribunal for bad % doubtful debts..NPA 2% by 2002 8) Banking structure – 2-3 banks of international recognition, 8-10 national level, & local banks9) Guidelines for asset classification, transparency10) Prudential norms – asset classification, arrangement of bad debt11) Profit & loss account formats were revised12) Greater autonomy13) Interest deregulation14) Banking ombudsman scheme to address consumer grievances15) Public sector banks can raise capital from capital market16) Rating models – CAMELS – capital adequacy, asset quality, management earnings, liquidity & systems CACS capital adequacy, asset quality, compliance & systems

CAPITAL MARKET

STRUCTURE

ROLE

GROWTH

FACTORS RESPONSIBLE FOR GROWTH

PROBLEMS

REFORMS

SEBI

MARKET FOR MEDIUM & LONG TERM LOANS

STRUCTURE OF CAPITAL MARKET

GILD-EDGED INDUSTRIAL SECURITIES DEVELOPMENT FINANCIAL INTERMEDIARIES FINANCIAL INSTITUTION

Primarysecondary

Primarysecondary Finance assistance to

IndustriesIFCI, ICICI,IDBI, EXIMUTI, LICSubscribe share & debenturesLong term loans

Merchant banksMutual fundsLeasing companiesVenture capital companies

ROLE OF CAPITAL MARKET

1) RESOURCE MOBILIZATION2) RESOURCE ALLOCATION3) CREATION OF LIQUIDITY4) RAISING LONG TERM CAPITAL5) INDUSTRIAL DEVELOPMENT6) PROPER CHANNELISING FUNDS7) PROVISION OF SERVICES

Growth of capital markets1) Number of stock exchanges 8 in 1975-76 to 23 2002-03 -TSO2) Capital issues 98 cr. 1975-76 to 40,816 cr. – TSO3) %Capital raised of GDS 0.7% in 1975 to 6.9% in 2003-03 – TSO4) Increase in operation of BSE5) Increase in operation of NSE6) Resource mobilization through MF 4580 cr. In 2002-037) Increase in turnover in equity derivatives8) Improvement in price-earning ratio

FACTORS RESPONSIBLE FOR GROWTH

Establishment of DFISEBI in 1992Establishment of MFNSEUnderwritingCredit rating – credit rating information services of India Ltd (CRSIL) investment information & credit rating agency of India Ltd (ICRA)Growing public confidenceIncreasing awareness of investment opportunities

PROBLEMS OF CAPITAL MARKETBrokers sub-brokersLack of transparency – more earning for brokersFloor –based tradingPaper transactionsScamsFortnightly settlementMonopoly to BSE

REFORMS1) SEBI – 1988; statutory body 19922) NSE – 1992- working in 1994; IDBI & co sponsored by DFI : debt market – TBs,CDs CPs capital market- equities, convertible debentures network of 2000 satellite terminals, 3500 traders3) Dematerialization4) Reforms in Govt. securities – auction systemEstablishment of Securities Trading Corporation of India to develop secondary market in govt. securitiesWays & means advances14 days TB

Primary dealers 1995, satellite dealers in 1996Foreign investors allowedForeign Investments through the issue of Global Depository Receipts (GDRs) & Foreign Currency Convertible Bonds (FCCBs)Indian companies got access to international market through Euro issue(Indian companies on NASDAQ)Tax exemption on income from govt. securitiesNegotiated Dealing System 2001CCIL5)Credit Rating Agencies CRISIL- 1988, ICRA- 1991, Credit Analysis & research Ltd. CARE, 19936)Merchant Banking 7) Rolling settlement 8) depositories NSDL –demat of securities, National Securities Depository Ltd. In 1996 9) screen based trading10) 1997, L.C. Gupta Committee recommended introduction of derivative trading11) Insurance Regulatory and Development Authority Act (IRDA) 1999, IRDA set up 200012) PAN made compulsory for operating demat. account

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SEBI

FUNCTION /ROLE OF SEBI – 1) protect investors interest – a) frame rules & regulations b) ensures that rules are followed c) handles complaints of investors 2) Regulation of stock brokers activities – registered 3) Formulates guidelines on first capital issue 4) Regulate working of Mutual funds 5)Regulation of Merchant banking- rules, regulation, code of conduct 6) Regulation of Portfolio Management Services 7) Restriction on insider trading 8)Regulation of takeovers & mergers 9) Education & guidelines to investors 10) stricter norms on share transfer( NRI, preferential allotment under SEBI code)Criticism : false claim on success of dealing complaints, large no. of rules, less protection to Investors, corporate friendly, insufficient power