shafi@nitc.ac.

in 1/24/2011

m

 

c Banks and Financial Institutions

9 Commercial Banks

9 Reforms in Financial System and Banking

9 Development Financial Institutions

9 Non Banking Financial Companies (NBFCs)

c Central Banking
9 Reserve Bank of India

9 Role of Reserve Bank

9 Functions of RBI; Credit Creation, Currency, Forex,

c Insurance Companies
9 LIC/GIC/ Private Players

9 IDRA/ Insurance Regulations Money Market

c Money Market
9 Money market players

9 Money market instruments

c Capital market
9 Capital market institutions

9 Security Exchange Board of India

9 Capital Market Instruments

c International Monetary System and Economic Environment

9 Brettonwood Twins; IMF and World Bank

9 WTO and GATT

1
9 Trade in Services and Economic Environment
 shafi@nitc.ac.in 1/24/2011

%

 m

 
  


c Commercial banks
c Cooperative banks

c Central Bank

c NBFCs

c Development Financial Institutions

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ë

ë

c A commercial bank is a type of financial

intermediary accepting deposit for lending money
to the needy. "commercial bank" to refer to a bank
or a division of a bank primarily dealing with
deposits and loans from corporations or large
businesses or common public. Commercial
banking may also be seen as distinct from retail
banking, which involves the provision of financial
services direct to consumers. Many banks offer
both commercial and retail banking services

3
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%

  

c Deposits
9 Demand deposit: Current, Saving, call
9 Term deposits

c Creation of credit
c Ancillary function
9 MT, FT, DD, Forex, Locker,

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c Banking regulation act 1949

c Banking companies act 1970

c State bank of India act 1955 and subsidiary

banks 1959
c Nationalization of Banks 1969 and 1980

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 m%


c Scheduled commercial banks

9 Public sector banks
9 Private sector banks

9 Foreign banks

9 Regional rural banks

9 New generation banks

c Scheduled cooperative banks

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 m

%

 
c Narasimham committee 1991 and 1998
9 Interest rate deregulation
9 Reduction in pre-emptive reserves (SLR-CRR)
9 Liberal Branch expansion policy
9 Priority lending has been redefined
9 Prudential norms for capital adequacy: asset classification, quality, provision on NPAs,
9 NPA from 3% to 0% by 2002
9 Capital adequacy to be 8-10% (investment in Risk weighted asset)
9 Entry norms for private banks
9 Capital market access for banks
9 Asset reconstruction fund
9 Debt recovery tribunals (ARC, DRT)
9 Dismantling BSRB
9 Flexibility in remuneration for PSBs and permission for VRS
9 Govt. holding to be reduced from 55 to 33% in SBI and 51 % in other public sector banks
9 Rapid computerization
9 Mandatory disclosure policies , greater transparency
9 Centralized monitoring agency for fund transfers
9 Mergers and acquisition
9 Increased capital base for public sector banks and private sector for 300 crore

7
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   %


c Ôrban cooperative bank

9 Scheduled /non scheduled
c Rural cooperative bank
9 State cooperative bank
9 District cooperative bank

9 Regional/primary society

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ñ  

 m

 
  

ñ

%m

c All-India Development Banks

c Specialized Financial Institutions

c Investment Institutions

c State-level institutions

c Other institutions

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 shafi@nitc.ac.in 1/24/2011

ë 

c A central bank, reserve bank, or monetary authority is a public institution

that usually issues the currency, regulates the money supply, and controls
the interest rates in a country. Central banks often also oversee the
commercial banking system within its country's borders. A central bank is
distinguished from a normal commercial bank because it has a monopoly
on creating the currency of that nation,

c The primary function of a central bank is to provide the nation's money

supply, but more active duties include controlling interest rates, and acting
as a lender of last resort to the banking sector during times of financial
crisis. It may also have supervisory powers, to ensure that banks and other
financial institutions do not behave recklessly or fraudulently.

c Most developed nations today have an "independent" central bank, that is

one which operates under rules designed to prevent political interference.
Examples include the European Central Bank (ECB) and the Federal
Reserve System in the Ônited State

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c The Reserve Bank of India is the central banking system of India and controls the
monetary policy of the country
c Monetary authority: The Reserve Bank of India is the main monetary authority of the
country and beside that the central bank acts as the bank of the national and state
governments. It formulates, implements and monitors the monetary policy as well as
it has to ensure an adequate flow of credit to productive sectors. Objectives are
maintaining price stability and ensuring adequate flow of credit to productive
sectors.
c Regulator: The institution is also the regulator and supervisor of the financial system
and prescribes broad parameters of banking operations within which the country's
banking and financial system functions. Objectives are to maintain public confidence
in the system, protect depositors' interest and provide cost-effective banking
services to the public. The Banking Ombudsman Scheme has been formulated by
the Reserve Bank of India (RBI) for effective addressing of complaints by bank
customers.
c Controller: The RBI controls the monetary supply, monitors economic indicators like
the gross domestic product and has to decide the design of the rupee banknotes as
well as coins 11
 shafi@nitc.ac.in 1/24/2011

c Manager of exchange control: The central bank manages to reach the goals of the Foreign Exchange
Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development
and maintenance of foreign exchange market in India.

c Issuer of currency: The bank issues and exchanges or destroys currency and coins not fit for circulation. The
basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to
utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the
country so that it can achieve the objective of price stability as well as economic development, because both
objectives are diverse in themselves.

c Developmental role: The central bank has to perform a wide range of promotional functions to support
national objectives and industries.[6] The RBI faces a lot of inter-sectoral and local inflation-related problems.
Some of this problems are results of the dominant part of the public sector.

c Related functions: The RBI is also a banker to the government and performs merchant banking function for
the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was
established in 1988 to promote private real estate acquisition. The institution maintains banking accounts of
all scheduled banks, too.
c Stabilize Financial Mobility: The recent financial turmoil world-over, has however, vindicated the Reserve
Bank's role in maintaining financial stability in India

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c Last resort:
c Bankers Bank

c Controller of Credit

c Overdraft for state govts

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c .Bank Rate/ Interest Rate: RBI (Reserve Bank of India) lends to the commercial banks through its discount window
to help the banks meet depositor·s demands and reserve requirements. The interest rate the RBI charges the
banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the
market, it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system, it will
increase the bank rate.
c Cash Reserve Requirements (CRR): Every commercial bank has to keep certain minimum cash reserves with RBI.
RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decrease the reserve requirement
depending on whether it wants to affect a decrease or an increase in the money supply. An increase in CRR will
make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with
the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money
supply.
c Statutory Liquidity Requirements (SLR): Apart from the CRR, banks are required to maintain liquid assets in the
form of gold, cash and approved securities and balances with current accounts of RBI. RBI has stepped up liquidity
requirements for two reasons: - Higher liquidity ratio forces commercial banks to maintain a larger proportion of
their resources in liquid form and thus reduces their capacity to grant loans and advances ²
c Open Market Operation
c Credit rationing
c Selective Credit Control
c REPO: rate offered for Purchase of securities /sanctions
c Reverse REPO rates offered for supply of securities /deposits
9 Fixation of marginal requirement

9 Minimum lending rate

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c Life insurance in India
c Phase-1: 1818-1956: private sector only (246)
c Phase 2: 1956-2000: nationalization, public sector, state
monopoly
c Phase-3: Post 2000: liberalization, private and foreign
companies
General Insurance in India
c Phase-1: 1850-1972: private sector only (246)
c Phase 2: 1972-2000: nationalization, public sector, state
monopoly
c Phase-3: Post 2000: liberalization, private and foreign
companies

15
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 m



  
c Malhotra Committee recommendations in 1993
9 IDRA Act. 1999
9 LIC/GIC
9 Capital base of LIC and privatization of LIC
9 Govt. stake to reduce up to 50%
9 Entry norms for foreign players with collaberation
9 Minimum paid up capital of Rs. 100 crore
9 Restructuring of GIC and delinking of four subsidiaries
9 Freedom and autonomy
9 Life and general as a single entity has been restricted
9 Mandatory investments in G-Secs reduced to 50-25%
9 Setting up of an ombudsman in insurance sector

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The money market are market for financial assets that are close substitutes of money which consists of financial institutions
and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time,
typically up to one year.

Characteristics
a) Not a single entity but collection of market for several instruments
b) Wholesale market for short-term debt instruments
c) Honor and creditworthiness of the participants are important
d) Players are :
a) RBI,
b) DFHI
c) NBFCs
d) STCI
e) PSÔs and
f) Mutual funds
g) Banks
h) Corporate investors
i) State governments
j) Non resident indians
e) Need based market where demand and supply of money shapes the market

Liquid and vibrant money market is necessary for the development of financial system and its capital market.
Average turn over of indian money market is Rs. 40000 crores daily

In india RBI ensures liquidity, short term interest rates

Ensures flow of credits
Bring order to Forex market through money market

In the Ônited States, federal, state and local governments all issue paper to meet funding needs. States and local
governments issue municipal paper, while the ÔS Treasury issues Treasury bills to fund the ÔS public debt.
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c Treasury bills - Short-term debt obligations of a national government that are issued to mature in
three to twelve months
c Call money market or money at short notice:
c Certificate of deposit - Time deposits, commonly offered to consumers by banks, thrift
institutions, and credit unions.
c Commercial paper - Ônsecured promissory notes with a fixed maturity of one to 270 days;
usually sold at a discount from face value.
c Commercial Bills
c Collateral borrowings

c Other instruments:
c Eurodollar deposit - Deposits made in Ô.S. dollars at a bank or bank branch located outside the
Ônited States.
c Municipal notes - (in the Ô.S.). Short-term notes issued by municipalities in anticipation of tax
receipts or other revenues.
c Repurchase agreements - Short-term loans³normally for less than two weeks and frequently for
one day³arranged by selling securities to an investor with an agreement to repurchase them at
a fixed price on a fixed date.
c Short-lived mortgage- and asset-backed securities
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c Treasury bills (or T-Bills) are issued by the central bank
or government to tide over short term liquidity falls
c mature in one year or less(91/182/364) like zero-
coupon bonds, they do not pay interest prior to maturity;
instead they are sold at a discount of the par value to
create a positive yield to maturity.
9 Negotiable instruments
9 Highly liquid
9 Assured yield/discount and maturity at par
9 Included in SLR requirement s for banks by RBI
9 Available in multiples of Rs. 25000
9 Auctions by RBI every week

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ë

ë
c In the global money market, commercial paper is an unsecured promissory note with a fixed maturity. Commercial
Paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt
obligations and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity
date specified on the note.
c In india the CPs were introduced by RBI in 1990 which was femilier in ÔS since 19th century
c FIIs are eligible to invest in CPs as per the guidelines and restrictions of SEBI issued from time to time
c Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able
to sell their commercial paper at a reasonable price.
c Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than
bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay.
Interest rates fluctuate with market conditions, but are typically lower than banks' rate
c Means It is an unsecured P-Note in which the interest rates are determined by the market force in a dematerialized
format at a discount
c Issuance of CPs
9 Pass resolution by the company
9 Execute reserve bank norms
9 Rate by credit rating agencies
9 IPA (issuing and paying agent) may be a scheduled commercial bank as an agent for the company to
deal
9 Each CP has be reported by IPA to RBI and the company has to identify the brokers to place the CP in
market may be financial institutions, merchant banks and other dealers
9 Banks use to deposit in CPs rather sanctioning loans to corporate which enhance their liquidity
requirements and reduce the risks

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 % 

c The working capital of a firm is through cash-credits, overdrafts, purchase of

discounting of commercial bills which is a short term negotiable instrument
with low risk enhances the liability of payment on a fixed date when goods
are bought/sold.
c It is the order signed by the maker directing to pay the certain amount only
to the concerned person/bearer of the instrument on a particular date
c The banks or financial institutions may be willing to discount the bills
keeping a margin with them on behalf of interest which they can even
further rediscounted from DFHI, LIC, GIC, ÔTI etc. in which the maturity shall
not normally exceed 30-90 days
c It is mostly foreign trade that is financed through bill market in india also the
bill market is now not very attractive to the banks since the misuse of the
bills in early 90s
c Inland Bills less attractive
c Foreign Bills attractive

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ëë  

c CDs unsecured negotiable short term instrument in the

bearer form issued by banks and development financial
institutions introduced in 1989 by government and are
similar to FDs but different in term guidelines and its bearer
format.
c They are different from savings accounts in that the CD has
a specific, fixed term. usually, a fixed interest rate. It is
intended that the CD be held until maturity, at which time
the money may be withdrawn together with the accrued
interest.
c CDs are issued by banks during the tight liquidity period
c CDs are also subject to SLR requirements by RBI.

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c Call money market is a market for very short
term funds repayable on demand or short
notice
c The maturity period varies from 1 to 14 days
without any collateral security
c Banks are the important participants in call
money market either to employ the surplus
funds or to meet the cash reserve
requirements

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ë
 

c A Repurchase agreement, also known as a Repo or Sale and Repurchase

Agreement, is the sale of securities together with an agreement for the
seller to buy back the securities at a later date. The repurchase price will be
greater than the original sale price, the difference effectively representing
interest, sometimes called the repo rate. The party who originally buys the
securities effectively acts as a lender. The original seller is effectively acting
as a borrower, using their security as collateral for a secured cash loan at a
fixed rate of interest.

c A repo is equivalent to a cash transaction combined with a forward contract.

The cash transaction results in transfer of money to the borrower in
exchange for legal transfer of the security to the lender, while the forward
contract ensures repayment of the loan to the lender and return of the
collateral of the borrower. The difference between the forward price and the
spot price is effectively the interest on the loan while the settlement date of
the forward contract is the maturity date of the loan.

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c Eurodollars are deposits denominated in Ô.S.
dollars at banks outside the Ônited States, and
thus are not under the jurisdiction of the Federal
Reserve. Consequently, such deposits are subject
to much less regulation than similar deposits
within the Ô.S., allowing for higher margins. The
term was originally coined for Ô.S. dollars in
European banks, but it expanded over the years to
its present definition: a Ô.S. dollar-denominated
deposit in Tokyo or Beijing would be likewise
deemed a Eurodollar deposit. There is no
connection with the euro currency.

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 ë 
c A municipal bond is a bond issued by a city or other local
government, or their agencies. Potential issuers of municipal
bonds include cities, counties, redevelopment agencies,
special-purpose districts, school districts, public utility
districts, publicly owned airports and seaports, and any other
governmental entity (or group of governments) below the
state level. Municipal bonds may be general obligations of
the issuer or secured by specified revenues.

c In the Ônited States, interest income received by holders of

municipal bonds is often exempt from the federal income tax
and from the income tax of the state in which they are
issued, although municipal bonds issued for certain
purposes may not be tax exempt.

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c In finance, a forex swap (or FX swap) is a simultaneous
purchase and sale of identical amounts of one currency
for another with two different value dates (normally spot
to forward)

Forex swap consists of two legs:

c a spot foreign exchange transaction, and
c a forward foreign exchange transaction.
These two legs are executed simultaneously for the same
quantity, and therefore offset each other. It is also
common to trade forward-forward, where both
transactions are for (different) forward dates.

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ë
c The term liquidity crisis may refer to :
c a "general feeling of mistrust in the banking system conducting to a
temporary disappearance of credit; a lack of cash experienced by one
particular business or a credit crunch.
c A credit crunch is a sharp increase in the interest rates and a strong
decrease in allocated credit
c A liquidity crisis occurs when a business experiences a lack of cash required
to grow the business, pay for day-to-day operations, or meet its debt
obligations when they are due, causing it to default. When "liquidity crisis" is
used to refer to an economy as a whole it means that liquidity crises
affecting principal players in the economy are resulting in diminished
availability of credit.
c Housing Finance Bubble in ÔS.
c Lehman Brothers
c AIG
c Morgan Stanly/Meryl Lynch

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