FINANCIAL INSTITUTIONS AND SERVICES

Finance Terms
• Finance: The proper management of money. • Money: The current medium of exchange or means of payment. • Credit or Loan: A sum of money to be returned normally with interest.

Classification of finance
1. Public finance
– It studies the sources of funds of public authorities such as states, local self-governments and the Central Government. – It is concerned with the income and expenditure of public authorities and with the adjustment of one to another.

Contd…

Classification of finance
• Private finance
– An individual – Profit-seeking business organizations
• External finance (outside sources)
– Direct financing (through issuing securities) – Indirect financing (through middlemen)

• Internal finance (ploughing back of profits) – A non-profit organization

Financial system A set of institutions. Contd… . instruments and markets which promote savings and channel them to their most efficient use.

Financial system Financial Institutions Financial Markets (Claims. assets. securities) Financial instruments Financial Services Regulatory Intermediaries Non-Intermediaries Others Primary Secondary Banking Nonbanking Organised Un-organised Short term Medium Term Long Term Primary Secondary Capital Markets Equity Market Debt Market Money Markets Derivatives Market .

Financial Institutions • Banking – These are participate in the economy’s payments mechanism – Their deposit liabilities constitute a major part of the national money supply – They can. which is money . as a whole. create deposits or credit.

– LIC. UTI.Financial Institutions • Non-Banking – Lend only out of resources put at their disposal by the savers. IDBI .

• These are classified into – Primary and secondary markets – Money and capital markets .Financial Markets • These are the centers or arrangements that provide facilities for buying and selling of financial claims and services.

– these do not contribute directly to the supply of additional capital .Primary and Secondary Markets • Primary Markets – deal in the new financial claims or new securities (new issue markets) – these are mobilize savings and they supply fresh or additional capital • Secondary Markets – deal in securities already issued or existing or outstanding.

• Money markets deals short-term claims • Capital markets deals long-term claims .Money and Capital Markets • Both are perform the same function of transferring resources to the producers.

• Financial instruments .Financial Instruments and Services • Financial asset – A sum of money sometime in future (repayment of principal) and/or a period (regular/intervals) payment in the form of interest or dividend.

• Large number of small. • Networks are permitting electronic fund transfers from the merchant’s counter. Contd… .Technology in Financial System • Financial Services will be provided by a wide variety of institutions. • Systems providing access to funds from virtually any place in the Nation and are likely to be in use in the next few years. specialized financial service organizations will prevent the few from dominating the market. • Small financial service firms will be able to obtain access to the technologies they will require to remain viable.

• Large computers will be used to support the data bases. fiber optics and cellular radio will find wide application in the financial service industry. video cable. • Decreasing computer costs will create the opportunity for large numbers of individual consumers and managers of small businesses to take advantage of technology in using financial services. • Computers that accept voice inputs and recognize fingerprints may become cost effective for financial service delivery. .Technology in Financial System • Advanced communication technologies including satellite relays.

• Strong growth in asset prices and the growing importance of household credit are potential sources of financial instability. • Financial innovation in products and markets.Financial System instability • Increased cross-border integration and the presence of large international financial institutions facilitate the dissemination of financial shocks across countries. together with the existence of large financial companies facilitate the transmission of financial shocks in domestic financial markets. .

Financial System Stability • Monitoring and analysis of financial system developments • Designing and building up financial system safety nets • Regulation of the banking system • Market Infrastructure • Safety Buffers • Adoption of Common International Standards • Corporate Bonds and Securities Market • Risk management • Market discipline (through prudential regulation and supervision) .

. • These institutions provide a crucial role in providing credit in the form of higher risk loans. • The purpose of DFIs is to ensure investment in areas where otherwise. the market fails to invest sufficiently. community development financial institution and revolving loan funds.Development Finance Institution (DFI) • It refers to a range of alternative financial institutions including microfinance institutions. equity positions and risk guarantee instruments to private sector investments in developing countries.

– An ability to access technical assistance funds.Subsidies • There are three main forms of subsidies in the operations of DFIs in practice – High level of liquidity. and – Subsidies passed on directly to beneficiaries. .

Development banking. Mutual Funds.Universal Banking • Universal banking is a combination of Commercial banking. • A universal bank is a bank which offers commercial bank functions plus other functions such as Merchant Banking. Auto loans. Insurance. etc. Housing Finance. • It is a place where all financial products are available under one roof. Credit cards. . Insurance and many other financial activities. Investment banking. Retail loans.

Advantages of Universal Banking • • • • • • Investors' Trust Economics of Scale Resource Utilisation Profitable Diversification Easy Marketing One-stop Shopping .

Disadvantages of Universal Banking • • • • Different Rules and Regulations Effect of failure on Banking System Monopoly Conflict of Interest .

Financial Intermediaries & Financial Innovation .

Financial Institutions • Provider of financial services such as – transforming financial assets in terms of maturity of liquidity (these are financial intermediaries) – trading financial assets for themselves and others – creating financial assets and then selling those assets on the behalf of customers – giving professional investment advice to others – managing investment portfolios for others • Depository institutions acquire most of their funds through accepting deposits • Non depository institutions receive funds from other sources .

stocks or making loans.Role of Financial Intermediaries • Make direct investments by purchasing bonds. . insurance policies. These are liabilities for the intermediary and are indirect investments for the investors. These are their assets • Raise money for these investments by issuing their own financial assets such as deposits. mutual fund shares.

– Type II liabilities: amount is certain but timing is not • example: term life insurance policy. . Insurance company knows amount of policy but uncertain when the policy holder will die.Asset/Liability Management • Not all liabilities of financial intermediaries are created equal! They differ in terms of the certainty of their amount and timing – Type I liabilities: timing and amount are certain • example: bank fixed rate CD. Bank knows how much it owes the depositor and when.

Asset/Liability Management – Type III liabilities: amount is not certain but timing is • example: variable rate Certificate of Deposits (CD). but the interest owed is not known when the CD is issued. the type of assets that they hold) . Bank knows the maturity date. – Type IV liabilities: time and amount are uncertain • example: auto insurance policy.e. The timing and payout for an auto accident is not known when the policy is issued. • The type of liabilities created by a financial intermediary will determine how they invest their funds (i.

stock prices and exchange rates led to the development of derivative securities – advances in technology make new trading strategies feasible – competition among institutions for unique products and strategies – desire to avoid regulations or tax laws • Why does it happen? .Financial Innovation • What is it? – creation of new financial assets or new ways to use financial assets – changing circumstances: increased instability in interest rates.

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• Towards the end of the 19th Century the cash balances of the government were kept in the government treasuries and the government shed its connections with the Presidency Banks.Banking History • In the first half of the nineteenth century. three Presidency Banks were started in Madras. Bombay and Bengal with the financial participation of the government for conducting banking business and issue currency notes. Contd … .

although it was purely a commercial bank. 1921 by the Imperial Bank of India Act of 1920. • It acted as the sole-banker to the Government. • The Imperial Bank was the biggest bank until 1935. • It was established by the amalgamation of the three Presidency Banks. • Until the establishment of the Reserve Bank of India in 1935. the Imperial Bank performed certain central banking functions.Banking History • The Imperial Bank came into existence on the 27th January. .

Its present governor is Duvvuri Subbarao. • It has 26 offices in which four are regional offices located in metropolitan cities. • Its head quarters is in Mumbai (Maharashtra).Introduction • It is the Central Bank of India Established in 1934 under the RESERVE BANK OF INDIA ACT 1934. .

had a nominal value of shares of INR 2. Later on in 1949. The govt. It moved to Mumbai in 1937. the bank was nationalised and is fully owned by the Govt.20.Brief History of RBI • It was set up on the recommendations of the Hilton Young Commission. . • Initially it was privately owned. of India. • It was started as share-holders bank with a paid up capital of INR 5 crore. • Initially it was located in Kolkata.000.

" .Preamble • The Preamble of the Reserve Bank of India describes the basic objectives of the Reserve Bank as "..to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage..

 National Bank for Agriculture and Rural Development (NABARD.  Deposit Insurance and Credit Guarantee Corporation of India(DICGC). 1982). . 12 July.  The Reserve Bank of India has recently divested its stake in State Bank of India to the Government of India.  RBI has also set up some trainning institutions.  Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL).Subsidiaries The Reserve Bank of India has fully-owned four subsidiaries which include  National Housing Bank(NHB).

Functions of RBI  Monetary functions      Note issue (except one rupee note all other notes are issued) Banker to the government Banker’s bank Custodian of foreign reserves Controller of credit    Bank Rate Open market operations Variable reserve requirements (Cash Reserve Requirement & Statutory Liquidity Requirements)  Non-Monetary Functions  Supervisory functions  Promotional functions .

 Helping  Making  Acting as advisor to the Govt. ways and means advances to the state and local authorities.  Receiving  Carrying and making payments on behalf of the Govt. on all monetary and banking matters. out the Govts’ exchange remittances and other banking operations. . both Central and State Govts float new loans and mange public debt.Banker to the Government  Keeping the cash balances of the Government as deposits free of interest.

Banker’s Bank • Apex banking institution • Controls the banking activities and credit system in India • It provides financial assistance to scheduled banks by rediscounting eligible securities .

• The bank has licensed several banks as authorized dealers in foreign exchange. • According to RBI Act. • In India. . 1934 the bank was required to buy and sell at fixed rates.Custodian of Foreign Reserves • Most of the countries. central bank is with the task of managing their foreign reserves. RBI has maintain the rate of exchange.

e. empowers the Reserve Bank to publish the bank rate from time to time. close of business of 17/04/2012) – Decreased from 9.Controller of Credit • Bank Rate – Sec.00% which was continuing since 13/02/2012 Contd … . – 9.49 of RBI Act. – Standard rate which is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase under this act.00% (w. – RBI is able to regulate commercial bank credit and the general credit situation in the country to a certain extent.f.50% to 9.

– Section 17(8) provides this right to RBI.Controller of Credit • Open market operations – The purchase and sale of Govt. . securities by the RBI from/to the public and bank on its own account. – To provide seasonal finance to commercial banks by purchase of securities from them.

Gold and Approved securities which shall be less than 25% of business on any day.Variable Reserve Requirements • Sec 42 of RBI Act. . • The reserve maintained is called Cash Reserve Requirement/Ratio (CRR). every bank included in the second schedule shall maintain with the bank an average daily balance. • According to Sec 24 of Banking Regulation Act. every banking company shall maintain Cash. the amount of which shall not be less than 3% of the total demand and time liabilities in India of such bank.

Cash Reserve Requirement (CRR) • Every scheduled bank should maintain a minimum balance with RBI.e. • It was 5% on demand deposits and 2% on time deposits. • Then the ratio changed to 3 and 15% for time and demand liabilities.f.50% which was continuing since 24/01/2012 .75% (w. • 4. • RBI (amendment) Act 1962 removed the distinction between time and demand liabilities. 10/03/2012) -announced on 24/01/2012 • Decreased from 5. • The reserve between 5 and 20% in respect of demand liabilities and 2 and 8% in respect of time liabilities.

• 23%(w.f. • RBI gradually reduced the SLR. • RBI is given the power to change the minimum liquidity ratio.Statutory Liquidity Requirement (SLR) • It is another method of influencing the lending policies of commercial banks.e. 11/08/2012) announced on 31/07/2012 . • Narasimham Committee recommended it was from 25 to 38%.

– The Section 22 of Banking Regulations Act 1949. – It promotes banking habits – Extend banking facilities to rural and semi urban areas – Establish and promote new specialized financing agencies • Promotional Functions . – Sanction of new branch or a new place of business. every bank has to obtain a license from RBI carrying on banking business.Non-Monetary Functions • Supervisory Function – RBI Act 1934 & than Banking Regulations Act 1949 have given wide range of powers to RBI to control over commercial banks.

Indian Organized Money Market .

Central Bank .

Introduction • It regulates and makes policy relating to monetary management in the country. . • By issuing of currency notes which is directly and solely under the purview of the Central Bank. • It is an organ of the government which participates in financial markets in different ways.

.Introduction • By working as the agent and adviser of the Government specifically concerning to the financial matters. servicing of debts. such as loans. advances. • By acting as bankers’ bank in the financial market and it regulates the banking operations in the country. • By maintaining adequate foreign exchange reserve for meeting the requirements of foreign trade and servicing of foreign debts. etc.

settlement and transfer Credit control .Functions • • • • • • Note issue Government’s banker. agent and adviser Banker’s bank and lender of last resort Custodian of foreign balances of the country Central clearance.