Banking and Financial Institutions PDF

UNIT SNAPSHOT
UGC NET COMMERCE

Unit 7
Banking & Financial Institutions

❖ Financial System:
The financial system of a country is an important tool for economic development of the
country, as it helps in creation of wealth by linking savings with investments. It facilitates the
flow of funds form the households (savers) to business firms (investors) to aid in wealth
creation and development of both the parties.
A Financial System consists of various financial Institutions, Financial Markets, Financial
Transactions, rules and regulations, liabilities and claims etc.
❖ Indian Financial System:

Broad components of Indian financial system include financial institutions, financial markets,
financial assets and financial services.
• Financial institutions are intermediaries of financial markets which facilitate financial

transactions between individuals and financial customers.
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• Financial market refers to any marketplace where buyers and sellers participate in trading
of assets such as shares, bonds, currencies and other financial instruments.
• Financial assets include cash deposits, checks, loans, accounts receivable, letter of credit,
bank notes and all other financial instruments that provide a claim against a
person/financial institution to pay either a specific amount on a certain future date or to
pay the principal amount along with interest.
• Financial Services are concerned with the design and delivery of financial instruments
and advisory services to individuals and businesses within the area of banking and related
institutions, personal financial planning, leasing, investment, assets, insurance etc.
❖ Banking:

Banking is the business of accepting for the purpose of lending or investment, of deposits of
money from the public repayable on demand and withdraw:able by cheque, draft, and order or
otherwise.”
❖ Banking Regulation Act, 1949:
The Banking Regulation Act, 1949 is a legislation in India that regulates all banking firms in
India. Passed as the Banking Companies Act 1949, it came into force from 16 March 1949 and
changed to Banking Regulation Act 1949 from 1 March 1966. It is applicable in jammu and
kashmir from 1956. Initially, the law was applicable only to banking companies. But, 1965 it was
amended to make it applicable to cooperative banks and to introduce other changes.

❖ Types of Banks:
Central Banks is the apex institution which supervises and controls the entire banking system.
Each country has one central bank. The Reserve Bank of India (RBI) is the central bank of our
country.
These banks play the most important role in modern economic organization. Their business
mainly consists of receiving deposits, giving loans and financing the trade of a country. They
provide short:term credit, i.e., lend money for short periods. This is their special feature.
❖ Scheduled banks:
A scheduled bank, in India, refers to a bank which is listed in the 2nd Schedule of the Reserve
Bank of India Act, 1934. Banks not under this Schedule are called non:scheduled banks.
Scheduled banks are usually private, foreign and nationalized banks operating in India.
❖ Cooperative banking:

A cooperative bank is an institution which is owned by its members. They are the culmination
of efforts of people of same professional or other community which have common and shared
interests, problems and aspirations. Cooperative Banks in India have become an integral part of
the success of Indian Financial Inclusion story. Indian cooperative structures are one of the
largest such networks in the world with more than 200 million members.
The structure of cooperative network in India can be divided into 2 broad segments: Urban
and Rural.
Urban Cooperatives can be further divided into scheduled and non:scheduled. Both the
categories are further divided into multi:state and single:state. Majority of these banks fall in
the non:scheduled and single:state category.
The rural cooperatives are further divided into short:term and long:term structures. Short:term
cooperative structures are further sub:divided as:
• State Cooperative Banks: They operate at the apex level in states
• District Central Cooperative Banks:They operate at the district levels
• Primary Agricultural Credit Societies:They operate at the village or grass:root level.
Likewise, the long:term structures are further divided into –

• State Cooperative Agriculture and Rural Development Banks (SCARDS): These operate at
state:level.
• Primary Cooperative Agriculture and Rural Development Banks (PCARDBS):They operate
at district/block level.
❖ State Bank of India:
State Bank of India is a public sector banking and financial services company. It has its
headquarters in Mumbai, Maharashtra. The oldest commercial bank in India, SBI originated in
1806 as the Bank of Calcutta. Along with the Bank of Bombay (founded 1840) and the Bank of
Madras (founded 1843), it was one of three so:called presidency banks, each of which was
jointly owned by the provincial government and private subscribers. In 1921 the presidency
banks were merged to form the Imperial Bank of India (IBI), which then became the largest
commercial enterprise in the country. In 1955 the government of India and the country’s central
bank, the Reserve Bank of India (founded 1935), assumed joint ownership of IBI, which was

renamed the State Bank of India. Four years later, by the State Bank of India (Subsidiary Banks)
Act, banks earlier operated by individual princely states became subsidiaries of SBI.
State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore
(SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT), besides Bharatiya Mahila
Bank (BMB), merged with SBI with effect from April 1, 2017.
❖ Nationalization of Banks in India:
The measure of bank nationalisation came into effect on 19 July 1969. The ownership of 14
major commercial private banks : estimated to be controlling 70 percent of the deposits in the
country : was transferred to the government. There were primarily two reasons why the
ownership of these 14 banks was transferred to the government. The first was the unpredictable
manner in which these functioned as private entities. Second, these commercial banks were
seen as catering to the large industries and businesses. Agriculture, as a sector, was largely
ignored by these banks. 11 years hence, a second nationalisation took place in April 1980,
wherein six more banks were put under government control.

❖ Function of bank:
❖ Types of Deposits:
Banks are called custodians of public money and mobilization of the deposits from the public
is the most important function of the commercial banks. Mainly, there are two types of
deposits viz. Time Deposits and Demand Deposits.
❖ Time Deposits:
When money is deposited with a “tenure” , it cannot be withdrawn before its maturity fixed
at a particular time. Such deposits are called “Time deposits” or “Term deposits”. The most
common example of Time deposits is “Fixed Deposit”. The rate of interest on time deposits
is usually higher than demand deposits.

❖ Demand deposits:
If the funds deposited can be withdrawn by the customer (depositor / account holder) at
any time without any advanced notice to banks; it is called demand deposit. One can
withdraw the funds from these accounts any time by issuing cheque, using ATM or
withdrawal forms at the bank branches. The money as demand deposit is liquid and can be
encashed at any time. The demand deposits may or may not pay interest to the depositor.
For example, while we get an interest on savings accounts; no interest is paid on current
accounts.
❖ CASA Deposits:
CASA deposits refers to Current Account Saving Account Deposits. As an aggregate the CASA
deposits are low interest deposits for the Banks compared to other types of the deposits.
The Bank with High CASA ratio (CASA deposits as % of total deposits) are in a more
comfortable position than the Banks with low CASA ratios.
❖ Non Resident Ordinary Accounts (NRO):
It is a rupee denominated account and can be in the form of savings or current or recurring or
fixed deposit. The income which is deemed to accrue or arise in India can be deposited only
this type of account. Examples of such forms of incomes are Rent, Dividend and Commission
etc. Such incomes cannot be deposited in NRE Account. Moreover, the interest earned on
this form of account is also taxable as compared to NRE and FCNR Account in which Tax on
Interest is not levied in India.
❖ Non:Resident External Account (NRE):
It is a rupee denominated account and the amount in this type of account is freely repatriable.
This type of NRI Account can either be in the form of Savings, Current, Recurring or Fixed
Deposit. There is no tax applicable in India on funds lying in NRE accounts.
❖ Foreign Currency Non Resident Account (FCNR):

It can only be opened in Foreign Currency and not in the Indian Currency. It is a form of fixed
deposit on which regular interest is paid. As Interest Rates in India (approx 7:8%) are much
higher as compared to the interest rates in western countries (approx 1:2%), many NRI’s
invest their surplus funds in fixed deposits in India through this type of NRI Account Another
benefit of this type of NRI Bank Account is that the investor will not have to bear any risk of
fluctuations in the foreign currency. This type of NRI Bank Account can be opened for a
minimum of 1 year and a maximum of 5 years. Moreover, the interest earned on this form
of NRI Bank Account is also exempted from tax in India.
❖ NOSTRO Account:
Italian word 'nostro' means 'ours'. Hence, Nostro account points at : "Our account with you"
Nostro accounts are generally held in a foreign country (with a foreign bank), by a domestic
bank (from our perspective, our bank). For example, SBI account with HSBC in U.K.
❖ VOSTRO Account:
Italian word 'vostro' means 'yours'. Hence, Vostro account points at : "Your account with us"
Vostro accounts are generally held by a foreign bank in our country (with a domestic bank).
It generally maintained in Indian Rupee (if we consider India) For example, HSBC account is
held with SBI in India.
❖ LORO Account:
Again, Italian word 'loro' means 'theirs'. Therefore, it points at : "Their account with them" Loro
accounts are generally held by a 3rd party bank, other than the account maintaining bank
or with whom account is maintained. For example, BOI wants to transact with HSBC, but
doesn't have any account, while SBI maintains an account with HSBC in U.K. Then BOI could
use SBI account.
❖ Advancing Loans:
Advancing Loans refers to one of the important functions of commercial banks. The public
deposits are used by commercial banks for the purpose of granting loans to individuals and

businesses. Commercial banks grant loans in the form of overdraft, cash credit, and discounting
bills of exchange.
❖ Discounting of bills:
Discounting of bill is a process of settling the bill of exchange by the bank at a value less than
the face value before maturity date.
❖ Cash Credit:
Cash credit can be defined as an arrangement made by the bank for the clients to withdraw cash
exceeding their account limit. The cash credit facility is generally sanctioned for one year but it
may extend up to three years in some cases. In case of special request by the client, the time
limit can be further extended by the bank.

❖ General Utility Functions:
Include the following functions:
• Providing Locker Facilities:
Implies that commercial banks provide locker facilities to its customers for safe keeping of
jewellery, shares, debentures, and other valuable items. This minimizes the risk of loss due to
theft at homes.
• Issuing Traveler’s Checks:

Implies that banks issue traveler’s checks to individuals for traveling outside the country.
Traveler’s checks are the safe and easy way to protect money while traveling.
• Dealing in Foreign Exchange:

Implies that commercial banks help in providing foreign exchange to businessmen dealing in
exports and imports. However, commercial banks need to take the permission of the central
bank for dealing in foreign exchange.
• Transferring Funds:
Refers to transferring of funds from one bank to another. Funds are transferred by means of
draft, telephonic transfer, and electronic transfer.
❖ NABARD:
National Bank for Agriculture and Rural Development (NABARD) is an apex development
financial institution in India, headquartered at Mumbai with regional offices all over India.
NABARD came into existence on 12 July 1982 by transferring the agricultural credit functions
of RBI and refinance functions of the then Agricultural Refinance and Development
Corporation (ARDC). It was dedicated to the service of the nation by the late Prime Minister
Smt. Indira Gandhi on 05 November 1982. Set up with an initial capital of Rs.100 crore, its’
paid up capital stood at Rs.10,580 crore as on 31 March 2018. Consequent to the revision in
the composition of share capital between Government of India and RBI, NABARD today is fully
owned by Government of India.

NABARD’S VISION: Development Bank of the Nation for Fostering Rural Prosperity.
MISSION: Promote sustainable and equitable agriculture and rural development through
participative financial and non:financial interventions, innovations, technology and institutional
development for securing prosperity.
❖ GOVT. SPONSORED SCHEMES UNDER NABARD:
The Government of India encourages farmers in taking up projects in select areas by subsidizing
a portion of the total project cost. All these projects aim at enhancing capital investment,
sustained income flow and employment areas of national importance.
NABARD has been a proud channel partner of the Government in some of these schemes shown
in this section. Subsidy as and when received from the concerned Ministry is passed onto the
financing banks.
• Dairy Entrepreneurship Development Scheme

• Capital Investment Subsidy Scheme for Commercial Production Units for organic/
biological Inputs
• Agri clinic and Agribusiness Centres Scheme
• National Livestock Mission

❖ Reserve bank of India:
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of
the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially
established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is
where the Governor sits and where policies are formulated. Though originally privately owned,
since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.
The Preamble of the Reserve Bank of India describes the basic functions 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; to have a modern monetary policy framework to meet the challenge
of an increasingly complex economy, to maintain price stability while keeping in mind the
objective of growth." The Reserve Bank's affairs are governed by a central board of directors.
The board is appointed by the Government of India in keeping with the Reserve Bank of India
Act.
❖ Functions of Reserve Bank of India:
Monetary Authority:

• Formulates, implements and monitors the monetary policy.
• Objective: maintaining price stability while keeping in mind the objective of growth.
Regulator and supervisor of the financial system:

• Prescribes broad parameters of banking operations within which the country's banking
and financial system functions.
• Objective: maintain public confidence in the system, protect depositors' interest and
provide cost:effective banking services to the public.
Manager of Foreign Exchange:

• Manages 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.
Issuer of currency:
• Issues and exchanges or destroys currency and coins not fit for circulation.
• Objective: to give the public adequate quantity of supplies of currency notes and coins
and in good quality.
Developmental role:
Performs a wide range of promotional functions to support national objectives.
Banker to the Government:
Performs merchant banking function for the central and the state governments; also acts as
their banker.
Banker to banks:
Maintains banking accounts of all scheduled banks.
Controller of the Credit:
The RBI undertakes the responsibility of controlling credit created by the commercial banks. RBI
uses two methods to control the extra flow of money in the economy. These methods are
quantitative and qualitative techniques to control and regulate the credit flow in the
country. When RBI observes that the economy has sufficient money supply and it may

cause inflationary situation in the country then it squeezes the money supply through its
tight monetary policy and vice versa.
❖ Monetary policy of RBI:

Monetary policy is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy used
by the government of a country to achieve macroeconomic objectives like inflation,
consumption, growth and liquidity.
Description:
In India, monetary policy of the Reserve Bank of India is aimed at managing the quantity of
money in order to meet the requirements of different sectors of the economy and to increase
the pace of economic growth.
The RBI implements the monetary policy through open market operations, bank rate policy,
reserve system, credit control policy, moral persuasion and through many other instruments.
Using any of these instruments will lead to changes in the interest rate, or the money supply in
the economy
Monetary policy can be expansionary and contractionary in nature. Increasing money supply
and reducing interest rates indicate an expansionary policy. The reverse of this is a
contractionary monetary policy.

❖ Bank Rate:
Bank rate, also referred to as the discount rate .It s the rate of interest which a central
bank charges on its loans and advances to a commercial bank. Whenever a bank has a shortage
of funds, they can typically borrow from the central bank based on the monetary policy of the
country.

❖ MSF:
Marginal Standing Facility is a liquidity support arrangement provided by RBI to commercial

banks if the latter doesn’t have the required eligible securities above the SLR limit.
❖ Launch of Marginal Standing Facility (MSF):
The MSF was introduced by the RBI in its monetary policy for 2011:12 after successfully test
firing it from December 2010 onwards.
Under MSF, a bank can borrow one:day loans form the RBI, even if it doesn’t have any eligible
securities excess of its SLR requirement (maintains only the SLR). This means that the bank can’t
borrow under the repo facility.
❖ Repo Rate:
Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of
India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used
by monetary authorities to control inflation.

❖ Reverse Repo Rate:
Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in
case of India) borrows money from commercial banks within the country. It is a monetary policy
instrument which can be used to control the money supply in the country.

❖ Cash Reserve Ratio:
The Cash Reserve Ratio refers to a certain percentage of total deposits the commercial banks
are required to maintain in the form of cash reserve with the central bank. The objective of
maintaining the cash reserve is to prevent the shortage of funds in meeting the demand by the
depositor. The amount of reserve to be maintained depends on the bank’s experience regarding
the cash demand by the depositors. If there had been no government rules, the commercial
banks would keep a very low percentage of their deposits in the form of reserves.
❖ Statutory liquidity Ratio:
The central bank has the legal power to change the CRR any time at its discretion. The cash
reserve ratio is a legal requirement and therefore it is also called as a Statutory Reserve Ratio
(SRR). The Statutory Liquidity Ratio (SLR) refers to the proportion of deposits the commercial
bank is required to maintain with them in the form of liquid assets in addition to the cash
reserve ratio.
❖ Open Market Operations:
The Open Market Operations refers to the sale and purchase of government securities and
treasury bills by the central bank of the country with a view to regulate the supply of money
in the economy. When the central bank wants to increase the money supply in the economy,
it purchases the government securities, i.e., bills, and bonds. On the other hand, the central
bank sells the government bonds and securities if the money supply is to be curtailed. The
open market operations are one of the most widely used measures of monetary control.

❖ Moral Suasion:
Moral Suasion refers to a method adopted by the central bank to persuade or convince the
commercial banks to advance credit in accordance with the directives of the central bank in the
economic interest of the country. Simply, the process in which the central bank requests or
persuade the commercial banks to comply with the general monetary policy of the central bank
is called a moral suasion

❖ Credit Rationing:
The Credit Rationing is a measure undertaken by the central bank to limit or deny the supply
of credit based on the investor’s creditworthiness and an increased loan demand. In other
words, a situation where the central bank denies credit to the borrowers who want funds and
are willing to pay a higher interest rate is called a credit rationing.
❖ Inflation Targeting Framework:
Inflation targeting is a monetary policy in which a central bank estimates and makes public a
projected or “target” inflation rate. After declaration of target, the central bank attempts to
steer actual inflation towards the target through the use of interest rate changes and other
monetary tools. The Union Government has set an Consumer Price Index based inflation target
of 4±2% for the next five years i.e. till March 31, 2021. In this regard, Union Government has
also set:up Monetary Policy Committee (MPC) to adhere to the target.
❖ Monetary Policy Committee:
In India, the monetary policy is responsibility of RBI. The main objectives of the monetary policy
in India are to maintain the price stability, securing the financial stability and to ensure the
adequate flow of credit. The Monetary Policy Committee was set up in 2015 after amending the
RBI Act. In context, a Monetary Policy Framework Agreement was signed on February 20, 2015.
Monetary Policy Committee is an executive body of 6 members. Of these, three members are
from RBI while three other members are nominated by the Central Government. Governor of
the Reserve Bank of India is the ex:officio chairperson of the committee. Each member has one
vote. In case of a tie, the RBI governor has casting vote to break the tie. MPC is needed to meet
at least four times a year and make public its decisions following each meeting.
❖ Line of Credit:
The Line of Credit is the agreement between the financial institution (bank) and the individual
(company or government) with respect to the maximum loan amount that an individual can
borrow from a bank any time he wants, provided the loan amount does not exceed the set limit
in the agreement. The line of credit can be secured by collaterals or could be unsecured
depending on the past credit records of the individual.

❖ Kiosk Banking:
The Kiosk Banking is the initiative taken by the RBI for those living in villages or other remote
areas who are deprived of banking services due to the non:availability of a bank branch in their
locality. In such arrangement, the person is not required to go the bank to avail the banking
services. Instead, the bank comes to the village where the person can make the transactions.
❖ Non:Banking Financial Companies (NBFCs):

The Non:Banking Financial Companies (NBFCs) are the financial institutions that offer the
banking services, but does not comply with the legal definition of a bank, i.e. it does not hold a
bank license.
NBFCs do the business of loans and advances, acquisition of shares, stock, bonds, debentures,
securities issued by Government. They also deal in other securities of like marketable nature,
leasing, hire:purchase, insurance business, chit business.
Usually, the 50:50 test is used as an anchor to register an NBFC with RBI. 50:50 Test means that
the companies at least 50% assets are financial assets and its income from financial assets is
more than 50% of the gross income.
Non:Banking Financial Companies are regulated by different regulators in India such as RBI, Irda,
SEBI, National Housing Bank and Department of Company Affairs. NBFCs which are regulated by
other regulators are exempted from the requirement of registration with RBI but they need to
register with respective regulators.
The major differences between NBFCs and Banks are as follows:
• NBFC cannot accept demand deposits (they can accept term deposits).

• NBFCs do not form part of the payment and settlement system i.e. they cannot issue cheques
drawn on itself.
❖ Merchant Banking:
Merchant banking can be defined as a skill:oriented professional service provided by merchant
banks to their clients, concerning their financial needs, for adequate consideration, in the form
of fee. Merchant banks are a specialist in international trade and thus, excel in transacting with
large enterprises.
Any person, indulged in issue management business by making arrangements with respect to
trade and subscription of securities or by playing the role of manager/consultant or by providing
advisory services, is known as a merchant banker.

❖ Mezzanine Financing:
The Mezzanine Financing is a quick way to raise loans for the expansion of current business
operations, from the investors or the financial institution such as a bank, without keeping any
collateral security against it. But however, the lender has the right to convert the debt capital
to ownership or equity interest in the company, in case the borrower defaults in the payment
of the loan.
The mezzanine financing includes no collateral security and involves minimum due diligence,
the risk is high for the lender.
❖ Chit Fund Company:

The Chit Fund Company is a financial institution engaged in the principal business of managing,
conducting and supervising the chit scheme. The chit scheme is also known by different names,
such as Chitty,Kuri, Chit, Chit Fund
The operations of the Chit Fund Company are governed by the Chit Fund Act, 1982,
administered by the State Governments. While the deposit taking activities of, such firm is
regulated by the Reserve Bank of India.

❖ Microfinance:
The Microfinance is the cluster of banking services, relatively of lower monetary amounts,
designed specifically to meet the banking requirements of an unemployed or low:income
people. Microfinance is the arrangement of financial services including loans, savings, insurance,
money transfers and remittances offered to the lower income groups or poor entrepreneurs,
who otherwise cannot avail the standard banking services.
❖ Mutual Benefit Finance Companies:

The Mutual Benefit Finance Companies also called as “Nidhis”, are the non:banking finance
companies that enable its members to pool their money with a predetermined investment
objective. The main sources of funds are share capital, deposits from its members, deposits from
the general public
❖ Rural banking:
Rural banking has become integral to the Indian financial markets with a majority of Indian
population still living in rural or semi:urban areas. Government of India and the Reserve Bank of
India have been continuously working to achieve complete financial inclusion i.e. timely and

sufficient access to financial services and credit at an affordable cost, in the vast expanse of our
country.
❖ RBI has also encouraged the spread of these banks by undertaking the following:
• Allowing non:target group financing for RRBs.

• Recapitalisation and recapitalisation and restructuring of RRBs.
• Simplification of lending procedures as per Gupta Committee recommendations
• Special credit plans
• Kisan Credit
• Deregulation of lending rates Direct financing for SCBs
• Various relaxations in investment policies and non:fund business
❖ Jan Dhan Yojana:
Pradhan Mantri Jan Dhan Yojana (PMJDY) or National Mission for Financial Inclusion was
launched on 28 August 2014 to ensure affordable access to financial services viz. Bank accounts,
remittance, credit, insurance and pension. This scheme was launched to provide basic banking
accounts to 7.5 crore unbanked people with RuPay debit card and overdraft facility (after six
months).
Facilities offered under the scheme:
• A bank account with no minimum balance; and interests on deposits

• Debit cards
• Accidental Insurance Cover of Rs. 1 Lakh; life cover of Rs.30000/: payable on death of
beneficiary.
• Overdraft facility up to Rs.5000/: on satisfactory operation of 6 months.
• Easy transfer of money across India.
• Transfer of benefits under DBT in these accounts.
• Access to pension and insurance products.

❖ E:Banking :
Electronic banking can be defined as the use of electronic delivery channels for banking products
and services, and is a subset of electronic finance . The most important electronic delivery
channels are the Internet, wireless communication networks, automatic teller machines (ATMs),
and telephone banking. Internet banking is a subset of e:banking that is primarily carried out by
means of the Internet. The term transactional e: banking is also used to distinguish the use of
banking services from the mere provision of information

❖ DIGITAL PAYMENT METHODS:
The Digital India programme is a flagship programme of the Government of India with a vision
to transform India into a digitally empowered society and knowledge economy. “Faceless,
Paperless, Cashless” is one of professed role of Digital India.
As part of promoting cashless transactions and converting India into less:cash society, various
modes of digital payments are available.
These mode are:
❖ Non :performing Assets:
A Non:performing asset (NPA) is defined as a credit facility in respect of which

the interest and/or installment of principal has remained ‘past due’ for a specified period of
time. In simple terms, an asset is tagged as non performing when it ceases to generate income
for the lender. Reserve Bank of India defines, these non performing Assets according to
international best practices of “90 days overdue” norms. According to these norms, a NPA is
such a loan or advance given by a bank where the interest or installment of the principal sum
remains overdue for more than 90 days (in respect of a term loan).

Types of assets in Books of Banks:
• Standard assets :: Assets which are generating regular income to the bank.
• Sub:standard assets :: An asset which is overdue for a period of more than 90 days but
less than 12 months.
• Doubtful assets :: An asset which is overdue for a period of more than 12 months.
• Loss assets :: Assets which are doubtful and considered as non:recoverable by bank,
internal or external auditor or central bank inspectors
Sub:standard assets, Doubtful assets and Loss assets are NPA.
❖ ICICI Bank:
Industrial Credit and Investment Corporation of India (ICCI) Ltd. was established in 1955 at the
initiative of World Bank, the Government of India (GoI) and representatives of Indian
industry, with the principal objective of creating a development nancial institution for
providing medium:term and long:term project financing to Indian businesses. The ICICI Bank
was originally founded in 1994 by ICICI Limited, an Indian financial institution and was its
wholly:owned subsidiary. Its headquarters is in Mumbai, Maharashtra. It provides a

comprehensive range of financial and advisory products including project nancing for the
infrastructure sectors, corporate nance products, lease finance, guarantees and equity products
as well as advisory services.
❖ Industrial Finance Corporation of India (IFCI Bank):
Industrial Finance Corporation of India (IFCI) was set up on July 1, 1948 in New Delhi to provide
medium and long:term nancial assistance to the manufacturing, services and infrastructure
sectors. It is a Government Company under Section 2(45) of the Companies Act, 2013. It is also
a Systemically Important Non:Deposit taking NonBanking Finance Company (NBFC:ND:SI),
registered with the Reserve Bank of India (RBI). It grants loans only to public limited companies
and co:operatives but not to private limited companies or partnership firms, both in rupees and
foreign currencies. It also underwrites the issue of stocks, bonds, shares, etc.
❖ Small Industries Development Bank of India (SIDBI):
Small Industries Development Bank of India (SIDBI) is the principal financial institution for the
promotion, nancing and development of the Micro, Small and Medium Enterprise (MSME)
sector and also co:ordinates the functions of the institutions engaged in similar activities. It was
set up on April 2, 1990 under the Small Industries Development Bank of India Act, 1989. It has
headquarters in Lucknow, Uttar Pradesh.
❖ Industrial Development Bank of India (IDBI):
Industrial Development Bank of India (IDBI) was constituted under Industrial Development Bank
of India Act, 1964 as a Development Financial Institution (DFI) and came into being as on July
01, 1964. On October 1, 2004, the erstwhile IDBI was converted into a banking company – IDBI
Ltd. : to undertake the entire gamut of banking activities while continuing to play its secular DFI
role. Desirous of fuelling its business growth, IDBI Ltd. merged its subsidiaries : the erstwhile
IDBI Bank, IDBI Home Finance Ltd., IDBI Gilts, the erstwhile United Western Bank Ltd., with itself
over a period of time. IDBI Ltd. also changed its name to IDBI Bank Ltd. to reflect its widened
business functions. The registered office of the bank is located in Mumbai.

❖ All India Development Finance Institutions (DFIs) at a Glance
IFCI IDBI SIDBI
IFCI was the first DFI to be IDBI was initially set up as a SIDBI was setup as a
setup in 1948. Subsidiary of the RBI. In subsidiary of IDBI in 1989.
February 1976, IDBI was
made fully autonomous.
With Effect from 1 July 1993, IDBI was designated as apex SIDBI was designated as apex
IFCI has been converted into organisation in the eld of organisation in the field of
Public Limited Company. Development Financing. Small Scale Finance. The
However, it was converted in Union Budget of 1998:99
a bank wef Oct 2004. proposed the delinking of
SIDBI from IDBI.
The key function of IFCI was; The key functions of IDBI The key function of SIDBI
granting long:term loans(25 were; it provides refinance was; to provide assistance to
years and above); against loans granted to small scale units; initiating
Guaranteeing rupee loans industries; it subscribed to steps for technological up
oated in open markets by the share capital and bond gradation and modernization
industries; Underwriting of issues of other DFIs; it also of SSIs; expanding the
shares and debentures; acted as the coordinator of marketing channel for the
Providing guarantees for DFIs at all India level. Small Scale Industries
industries. product; promotion of
employment creating SSIs
❖ UTI:
Unit Trust of India (UTI) was established in 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de:linked from the RBI and the Industrial Development
Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. UTI

Mutual Fund was carved out of the erstwhile Unit Trust of India (UTI) as a SEBI registered mutual
fund from 1 February 2003. The Unit Trust of India Act 1963 was repealed, paving way for the
bifurcation of UTI into – Specified Undertaking of Unit Trust of India (SUUTI); and UTI Mutual
Fund (UTIMF).
❖ SIDBI:
Small Industries Development Bank of India (SIDBI) is a development financial institution in

India, headquartered at Lucknow and having its offices all over the country. Its purpose is to
provide refinance facilities and short term lending to industries, and serves as the principal
financial institution in the Micro, Small and Medium Enterprises (MSME) sector. SIDBI also
coordinates the functions of institutions engaged in similar activities. SIDBI operates under the
Department of Financial Services, Government of India.
SIDBI is one of the four All India Financial Institutions regulated and supervised by the Reserve
Bank; other three are EXIM Bank, NABARD and NHB. They play a salutary role in the financial
markets through credit extension and refinancing operation activities and cater to the long:term
financing needs of the industrial sector
SIDBI is active in the development of Micro Finance Institutions through SIDBI Foundation for
Micro Credit, and assists in extending microfinance through the Micro Finance Institution (MFI)
route. Its promotion & development program focuses on rural enterprises promotion and
entrepreneurship development.

❖ SFCs:
State Financial Corporations (SFCs) are the State level financial institutions which play a vital role
in the growth of small & medium enterprises in the concerned States. They offer financial
assistance in the form of direct subscription to debentures/equity, term loans, guarantees,
discounting of bills of exchange & seed/ special capital, etc. SFCs have been set up with the
purpose of catalyzing higher investment, engendering greater employment & extending the
ownership base of industries. They have also started offering assistance to newer types of
business activities like tissue culture, floriculture, poultry farming, services related to
engineering, marketing and commercial complexes
❖ Banking Reforms in India:
In economic liberalisation and growing trend towards globalisation (external liberalisation),

various banking sector reforms have been introduced in India to improve the operation
efficiency and upgrade the health and financial soundness of banks so that Indian banks can
meet internationally accepted standards of performance.
• The first Narasimhan Committee (1991)
• The Verma Committee (1996),
• The Khan Committee (1997), and
• The Second Narasimhan Committee (1998).
Narsimham Committee I (1991) was formed to overhaul banking sector of India & to overcome
its problems. On the recommendations of Narasimhan Committee, following measures were
undertaken by government since 1991: –
• Lowering SLR and CRR : The high SLR and CRR reduced the profits of the banks. SLR had
been reduced from 38.5% in 1991 to 25% in 1997. This has left more funds with banks for
allocation to agriculture, industry, trade etc. Cash Reserve Ratio (CRR) is the cash ratio of
banks total deposits to be maintained with RBI. The CRR had been brought down from
15% in 1991 to 4.1% in June 2003. The purpose is to release the funds locked up with RBI.
• Prudential Norms : Prudential norms have been started by RBI in order to impart
professionalism in commercial banks. The purpose of prudential norms includes proper

disclosure of income, classification of assets and provision for Bad debts so as to ensure
that the books of commercial banks reflect the accurate and correct picture of financial
position.
• Capital Adequacy Norms (CAN) : Capital Adequacy ratio is the ratio of minimum capital
to risk asset ratio. In April 1992 RBI fixed CAN at 8%.
• Deregulation of Interest Rates : Narasimhan Committee advocated that interest rates

should be allowed to be determined by market forces. Since 1992, interest rates have
become much simpler and freer.
• Recovery of Debts : Government of India passed the “Recovery of debts due to Banks and
Financial Institutions Act 1993” in order to facilitate and speed up the recovery of debts
due to banks and financial institutions. Six Special Recovery Tribunals have been set up.
An Appellate Tribunal has also been set up in Mumbai.
• Competition from New Private Sector Banks – Banking was made more open for private
sector. New private sector banks have already started functioning. These new private
sector banks are allowed to raise capital contribution from foreign institutional investors
up to 20% and from NRIs up to 40%. This has led to increased competition.
• Freedom of Operation : Scheduled Commercial Banks were given freedom to open new
branches and upgrade extension counters, after attaining capital adequacy ratio and
prudential accounting norms. The banks were also permitted to close non:viable branches
other than in rural areas.
• Local Area Banks (LABs) : In 1996, RBI issued guidelines for setting up of Local Area Banks,
and it gave Its approval for setting up of 7 LABs in private sector. LABs will help in
mobilizing rural savings and in channelling them into investment in local areas.
• Supervision of Commercial Banks : RBI has set up a Board of financial Supervision with
an advisory Council to strengthen the supervision of banks and financial institutions. In
1993, RBI established a new department known as Department of Supervision as an
independent unit for supervision of commercial banks.

Narasimham Committee Report II – 1998:
In 1998 the government appointed yet another committee under the chairmanship of Mr
Narsimham. It is better known as the Banking Sector Committee. It was told to review the
banking reform progress and design a programme for further strengthening the financial system
of India. The committee focused on various areas such as capital adequacy, bank mergers, bank
legislation, etc.
Recent Banking Committees: Recognizing that banking reforms are a continuous task, following
committee were setup by the government over the past few years:
Nachiket Mor committee :
Committee on Comprehensive Financial Services for Small Businesses and Low:Income

Households, set up by the RBI in September 2013, was mandated with the task of framing a
clear and detailed vision for financial inclusion and financial deepening in India. In its final report,
the Committee has outlined six vision statements for full financial inclusion and financial
deepening in India.
P.J. Nayak committee:
Public Sector banks have been suffering with multiple problems of non:performing assets
(NPAs), large over:dues; competition, performance, political pressures and so on. In this context,
the former RBI governor Raghuram Rajan had constituted the P.J. Nayak committee In January
2014 under Shri P.J Nayak, former Chairman and CEO, Axis Bank, and Former Country Head,
Morgan Stanley India. The core terms of reference for the committee were based on
governance, management and operational issues in the public sector banks.
Urjit Patel committee:
Expert Committee to Revise and Strengthen the Monetary Policy Framework, headed by the
then RBI Deputy Governor Urjit R Patel submitted its report in 2014. Main objective of the
committee was to recommend what needs to be done to revise and strengthen the current
monetary policy framework with a view to making it transparent and predictable.
❖ BIS:
The Bank for International Settlements (BIS) is an international organization of central banks
which fosters international monetary and financial cooperation and serves as a bank for central

banks.” It also provides banking services, but only to central banks, or to international
organizations. Based in Basel, Switzerland, the BIS was established by the Hague agreements of
1930. As an organization of central banks, the BIS seeks to make monetary policy more
predictable and transparent among its 55 member central banks. The BIS’ man role is in setting
capital adequacy requirements to safeguard bank’s operations.

❖ Basel Norms:
Basel is a city in Switzerland. It is the headquarters of Bureau of International Settlement (BIS),

which fosters cooperation among central banks with a common goal of financial stability and
common standards of banking regulations. Basel is a city in Switzerland. It is the headquarters
of Bureau of International Settlement (BIS), which fosters cooperation among central banks with
a common goal of financial stability and common standards of banking regulations.
❖ BASEL I:
In 1988, BCBS introduced capital measurement system called Basel capital accord, also called
Basel 1. It focused almost entirely on credit risk. It defined capital and structure of risk weights
for banks. The minimum capital requirement was fixed at 8% of risk:weighted assets (RWA).
India adopted Basel 1 guidelines in 1999.
Objectives of Basel I were:
(a) to ensure an adequate level of capital in the international banking system
(b) to create a more level playing field in the competitive environment
❖ BASEL II:
In 2004, Basel II guidelines were published by BCBS, which were considered to be the refined
and reformed versions of Basel I accord. The New Basel Capital Accord focused on, three pillars
viz.

❖ Basel III:
In 2010, Basel III guidelines were released. These guidelines were introduced in response to the
financial crisis of 2008. Basel III norms aim at making most banking activities such as their trading
book activities more capital:intensive. The guidelines aim to promote a more resilient banking
system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.
Presently Indian banking system follows Basel II norms. The Reserve Bank of India has extended
the timeline for full implementation of the Basel III capital regulations by a year to March 31,
2019.
The three pillars of BASEL:3 can be understood from the following figure:
❖ Capital Adequacy Ratio:
The Capital Adequacy Ratio (CAR) is a measure of a bank's available capital expressed as a
percentage of a bank's risk:weighted credit exposures. CAR is the capital needed for a bank
measured in terms of the assets (mostly loans) disbursed by the banks. Higher the assets, higher
should be the capital by the bank.
A notable feature of CAR is that it measures capital adequacy in terms of the riskiness of the
assets or loans given. For example, if the bank has given loans to the government by investing

in government securities like government bonds, it need not keep any capital. This is because,
the riskiness of loans to government securities is zero and hence, the risk weight for government
securities is zero.
Capital is classified in terms of its degree of contribution from the owners (share holders). Tier
1 Capital is more equity capital or it is provided by the most responsible people of the bank – its
share holders. Hence, most of the tier 1 capital will be in the form of equities. On the other hand,
tier 2 capital is more in the form of reserves, debts etc.
❖ Financial Market : Efficient transfer of resources from those having idle resources to others
who have a pressing need for them is achieved through financial markets. Stated formally,
financial markets provide channels for allocation of savings to investment. The financial
markets have two major components; the money market and the capital market.

❖ Money Market : The money market refers to the market where borrowers and lenders
exchange short:term funds to solve their liquidity needs. Money market instruments are
generally financial claims that have low default risk, maturities under one year and high
marketability.
❖ Capital Market : The Capital Market is a market for financial investments that are direct or
indirect claims to capital. It is wider than the Securities Market and embraces all forms of
lending and borrowing, whether or not evidenced by the creation of a negotiable financial
instrument.
❖ Securities Market : Securities Market, refers to the markets for those financial
instruments/claims/obligations that are commonly and readily transferable by sale. The
Securities Market has two inter:dependent and inseparable segments, the new issues
(primary) market and the stock (secondary) market.
❖ Primary Market : The market wherein resources are mobilised by companies through issue
of new securities is called the primary market. Primary Market (New Issues) is of great
significance to the economy of a country. It is through the primary market that funds flow

for productive purposes from investors to entrepreneurs.
❖ Secondary Market : Secondary market essentially comprises of stock exchanges which

provide platform for purchase and sale of securities by investors. The trading platform of
stock exchanges are accessible only through brokers and trading of securities is confined only
to stock exchanges. The stock market or secondary market ensures free marketability,
negotiability and price discharge.
❖ Securities and Exchange Board of India (SEBI) : SEBI was constituted on 12th April 1988 as
an interim administrative body under the Finance Ministry. It was constituted as the
regulator of capital markets in India under a resolution of the Government of India. Its
objective was to protect the interests of investors in securities and to promote the
development and regulation of securities market. Four years later, on 4th April 1992 a
notification awarding statutory powers to SEBI was issued (Securities and Exchange Board of
India Act, 1992).
❖ Stock Exchange : Stock exchanges thus represent the market place for buying and selling of
securities and ensuring liquidity to them in the interest of the investors. The stock exchanges
are virtually the nerve centre of the capital market and reflect the health of the country’s
economy as a whole. The stock exchanges are managed by Board of Directors or Council of
Management consisting of elected brokers and representatives of Government and Public
appointed by SEBI. The Boards of stock exchanges are empowered to make and enforce
rules, bye:laws and regulations with jurisdiction over all its members.

❖ Stock Broker : A stockbroker is an individual / organization who are specially given license to
participate in the securities market on behalf of clients. When the Stockbroker acts as agent
for the buyers and sellers of securities, a commission is charged for this service. Every stock
broker is required to be a member of a stock exchange as well as registered with SEBI.
❖ Membership of Stock Exchange : Membership of stock exchanges is generally given to

persons financially sound and with adequate experience/ training in stock market. Their
enrolment as member is regulated and controlled by SEBI to whom they have to pay an
annual charge. A member of the stock exchange is called ‘broker’ who can transact on behalf
of his clients as well as on his own behalf. A non:member can deal in securities only through
members.

❖ Bombay Stock Exchange (BSE) : Bombay Stock Exchange Ltd., popularly known as "BSE" was
established in 1875 as "The Native Share and Stock Brokers Association". It is the oldest one
in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is a
voluntary non:profit making Association of Persons (AOP) and is currently engaged in the
process of converting itself into demutualised and corporate entity. It has evolved over the
years into its present status as the premier Stock Exchange in the country. It is the first Stock
Exchange in the Country to have obtained permanent recognition in 1956 from the Govt. of
India under the Securities Contracts (Regulation) Act, 1956.
❖ Rolling Settlement : All transactions in all groups of securities in the Equity segment and
Fixed Income securities listed on BSE are required to be settled on T+2 basis (w.e.f. April 1,
2003). Under rolling settlements, the trades done on a particular day are settled after a given
number of business days. A T+2 settlement cycle means that the final settlement of
transactions done on T, i.e., trade day by exchange of monies and securities between the
buyers and sellers respectively takes place on second business day (excluding Saturdays,
Sundays, bank and Exchange trading holidays) after the trade day.
❖ National Stock Exchange (NSE) : Based on Pherwani Committees report submitted in June,
1991, the National Stock Exchange of India Limited (NSEIL) was established to provide an
efficient system eliminating all the deficiencies of stock exchanges and is geared to meet the
requirements of the large investor population. NSEIL was promoted by leading FIs at the
behest of Government of India and was incorporated in November 1992. NSEIL commenced
operations in the Wholesale Debt Market (WDM) segment in June 1994, operations in the
Capital Market (CM) segment in November 1994, and operations in derivatives segment in
June 2000.

❖ Over:the:Counter Exchange of India (OTCEI) : OTCEI was incorporated in 1990 as a Section
25 company under the Companies Act 1956. The Exchange was set up to aid enterprising
promoters in raising finance for new projects in a cost effective manner and to provide
investors with a transparent & efficient mode of trading. Modelled along the lines of the
NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets
such as screen:based nationwide trading, sponsorship of companies, market making and
scripless trading. OTCEI is no longer a functional exchange as the same has been
de:recognised by SEBI vide its order dated 31 Mar 2015.
❖ Nifty : Nifty which is derived from National and Fifty is an equity benchmark index for the
Indian Equity Market. Officially known as S&P CNX Nifty, it is operated by India Index Services
and Products, which is a subsidiary of National Stock Exchange of India (popularly known as
NSE). Nifty was introduced by NSE on April 21, 1996. It represents the weighted average of
50 Indian Company Stocks across 24 sectors, which account for around 60% of the market
capitalization.
❖ Sensex : Sensex which is derived from Sensitive and Index is an equity benchmark index for
the Indian Equity Market. Officially known as S&P BSE Sensex, it is operated by Bombay Stock
Exchange (popularly known as BSE). Sensex was introduced by BSE on January 1, 1986. It
represents the weighted average of 30 Indian Company Stocks across 13 sectors.

❖ Foreign Institutional investors (FIIs): are entities established or incorporated outside India
and make proposals for investments in India. These investment proposals by the FIIs are
made on behalf of sub accounts, which may include foreign corporates, individuals, funds
etc. In order to act as a banker to the FIIs, the RBI has designated banks that are authorised
to deal with them. The biggest source through which FIIs invest is the issuance of
Participatory Notes (P:Notes).
❖ Qualified Institutional Buyer : Qualified Institutional Buyers are those institutional investors
who are generally perceived to possess expertise and the financial muscle to evaluate and
invest in the capital markets.
❖ Retail Investor : A retail investor is an individual investor in the Indian Securities market
whose subscription to securities is of a value less than Rs. 2 lakh.
❖ Demutualization of Stock Exchanges : Demutualisation is the process of transformation of

the legal structure of a stock exchange from a mutual form to a business corporation form
and after demutualisation, the ownership, the management and the trading rights at the
exchange are isolated from one another. SEBI had set up a committee under the
Chairmanship of Justice Kania for the same which came up with report on demutualization
of Stock Exchanges through uniform scheme prescribed. Accordingly, SEBI issued scheme of
demutualization to BSE and other Regional Stock Exchanges.
❖ Institutional Trading Platform : SEBI has notified new norms for listing of small and medium
enterprises (SMEs) including the start:up companies on Institutional Trading Platform (ITP)
on stock exchanges without an initial public offering. This will allow SMEs to list themselves
on stock exchanges without raising funds from the public, which in turn will help both the
investor and the small companies.
❖ Insider Trading : Insider trading denotes dealing in a company’s securities on the basis of
confidential information relating to the company which is not published or not known to the
public used to make profit or loss. Insider is the person who is connected with the company,
who could have the unpublished price sensitive information (UPSI) or receive the information
from somebody in the company. Prohibition of insider trading is necessary to make securities
market fair and transparent. SEBI has taken number of policy measures to prevent insider
trading in India.

❖ Credit Rating Agency : Credit rating is an assessment of the probability of default on payment
of interest and principal on a debt instrument. It is not a recommendation to buy, sell or hold
a debt instrument. Rating only provides an additional input to the investor and the investor
is required to make his own independent and objective analysis before arriving at an
investment decision. All the credit rating agencies in India are regulated by SEBI (Credit
Rating Agencies) Regulations, 1999.
❖ SME exchange : SME exchange means a trading platform of a recognised stock exchange
having nationwide trading terminals permitted by SEBI to list the specified securities issued
in accordance with SEBI (ICDR) Regulation. The two stock exchange of India i.e. Bombay Stock
Exchange (BSE) and National Stock Exchange (NSE) have begun their SME listing platforms.
While BSE SME Exchange began its operation in March, 2012, NSE's SME exchange titled
EMERGE commenced operations in September, 2012.
❖ Registrar and Transfer Agents (RTAs) : SEBI guidelines makes it mandatory to appoint
Registrar to an issue and Share Transfer Agent, in relation to the management of public offer
introduced by the body corporate in general public, and to service the shareholders. RTAs
maintain detailed records of all investor transactions in mutual funds and shares.
❖ Banker to an Issue : “Banker to an issue” means a scheduled bank carrying on all or any of
the following issue related activities namely::
(i) acceptance of application and application monies;
(ii) acceptance of allotment or call monies;
(iii) refund of application monies;
❖ Underwriter : A company must receive a minimum of 90% subscription against the entire
issue before making any allotment to the public. If the company does not receive the
minimum subscription of 90% of the issue, the entire subscription shall be refunded to the
applicants. If public do not subscribe fully, the underwriter ensures the company that “to the

extent of unsubscribed portion, shares and debentures will be taken up by him”. For this
contract, the consideration is “Underwriting commission”.3
❖ Merchant Banker : Any person who is engaged in the business of issue management either
by making arrangements regarding selling, buying, or subscribing to the securities as
manager, consultant, adviser in relation to such an issue management. Merchant banking
firms carry out a range of activities that help enterprises mobilize funds from the capital
markets.
❖ Depository : Depository is a place where financial securities are held in dematerialised form.
It is responsible for maintenance of ownership records and facilitation of trading in
dematerialised securities.

❖ Depository Participants : Depository interacts with its clients or investors through its agents,
called Depository Participants normally known as DPs. For any investor or client, to avail the
services provided by the Depository, has to open Depository account, known as Demat A/c,
with any of the DPs.
❖ Clearing Corporations : Clearing corporations function as counter:parties for all trades

executed on the exchange they are affiliated with. So all buyers pay funds to the clearing
house / clearing corporation, and all sellers deliver securities to the clearing house / clearing
corporation. The clearing house / clearing corporation completes the other leg of the
settlement by paying funds to sellers and delivering securities to buyers.
❖ Custodian of Securities : Custodian of securities is a licence granted by Sebi to eligible

entities allowing them to offer custodial services to financial market participants including
foreign institutional investors (FIIs) and foreign portfolio investors (FPIs). Custodians are
clearing members, who settle trades on behalf of their clients. They are generally a financial

institution that holds customers' securities for safekeeping to minimise the risk of their theft
or loss.
❖ Portfolio Manager : “Portfolio manager” means any person who pursuant to a contract or
arrangement with a client, advises or directs or undertakes on behalf of the client (whether
as a discretionary portfolio manager or otherwise) the management or administration of a
portfolio of securities or the funds of the client.
❖ Algorithmic Trading : Any order that is generated using automated execution logic shall be
known as algorithmic trading. With the increasing trend amongst capital market players of
generating orders through automated execution logic called Algorithmic Trading. SEBI have
formulated broad guidelines to be followed by both Stock Exchanges and Stock Brokers for
Algorithmic Trading. These guidelines permits secure systems for algorithmic trading and
help to keep pace with the speed of trade and volume of data that may arise through it.
❖ Government Securities : A Government Security (G:Sec) is a tradeable instrument issued by

the Central Government or the State Governments. It acknowledges the Government’s debt
obligation. Such securities are short term (usually called treasury bills, with original
maturities of less than one year) or long term (usually called Government bonds or dated
securities with original maturity of one year or more). In India, the Central Government issues
both, treasury bills and bonds or dated securities while the State Governments issue only
bonds or dated securities, which are called the State Development Loans (SDLs). G:Secs carry
practically no risk of default and, hence, are called risk:free gilt:edged instruments.
❖ Cash Management Bills (CMBs) : In 2010, Government of India, in consultation with RBI
introduced a new short:term instrument, known as Cash Management Bills (CMBs), to meet
the temporary mismatches in the cash ow of the Government of India. The CMBs have the
generic character of T:bills but are issued for maturities less than 91 days.
❖ Dated G:Secs – They are securities which carry a xed or oating coupon (interest rate) which
is paid on the face value, on half:yearly basis. Generally, the tenor of dated securities ranges
from 5 years to 40 years.
❖ Treasury Bills : Treasury Bills are money market instruments issued by RBI to finance the
short term requirements of the Government of India. These are discounted securities and
thus are issued at a discount to face value. The return to the investor is the difference
between the maturity value and issue price. In the short term category of investment

instruments, the treasury bill carry the lowest risk. There are four types of treasury bills :
14:days T bill, 91:days T bill, 182:days T bill and 364:days T bill. The usual investors in these
instruments are banks who invest not only to invest their short:term surpluses but also to
get benefitted for maintaining the Statutory Liquidity Ratio (SLR) requirements in T:bills is
reckoned for the purpose of statutory reserves.
❖ Certificate of Deposits (CDs) : A Certificate of Deposit or CD, functions as a deposit receipt

for money which is deposited with a financial organization or bank. However, a Certificate of
Deposit is different from a Fixed Deposit Receipt in two aspects. The first aspect of difference
is that a CD is only issued for a larger sum of money. Secondly, a Certificate of Deposit is
freely negotiable. First announced in 1989 by RBI, Certificate of Deposits have become a
preferred investment choice for organizations in terms of short:term surplus investment as
they carry low risk while providing interest rates which are higher than those provided by
Treasury bills and term deposits. Like treasury bills, CDs are also issued at a discounted price
and their tenor ranges between a span of 7 days up to 1 year.
❖ Commercial Papers : Commercial Papers are can be compared to an unsecured short:term

promissory note which is issued by highly rated companies with the purpose of raising capital
to meet requirements directly from the market. CPs usually feature a fixed maturity period
which can range anywhere from 1 day up to 270 days. Commercial Papers promise higher
returns as compared to treasury bills and are automatically not as secure in comparison.
Commercial papers are actively traded in secondary market.
❖ Repurchase Agreements (Repo) : Repurchase Agreements, also known as Reverse Repo or

simply as Repo, loans of a short duration which are agreed upon by buyers and sellers for the
purpose of selling and repurchasing. These transactions can only be carried out between RBI
approved parties Repo / Reverse Repo transactions can be done only between the parties
approved by RBI. Transactions are only permitted between securities approved by the RBI
like treasury bills, central or state government securities, corporate bonds and PSU bonds.

❖ Call Money Market : The call money market (CMM) the market where overnight (one day)
loans can be availed by banks to meet liquidity. Banks who seeks to avail liquidity approaches
the call market as borrowers and the ones who have excess liquidity participate there as
lenders. Participants in the call money market are banks and related entities specified by the
RBI.
❖ Depository Receipts (DRs) : Depository receipts (DRs) are financial instruments that
represent shares of a local company but are listed and traded on a stock exchange outside
the country. DRs are issued in foreign currency, usually dollars.
❖ Mutual Funds : Mutual fund is a mechanism for pooling the resources by issuing units to the
investors and investing funds in securities in accordance with objectives as disclosed in offer
document. Investments in securities are spread across a wide cross:section of industries and
sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may
not move in the same direction in the same proportion at the same time Investors of mutual

funds are known as unitholders. A mutual fund is required to be registered with SEBI before
it can collect funds from the public.

❖ Open ended mutual funds : An open ended mutual funds is a fund with a non:fixed number
of outstanding shares/units, that stands ready at any time to redeem them on demand. The
fund itself buys back the shares surrendered and is ready to sell new shares. The key feature
of open ended scheme is liquidity. Generally the transaction takes place at the net asset value
which is calculated on a periodical basis.
❖ Close ended mutual funds : It is the fund where mutual fund management sells a limited
number of unit and does not stand ready to redeem them. The shares of such mutual funds
are traded in the secondary markets.
Net Asset Value, or NAV, is the sum total of the market value of all the shares held in the
portfolio including cash, less the liabilities, divided by the total number of units outstanding.
Simply, NAV is the current value of a mutual fund unit.
❖ Exchange Traded Fund : An ETF, or exchange:traded fund, is a marketable security that tracks
a stock index, a commodity, bonds, or a basket of assets. Although similar in many ways, ETFs
differ from mutual funds because shares trade like common stock on an exchange. While
most ETFs track stock indexes, there are also ETFs that invest in commodity markets,
currencies, bonds, and other asset classes.
❖ Derivatives : A derivative is a contract between two or more parties whose value is based on
an agreed:upon underlying financial asset (like a security) or set of assets (like an index).
Common underlying instruments include bonds, commodities, currencies, interest rates,
market indexes and stocks. All these assets, which can be considered as 'underlyings' to a

derivative product, are subject to change in value. Derivative contracts seek to transfer these
risks of change in value from an individual who is not comfortable with the risk to one who
is. There are mainly four types of derivative contracts such as futures, forwards, options &
swaps.
❖ Participants in Derivatives Market : On the basis of their trading motives, participants in the
derivatives markets can be segregated into four categories : hedgers, speculators, margin
traders and arbitrageurs.
• Hedgers are traders who wish to protect themselves from the risk involved in price
movements.
• Speculators, unlike hedgers, look for opportunities to take on risk in the hope of making
returns.
• Arbitrage trade is a low risk trade where a simultaneous purchase of securities is done in
one market and a corresponding sale is carried out in another market. Sometimes the
price of a stock in the cash market is lower or higher than it should be, in comparison to
its price in the derivatives market. Arbitrageurs exploit these imperfections and
inefficiencies to their advantage.
• Margin traders are speculators who make use of the payment mechanism, which is
peculiar to the derivative markets. When you trade in derivative products, you are not
required to pay the total value of your position up front. You are only required to deposit
a fraction (called margin) of the value of your outstanding position. This is called margin
trading. This leverage factor is a multiplier, which allows the speculator to buy three to

five times the quantity that his capital investment would otherwise have allowed him to
buy in the cash market.
❖ Futures & Forward contract : Futures are standardized contracts and they are traded on the
exchange. On the other hand, Forward contract is an agreement between two parties and it
is traded over:the:counter (OTC).
❖ Options Contracts : Option is the most important part of derivatives contract. An Option
contract gives the right but not an obligation to buy/sell the underlying assets. The buyer of

the options pays the premium to buy the right from the seller, who receives the premium
with an obligation to sell the underlying assets if the buyer exercises his right.
❖ Swaps : A swap is a derivative contract made between two parties to exchange cash flows in
the future. Interest rate swaps and currency swaps are the most popular swap contracts,
which are traded over the counters between financial institutions. Retail investors generally
do not trade in swaps. The most commonly traded and most liquid interest rate swaps are
known as “vanilla” swaps, which exchange fixed:rate payments for floating:rate payments.

❖ Pension Funds : A pension fund, also known as a superannuation fund in some countries, is
any plan, fund, or scheme which provides retirement income.
❖ National Pension Scheme (NPS) : It is easily accessible, low cost, tax:efficient, flexible and
portable retirement savings account. It was launched in 2004 and was initially introduced for
new Government recruits (except armed forces). It aims to institute pension reforms in
country and to inculcate habit of saving for retirement amongst the citizens. Its objective is
to provide retirement income to all the citizens. Under it, individual contributes to his
retirement account. Employer can also co:contribute for social security/welfare of individual.
It was extended for all citizens of country from May 2009 including the unorganised sector
workers on voluntary basis.
NPS is governed and administered by Pension Fund Regulatory and Development Authority
(PFRDA). Currently, any Indian between age of 18 to 65 years may voluntarily join the NPS.
NRI can open an NPS account, however contributions made by NRI are subject to regulatory
requirements as prescribed by RBI and FEMA from time to time.
❖ Pension Fund Regulatory and Development Authority (PFRDA) : Pension Fund Regulatory
and Development Authority (PFRDA), a statutory body, is the pension regulator of India
which was established by Government of India on August 23, 2003 and was authorized by
Ministry of Finance, Department of Financial Services. Upon introduction of the PFRDA Bill
by the Government of India in the Parliament of India and the subsequent passage of the
PFRDA Act in 2013, the Authority became a Central Autonomous Body. PFRDA is regulating
and administering the National Pension System (NPS) along with administering the Atal
Pension Yojana (APY) which is a defined benefits pension scheme for the unorganized sector,
guaranteed by the Government of India. PFRDA is responsible for appointment of various
intermediate agencies such as Central Record Keeping Agency (CRA), Pension Fund
Managers, Custodian, NPS Trustee Bank, etc.
❖ Insurance : In D.S. Hamsell words, insurance is defined “as a social device providing financial

compensation for the effects of misfortune, the payment being made from the accumulated
contributions of all parties participating in the scheme”
In simple terms “Insurance is a co:operative device to spread the loss caused by a particular
risk over a number of persons, who are exposed to it and who agree to insure themselves
against the risk”.
❖ Principles of Insurance : Insurance is actually a form of contract. Hence there are certain
principles that are important to ensure the validity of the contract. Both parties must abide
by these principles.
Important Principles of Insurance:

1] Utmost Good Faith : A contract of insurance must be made based on utmost good faith
(a contract of uberrimate fidei). It is important that the insured disclose all relevant facts
to the insurance company. Any facts that would increase his premium amount, or would
cause any prudent insurer to reconsider the policy must be disclosed.
2] Insurable Interest : This means that the insurer must have some pecuniary interest in
the subject matter of the insurance. This means that the insurer need not necessarily be
the owner of the insured property but he must have some vested interest in it. If the
property is damaged the insurer must suffer from some financial losses.
3] Indemnity : Insurances like fire and marine insurance are contracts of indemnity. Here
the insurer undertakes the responsibility of compensating the insured against any possible
damage or loss that he may or may not suffer. Life insurance is not a contract of indemnity.
4] Subrogation : This principle says that once the compensation has been paid, the right of
ownership of the property will shift from the insured to the insurer. So the insured will not

be able to make a profit from the damaged property or sell it.
5] Contribution : This principle applies if there are more than one insurers. In such a case,
the insurer can ask the other insurers to contribute their share of the compensation. If the
insured claims full insurance from one insurer he losses his right to claim any amount from
the other insurers.
6] Proximate Cause : This principle states that the property is insured only against the
incidents that are mentioned in the policy. In case the loss is due to more than one such
peril, the one that is most effective in causing the damage is the cause to be considered.
❖ Types of Insurance Contracts : The term insurance can be understood as an arrangement, in

which the insurer commits to provide compensation for loss, damage, death, caused to the
insured in return for the payment of the premium.
There are two types of contract, life insurance, and general insurance. The insurance plan
which covers the life:risk of the insured is called life insurance. On the other hand, the
insurance plan which covers any risk other than the life:risk of an individual is called general
insurance. Life insurance is also known as assurance, whereby the sum assured is paid to the
insured, while the general insurance policies are called as insurance.

❖ Factors limiting insurability of risk – There are three major factors which limit insurability of
risk:
1. Premium loadings, which reflect insurer administrative and capital costs.

2. Moral hazard that arises because insurance changes a person’s incentive to take
precautions.
3. Adverse selection that arises when the policy holders are better informed about expected
claims costs than insurer.
❖ Re:insurance : It is a process whereby one entity (the reinsurer) takes on all or part of the
risk covered under a policy issued by an insurance company in consideration of a premium
payment. In other words, it is a form of an insurance cover for insurance companies. Unlike
co:insurance where several insurance companies come together to issue one single risk,
reinsurers are typically the insurers of the last resort. Broadly, reinsurance can be classified
under two heads : treaty reinsurance and facultative reinsurance.
❖ Insurance Act, 1938 : The general insurance business in India is governed by the Insurance
Act, 1938 which is based on the British Insurance Act. The Act was amended in 1969 for
‘social control’ to govern the general insurance business on healthy lines. However, it was
felt that there still existed some scope for improvement. In view of this, on May 13, 1971 the
government nationalised the general insurance industry by an ordinance which became the
General Insurance (Nationalisation) Act, 1972.
❖ General Insurance Corporation (GIC) : General Insurance Corporation (GIC) was formed as a
government company in November 1972. The GIC as the holding company is entrusted with

the task of superintending, controlling and carrying on the general insurance business in the
country. Its subsidiaries in all the four zones of the country viz., the Oriental Fire & General
Insurance Company (now known as the Oriental Insurance Co. Ltd.), the National Insurance
Company Ltd., the New India Assurance Company Ltd. and the United India Insurances
Company do all classes of direct business of general insurance except aviation which is done
by the GIC.
❖ Life Insurance Corporation of India (LIC) : It is an Indian state:owned insurance group and
investment company headquartered in Mumbai. It is the largest insurance company in India.
Life Insurance Corporation of India was founded in 1956 when the Parliament of India passed
the Life Insurance of India Act that nationalised the private insurance industry in India. Over
245 insurance companies and provident societies were merged to create the state owned
Life Insurance Corporation.
❖ Insurance Regulatory and Development Authority (IRDA) : IRDA is an apex statutory body
that regulates and develops the insurance industry in India. It was constituted as per
provisions of Insurance Regulatory and Development Authority Act, 1999. It is
headquartered in Hyderabad. Telangana. Key Functions of IRDA:
• It protects rights of insurance policy holders, provide registration certification to life
insurance companies and renew, modify, cancel or suspend this registration certificate as
and when appropriate.
• It also promotes efficiency in conduct of insurance business, promotes and regulates
professional organisations connected with insurance and reinsurance business.
• It also regulate investment of funds by insurance companies, adjudicates disputes
between insurers and intermediaries or insurance intermediaries.

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Banking & Financial Institutions

❖ Indian Financial System:

• Financial institutions are intermediaries of financial markets which facilitate financial

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❖ Banking Regulation Act, 1949:

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Likewise, the long:term structures are further divided into –

❖ State Bank of India:

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❖ Nationalization of Banks in India:

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❖ Non Resident Ordinary Accounts (NRO):

❖ Non:Resident External Account (NRE):

❖ Foreign Currency Non Resident Account (FCNR):

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• Issuing Traveler’s Checks:

• Dealing in Foreign Exchange:

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❖ GOVT. SPONSORED SCHEMES UNDER NABARD:

• Dairy Entrepreneurship Development Scheme

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Regulator and supervisor of the financial system:

Manager of Foreign Exchange:

Controller of the Credit:

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❖ Monetary policy of RBI:

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Marginal Standing Facility is a liquidity support arrangement provided by RBI to commercial

❖ Launch of Marginal Standing Facility (MSF):

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❖ Statutory liquidity Ratio:

❖ Open Market Operations:

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❖ Inflation Targeting Framework:

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❖ Non:Banking Financial Companies (NBFCs):

The major differences between NBFCs and Banks are as follows:

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❖ Chit Fund Company:

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❖ Mutual Benefit Finance Companies:

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• Allowing non:target group financing for RRBs.

❖ Jan Dhan Yojana:

• A bank account with no minimum balance; and interests on deposits

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❖ Non :performing Assets:

A Non:performing asset (NPA) is defined as a credit facility in respect of which

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