CHIRAG.

S
ASST.PROFESSOR
DEPT. OF COMEERCE AND
MANAGEMENT
JYOTI NIVAS COLLEGE
Unit
Content of Subject Hours

Historical background:Tracing the history of Indian financial system, components of

I Indian financial system, constitution of Indian financial system to economic 8
development.

Financial Institutions:Commercial Banking - Nationalization of commercial Banks,

Narasimhan Committee Report, Structure of Commercial Banks in India, Functions,
Asset structure of Commercial banks. Sources of funds. Investment of funds.
II 22
Investment policy, NPA's. Non Banking Institutions -, SFC's SIDC's LIC, Mutual
funds, EXIM Bank, - Constitution, objectives and functions.

Financial MarketMoney Market - Components, Characteristics of a developed

money market. Functions and Instruments.

Capital market - Primary & Secondary - Meaning, Objectives, Functions,

Components of Capital Market, Instruments Traded, Methods of Marketing
III Securities, Components of primary market. Intermediaries, Stock Market, Stock 12
Exchange, NSE, BSE, Derivatives (concepts only)

Financial Services

Classification - Fund Based, Non Fund Based and Modern Services - Hire
IV Purchasing - Leasing - Portfolio Management - Merchant Banking -Factoring. Debt 6
management

Regulatory Institutions
12
V RBI - Organisation, objectives, role and functions, monetary policy of RBI,
NABARD, SEBI - Organisation and Objectives.
2
Content
1. Introduction to Financial System
2. Meaning
3. Financial Institutions
4. Capital Markets
5. Primary Market
6. Secondary Market
7. Long Term Loan Market
8. Money Market
9. Stock Exchange
10. Monetary Establishments
11. Banking Institutions
12. The Organised Non-Banking Financial Institutions
13. Mutual Funds
14. Introduction
15. Functions Of Commercial Banking
16. Types OfDeposits
17. Lending Of Funds
18. Discounting Of Bills Of Exchange
19. Investment Of Funds On Securities
20. Creation Of Credit Or Creation Of Money
21. Secondary Functions Of Commercial Banks
22. Miscellaneous Or General Utility Services
23. Investment Norms:
4.1 Introduction
4.2Meaning
3. Definition
4. Types & Perform Of Co-Operative Banks, India
5. Primary Co-Operative Credit Society
6. Central Co-Operative Banks
7. State Co-Operative Bank
8. Land Development Banks
9. Urban Co-Operative Banks
10. Functions Of Co-Operative Banks
11. Problems Of Co-Operative Banks
12. Advantages Of Cooperative Banks
13. Disadvantages Of Cooperative Banks:
14. Role Of Co-Operative Banks For Agricultural Development.
1. Regional Rural Banks:
2. Objectives Of RRB’s
3.Areas Of Operations Of RRB
5.4Micro Finance: Meaning
5.5Micro Finance Products
5.6Role of Self help group
5.7Micro Finance-the role of Post Offices
5.8Role of Companies in Micro Finance
1. Meaning
2. Choices Of Capital Market
3. Importance Of Capital Market
4. Classification Of Capital Market
5. Primary Market
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5. Functions Or Services Of Primary Market Or New Issue Market
6. Secondary Market
7. Functioning Of Secondary Market
8. Primary And Secondary Markets – Similarities
9. Characteristics/ Functions Of Capital Market
10. Demat Account
11. Procedure
1. Meaning And Significance:
2. Need / Importance:
3. Types
4. Organization Of Rbi:
5. Objectives:
6. Functions:
7. Main Functions:
7. Supervisory Functions:
8. Promotional Functions:
9. Methods Of Credit Control
10. Quantitative Methods:
11. Securities And Exchange Board Of India (SEBI)
1. Introduction
2. Meaning
3. Choices Of Economic Services
4. Importance Of Economic Services
5. Styles Of Economic Services
6.Factoring:
8.7Partitioning Mechanism
8. Steps In Partitioning
9. Services Rendered By The Difficulty
10. Features Of Leasing
11. Venture Capital:
12. Features Of Venture Capital

4
 Unit 1
FINANCIAL SYSTEM

Structure
10. Introduction
11. Meaning
12. Financial Institutions
13. Capital Markets
14. Primary Market
15. Secondary Market
16. Long Term Loan Market
17. Money Market
18. Stock Exchange

Introduction – Meaning – Classification of Financial System. Financial Markets – Functions

and Significance of Primary Market, Secondary Market, Capital Market, & Money Market.

OBJECTIVES: You understand the financial systems how it works in the Indian market. The
importance of primary, secondary market and shorter money market are explained. The roles
of stock exchanges in the primary and secondary market can also be understood. The role of
intermediaries and the importance of financial instruments in the financial market are also
explained in brief.

1.1 INTRODUCTION

5
 O r ga niza t ion of t he f ina nc ia l s ys t e m

F ina nc ia l I nt e r me dia r ie s F in a n c ia l M a r ke t s F ina nc ia l

A s s e t s /In s t r u me n t s

B an k s M u t u al I n sur a n c e Mo n e y Cap it al/Secur it ies M ar k et

NBFC
Fun ds Or ga n iz a t io n Ma r k e t

L ea s i n g Comp an i es
P r im ar y M ar k et Seco n d ar y
H i re-Pu rch a s e/ C o n s u m e r Fi n an ce M ar k et
Comp an i es
H o u s i n g Fi n a n ce Comp an i es P r im ar y /Dir ect I n dir ect Der iv at iv es
Ven tu re Cap i tal Fu n d s
M u tu a l F u n d -u n i ts F o rw a rd
Merch a n t B an ki n g O rg a n i za ti o n E q u i ty I n n o va t i ve d e b t S e c u r i ty R e c e i p ts Fu t u r e s
Cred i t Rati n g Agen ci es Pref eren ce i ns trum ents Pa s s T h ro u g h Opti o ns
C o n v e r ti b l e D e b e n tu r e s C e r ti fi c a te s
Fa cto ri n g a n d Forf ei ti n g O rg. , D eb en tu res
N o n - C o n v e r ti b l e
S to ck b roki n g f i rms D e b e n tu r e s

Dep os i tori es S e c u r e d P r e m i u m N o te s

W a r r a n ts

Source: Prof. Augustin Amaladas & Prof. Amala Shanthi - slide share, St. Joseph’s College of
Commerce, Bangalore.

The financial system links between the savers and users to promote faster economic development. A
lender (saver) believes that he/she could enjoy the future money than present money. A borrower
(user) believes that he gets maximum enjoyment of the present than future money. A well organised
financial system is a backbone of the Economic development of any country. Its Financial inputs
from financial system for the production of goods and servic es which in turn promote the well
being and standard of living of the people of a country. Financial markets and financial
institutions are supportive mechanism of a financial system which requires money and money
assets. Mobilisation of savings and investing in productive ventures are the responsibility of a
financial system.

6
 Post-1991 Phase Organization of the Indian financial System

Reorganization ofStructure
Privatization of
financial
institution DFIs/PFIs Banks NBFCs M utual-funds Capital Money-
Market Market
➢ Banks
Stock-
➢ M utual-Fund Primary
exchange
➢ Insurance
Investor Protection:
Companies
SEBI

Prudential Norms:
Securitisation,
➢ Credit/advance Exposure Asset
portfolio Asset-Liability
Norms: Reconstruction Manage ment Credit Risk Country Risk
➢ Investment And Enforce me nt Manage ment Management
Portfolio O f Security
Inte re st
➢ Capital adequacy

Source: Prof. AugustinAmaladas& Prof. AmalaShanthi - Slide Share, St. Joseph’s College of
Commerce, Bangalore.

2. MEANING
The term national economy may be a set of inter-related activities or services
operating along to realize some pre-determined purpose or goal. It includes totally different
markets the establishments, instruments, services and mechanisms that influence the
generation of savings, investments, capital formation and growth.

1. DEFINITION
Van Horne has outlined the national economy as “the purpose of economic markets to assign
savings expeditiously in an economy to final users either for investment in real assets or for
consumption”.
2. Consistent with Robinson, the first operate of the system is “to give a link between savings
and investment for the creation of latest wealth and allow portfolio adjustment within the
composition of the prevailing wealth”.

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1.2.2 ROLE OF FUNCTIONS OF ECONOMIC SYSTEM
A national economy performs the subsequent functions:
1. It is a link between savers and investors. It helps in utilizing the mobilized savings of the
scattered savers in additional economical and effective manner. It channelizes flow of savings
in to productive investment.
2. It provides a payment mechanism for the exchange of products and services.
3. It provides a mechanism for the transfer of resources across geographic boundaries.
4.It provides a mechanism for managing and dominant the chance concerned in mobilizing
savings and allocating credit.
5. It promotes the method of capital formation by transferrable along the availability of
savings and also the demand for investible funds.
6.It helps in lowering the value of transactions and increase returns. Reduced value
motivates folks (groups) to save lots of additional.
7.It provides elaborated info to the operators/players within the market like people, business
homes, government etc.

1.2.3 CLASSIFICATION OF ECONOMIC SYSTEM

The following are the four major classification of Indian monetary System:
1. Monetary establishments
2. Monetary Markets

.
3. Monetary Instruments/ assets/securities

1. Financial Services

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3. FINANCIAL INSTITUTIONS
Financial establishments are the intermediaries who facilitate sleek functioning of the
national economy by creating investors and borrowers meet. They mobilize savings of the
excess units and apportion them in productive activities promising a stronger rate of returns.
Financial establishments are termed as money intermediaries as a result of they act as
middleman between the savers and borrowers.

Financial market
1. MEANING
A market could be a place or mechanism that
facilitates the transfer of resources from one
entity to a different. A money market is an
establishment or arrangement that facilitates the
exchange of monetary instruments like shares,
debentures, loans etc. In different words, a
market wherever in money instruments like
money claims, assets and securities are unit listed is understood as “a money market”. Money
market transactions might occur either at a selected place or location. Eg: banks, stock
exchanges or through different mechanisms like telephone, telex or fax or different electronic
media.

1.3.2 DEFINITION
In line with Brigham Eugene. F. “The place wherever individuals and organizations needing
to borrow money are unit brought alongside those having surplus funds is named a money

9
market”. One in every of the necessary requisites for the accelerated development of
associate economy is that the existence of a dynamic money market. A money market is of
nice use for a rustic because it helps the economy in many ways that.

1.3.3 ROLE OR IMPORTANCE OF MONEY MARKET

The role or importance of money market is as follows:

1. Transfer of resources:

Money market facilitates the transfer of resources from one person to another.

2. Growth in income:

Money market permits the lender to earn interest and dividend on their surplus investible
funds, so conducive to extend in their financial gain.

3. Productive usage:

Money market yield the productive use of funds employed in finance system, so enhancing the
financial gain and therefore the gross national production.

4. Capital formation:

Money market provides a channel through that the new savings flow to help capital
formation.

5. Worth discovery or worth determination:

Money markets yield the determination of the worth of listed money assets through the
interaction of various set of participants.
6. Sale mechanism:
Money market provides a mechanism for commerce of monetary assets by associate capitalist
and provides the advantages of marketability and liquidity of such assets.
7. Data availability:
The data generated in money market is helpful to numerous parties participating in economic
system. Thus, a money market could be a primary constituent of monetary system. The money
market not solely helps within the transfer of savings from new trade or production, however
conjointly provides opportunities for money investment to earn financial gain. In different
words, money markets perform each money and non- financial functions. The money market
permits finance of not solely physical capital formation i.e. Tangible mounted assets and
inventories, however conjointly consumption expenditure. That is why money markets manage
the flow of funds not solely between individual savers

10
and investors however conjointly between institutional savers and investors.

1.3.4 CLASSIFICATION OFMONETARY MARKETS

The Classification of monetary markets in India is as follows:
1. Unorganized markets:
In these markets there are unit variety of money lenders, bankers, and traders etc. United
Nations agency lends money to the general public. Bankers conjointly collect deposits from
the general public. There are non-public finance firms, invoice funds etc, whose activities
aren't controlled.
2. Organized markets:
In the organized markets, there are unit standardized rules and rules governing their money
dealings. There's conjointly a high degree of institutiona lization and instrumentalisation.
These markets are unit subject to strict oversight and management by the run batted in or
different restrictive bodies.
These organized markets may be additional classified into 2 viz.
I. Capital market.
II. Securities Market.
1.4 CAPITAL MARKET
The capital market could be a marketplace
for monetary assets that have a protracted
or indefinite maturity. Typically it deals
with long run securities that have a
maturity amount of higher than one year.
It includes establishments and mechanism
for the effective pooling of long term funds from people and institutional investors and
creating them accessible industrial undertakings. Capital market in brief, deals in shares,
debentures, bonds and securities.

1.4.1 OPTIONS OF CAPITAL MARKET

1. It deals in long and medium term funds.
2. It consists of primary market and secondary market and special monetary establishments.
3. It covers each individual and institutional investor.
4. It makes funds accessible to industrial and industrial undertakings.

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1.4.2 IMPORTANCE OF CAPITAL MARKET
Absence of capital market acts as a deterrent issue to capital formation and economic process.
Resources would stay idle if finances don't seem to be funneled through capital market. The
importance of capital market may be in brief summarized as follows:
1.The capital market is a vital supply for the productive use of economy’s savings. It
mobilizes the savings of the folks for more investment, and therefore avoids their wastage in
unproductive uses.
2. It provides incentives to saving and facilitates capital formation by giving appropriate rates
of interest because the value of capital.
3.It provides anas avenue for investors, significantly the social unit sector to speculate in
monetary assets that are a lot of productive than physical assets.
4.It facilitates increase in production and productivity within the economy and therefore
enhances the economic welfare of the society.
5.The operations of various establishments within the capital market induce economic
process. They furnish qualitative directions to the flow of funds and convey concerning
rational allocation of scarce resources.
6.A healthy capital market consisting of knowledgeable intermediaries promotes stability in
values of securities representing capital funds.
7.Moreover, it is a vital supply for technological upgradation within the industrial sector by
utilizing the funds endowed by the general public.
Thus, a capital market is a vital link between |people who} save and people who draw a bead
on to speculate these savings.

1.4.3 CLASSIFICATION OF CAPITAL MARKET

Capital market may be classified into three, viz,
i. Industrial exchange.
ii. Government exchange.
iii. Long run loan market.
iv. Industrial securities market:
It implies, It is a marketplace for industrial securities, viz,
i. Equity shares or stock
ii. Preferred shares.
iii. Debentures or bonds.

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 It is a market wherever industrial considerations raise their capital or debt by
supplying applicable instruments. It may be more divided into two:-
• Primary market or new issue market
• Secondary market or exchange.

5. PRIMARY MARKET
Primary market may be a marketplace for
new issue or new monetary claims. Thus It is
additionally known as New Issue Market.
The first market deals with those securities
that are unit issued to the general public for
the primary time. Within the primary market,
borrowers exchange new monetary securities
for future funds. Thus, the first market facilitates capital formation. There are three ways by
that an organization might raise capital in a very primary market. They are:

 Public issue.
 Rights issue.
 Private placement.
The foremost common methodology of raising capital by new corporations is through sale of
securities to the general public. It is known as public issue. Once associate existing company
needs to boost extra capital, securities are unit initial offered to the present shareholders on
preventive basis. It is known as offer. Non-public placement may be a manner of
commercialism securities in private to little cluster of investors.

1.FUNCTIONS OR SERVICES OF PRIM ARY MARKET OR NEW ISSUE

MARKET
1.The transfer: A vital perform rendered by primary market is to permit the transfer of
resources from capitalist to entrepreneurs who establish new corporations. It is additionally
known as the perform of origination. The transfer perform is expedited by specialist agencies
that assist in numerous activities related to suchtransfer.

2.Investigatory services : The investment bankers and different agencies concerned in

primary market offer the investigatory services. These embrace, economic analysis, technical

13
analysis, monetary associate analysis of the businesses wherever a capitalistants to take a
position. This data helps the investors in creating a transparent selection on the kind, quality
and amount of investment to form.

3.Consultative and data services: Numerous consultative services are unit out there in
primary market with a read to up the standard of capital problems in primary market. The
relevant services embrace crucial the kind, the mix, the price, the timing, the size, the
commercialism ways and therefore the terms and conditions of issue of securities etc.

4.The guarantee: If the corporate, getting into capital market isn't positive of raising full
quantity of funds from the market, there are unit bound mechanism there by success of such
issue are secured. It is known as underwriting. Underwriting aims at guaranteeing the
subscription of public issue. Underwriters guarantee roaring subscription of the problem by
endeavor to require up the securities within the event of the general public failing to subscribe
a similar. It advantages all those concerned in primary market just like the provision company,
the investment public and capital market generally. The perform of underwriting is undertaken
for a commission.

5.The distribution: The perform that facilitates the sale of securities from company to
investors is termed ‘Distribution’. The perform of distribution is rendered by the specialised
agencies like brokers and dealers in securities. They maintain a relentless and an in depth link
with the issuers on the one hand and therefore the final investors on the opposite.

1.6 SECONDARY MARKET

Secondary market may be a marketplace for secondary sale of securities. In different words,
securities that have already competent the new issue market are unit listed during this market.
Generally, such securities are unit quoted within the exchange and it provides a nonstop and
regular marketplace for shopping for and commercialism of securities. This market consists
of all stock exchanges recognized by the government of India. The stock exchanges in India
are regulated under the Securities Contracts (Regulation) Act 1956. The Bombay exchange is
that the principal exchange in India that sets the tone of the opposite stock markets. The
secondary market provides liquidity to monetary instruments that are unit already issued in
primary market. In a very exchange, purchases and sales of securities whether or not of state
or semi- government bodies or different public bodies and additionally shares and
debentures issued by non-public joint stock corporations are unit done.
Functioning of secondary market:

For the effective functioning of secondary market, correct management should be exercised.
At present, management is exercised through the subsequent 3 necessary processes.

1. Recognition of stock exchanges:

As an area of secondary market operation the stock exchanges got to be recognized by

regulatory agency. The securities that are unit issued in primary market are listed solely in
recognized exchanges like Bombay stock exchange, NSE, Bombay exchange etc. In indiasebi
is recognizing the stock exchanges.

2.Listing of securities available exchanges:

Once the stock exchanges are recognized the securities that are needed to be listed like shares
debentures etc. Should be listed available exchanges

3.Recognition of broker:

The intermediaries, WHO facilities swish functioning of secondary market like brokers, deal
in secondary market. Sub-brokers got to be recognized by SEBI, them solely the desire be
able to interchange stock exchanges.

1.6.1 FUNCTIONS OR SERVICES OF SECONDARY MARKET

The Secondary market or exchange occupies a important position within the national
economy. In perform many economic functions and render valuable services to the investors,
corporations and to the economy as whole. They are as follows:

1. Liquidity of Securities:

Stock exchanges offer liquidity to securities, since securities is regenerate in to money at any
time in step with the discretion of the capitalist by commercialism tem at the listed costs.

2. Marketability to Securities:

Secondary market facilitate shopping for and commercialism of securities at listed costs by
providing continuous marketability to the investors in respect of securities they hold or will
hold. Therefore they produce a prepared marketplace for securities.

3. Safety of Funds happiness to investors:

Stock exchanges facilitate in maintaining safety of funds endowed as a result of they need to
perform below strict rules and rules and therefore the bye- laws are meant to make sure safety
of investible funds. These rules are framed by SEBI. This is able to strengthen the investor’s
confidence and promote larger investment.
4. Availableness of future funds to companies:

The securities listed within the stock, market are negotiable and transferable. Because it is
transferred from one capitalist to a different, one capitalist is substituted by another; however
the corporate is secured of future availableness of funds.

5. Flow of funds to profitable projects:

The profit and recognition of corporations are mirrored available costs. The costs quoted
indicate the relative profit and performance of corporations. Funds tend to be attracted
towards securities of profitable corporations and this facilitates of profitable corporations and
these facilities the flow of capital in to profitable channels.

6. Motivation for improved performance by companies:

The performance of an organization is mirrored on worths the costs quoted within the
exchange price of economic assets depends upon the company’s performance. These costs are
additional visible within the eyes of the general public. Exchange provides space for this
worth quotation for those securities listed by it. This airing makes an organization tuned in to
its standing within the market and it acts as a motivation to enhance its performance additional.

7. Promotion of investment opportunities:

Stock exchanges mobilize the savings of the general public and promote investment through
capital problems. Unless there's a good secondary market, investment opportunities won't be
with investors.

8. Availableness of Business Information:

The dynamical business conditions within the economy are immediate mirrored on the
secondary market/stock exchanges. Booms and depressions is known through the dealings
within the stock exchanges. Relying upon the prevailing data policies is taken by the
government. Therefore an exchange reflects the prevailing economic state of affairs to ball
involved. In order that appropriate actions is taken.

9. Promoting of latest problems by companies:

If the new problems are listed available exchanges They are without delay acceptable to the
general public, since, listing is finished when analysis of such securities by involved
exchange authorities. Prices of underwriting such problems would be less public response to
such new problems would be comparatively terribly high. Therefore a exchange helps within
the promoting of latest problems additionally.
10. Different services:

Exchange allows the investors to scale back their risks by heterogeneous portfolio of
investment. It additionally develops savings habits among the community and paves the
manner for capital formation. It helps the investors in selecting securities by supply the daily
quotation of listed securities and by revealing the trends of dealings on the exchange. It
allows corporations and therefore the government to boost funds by providing a prepared
marketplace for their securities.

1.6.2 Primary and Secondary Markets – Similarities:

Both the first and secondary markets are closely reticular. This is often clear from the
following:
1. Trading:

If securities are to be listed within the stock exchange/ secondary market, It is necessary that
They are initial issued within the primary market.

2.Listing:

Solely those shares that are capable of listing in some purported stock exchanges are totally
signed in primary market.

3.Regulation:

The rules with reference to each primary yet as secondary market are regulated by the SEBI
and exchange. The thing is to motivate orderliness in each primary and secondary market.

4. Marketability:

The advantage of marketability provided by the secondary market greatly helps the
subscribers within the primary market. As an example, the positive trends prevailing within
the secondary market vastly facilitate the investors to scale back their holdings and acquire new
shares within the secondary market.

5. Conditional Prevailing:

The conditions prevailing within the secondary market have an effect on success or failure of
the problem created within the primary market. Consequently, wherever the conditions are
therefore favorable within the secondary market that prime market costs prevail, the problems
created within the primary market can end up to be encouraging and roaring. Problems would
fetch smart premiums.

6. Survival:

The survival of the secondary market depends upon the potency of the first market. There
may well be no stock exchanges if there's no primary market, within the same manner there'll
be no primary market within the absence of associate economical functioning of exchange.
1.6.2 DIFFERENCES BETWEEN PRIMARY AND SECONDARY MARKET
Features Primary market Secondary market
It deals only with new or fresh Deals is existing securities which are
Primary issues vs
issues of shares made by the already issued by
Secondary issues
companies for the first time companies/corporations.
Fixed/flexible There are no fixed geographical It has a fixed place for trading
Geographical location for primary market Eg. Bangalore Stock
location Exchange/BSE/NSE
For the first time securities are Securities are transferred from one
Whether transferable issued person to another through stock
exchange(s).
All companies can enter primary Only those companies which have
market issued securities in primary market
Market entry
can enter into secondary market for
trading purpose.

No definite administration Has a definite administration set up

Administration and
by recognized Indian stock
management
exchanges.

It helps long term instruments for It Provides liquidity for those

Purpose savings and investments. instruments which are already issued
by companies.

1.6.3 Government securities market or gilt edged securities market:

It is a market wherever government securities are listed. In India there are several forms of
government securities- short term and long term. Long term securities are listed during this
market, whereas short term securities are listed in market. Securities issued by the central
government, state governments, semi- Government authorities
like town companies, port trusts etc. Improvement trusts,
state electricity boards

Trusts state electricity boards. All India and state level

money establishments and public sector enterprises are
dealt during this market.

Government securities are issued in denominations of

Rs. 100. Interest is owed half- yearly and that they carry
tax exemptions conjointly. The role of brokers in
promoting these securities in much terribly restricted
and also the major participant during this market is that the “Commercial Banks” as a result of
they hold to satisfy their SLR necessities. The secondary marketplace for these securities is
incredibly slender since most of the institutional investors tend to retain these securities till
maturity.
The government securities are in several forms viz,

A. Stock certificates.

B. Speech act notes.

C. Bearer bonds which might be discounted.

7. LONG TERM LOANS MARKET

Development banks and industrial banks play a major role during this market by activity long
term to company customers. Long run loans market might any be classified into:
a. Term loans market:

In India, several industrial funding establishments are

created by the government each at the national and
regional levels to provide long run and medium term
loans to company customers directly likewise as
indirectly. These development banks dominate the
commercial finance in Republic of India.
Establishments like IDBI, IFCI, ICICI, and different
state money firms return below this class.

B. Mortgages:

The mortgages market refers to those centers that provide real estate loan chiefly to
individual customers. A real estate loan may be a loan against the protection of immoveable
property like property. The transfer of interest in an exceedingly specific immoveable
property to secure a loan is named mortgages.

C. Money Guarantee Market:

A Guarantee market may be a centre wherever finance is provided against the guarantee of a
purported person within the money circle. Guarantee may be a contract to discharge the
liability of a third party just in case of his default. Guarantee acts as a security from the
creditors’ purpose of read. Just in case the borrowers fail to repay the loan, the liability fails on
the shoulders of the warranter. Hence, the warranter should be acknowledged each to the
recipient and also the below and he should have suggests that to discharge his liability.

8. MONEY MARKET
Money market contains a marketplace for short term loan or money assets. It is a marketplace
for the disposition and borrowing of short terms funds. Because
the name implies, it doesn't truly deal in money or money.
However it truly deals with close to substitutes for money or
close to money like trade bills, speech act notes and government
papers drawn for a brief amount not exceptional one year. These
short term instruments are often reborn into money promptly
with none loss and at low dealings value.
The money market doesn't seek advice from a specific place
wherever short term funds are affect. It includes all individual,
establishments and intermediaries handling short term funds.
The transactions between borrowers, lenders and middlemen
happen through telephone, telegraph, mail and agents.
No personal contact or presence of the two parties is important for negotiations in a very
market. However, a geographical name is also given to a market in step with its location. For
instance, the London markets operators from Lombard Street and also the big apple money
market operators from Wall Street. But, they attract funds from everywhere the world.
Similarly, the Mumbai market is that the center for short-run loan ready funds of not solely
Mumbai, however conjointly the complete ofIndia.
1. Definition
Geoffrey Crow her in his book “A define of money” has explicit “Money market could be a
collective name given to numerous the varied the assorted forms and establishments that deal
within the various grades of close to money”.
The assets that are used as credit instruments are referred to as “Near money assets”.
2. Features of a money market:
The subsequent are the overall options of a market are:
1. It is a market strictly for brief term funds or money assets referred to as close to money.
2. It deals with money assets having a maturity amount up to 1 year solely.
3.It deals with solely those assets which might be reborn into money promptly while not loss
and with minimum dealings value.
4. Typically transactions happen through i.e., language, relevant documents and written
communications are often changed later. There is no formal place like stock market as within
the case of a capital market.
5. Transactions have to be compelled to be conducted while not the assistance of brokers.
6.It is not one homogenized market. It contains of many sub- markets, every specializing in a
very specific style of finance. Eg: decision market, acceptance market, bill market and shortly.
7.The elements of a market are the financial organization, industrial banks, non-banking
money corporations, discount homes and acceptance homes. Industrial banks typically play a
dominant role during this market.

1.8.3 Significance/importance/functions of money market

A developed business plays a crucial role within the financial set-up of a rustic by provision
short term funds adequately and quickly to trade and industry. The money market is associate
integral a part of a country’s economy. Therefore, a developed market is very indispensable
for the speedy development of the economy. A developed market helps within the swish
functioning of the financial set-up in any economy within the following ways:
1. Economic development:
The money market provides short term funds to each public and personal establishments.
These establishments would like money to finance their capital wants [ In alternative words,
the money market assures offer of funds, the finance is completed through discounting of the
trade bills, industrial banks, acceptance homes, discount houses]. During this means, the
money market facilitates within the economic development by providing money help to trade,
commerce and business.
2.Profitable investment:
The industrial banks affect the deposits of their customers(The banks are needed to place
their assets into money type to fulfill the directions of the financial organization on the one
hand, whereas on the opposite, they need to place their excess reserves into productive
channels to earn financial gain on them). The aim of the industrial banks is to maximise
profits. The surplus reserves of the banks are endowed in close to money assets. The aim is to
make sure liquidity while not fore going profits utterly.
3. Borrowings by the government:
The money market helps the government in borrowing short term funds at terribly low interest
rates. The borrowing is completed on the idea of treasury bills.
4. Importance for central bank:
If the money market is well developed, the financial organization implements the financia l
policy with success. It is solely through the money market that the financial organization will
manage the industry and therefore contribute to the event of trade and commerce.
5. Mobilization of funds:
The money market helps in transferring funds type one sector to another. The event of any
economy depends on accessibility of finance. No country will develop its trade, commerce
and business till and unless the money resources are mobilized.
6. Independency of economic banks:
Just in case of the prevalence of a developed market, the industrial banks need notborrow
from the financial organization. Just in case the industrial banks have insufficiency of
resources, they will meet their necessities by recalling a number of their loans from rather
than borrowing from the financial organization at the next rate of interest.
7. Savings and investments:
Another purpose of importance of the money market is that it helps in promoting liquidity
and safety of economic assets. By doing therefore, it will facilitate in encouraging savings
and investment.

1.8.4 Objectives Of Money Market

The subsequent are the necessary objectives of a market are:
1. To supply a parking place to use short-run surplus funds, primarily of economic banks.
2. To supply space for overcoming short-run deficits.
3.To alter the financial organization to influence and regulate liquidity within the economy
through its intervention during this market.
4.To supply an affordable access to users of short-run funds to fulfill their necessities quickly,
adequately and at affordable prices.

1.8.5 Characteristics/Features of a developed money market

So as to meet the on top of objectives, the money market ought to be totally developed and
economical.(In each country of the globe some style o f market exists. A number of them are
extremely developed, whereas others don't seem to be well developed. Prof. S.N. subunit has
represented bound essential options of a developed market. They are as follows:
1. Extremely organized banking system:
The industrial banks are the nerve centre of the complete market. They are the most suppliers
of short-run funds. Their policies concerning loans and advances have impact on the whole
market. The industrial banks function an important link between the financial organizatio n
and also the varied segments of the money market. Consequently a well-developed market
and a extremely organized industry co-exist.
2. Presence of a central bank:
The financial organization acts because the banker’s bank. It keeps their money reserves and
provides them money accommodation in times of difficulties by discounting their eligible
securities. Through its open market operations, the financial organization absorbs surplus
money throughout off- seasons and provides extra liquidity within the busy seasons. Thus, the
financial organization is that the leader, guide and controller of the money markets.

3. Accessibility of correct credit instruments :

A developed market needs a nonstop accessibility of promptly acceptable negotiable
securities like bill of exchange, treasury bills etc…. Within the market. There ought to be
variety of dealers within the market to interact in these securities. Accessibility of negotiable
securities and also the presence of dealers and brokers in giant numbers to interact in these
securities are required for the existence of a developed market.
4. Existence of sub-markets:
The quantity of sub- markets determines the event of a market. The larger the quantity of sub-
markets, the broader and additional development is the structure of money market. The many
sub-markets along create a coherent (united) market.
5. Ample resources:
There should be accessibility of spare funds to finance transactions within the sub- markets.
These funds could return from among the country and conjointly from foreign countries. The
London, New York and Paris money markets attract funds from everywhere the globe.
6. Existence of secondary market:
There ought to be a vigorous secondary market in these instruments.
7. Demand and provide of funds:
There ought to be an oversized demand and provide of short-run funds and it ought to have
adequate quantity of liquidity within the variety of large amounts maturing among a brief
amount.
8. Alternative factors:
Besides the on top of, alternative factors conjointly contribute to the event of a market. Speedy
industrial development resulting in the emergence of stock exchanges giant volume of
international trade resulting in the system of bills of exchange, political stability, favourable
conditions for foreign investment, worth stabilization etc… are the opposite factors that
facilitate the event of money market within the country. London market could be a extremely
developed market as a result of it satisfies all the necessities of a developed market. If
anyone or additional of those factors are absent, then the money market is named associate
beneath developed one.

1.8.6 Composition of Money Market

The money market could also be sub-divided into four, viz..,
1. Decision money market:
The decision securities industry could be a marketplace for very short amount loans say in
some unspecified time in the future to 14 days. So, It is extremely liquid. The loans are due o n
demand at the opinion of either the loaner or the recipient. In India, decision money markets
are related to the presence of stock exchanges and thence, they are situated in major industrial
cities like Mumbai, Calcutta, Chennai, Delhi, Ahmadabad etc… the special options of this
market is that the rate of interest varies from day to day and even from hour to hour and Centre
to Centre. It is terribly sensitive to changes in demand and provide of decision loans.
2. Industrial bills market:
It is a marketplace for bills of exchange (arising out of real trade transactions). Within the
case of credit sale, the vendor could draw a bill of exchange on the customer. The customer
accepts such a bill promising to pay at a later date per the bill. The sellers needn't to attend till
the maturity date of the bill. Instead, he will get money by discounting the bill. In India, the
bill market is beneath developed. The run has taken several steps to develop a sound bill
market. The run has enlarged the list of participants within the bill market. The discount and
finance house of India was setup in 1988 to push secondary market in bills. In spite of these,
the expansion of the bill market is slow in India. There are not any specialised agencies for
discounting bills. The industrial banks play a major role during this market.
3. Treasury bills market:
It is a marketplace for treasury bills that have ‘short term’ maturity. A Treasury bill could be a
certificate of indebtedness or a finance bill issued by the government. It is extremely liquid
as a result of its reimbursement is secure by the government.. It is a crucial instrument for
short borrowing of the government.. There are 2 sorts of treasury bills viz.,
a) Ordinary or regular and
b) Adhoc treasury bills popularly called ‘adhocs’.
Normal treasury bills are issued to the general public, banks and different monetary
establishments with a read to raising resources for the central government to fulfill its short
monetary desires.
Adhoc treasury bills are issued in favour of the run solely. They are not sold through tender
or auction. They will be purchased by the run solely. Adhocs do not seem to be marketable in
India, however holders of those bills will sell them back to run. Treasury bills have a maturity
amount of ninety one days or 182 days or 364 days solely. Monetary intermediaries will park
their temporary surpluses in these instruments and earn financial gain.
4. Short loan market:
It is a market wherever short are given to company customers for meeting their capital needs.
Industrial banks play a major role during this market. Industrial banks give short loans within
the variety of money credit and order of payment.
Order of payment facility is especially given to business folks wherever as money credit is
given to industrialists. Order of payment is only a short lived accommodation and It is given
within the accounting itself. However money street credit is for a amount of 1 year and It is
sanctioned during a separate account.

1. 9 STOCK EXCHANGES:

Stock exchanges could be a market during which securities are bought &sold and It is a vita l
marketplace for developing a capital market.
The Securities Contracts (Regulation) Act 1956 defines stock market as “an associatio n
organization or body of people whether or not incorporated or not, established for the aim of
helping, control and dominant business in shopping for mercantilism and dealing in
securities”.

1. 9.1 FUNCTIONS OF STOCK EXCHANGES

A stock market discharges many functions. It provides a market place to sell and get freely the
stocks & shares through the licensed brokers. The important functions of stock exchanges are
as follows:

1. Market place for stock:

Stock exchanges provides a market place for mercantilism and shopping for of securities
freely by the brokers for his or her purchasers.

2. Prepared and continuous market:

Stock exchanges offer prepared and continuous marketplace for stocks & shares. This
provides prepared liquidity, price, continuity and negotiability to the capital bolted up in
securities.

3. Assessment of securities:

The stock exchanges ensures correct appraisal of security. The free play of demand for &
offer of securities determines value ceaselessly.

4.Stock exchanges forecast the future:

Besides, providing continuous market, stock exchanges, render statement operate. The worth
movements for securities replicate and forecast the longer term happenings in business
operations.
5. Mobilization of savings:

The stock markets are excellent markets that facilitate to mobilize the savings of the
individuals to productive channels.

6. Capital formation:

Besides causation public to avoid wasting & invest in securities, the exchange promotes
capital formation and provides necessary funds to the necessitous industries.

7. Economic barometer:
Like measuring instrument that indicates the variation in temperature of the surroundings at
any purpose of your time, the stock market indicates the health of the economy. Value trends
on a stock market replicate the economic progress & socio-political conditions of a rustic. It
indicates the boom or depression existing within the country.

8. Management of company enterprises:

To induce the stocks & shares listed on stock exchanges, the businesses got to follow sure
rules and laws. “Listing” means that obtaining the name of the corporate registered with the
stock market to trot out its securities formally on the exchange. When listing the safety, the
corporate has got to follow the official policies of the exchange whereas managing its
securities. Thus, exchange exercise healthy management over the businesses.

9. Speculation:

The operators on the stock market are licensed agents. They are referred to as by totally
different names. These operators hold company securities new and previous for a brief
amount significantly the new shares, owing to temporary holding by monetary intermediaries
referred to as “speculators”. Speculators can have a seasoning amount. The speculators who
would like to form profit out of variation in costs of securities, operate skillfully and offer
sensible liquidity position to the securities. Speculation, though affects the share costs badly
at sure time, it plays an important role in moving the capital markets. These facilities are for
speedy economic development & honest dealing on shopping for & mercantilism of
securities.

10. Management of public deposits:

The government of India & all state governments are engaged in planned economic
development. Owing to this planned growth, government need Brobdingnagian capital & the y
need to float loan, bonds & alternative securities to induce a locality of finance for these
securities to induce a locality of finance for these comes. These securities also are trot out
within the stock exchanges. The governments’ monetary desires within the variety of debt are
glad by stock exchanges by providing marketplace for these securities.
11. Alternative functions:

Stock market offer facilities like giving business info of the company sector. Each listed
company of the company sector. Each listed company has got to submit annually the audited
monetary statements to the exchange. Numerous styles of reports also are submitted to the
exchange. This can be complied by the exchange and acts as a information of company
sector. This ensures most promotional material of company operations and dealing.

1.9.2 NATIONAL STOCK EXCHANGE(NSE):

Stock exchanges may be a market throughout that
securities are bought & sold-out & it is a important
marketplace for developing a capital market.
The Securities Contracts (Regulatio n) Act 1956
defines stock exchange as “an association organization
or body of individ ua ls whether or not or not
incorporated or not, established for the aim of serving
to, management and dominant business in buying & mercantilism & dealing in securities”.

1. 9.3 FUNCTIONS OF STOCK EXCHANGES

A stock exchange discharges several functions. It provides a market place to sell and find
freely the stocks & shares through the commissioned brokers. The vital functions of stock
exchanges are as follows:

1. Market place for stock:

Stock exchanges provide a market place for mercantilism and buying of securities freely by
the brokers for his or her purchasers.
2. Ready and continuous market:
Stock exchanges supply ready and continuous marketplace for stocks & shares. This provides
ready liquidity, price, continuity and negotiability to the capital fastened up in securities.
3. Assessment of securities:
The stock exchanges ensures correct appraisal of security. The free play of demand for &
supply of securities determines price endlessly.
4. Stock exchanges forecast the future:
Besides, providing continuous market, stock exchanges, render statement operate. The price
movements for securities replicate and forecast the long term happenings in business
operations.
5. Mobilization of savings:
The stock markets are glorious markets that facilitate to mobilize the savings of the people to
productive channels.
6. Capital formation:
Besides deed public to avoid wasting & invest in securities, the exchange promotes capital
formation and provides necessary funds to the indigent industries.
7. Economic barometer:
Like measuring device that indicates the variation in temperature of the environment at any
purpose of it slow, the stock exchange indicates the health of the economy. Price trends on a
stock exchange replicate the economic progress & socio-political conditions of a country. It
indicates the boom or depression existing at intervals the country.

8. Management of company enterprises:

To induce the stocks & shares listed on stock exchanges, the companies need to follow certain
rules & laws. “listing” implies that getting the name of the company registered with the stock
exchange to upset its securities formally on the exchange. Once listing the security, the
company has to follow the official policies of the exchange whereas managing its securities.
Thus, exchange exercise healthy management over the companies.

9. Speculation:
The operators on the stock exchange are commissioned agents. They are said as by whole
totally different names. These operators hold company securities new and former for a short
quantity considerably the new shares, because of temporary holding by financia l
intermediaries said as “speculators”. Speculators will have a seasoning quantity. The
speculators who would love to create profit out of variation in prices of securities, operate
skillfully & supply wise liquidity position to the securities. Speculation affects the share
prices badly at certain time. It plays a very important role in moving the capital markets. This
facilities increase the speed of economic development, honest dealing on buying and
mercantilism ofsecurities.
10. Management of public deposits:
The Government o f India and all state governments measures are engaged in planned
economic development. Because of this planned growth, government would like broadening
of capital & they have to float loan, bonds & various securities to induce a region of finance
for these securities. These securities are also upset at intervals the stock exchanges. The
government’s financial needs at intervals the range of debt is met by stock exchanges by
providing marketplace for these securities.
11. Various functions:
Stock markets supply facilities like giving business data of the corporate sector Every listed
company has to submit annually the audited financial statements to the exchange. Varied
types of reports are also submitted to the exchange. This may be complied by the exchange
and acts as a info of company sector. This ensures most publicity of company operations and
dealing.

Summary
The financial system consists of financial institutions, intermediaries and financial
instruments. There are various financial markets such as primary, secondary, capital, money
and money markets. Primary market plays an important role in the initial issue whereas
secondary market plays in the resale of stock s and shares of the holders. The secondary
market plays a vital role in identifying the development and growth of the company and
economy. Short term market is known as money market. Stock exchanges are regulated by
SEBI.

KEYWORD/GLOSSARY
National economy as “the purpose of economic markets to assign savings expeditiously in an
economy to final users either for investment in real assets or for consumption”.
Financial institutions: Financial establishments are the intermediaries who facilitate sleek
functioning of the national economy by creating investors and borrowers meet.
Money market facilitates the transfer of resources from one person to another.

Unorganized markets: In these markets there are unit variety of money lenders, bankers, and
traders etc.
Organized markets: In the organized markets, there are unit standardized rules and rules
governing their money dealings.

The capital market could be a marketplace for monetary assets that have a protracted or
indefinite maturity.

Primary market may be a marketplace for new issue or new monetary claims.

Secondary market may be a marketplace for secondary sale of securities.

Government securities market or gilt e dged securities market: It is a market wherever
government securities are listed.
Long term loans market: Development banks and industrial banks play a major role during
this market by activity long term to company customers.
Stock Exchanges: It provides a market place to sell and get freely the stocks & shares
through the licensed brokers.
Speculation: The operators on the stock market are licensed agents.

National stock exchange(nse): The aim of serving to, management and dominant business in
buying & mercantilism & dealing in securities. Securities are bought & sold-out & it is a
important marketplace for developing a capital market.

ANSWER TO CHECK YOUR PROGRESS

1) What do you mean by financial system?

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2) What is primary market?
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3) What is the classification of financial system?
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4) What do mean by capital market?
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5) What is money market?
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QUESTIONS (5MARKS)

1. Write a note on primary market.

2. Write a note on secondary market.
3. What are the functions of primary market?
4. Write a note on financial institutions.
5. What are the differences between primary and secondary market?
6. Distinguish between capital market and money market.

SUGGESTED BOOKS/ARTICLES

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill
3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl
4. M Y Khan: Indian Financial System, TMH
5.E Gardon & K Natarajan: Financial Markets & Services.
Web:

All pictures are taken from Google Images as on 14/10/2014

 Unit 2

FINANCIAL INSTITUTIONS

1. Monetary Establishments
2. Banking Institutions
3. The organised Non-Banking Financial Institutions
4. Mutual Funds

Types of Banking and Non-Banking Financial Institutions.Constitution, objectives &

functions of IDBI, SFCS, SIDCS, LIC, EXIM Bank.Meaning and scope of Mutual Funds.

Objectives of the study

Financial establishments are termed as monetary intermediaries as a result of they act as
middleman between the savers and borrowers. There are banking and non-banking financial
institutions. There are long term lending institutions such as IDBI, IFC, LIC and commercial
banks lends for short term as well as long term. We understand all of the above how they
function for the economic development of our country.

2.0 Introduction
The principle objective of SFC’s is to provide medium short term and long term financial
assistance to small industries particularly in a circumstance when normal banking assistance
is not available. SIDC are setup in various states under the companies Act of 1956 to later the
primary development needs of tiny, small, village industries in the state.
Insurance organization in India comprise of government organization namely, life
insurance corporation of India and general insurance corporation of India. LIC collects large
amount of funds from the public and deploys to the savings, the best advantage of the policy
holders for the industrial development as a whole. EXIM bank provides re- finance facilities to
the commercial banks and other financial institutions against their export and import financial
activities. A mutual fund collects the savings from little investors, invest them in government
and alternative company securities and earn financial gain through interest and dividends,
besides capital gains. It works on the principle of ‘small drops of water build an enormous
ocean’.
2.1 Monetary Establishments

A financial organization is essentially a term financial institution, providing medium and

future monetary help to industrial and business units, for promoting industrial and economic
development within the country.

Financial establishments are the intermediaries World Health Organization facilitates swish
functioning of the national economy by creating investors and borrowers meet. The y
mobilize savings of the excess units and allot them in productive activities pro mising a more
robust rate of returns.

Financial establishments are termed as monetary intermediaries as a result of they act as

middleman between the savers and borrowers.

1. FORMS OF MONETARY INSTITUTIONS

Monetary establishments may be classified into 2 categories:

1. Banking institutions
 2. Non-banking institutions.

2.2 Banking Institutions

Indian banking system is subject to the financial institution. I.e., banking company of
our country RBI because the apex bank establishment organizes runs, supervises, regulates
and develops the medium of exchange and therefore the national economy of the country.
The most legislation governing industrial banks in India is the Banking Regulation Act, 1949.
The banking establishments is loosely classified into two categories:

A. Organized sector.

B. Unorganized sector.
2.2.1 ORGANIZED SECTOR

The organized sector consists of economic banks, co-operative banks & regional rural banks.

I. Industrial banks

Traditionally, industrial banks accepted deposits and met the short and medium term funding
wants of the business. But now, since 1990’s banks are funding the future wants of the
business notably the infrastructure sector. The alleviation measures initiated within the Indian
economy, light-emitting diode to the entry of enormous non-public sector banks in 1993. This
has exaggerated competition among non-public and public sector banks and quality of
services has improved.

II. Co-operative banks

Source: Google image as on 15/10/2014

An important section of the organized sector of Indian Banking is that the co-operative
banking. This section is delineate by a gaggle of societies registered underneath the acts
of the states about co-operative societies. Co-operative societies could credit or non-credit
societies.
Different kinds of co-operative credit societies are in operation within the Indian
economy. These establishments may be classified into two broad categories:
a. Rural credit societies that are primarily agricultural

b. Urban credit societies that are primarily non- agricultural.

 III. Regional Rural Banks

RRBS were found out by the regime and therefore the sponsoring business banks with the
target of developing the agricultural economy. RRBS give credit facilities and banking
services to little farmers, little entrepreneurs within the rural areas. The regional rural
banks were found out with a read to produce credit facilities to weaker areas.

IV. Foreign banks:

Foreign banks are in India from British days. These banks have targeting company
purchasers and are specializing in areas about International banking.

2.2.2 Unorganized sector

People engaged in unorganized banking sector are the indigenous bankers, money lenders,
Seth, sahukars effecting the operate of banking.

Indigenous bankers are the forefathers of contemporary business banks. These are the
people or partnership corporations playing the banking functions. They are the native
bankers. The geographical region coated by the native bankers is far larger than the realm
coated by the business banks. Few characteristics of native are as follows:
• Indigenous bankers are often seen from the actual fact that they not solely provided
credit to trade & commerce, however now and then to the government of the day
additionally.

• Indigenous bankers raise funds from the general public additionally.

• They raise funds from the general public additionally.

• They give finance for productive functions directly and indirectly to trade and trade.

•They detain bit with traders and little industrialists and finance, selling on a sizeable scale.
Disposition is conducted on the premise of dedication notes.
2.2.3 Money Lenders
Money lenders rely entirely on their own funds for the capital. Money lenders is also rural or
urban, skilled or non-professional. They embody giant farmers, traders, merchants, goldsmiths,
village shopkeepers, sardars of laborers etc. The most characteristics of money lenders are the
following:

• Their funds are own funds.

• Their purchasers are principally the weaker sections of the society.

• Their loans are extremely exploitive. They charge terribly high rate of interest.

• Their operations are entirely unregulated.

• The credit is prompt & versatile.

2.2.2 Non-banking Institutions

The non-banking establishments is also classified loosely into 2 groups:
A. Organized monetary establishments.

B. Unorganized monetary establishments.

A. Organized monetary Institutions:

Source: http://www.cfp.altius.ac.in/fpsb_india.html

3. The Organized Non-Banking Financial Institutions include

1. Development Finance Institutions:

• The establishments like IDBI, ICICI and IIBI in any respect India level.
• SFCS, SIDCS at the state level.
• Agricultural development finance establishments as NABARD, LDBS etc.
Development money establishments give medium and future finance to the company and industrial
sector and additionally take up promotional activities for economic development of
the country.
• IDBI- Industrial Development Bank of India.
• ICICI- Industrial Credit Investment Corporation of India.
• IIBI- Industrial Investment Bank of India.
• SFCS- State Finance Corporation
• SIDCS- State Industrial Development Corporation.
• LDBS- Land Development Banks.
• NABARD- National Bank for Agriculture & Rural Development.
• LDBS-Land Development Banks

2. Investment Institutions
It includes those money establishments that mobilize savings of the general public at giant
through varied schemes and invest these funds in company and government securities.
These embrace LIC, GIC, UTI and Mutual funds.

1. INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

It is started by run in 1964. Later in 1975 it had been taken by Central government. (Indira
Gandhi emergency period) In 1995, seventy two of capital is maintained by government and
also the remaining is given to others i.e., 28%. LIC, GIC etc. For public.

It was established in July 1964 underneath IDBI Act as an entirely closely- held by run and it
had been separated by run in 1975.

A Government of India taken and disinvested its shares in 1995 to the extent of twenty eighth
& maintained to the extent of seventy two.

Role:
1. It is allotted the role of principle financial organisation for coordinative the activities of all
the financial organisation engaged in funding promoting and developing the industries.
2.It helps within the designing, promoting & developing the industries to fill the gaps within
the industrial development.

3.It provides technical & body help for the promotion, manage ment & enlargement of
business.

4.It undertakes market & investment researches, surveys & techno-economic studies to
contribute to the event of the business.

Constitution:
1. The share capital of IDBI was control by run until 1975.

2.The share capital was transferred to the government of India and it became government
closely-held establishment.

3.Nowadays government holds seventy two of the share capital LIC, UTI, SBI and EXIM bank
along hold Sep 11 foreign establishment investors third and also the balance is control by the
general public.

Financial Resources: The main sources of funds to the IDBI are some capital, reserves &
surplus, borrowing from run, market borrowing each in India & abroad by supply certificate
of deposits, mounted deposits & financial gain bonds. Ex: IDBI flexi bonds.

Functions: IDBI performs sort of functions all those are teams into three categories:

i) Direct functions

ii) Indirect functions

iii) Promotional activities.

I) Direct functions:

•They embrace, Term loans are provided to the industries for a amount starting from 10-
12 years together with capital.

•Underwriting the securities direct subscription to shares and debentures guarantees the
loan, risk capital.

•Equipment leasing/ lease financing: It provides lease for the acquisition of equipme nts
for amount of 5-8 years.
II) Indirect function:

•Refinancing of commercial loans to the IFCI, SFC, business banks, SIDC’s and co-
operative banks from 10-25 years.

•Resource support to the money establishments by subscribing shares and lo ans of

economic establishments.

• Discounting of bills.

III) Promotional Activities:

It refers to the efforts taken by the IDBI to market the expansion of industries within the
country by giving help to backward areas, little scale sectors and through different
development of entrepreneurs.

Direct help to backward areas within the type of concessional loans, longer reimbursement
amount, versatile debt equity quantitative relation.

IDBI conducting service of the backward space for assessing the commercial potential,
resource accessible, infrastructure facilities then on. Help to little scale sector industries
includes re-finance to state level establishments, finance to SFC’s, contribution to shares
and debentures, putting in of national equity fund and introducing of single window
theme for grant of loans.

Development of entrepreneurs has been one in all the foremost activities of IDBI by
providing seed capital help, re- finance against loans up to 21lakhs, 100% re- finance in
respect of composite loans, offer of knowledge, preparation of project profiles, technica l
and management practice and coaching programs to the entrepreneurs.

Recent Trends of IDBI:

After 1991, IDBI enlarged their activities to hide merchandiser banking (advice & service
for rising capital, issue management informative services for mergers and acquisition and
loan syndication), debentures, trust territory, for-ex services, facility participant, started
subsidiaries, IDBI capital market securities restricted and IDBI investment management
company restricted was started for rising the debt, public issue and investment company
schemes.
 2.3.2.2 STATE FINANCIAL CORPORATION (SFC)

State Financial Corporation are established under the state financial corporation Act of
1951 with the view to providing medium and long term finance to the medium and small
industries. There are 18 SFCs operating in different states of our country.

At the time of setting up of IFCI the necessity to for assisting smaller industrial establishment
has been recognized because it was not possible for a single institution to satisfy the capital
needs of small concerns spread all over the country.

Punjab government took the lead in organizing the financial corporation and setup state
financial corporation in 1953. Gradually, financial institutions started in different states.

Normally, the area of operation of an SFC is confined to one stage to extend financial helps to
small enterprises. However, the activities of some of the state financial corporations cover the
neighboring states / unions territories which do not have SFCs of their own.

To reach the small concerns financial needs SFCs are opened number of regional / branc h
officers.

Objectives and Scope:

1. The principle objective of SFC’s is to provide medium short term and long term
financial assistance to small industries particularly in a circumstance when norma l
banking assistance is not available.
2. SFCs collectively serve the broad national objectives of economic growth through the
promotion of small industries balanced regional growth and widening of industries
through the encouragement of new entrepreneurs.
3. To provide assistance to new as well as existing industries for the purpose of
establishment, modernization, renovation, expansion and diversification of public
 limited companies, private companies, partnership and proprietor concerns engaged in
manufacturing, mining, hotel, road transport, generation and distribution of electricity
development of lands, fishing and to provide technical services.
4. To provide for discounting of bills of exchange and direct subscription to equity as
debentures of industries and to enhance the loan ceiling from 30, 00,000 to 90,
00,000.
Functions:

1. Granting loans and advances / subscribing to debentures of industrial concerns,

repayable within 20 years.
2. Guarantying the loans raised by the industrial concerns on such terms and conditions
as may be mutually agreed upon.
3. Guarantying of such deferred payment of any industrial concern.
4. Underwrite the issue of shares and debentures.
5. Provides foreign exchange loans.
6. Participating in equity capital of small scale industrial units coming up in back ward
areas.
7. Besides, the SFC A ct as an agent of the Central government, State government, IFCI
on any other institution providing financial assistance to the industries.

Operational policies of State Financial Corporation:

1. Policy on size of assistance is Rs.60, 00,000 in case of co-operative societies.

2. Policy on forms of assistance, through granting and guarantying.
3. Policy on duration of assistance to the maximum of 20 years.
4. Policy on nature of industrial products to be assisted to the small scale units.
5. Policy on security: They provide secured loans on fixed assets.
6. Their interest rate policy: The lending rates of the SFC’s are normally linked to the
bank rate.
7. Policy on assistance to technical entrepreneurs- they provide financial assistance at a
concessional rate to develop technical industries.
3.SM ALL SCALE INDUSTRIES DEVELOPM ENT CORPORATION OR
STATE INDUSTRIAL DEVELOPMENT CORPORATION (SIDC)

Constitution:

SIDC are setup in various states under the companies Act of 1956 to later the primary
development needs of tiny, small, village industries in the state.

In Tamil Nadu SIDC was setup in 1970 for the promotional development of small scale
industries in the state.

Objectives:

1. To promote develop medium and small scale tiny and village industries.
2. To extend financial assistance in the form of rupees, loans, underwriting, guarantees,
letter of credit etc.
3. To take up promotional activities including flexibility reports, surveys, training and
development.
4. To provide a package of developmental services like technical guidance, assistance to
plant location, co-ordination with other organization.
5. To provide infrastructural facilities.
6. To setup industrial growth centre.
7. To keep the pace with the changing economic environment.
8. To initiate various measures to expand the scope of their activities.

Functions:

1. Formation of Industrial States: SIDC constructing industrial work sheds with all
infrastructural facilities in selected locations.
2. Marketing assistance: SIDC participates in the tenders floated by the government
departments on behalf of small scale units and obtain order for them.
3. Higher purchase and equipment leasing and scheme : Under this scheme SIDC
renders the package assistance to the allotes of industries for the supply of machineries
and on hire purchase on lease.
4. Export House : SIDC has been recognized as export house it identifies the potential
industrial units supplying export worthy products and prospective buyers of the
product abroad.
 5. Industrial development in backward areas : It provides employments to the rural
educated youth’s constructing industrial estates in rural areas in order to develop the
backward areas.

2.3.2.4 LIFE INSURANCE CORPORATION OF INDIA(LIC):

Insurance organization in India comprise of government organization namely, life

insurance corporation of India and general insurance corporation of India.

LIC was started in India on 1st September 1956 as a fully owned by government of India.

Functions:

LIC collects large amount of funds from the public

and deploys to the savings, the best advantage of the
policy holders for the industrial development as a
whole.

LIC provides funds to the industries in 3 forms:

1. Direct lending to industries: LIC helps small

scale and medium scale industries by granting loans
by setting up of co-operative industrial estates and
provides loans and advances in the form of long term
medium term and short term loans to the industries. Total loan made up to 31st March
2005 was 3152crores.

2. Purchase of Shares and Debentures in the stock market: LIC also finance private
industries by subscribing the shares and debentures till 1964 it was a single large
 buyer of the securities of different company’s total investment made by LIC by way
of subscription to share and debentures was 48,000crores as on 31st March 2005.

3. Subscription to the shares and bonds of financial institutions : LIC finance industries
indirectly by investing in the shares and bonds of state level financial institution like
IDBI, IFCI, ICICI etc.
LIC provides financial assistance to state electricity board for power generation by way of
loans or subscription bonds. LIC has been extending financial assistance to state level co-
operative housing societies, housing development corporation, National Housing Bank.
Providing finance for the infrastructure projects pertaining to the port, roads, railways,
airports etc. And other private projects. It was started LIC mutual scheme in June 1989 with a
view to provide various investment media’s to all the investors particularly small investors in
rural and semi- urban areas. It was started LIC housing finance limited in June1989 with the
main objective of providing finance of construction / purchase of individual houses.

5. EXIM BANK (EXPORT AND IMPORT BANK OFINDIA)

Constitution: It was started on 1st Jan 1982 to take over the operations of the international
financial wing of IDBI

It provides financial assistance to exporters and

importers and functions as the principle financial
institutions for coordinating the working of other
institution engaged in financing exports and imports
of goods and services.

EXIM bank provides re- finance facilities to the commercial banks and other financial
institutions against their export and import financial activities.

Functions:

1. Financing of export and import of goods and services.

2. Financing of Joint ventures, in foreign countries.
3. Financing of export and import of machinery and equipment.
 4. Provides loans to the Indians to enable them to contribute to the share capital of joint
ventures in foreign countries.
5. Undertaking merchant banking functions.
6. Providing technical administrative & financ ial assistance in connection with export &
import.
7. A programme to finance R&D of export oriented companies and concessional interest
rates.
8. Working capital finance for export companies.
9. Financing packages for knowledge based industries such as information technology,
computer software and pharmaceuticals.
10. Cooperation agreement with US EXIM bank for promoting bilateral trade between
USA & India.
11. Cooperation agreement with other developing and SAARC nations.
12. It acts as consultant to share its own experience in institution building.
Objectives:

1. To translate national foreign policies into concrete action plans.

2. To provide alternate financing solution to the Indian exports aiding him his efforts to
be internationally competition.
3. To develop mutually beneficial relationship with the international financia l
community.
4. To initiate and participate in debates on issues related to Indians international trade.
5. To forge close working relationship with other export development and financing
agencies, multilateral funding agencies and national trade and investment promotion
agencies.
6. To anticipate and absorb new developments in banking export financing and
information technology.
7. To be responsive to export problems of Indian exporters and pursue polic y
resolutions.
8. To utilize all possible financing mechanisms to promote export capabilities including
post shipment credit, export marketing, financing etc.

2.4 MUTUAL FUNDS

Meaning

To state in easy words, a mutual funds collects the savings from little investors, invest the m in
government and alternative company securities and earn financial gain through interest and
dividends, besides capital gains. It works on the principal of ‘small drops of water build an
enormous ocean’. For example, if one has Rs. One thousand to take a position, it's going to not
fetch greatly on its own. But, once it's pooled with Rs. One thousand every from plenty of
others, then, one might produce a ‘big fund’ giant enough to take a position in a very wide
kinds of shares and debentures on a commanding scale so, to fancy the economies of huge
scale operations. Hence, a fund is nothing however a type of collective investment. It's shaped
by the approaching along of variety of investors World Health Organization transfer their
surplus funds to a professionally qualified organization to manage it. To urge the excess funds
from investors, the fund adopts an easy technique. Every fund is split into atiny low fraction
known as “units” of equal price. Every capitalist is allotted units in proportion to the scale of
his investment. Thus, each capitalist, whether or not massive or little, can have a stake within
the fund and may fancy the wide portfolio of the investment control by the fund. Hence,
mutual funds change legion little and huge investors to partic ipate in and derive the advantage
of the capital market growth. It's emerged as a preferred vehicle of creation of wealth because
of high come, lower price and distributed risk.

Definition
The SEBI laws, 1993 defines a mutual funds as “a fund established within the type of a trust
by a sponsor, to boost monies by the trustees through the sale of units to the general public,
beneath one or a lot of schemes, for investment in securities in accordance with these
regulations”.
In step with Weston J. Fred and Brigham, Eugene, unit trusts are “corporations that settle for
greenbacks from savers and so use these greenbacks to shop for stocks, future bonds, short
term debt instruments issued by business or government units; these companies pool funds
and so scale back risk by diversification”.

Scope of fund

As started earlier, a fund is nothing however a pool of the investors’ funds. The special feature
of a fund is that the contributors and also the beneficiaries of the fund are one and also the
same category of individuals i.e. Investors. No one else will claim that fund. Since the
investors themselves contribute to the pool of fund and revel in it and its fruits, the term
‘mutual’ has been used.

The vital options of a fund are the following:

1.A fund belongs to people who have contributed to it fund and so, the possession of the fund
lies within the hands of the investors.

2.Since all investors cannot participate within the management of the fund, it's left within the
hands of investment professionals World Health Organization earn a fee for his or her
services.

3. The pool of funds collected is endowed in a very portfolio of marketable securities.

4.The investors share within the fund is drawn by “units” similar to shares within the case of
share capital of a corporation. The unit price depends upon the worth of the portfolio control
by the fund. Hence, the worth changes nearly daily and it's known as web plus value.

5.Typically the investment portfolio of the fund is formed in step with the target of the fund.
For instance a sectoral fund invests its funds in a very specific sector adore it sector, oil sector
etc.

Summary

Financial establishments are termed as monetary intermediaries as a result of they act as

middleman between the savers and borrowers. There are banking and non-banking financial
institutions. There are long term lending institutions such as IDBI, IFC, LIC and commercial
banks lends for short term as well as long term. We understand all of the above how they
function for the economic development of our country. The principle objective of SFC’s is to
provide medium short term and long term financial assistance to small industries particularly
in a circumstance when normal banking assistance is not available. SIDC are setup in various
states under the companies Act of 1956 to later the primary development needs of tiny, small,
village industries in the state. Insurance organization in India comprise of government
organization namely, life insurance corporation of India and general insurance corporation of
India. LIC collects large amount of funds from the public and deploys to the savings, the best
advantage of the policy holders for the industrial development as a whole. EXIM bank
provides re- finance facilities to the commercial banks and other financial institutions against
their export and import financial activities. A mutual funds collects the savings from little
investors, invest them in government and alternative company securities and earn financial
gain through interest and dividends, besides capital gains. It works on the principal of ‘small
drops of water build an enormous ocean’.

KEYWORDS/GLOSSARY
•Financial establishments are the intermediaries World Health Organization facilitate swish
functioning of the national economy by creating investors and borrowers meet. The y
mobilize savings of the excess units and assign them in productive activities promising a
higher rate of returns.

•Financial establishments also are termed as money intermediaries as a result of they act as
middleman between the savers and borrowers.

•Commercial banks accepted deposits and met the short and medium term funding wants of
the business. But now, since 1990’s banks also are funding the future wants of the business
significantly the infrastructure sector. The easement measures initiated within the Indian
economy, diode to the entry of huge non-public sector banks in 1993. This has raised
competition among non-public and public sector banks and quality of services has improved.

•RRBS were established by the regime and also the sponsoring business banks with the target
of developing the agricultural economy. RRBS offer credit facilities and banking services to
little farmers, little entrepreneurs within the rural areas. The regional rural banks were
established with a read to produce credit facilities to weaker areas.
•Foreign banks are in Asian nation from British days. These banks have targeting company
purchasers and are specializing in areas about International banking.
•Indigenous bankers are the forefathers of recent business banks. These are the people or
partnership corporations acting the banking functions. They're the native bankers.
•State money Corporation are established beneath the state money corporation Act of 1951
with the read to providing medium and future finance to the medium and little industries.
There are eighteen SFC’s in operation in several states of our country.
•The principle objective of SFC’s is to produce medium short term and future money help to
little industries significantly in a very circumstance once traditional banking help isn't on the
market.

•SIDC are units setup in varied states beneath the businesses Act of 1956 to later the first
development wants of small, small, village industries within the state. In province SIDC was
setup in 1970 for the promotional development of little scale industries within the state.
•LIC was started in Republic of India on first September 1956 as a completely owned by
government of India.

•LIC collects great amount of funds from the general public and deploys to the savings, the
simplest advantage of the policy holders for the economic deve lopment as an entire.
• LIC provides money help to state electricity board for power generation by manner of loans
or subscription bonds. LIC has been extending money help to state level co-operative housing
societies, development corporation, National Housing Bank.

•EXIM bank was started on first Gregorian calendar month 1982 to require over the
operations of the international money wing of IDBI.

•EXIM bank provides money help to exporters and importers and functions because the
principle money establishments for coordinative the operating of alternative establishment
engaged in funding exports and imports of products and services.
•EXIM bank provides re-finance facilities to the business banks and alternative money
establishments against their export and import money activities.
•The main sources of funds to the IDBI are some capital, reserves & surplus, borrowing from
run batted in, market borrowing each in Asian nation & abroad by supplying certificate o f
deposits, mounted deposits & financial gain bonds. Ex: IDBI flexi bonds.
•A fund belongs to people who have contributed to it fund and so, the possession of the fund
lies within the hands of the investors.

•Mutual funds collects the savings from little investors, invest them in government and
alternative company securities and earn financial gain through interest and dividends, besides
capital gains.

2 marks questions

1) What are financial institutions?

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2) What is banking?
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3) State the two objectives of IDBI?
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4) What is non-banking?
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5) What is EXIM bank?
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6) Define mutual fund?
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7) Identify from the picture Indian and foreign banks
5 marks questions
1) State the functions of IDBI.
2) Discuss the objectives and functions of LIC.
3) Explain the functions of EXIM bank.
4) Write a note on mutual fund.
5) What are the differences between banking and non-banking?

SUGGESTED BOOKS/ARTICLES

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill
3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl
4. M Y Khan: Indian Financial System, TMH
5. E Gardon& K Natarajan: Financial Markets & Services.
 Unit 3

COMMERCIAL BANKS

Structure
1. Introduction
2. Functions of Commercial Banking
3. Types of Deposits
4. Lending of Funds
5. Discounting of Bills of Exchange
6. Investment of Funds on Securities
7. Creation of Credit or Creation Of Money
8. Secondary Functions of Commercial Banks
9. Miscellaneous or General Utility Services
10. Investment Norms

Introduction – Role of Commercial Banks – Functions of Commercial Banks – Primary

Functions and Secondary Functions – Investmentnorms

Objectives of the study:

You understand the role and functions of commercial banks. Commercial bank receives
deposits for the purpose of lending. You will understand different forms of deposits such as
savings, recurring and fixed deposits. You also understand cash credit, overdraft and the rules
related to borrowing of loans and advances. Some of the non-banking operations of bank.

3.1 Introduction

Commercial banks are the oldest banking establishment within the organized sector. They
represent the predominant section of the banking industry in India.

BANK

A bank may be a financial organisation that deals in financial. It means a bank receives
financial within the variety of deposits from the general public and lends financial for
development of trade & commerce.
BANKER

Dr. H.L. Hart (Native of England) defines the term banker as “one World Health Organization
is within the normal of his business honourscheques drawn upon him by persons from & for
whom he receives financial on accounting.”

BANKING

Consistent with Section five (1) (b) of the Banking Regulation Act of 1949, the term banking
is outlined as “Accepting for the aim of disposal or investment of deposits of financial from
the general public owed on demand or otherwise & withdrawable by cheques, drafts, orders
or otherwise.”

FINANCIAL INSTITUTION

Section 5(1) (c) of the Banking Regulation Act of 1949, defines the term financial institutio n
as “Any company that transacts the business of banking in India.”

BUSINESS BANKING

It refers thereto banking that thinks about with the acceptance of deposits from the genera l
public owed on demand or once the ending of sure amount & the granting of chiefly short
term credit to trade, commerce and trade through a network of branches throughout the
country.

3.2 Functions Of Commercial Banking

The operate of business banking is loosely classified into 2 classes, viz.,

A. Principal/Primary/Basic/Fundamental operation.

B. Subsidiary/Secondary/Supplementary/Ancillary operation.

A. Primary functions
The primary functions of business banks are referred to as ancient functions or core functions.
They are the following:-
1) Acceptance of deposits from the generalpublic.
2) Lending of funds.

3) Investment of funds on securities.

4) Creation of credit/money.
5) Use of cheque system.

6) Remittance of funds.
I. Acceptance of deposits – supply of funds:-
Accepting deposits is one amongst primary operate of an advertisement bank. Banks receive
deposits from people, households, & company & non-corporate customers, government &
different agencies & therefore, they mobilize the savings within the country for productive
functions. Business banks provide totally different sorts of deposits to suit to the wants of
various classes of consumers. Deposits function the main supply of provide of funds to the
business banks. The various sources of provide of funds to the business banks are:-

i) Deposits of varied sorts.

ii) Borrowings from the Federal Reserve Bank of India.

iii) Borrowings from different monetary establishments.

iv) Borrowings from fellow bankers.
v) Borrowings from abroad.

3.3 Types of Deposits

Banks also are referred to as custodians of public financial. Basically, the financial is
accepted as deposit for keeping. However since the Banks use this financial to earn interest
from those that want financial, Banks share a neighborhood of this interest with the
depositors. However, accepting deposits and keeping track of the financial involves lots of
book-keeping and different operations.

The deposits are of various types:

Saving deposits
Saving accounts are opened for the aim of mobilizing savings. This account is also single or
joint. But, the speed of interest is low i.e., 4-5% p.a. Withdrawals are subject to sure
restrictions. It is appropriate for earnings and wage earners.

Fixed deposits
Fixed depos its are depos its at one t ime for a fixed per iod spec ified in ad va nce. The
rate o f interest is high whic h var ies with the per iod o f depos its. No withd rawa l is a
llowed during the per iod. The depos itor get a fixed deposit rece ipt which is non-
transferable. Those who have a surplus fund open fixed deposit account.

Current deposits

–B us ine ss me n op e n c ur re n t a cc o unt to o p e r a t e any n u mb e r o f t imes

during a work ing day. It is a lso ca lled demand deposit account because bank has to
re tur n the deposit o n de ma nd. Withdra wa ls a re free ly a llowed. No interest is paid.
In fact, there are services charges. Overdraft facilities are given in case of current accounts
only. Businessmen operate it.

Recurring deposits

–I n r e c u r r i n g d e p o s i t a c c o u n t a c e r t a i n s u m o f m o ne y i s periodically
deposited into the banks. Salaried persons and petty traders operate such type of account.
Withdrawa ls are per mitted only after the e xp iry o f ce rta in period. A high rate of
interest is paid.

3.4 Lending of Funds

Lending of funds constitutes the main business of commercial banks. The major portion of
the funds of commercial banks is employed by way of advances, as advances from the
primary source of profits for banks. Banks lends funds to the public by way of

A) Loans.

B) Overdraft
C) Money credit

D) Discounting of bills

Loans: A loan is a financial arrangement under

which an advance is granted by a bank to a
borrower on a separate account called the loan
account. When a loan is sanctioned to a borrower,
the entire amount of loan is debited to the loan
account of the borrower at once in lumpsum, either
in money or by transfer to the credit of his savings
bank account or current account or current account if any.

A loan is granted for short term, medium term & long term periods also. The
repayment of loan is made in lump sum or instalments also. A loan is granted either against
collateral securities or the personal securities of the borrower.

In the case of a loan interest is charged on the entire amount f loan sanctioned,
irrespective of the amount actually withdrawn by the borrower. Loans are given to against the
personal securities of the borrower. But usually & particularly where the amount involved is
heavy, tangible securities in the form of government securities, shares, debentures, fixed
deposit receipts. Life insurance policies, documents of title to goods are taken.

Money credit: A money credit is a financial

arrangement under which a borrower is allowed an
advance under a separate account called money credit
account upto a specified limit called the money credit
limit.

In the case of a money credit, the borrower

need not withdraw the entire amount at once in one lump sum. He can withdraw the amount in
installments as & when he needs.

A money credit is usually more permanent financial arrangement than an

overdraft. It can continue even for years together & is usually granted against the
hypothecation or pledge of agricultural or industrial products.
 Sometimes, it is given against guarantees. It is rarely given against the personal
securities of the borrower. Interest is charged quarterly or half yearly & is calculated on the
daily debit balance for the actual period of utilization. The money credit arrangement is the
most popular method of borrowing in India & about 70% of the total bank credit is in the
form of money credits.

The popularity of money credit is because if two reasons viz.,

A)The borrower is required to pay interest on the actual amount utilized by him for the actual
period of utilization.

B) It is a permanent financial arrangement.

Though money credit arrangement is popular with the borrowers, it is

disadvantage to the banker, because A) He can charge interest only on the actual amount
withdrawn by the borrower. B) He is required to keep at the disposal of the borrower, the
entire amount of money credit sanctioned.

Therefore, to compensate the banker there is a provision for charging

“commitment charge” on the unutilized portion of the money credit limit.

Overdrafts:-An overdraft is a financial arrangement under which a current account holder is

permitted by the bank to overdraw his account i.e., to draw more than the amount standing to
his credit upto an agreed limit against the collateral or personal securities of the borrower.

In the case of an overdraft, interest is charged quarterly or half yearly & is

calculated on the daily debit balances for the actual period of utilization.

It is advantageous to the borrower, as interest is charged only on the amount

actually withdrawn by him. But, it is disadvantageous to the banker because, he can charge
interest only on the amount actually overdrawn by the customer & he is required to keep at
the disposal of the borrower, the full amount of the overdraft sanctioned.

Therefore, to protect the interest of the banker, generally there is a provision for
charging “commitment charge” on the unutilized portion of the credit limit.
5. Discounting of Bills of Exchange

It is an arrangement under which a bank takes a bill of

exchange maturing with in a short period of 60 days or
90 days from an approved customer & pays him or
credit his current account immediately with the present
value \of the bill i.e., the face value of the bill minus
discount charges. Then on the due date of the, the bank
receives the face value of the bill from the acceptor of
the bill.

The bill discounted may be documentary bill (i.e., a bill of exchange accompanied by
documents of title to goods) or a clean bill (i.e., a bill of exchange not accompanied by
documents of title to goods.)

The interest for this financial accommodation is called the discount & is charge on the face
value of the bill for the unexpired period of the bill i.e., from the date on which the bill is
discounted to the date on which the bill matures.

6. Investment of Funds on Securities

Investment of funds on securities is one of the important functions of commercial banks.
They invest a considerable amount of their funds in government & industrial securities. I n
India commercial banks are required by statute to invest a major portion of their funds in
government & other approved securities.

3.7 Creation of Credit or Creation of Money

Commercial banks would not have become so prominent as they are today if they merely
borrow and lend money. They do something more than this i.e., they manufacture money. As
they manufacture money, they are called as “manufacturers of money “.

Commercial banks do not create legal tender money i.e., currency notes and coins. They
create only bank money or deposit money or cheque book money.

Bank money refers to the bank deposits created by banks. They are considered as money
because they perform the same functions as money i.e., they increase the purchasing power of
community and serve as a medium of exchange in the purchase of goods and services and in
the settlement of debts .

Bank deposits arise in two waysviz,

I)When a bank receives money from a depositor, opens an account in the name of depositor
and credits the amount received to the depositors account, bank deposits arise. Such bank
deposits are called as primary or passive or money deposits.

They are called as primary deposits, as they form the basis for loan transactions of the bank.

They are called as passive deposits, because in the creation of these deposits, the role of the
bank is passive.

They are called as money deposits as they represent money deposited by the depositors into
the bank.

II) When a bank grants financial assistance to a customer or purchases securities or fixed
assets , opens a deposit account in the name of the borrower of advance or the seller of
securities or fixed assets and credits the deposit account with the amount of advance granted
or with the price of securities or fixed assets purchased. Such deposits are called as secondary
or derivative or active deposits.

They are called as secondary deposits as they rank second in importance.They are called as
derivative deposits as they are derived from primary deposits. They are also called as active
deposits because in the creation of these deposits, the bank has to act i.e., it has to take some
action i.e. Either lending or purchase of investments or fixed assets.

Of the two types of deposits primary deposits cannot be considered as the money created by
banks, because they simply result in the transfer of money from the boxes of depositors to the
fills of banks and they do not make any addition to the total supply of money or purchasing
power in the country.

Only the derivative deposits that increase the total supply of money in the country can be
considered as the money created by banks.

Banks can create money i.e., create derivative deposits in several ways viz,

A) Creation of money by advancing loans

B) Creation of money by advancing (Providing money credits).

C) Creation of money by allowing overdraft.

D) Creation of money by discounting bills of exchange.

E) Creation o money by purchasing securities.

F) Creation of money by purchasing fixed assets.

G) Use of cheque system

Commercial banks have

introduced an inexpensive
medium of exchange, which is as
good as money, called ‘cheque’.
In the modern business world the
use of cheques to settle debts is
found to be more convenient than the use of liquid money. Commercial banks perform the
unique function of issuing and collecting cheques. Deposits can be withdrawn with the help
of a cheque which is a negotiable instrument. As such, it can be transferred easily from one
person to another and thus it has become the most developed credit instrument.

H) Remittance of funds

Banks help their customers in transferring funds from one place to another by issuing bank
drafts, mail transfers, telegraphic transfers and electronic transfers on nominal commission
charges. Commercial banks are able to carry out this important function at lesser cost since
they have their network of branches in every nook and corner of the country.
3.8 Secondary Functions Of Commercial Banks

Modern commercial banks besides performing the main functions viz, accepting deposits and
lending money cover a wide range of financial and non- financial services to customers and
general public. The bank’s services are steadily increasing to meet the ever growing needs of
the community.

The secondary functions of a modern banker may be classified into two as:

1) Agency functions

2) Miscellaneous functions or general utility functions

1) Agency functions:

The services rendered by a banker as an agent

of his customer (i.e. For and on behalf of his
customers) are called “agency services”.

The important agency services rendered by a

banker are as follows:

1. Collection of money on behalf of customers

2. Making payments on behalf of customers.
3. Purchase and sale on behalf of customers.
4. Advising customers regarding stock exchange investments.
5. Acting as trustee, executor, administrator or attorney of customers.
6. Serving as correspondents and representatives of customers.
7. Rendering of merchant banking services.
5.4 Miscellaneous Or General Utility Services

Services rendered by a banker not only to his customers, but also to the general public are
called ‘general utility services’.

The important general utility services rendered by a banker are as follows:

i) Safe custody of valuables.

ii) Dealing in foreign exchange business-export finance and import credit.
 iii) Issuing of letters of credit and travelers cheques.
iv) Acting as a referee.
v) Collecting information about other businessmen for customers.
vi) Underwriting of shares, debentures and government securities.
vii) Collection of statistics and data.
viii) Factoring services.
ix) Lease financing.
x) Housing finance
xi) Tax consultancy.
xii) Credit cards
xiii) Gift cheques
xiv) Consultancy function
xv) Teller system
xvi) ATM facility (automated teller machine)

3.10 Investment Norms:

The reserve bank has issued guidelines on categorization and valuation of banks’
investment portfolio. These guidelines are in conformity with international best practices and
are effective from 30th September 2000. The salient features of the guidelines are below:

1) The entire investment portfolio is to be classified under three categories:

a) Held to maturity [HTM]

b) Held for trading [HFT]
c) Available for sale [AFS]

HTM includes securities acquired with the intension of being held up to maturity.

HFT includes securities acquired with the intention of being traded to take advantage of the
short term price/ interest rate movements and

AFS includes securities not included in HMT and HFT.

2) Banks should decide the category of investment at the time of acquisition.

3) In the balance sheet, investments will continue to be classified under 6 heads:

 a) Government securities
b) Other approved securities.
c) Shares
d) Debentures and bonds
e) Subsidiaries and joint ventures
f) Others.

4)Investments classified under HTM need not be market to market and will be carried at
acquisition cost. These investments will include:

a) Recapitalization bonds
b) Investments in subsidiaries and joint ventures
c) Investments in debentures deemed as advance.

HTM will also include any other investment identified for inclusion in this category subject to
the condition that such investments will not exceed 25% of the total investment excluding
(a) to (c) cited above.

5)Banks which had already marked to market more than 75% of their SLR portfolio have the
option to reclassify their investments under this category up to the permissible level.

6)Profit on sale of investment in the HTM category should be taken into the p&l a/c before
being appropriated to the capital reserve account. Loss on sale should be recognized in the
profit and loss account.

7)Banks are free to decide on the extent of holdings under the HFT and AFS categories, based
on relevant considerations like tax planning, risk management capabilities and trading
strategies. Individual’s scrip in the AFS needs to be marked to market at the yearend or at more
frequent intervals. Individual scrip’s in the HFT category are to be revalued at least at monthly
intervals.

8)Market price of the scrip available from the trades/ quotes on the stock exchange price of
SGL transactions or RBI price list would serve as the “market value” for investments in AFS
and HFT.

9)Investments under the HFT category should be sold within 90days; in the event of inability
to sell due to adverse factors like tight liquidity, extreme volatility or a unidirectional
movement in market, the unsold securities should be shifted to the AFS category.
10)Profit or loss on sale of investments in both HFT and AFS categories should be taken in
the P&L a/c.

11)Shifting of investments from /to HTM may be done with the approval of the board once a
year, normally at the beginning of the accounting year. Investments from AFS to HFT may be
done with the approval of the board/ALCO/Investment Committee. Shifting from HFT to
AFS is generally not allowed.

12)Under all circumstances, the shifting of investments from one category to another should
be done at lowest value among acquisition cost, book value or market value, depreciation, if
any, should be fully provided for.

13)RBI will no longer announce the yield to maturity (YTM) rates for unquoted government
securities for the purpose of valuation of investments bybanks.

Summary

A bank receives financial within the variety of deposits from the general public and
lends financial for development of trade & commerce. Of business banking is loosely
classified into 2 classes, viz., Principal/Primary/Basic/Fundamental operation and Subsidiary/
Secondary/ Supplementary/ Ancillary operation. Saving accounts are opened for the aim of
mobilizing savings. Fixed deposits are deposits at one time for a fixed period specified in
advance. Businessmen open current account to operate any number of times during a working
day. In recurring deposit account a certain sum of money is periodically deposited into the
banks. Salaried persons and petty traders operate such type of acco unt. In the case of a
money credit, the borrower need not withdraw the entire amount at once in one lump sum. He
can withdraw the amount in installments as & when he needs. A money credit is usually more
permanent financial arrangement than an overdraft. It can continue even for years together &
is usually granted against the hypothecation or pledge of agricultural or industrial products.
Sometimes, it is given against guarantees. It is rarely given against the personal. Moder n
commercial banks, besides performing the main functions viz, accepting deposits and lending
money cover a wide range of financial and non financial services to customers and genera l
public. The bank’s services are steadily increasing to meet the ever growing needs of the
community.The services rendered by a banker as an agent of his customer (i.e. For and on
behalf of his customers) are called “agency services”. Services rendered by a banker not only
to his customers, but also to the general public are called
‘general utility services’. The reserve bank has issued guidelines. In conformity with
international best practices and are effective from 30th September 2000.

KEY WORDS/ GLOSSARY

• A Bank is a financial institution which deals in money. It means that a bank receives
money in the form of deposits from the public and lends money for development of
trade & commerce.
• Banking is defined as “Accepting for the purpose of lending or investment of deposits
of money from the public repayable on demand or otherwise &withdrawable by
cheques, drafts, orders or otherwise.”
• Banker as “one who is in the ordinary of his business honourscheques drawn upon
him by persons from & for whom he receives money on currentaccount.”
• Banking company refers to that banking which is concerned with the acceptance of
deposits from the public repayable on demand or after the expiry of certain period &
the granting of mainly short term credit to trade, commerce & industry through a
network of branches throughout the country.
• Commercial banking refers to that banking which is concerned with the acceptance
of deposits from the public repayable on demand or after the expiry of certain period
& the granting of mainly short term credit to trade, commerce & industry through a
network of branches throughout the country.
• B ank s are a lso ca l led custodians o f p ub l ic mo ne y. Ba s ic a l ly , t he
money is accepted as deposit for safekeeping. But since the Banks use this money to
earn interest from people who need money, Banks share a part of this interest with the
depositors
• Fixe d de pos its are depos its a t one t ime for a fixed period specified in
advance. The rate of interest is high whic h varies with the per iod o f
deposits
• I n re c u r r i n g d e p o s i t a c c o u n t a c e r t a i n s u m o f m o ne y is
periodically deposited into the banks. Salaried persons and petty traders operate suc h
type of acco unt. Withdra wa ls are pe r mitted o nly a fter the e xp ir y o f ce rta in
period. A high rate of interest is paid.
 • Lending of funds constitutes the main business of commercial banks. The major
portion of the funds of commercial banks is employed by way of advances, as
advances from the primary source of profits for banks.
• A loan is a financial arrangement under which an advance is granted by a bank to a
borrower on a separate account called the loan account.
• A money credit is usually more permanent financial arrangement than an overdraft. It
can continue even for years together & is usually granted against the hypothecation or
pledge of agricultural or industrial products.
• An overdraft is a financial arrangement under which a current account holder is
permitted by the bank to overdraw his account ie., to draw more than the amount
standing to his credit up to an agreed limit against the collateral or personal securities
of the borrower.
• Discounting of bills of exchange is an arrangement under which a bank takes a bill of
exchange maturing with in a short period of 60 days or 90 days from an approved
customer & pays him or credit his current account immediately with the present value
\of the bill i.e., the face value of the bill minus discount charges. Then on the due date
of the, the bank receives the face value of the bill from the acceptor of the bill.
• Services rendered by a banker not only to his customers, but also to the general
public are called ‘general utility services’.
• HTM includes securities acquired with the intension of being held up to maturity.

2 marks questions

1) What is commercial banking?

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2) State the two objectives of commercial banks?
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3) What are the primary functions of an Indian commercial bank?
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4) Mention any four commercial banks in India?
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5 marks questions

1) Explain the functions of commercial banks.

2) What are the primary functions of commercial banks?
3) What are the secondary functions of commercial banks?
4) Explain the changing role in Indian commercial banks.
5) Explain the different forms of lending by a commercial bank.

SUGGESTED BOOKS/ARTICLES

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill
3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl
4. M Y Khan: Indian Financial System, TMH
5. E Gardon& K Natarajan: Financial Markets & Services.
 UNIT 4

CO-OPERATIVE BANKS

Structure

1. Introduction
2. Meaning
3. Definition
4. Types & Perform Of Co-operative Banks, India
5. Primary Co-operative Credit Society
6. Central Co-operative Banks
7. State Co-operative Bank
8. Land Development Banks
9. Urban Co-operative Banks
10. Functions of Co-operative Banks
11. Problems of Co-operative Banks
12. Advantages of Co-operative Banks
13. Disadvantages of Co-operative Banks
14. Role of Co-operative Banks for Agricultural Development.

Introduction – Meaning – definition – features - functions – types – merits and demerits -

Lending policies – role of co-operative banks for agricultural development.

Objective
You learn co-operative banks, Land Mortgage bank and the role of such banks in the
agricultural development.

4.1 Introduction

Cooperative banks, another part of the Indian industry, originated with the enactment of the
co-operative credit societies act of 1904, that provided for the formation of co-operative
credit societies. Beneath the act of 1904, a no of co-operative societies wherever started. Due
to the increasing demand for co-operative credit, a brand new act was passed in 1912, that
provided for the institution of co-operative central banks by a union of primary credit
societies and people. The chief functions of those banks where:
(1) To attract deposits from non-agriculturist;

(2) To use excess funds of some societies briefly to create up for shortage to a different ;and

(3) To supervise and guide the related societies.

In 1914, the Maclagan committee was appointed to look at the co-operative movement and to
create recommendations concerning the advance of the movement. It suggested the institution
of a state co-operative apex bank. On the premise of the advice, a Central co-operative bank
was established in Mumbai. Alternative provinces conjointly took action on similar lines.
Though these is also thought of because the early beginnings within the direction of creating
Co-operative Banks to satisfy the monetary desires of Agriculturists, the movement received
momentum solely once the Second warfare.

2. Meaning

Co-operative bank is associate degree autonomous association of persons united voluntarily to

satisfy their member's monetary (loans, deposits, alternative services), economic, social, and
cultural desires and aspirations through a democratically controlled means.

3. Definition

Co-operative bank is associate degree autonomous association of persons united voluntarily to

satisfy their member's monetary (loans, deposits, alternative services), economic, social, and
cultural desires and aspirations through a democratically controlled means.

4. Types & perform of Co-operative Banks, India

The co-operative banks are small- sized units that operate each in urban and non- urban
centers. They finance little borrowers in industrial and trade sectors besides skilled and wage
categories. Regulated by the Federal Reserve Bank of India, they're ruled by the Banking
laws Act 1949 and banking laws (co-operative societies) act, 1965. The co-operative banking
structure in India is split into following five categories:

5. Primary Co-operative Credit Society

The primary co-operative credit society is associate degree association of borrowers and non-
borrowers residing in a very explicit neighborhood. The funds of the society ar derived from
73
the share capital and deposits of members and loans from central co-operative banks. The
borrowing powers of the members additionally as of the society ar fastened. The loans are
given to members for the acquisition of oxen, fodder, fertilizers, pesticides, etc.

6. Central Co-operative Banks

These are the federations of primary credit societies in a very district and are of 2 types-those
having a membership of primary societies solely and people having a membership o f
societies additionally as people. The funds of the bank accommodates share capital, deposits,
loans and overdrafts from state co-operative banks and joint stocks. These banks give finance
to member societies inside the boundaries of the borrowing capability of societies. The y
conjointly conduct all the business of a joint stock bank.

7. State Co-Operative Bank

The state co-operative bank may be a federation of central co-operative bank and acts as a
watchdog of the co-operative banking structure within the state. Its funds are obtained from
share capital, deposits, loans and overdrafts from the Federal Reserve Bank of India. The state
co-operative banks lend financial to central co-operative banks and first societies and
circuitously to the farmers.

8. LAND DEVELOPMENT BANKS

The development banks are organized in three tiers namely; state, central, and first level and
that they meet the future credit needs of the farmers for biological process functions. The state
development banks superintend, the first development banks located within the districts and
tehsil areas within the state. They're ruled each by the go vernment and Federal Reserve Bank
of India. Recently, the supervising of development banks has been assumed by full service
bank for Agriculture and Rural development (NABARD). The sources of funds for these
banks are the debentures signed by each central and government. These banks don't settle for
deposits from the final public.

9. Urban Co-Operative Banks

The term Urban Co-operative Banks (ucbs), tho' not formally outlined, refers to primary co-
operative banks placed in urban and semi- urban areas. These banks, till 1996, were allowed
to lend financial just for non-agricultural functions. This distinction doesn't hold these days.
These banks were historically focused on communities, localities, work place teams. They
basically lend to little borrowers and businesses. Today, their scope of operations has widened
significantly.

The origins of the urban co-operative banking movement in India are copied to the shut of
nineteenth century. Galvanized by the success of the experiments associated with the co-
operative movement in United Kingdom of Great Britain and Northern Ireland and also the
co-operative credit movement in Germany, such societies were came upon in India. Co-
operative societies are supported the principles of cooperation, mutual facilitate, democratic
deciding, and open membership. Co-operatives diagrammatic a brand new and various
approach to organization as against proprietary corporations, partnership corporations, and
joint stock firms that represent the dominant sort of industrial organizatio n. They chiefly rely
on deposits from members and non- members and just in case of would like, they get finance
from either the district central co-operative bank to that they're related or from the apex co-
operative bank if they add massive cities wherever the apex bank has its Head workplace.
They supply credit to little scale industrialists, salaried staff, and alternative urban and semi-
urban residents.

4.10 FUNCTIONS OF CO-OPERATIVE BANKS

Co-operative banks conjointly perform the fundamental banking functions of banking

however they dissent from business banks within the following respects
1.Business banks are joint-stock corporations beneath the companies’ act of 1956, or public
sector bank beneath a separate act of a parliament whereas co-operative banks were
established beneath the co-operative society’s acts of various states.
2. Depository financial institution structure is branch banking structure whereas co-operative
banks have a 3 tier setup, with state co-operative bank at apex level, central / district co-
operative bank at district level, and first co-operative societies at rural level.
3. Just some of the sections of banking regulation act of 1949 (fully applicable to business
banks), are applicable to co-operative banks, ensuing solely in partial management by tally of
co-operative banks.

4.Co-operative banks perform on the principle of cooperation and not entirely on business
parameters.
4.11 PROBLEMS OF CO-OPERATIVE BANKS

Duality of system of co-operative banks

However, issues concerning the expertise of urban co-operative banks gave rise to the read
that they ought to be higher regulated. Massive co-operative banks with paid share capital and
reserves of Rs.1 hundred thousand were brought beneath the view of the Banking Regulation
Act one949 with result from first March, 1966 and among the orbit of the Reserve Bank’s
superintendence. This marked the start of associate degree era of duality of management
over these banks. Banking connected functions (viz. Licensing, space of operations, interest
rates etc.) were to be ruled by tally and registration, management, audit and liquidation, etc.,
by State Governments as per the provisions of various State Acts. In 1968, UCBs were
extended the advantages of deposit insurance. Towards the late Nineteen Sixties there was
dialogue concerning the promotion of the tiny scale industries. UCBs came to be seen as vital
players during this context. The unit on industrial funding through Co-operative Banks,
(1968 called Damry Group) tried to broaden the scope of activities of urban co-operative
banks by recommending these banks ought to finance the tiny and house industries. This was
reiterated by the Banking Commission in 1969.
The Madhavdas Committee (1979) evaluated the role contend by urban co-operative banks in
bigger details and role player a roadmap for his or her future role recommending support fro m
tally and Government within the institution of such banks in backward areas and prescribing
viability standards.

The Hate unit (1981) desired higher utilization of bank’s surplus funds which the proportion
of the money Reserve quantitative relation (CRR) & the Statutory Liquidity quantitative
relation (SLR) of those banks ought to be brought at par with business banks, during a phased
manner. Whereas the Marathe Committee (1992) redefined the viability norms and ushered
within the era of easement, the Madhava Rao Committee (1999) targeted on consolidation,
management of illness, higher skilled standards in urban co-operative banks and wanted to
align the urban banking movement with business banks. A feature of the urban banking
movement has been its heterogeneous character and its uneven geographical unfold with most
banks focused within the states of Gujarat, Karnataka, geographic area, and Madras. Whereas
most banks are unit banks with none branch network, a number of the big banks have
established their presence in many countries once at their
bidding multi-state banking was allowed in 1985. A number of these banks are licensed
Dealers in exchange.

4.12 Advantages of Cooperative Banks

1. Straight forward to form:

The formation of a cooperative society is extremely easy as compared to the formation of the
other type of business organizations. Any 10 adults will be part of along and type a
cooperative society. The procedure involves within the registration of a cooperative society is
extremely easy and straightforward. No legal formalities are needed for the formation of
cooperative society.

2. No Obstruction for Membership:

Unless and otherwise specifically debarred, the membership of cooperative society is

hospitable everyone. No one is choked to hitch on the idea of faith, caste, creed, sex and color
etc. An individual will become a member of a society at any time he likes and might leave the
society once he doesn't prefer to continue as ; member.

3. Restricted Liability:

In most cases, the liabilities of the members of the society is proscribed to the extent of
capital contributed by them. Hence, they're alleviated from the worry of attachment of their
belongings, just in case of the society suffers money losses.

4. Service Motive:

In Cooperative society members are given higher smart and services at cheap costs. The
society conjointly provides money facilitate to its members < the concessional rates. It assists
in putting in place production units and selling of produces c tiny business homes therefore
conjointly tiny farmers for his or her agricultural product.
5. Democratic Management:

The cooperative society is managed by the electoral members from and among themselves.
Each member has equal rights through its single vote however will take active half in' the
formulation of the policies of the society. Therefore all member are equally vital for the
society.
6. Stability and Continuity:

A cooperative society can't be dissolved by the death financial condition, lunacy, permanent
incapability of the members. Therefore, its stable life are continued to exist for an extended
amount. It's got separate legal existence. New members might be part of and recent members
might quit the society however society continues to perform unless or otherwise all members
can set to shut identical.

7. Economic Operations:

The operation carried on by the cooperative society economical because of the eliminations
of middlemen. The services of middlemen are provided by the members of the society with
the minimum price. Within the case of cooperative society, the revenant and non-recurring
expenses are terribly less. Further, the economies of scale- ma production or purchase,
mechanically reduces the procuring value of the products, there by minimizes the price.
8. Surplus shared by the members:

The society sells merchandise to its members on a nominal profit. In some cases, the society
sells merchandise to outsiders. This profit is used for meeting the every day administration
price of the society. The procedure for distribution of profit that some portion of the excess is
spent for the welfare of the members, some portion unbroken reserve whereas the balance
shared among the members as dividend on the idea of this purchases.

9. State Patronage:

Government provides special help to the societies to change them to attain their objectives
with success. Therefore, the societies are given money at lower rates. Government conjointly
extends several kind of subsidies to cooperative societies strengthening their money stability
and property growth in future.

4.13 Disadvantages of Cooperative Banks:

Despite many another benefits, the cooperative society suffers from bound limitations c
drawbacks. A number of these limitations, that a cooperative type of business has are as
follows:
1. Restricted Resources:

Cooperative societies money strength rely upon the cap contributed by its members and loan
raising capability from state cooperative banks. The membership fee is proscribed that they're
unable to boost great deal of resources as their members belong to the lower and social class.
Thus, cooperative^ don't seem to be appropriate for the big scale business that need
broadening capital.

1. Inefficient Management:

A cooperative society is managed by the members solely. They are doing not possess any
social control and special skills. This is often thought of as major disadvantage of this sector.
Unskillfulness of management might not bring success to the societies.
2. Lack of secrecy:

The cooperative society doesn't maintain any secrecy in business as a result of the affairs of
the society is brazenly mentioned within the conferences. However secrecy is extremely vital
for the success of a concern. This paved the manner for competitors to vie in additional higher
manner.

3. Financial Trading:

The cooperative societies sell their product to outsiders solely in financial. But, they're
typically from the poor sections. These persons need to avail credit facilities that isn't
attainable within the case of cooperatives. Hence, selling may be a disadvantage for the
cooperatives.
4. Excessive Government interference:

Government place their candidate within the Board of management of cooperative society.
They influence the choice of the Board which can or might not be favourable for the interest
of the society. Excessive state regulation, interference with the flexibleness of its operation
affects adversely the potency of the management of the society.
5. Absence of Motivation:

The members might not feel zealous as a result of the law governing the cooperatives place
some restriction on the speed of come. Absence of relationship between work and reward
discourage the members to place their most effort within the society.
6. Disputes and Differences:

The management of the society constitutes the assorted kinds of personnel from completely
different social, economic and tutorial background. Many another times they powerfully
differ from one another on several vital problems. This becomes harmful to the interest of the
society. The various opinions and disputes might paralyses the effectiveness of the
management.

4.14 Role of Co-operative Banks for Agricultural Development.

Cooperative credit establishments play a major role within the readying of credit for
agriculture and rural sector and account for forty fifth per cent of total credit for the
agricultural sector. These establishment, however, lack expertise, sound management system
and autonomy in deciding. Low volume of business/low resource base, low borrowing
membership, high incidence of over dues, and twin management have adversely affected the
health of co-operative credit establishments. Additionally, poor recovery performance has
affected the flexibility of those establishments to cater to the credit wants of latest and non-
defaulting members and resulted in low paid up share capital. The very important link within
the short term co-operative system, viz., the PACS at the grassroot level is weak. Their size is
little and uneconomical and plenty of of them are dormant. Cooperatives ought to augment
their resource base, particularly the capital base and pay bigger attention to specialization and
diversification of loan business, non fund business, economical money mediation, risk
management and reduction in npas. In recognition of the importance of co-operative banks
within the development method of the agricultural economy and wish for its advance therefore
on build them economical and value effective instruments for delivery of rural credit, a task
force was official in Gregorian calendar month 1999 to review the cooperative system and
counsel measures for its strengthening. The terms of reference of the task force were:
(i)To review the functioning of the cooperative credit structure and counsel measures to
rationalize and improve and to form cooperatives as member driven and skilled business
enterprises;
(ii)to review aspects regarding prices, spreads and effectiveness at numerous tiers of
cooperative credit structure;

(iii)to review the money performance of the cooperative banks with a read to up their money
health in order that they'll become economical and value effective within the delivery of rural
credit and

(iv)TO review the present super ordinate and restrictive mechanism for cooperative credit
establishments and counsel measures for strengthening the arrangements.
Summary

Co-operative bank is associate degree autonomous association of persons united voluntarily to

satisfy their member's monetary (loans, deposits, alternative services), economic, social, and
cultural desires and aspirations through a democratically controlled means. The loans are
given to members for the acquisition of oxen, fodder, fertilizers, pesticides, etc. These banks
give finance to member societies inside the boundaries of the borrowing capability of
societies. The term Urban Co-operative Banks (ucbs), through not formally outlined, refers to
primary co-operative banks placed in urban and semi- urban areas. Co-operative banks
conjointly perform the fundamental banking functions of banking however they dissent from
business banks.

KEYWORDS/ GLOSSARY

• Co-operative bank is an autonomous association of persons united voluntarily to meet

their member's financial (loans, deposits, other services), economic, social, and
cultural needs and aspirations through a democratically controlled way.
• The co-operative banks are small- sized units which operate both in urban and non-
urban centers.
• The primary co-operative credit society is an association of borrowers and non-
borrowers residing in a particular locality.
• The state co-operative bank is a federation of central co-operative bank and acts as a
watchdog of the co-operative banking structure in the state.
• Commercial bank structure is branch banking structure whereas co-operative banks
have a three tier setup, with state co-operative bank at apex level, central / district co-
operative bank at district level, and primary co-operative societies at rural level.
• The cooperative society is managed by the elected members from and among
themselves. Every member has equal rights through its single vote but can take active
part in' the formulation of the policies of the society.
• A cooperative society cannot be dissolved by the death insolvency, lunacy, permanent
incapability of the members.
• Cooperative credit institutions play a significant role in the deployment of credit for
agriculture and rural sector and account for 45% per cent of total credit for the rural
sector.
2 marks questions

1) What is co-operative banks?

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2) Define the co-operative banks.
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3) State the two features of co-operative banks.
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4) State the two functions of co-operative banks.
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5) State any two merits and demerits of co-operative banks.
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5 MARKS QUESTIONS
1) State the functions of co-operative banks.
2) What are the types of co-operative banks?
3) What are the advantages and disadvantages of co-operative banks?
4) What are the problems of co-operative banks?
5) Write a note on role of co-operative banks for agriculture development.
 SUGGESTED BOOKS/ARTICLES

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill
3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl
4. M Y Khan: Indian Financial System, TMH
5. E Gardon& K Natarajan: Financial Markets & Services.
 UNIT 5:

RURAL FINANCE

Structure

1. Regional Rural Banks

2. Objectives of RRBs
3. Areas of Operations of RRB
4. Micro Finance: Meaning
5. Micro Finance Products
6. Role of Self-Help Groups
7. Micro Finance-the role of PostOffices
8. Role of Companies in Micro Finance

RRBS: Meaning – definition – features - functions – types – merits and demerits- Lending
policies – priority areas of lending – Role of RRBs in rural development. Micro finance:
micro finance products and services – role of Self-Help Groups – post office –role of
companies in micro finance as a part of social responsibilities.

Objectives: You can understand the role of RRBS in the economic developments. Micro
finance plays a vital role among the marginalized population. You can understand the role of
self help group in micro finance.

5.1 Regional Rural Banks

RRBs were found out by the authorities and therefore the sponsoring business banks with the
target of developing the agricultural economy. RRBs give credit facilities and banking
services to tiny farmers, tiny entrepreneurs within the rural areas. The regional rural banks
were found out with a read to supply credit facilities to weaker areas. There have been 196
RRBs at the tip of 2002, as compared to 107 in 1981 and six in 1975.

IDBI, NABARD are SIDBI additionally needed to supply social control and monetary help to
RRBs below RRB act. Introduction of kissan credit cards, self- help-groups [SHGs], etc., for
the general performance of RRBs.

5.2 Objectives of RRBs

1)To give low-cost credit and different facilities to tiny and marginal farmers, landless
agriculture labourers and entrepreneurs etc….

2)To develop the agricultural economy of country by providing liberal monetary help to
agriculture, trade and business industries within the rural areas.

3)To indicate Banking habit among individuals and mobilize their savings for economic
process of the agricultural areas.

4) To give employment to the educated youths of the agricultural areas.

5) To bring down the price of rural banking.

5.3 Areas of Operations of RRBs

RRBs are setup in areas that are relatively backward, however have potentialities for
economic development. Every RRB is operated among the boundaries such that by the Govt.
of Republic of India. It's to serve 5000 to 20000 individuals. Typically the world of
operations of a RRB contains one or a lot of districts of a State. The top workplace of RRB is
mostly placed within the capital city of a locality, whereas its branch offices are going to be
placed in Taluks or blocks.

Funds or monetary resources of RRBs

1) Share capital

2) Deposits from the general public

3) Borrowings from the sponsoring banks

4) Refinance from NABARD UNIT

9. Micro Finance: Meaning

Microfinance is a general term to describe financial services to low- income individuals or

to those who do not have access to typical banking services. Microfinance is also the idea
that low- income individuals are capable of lifting themselves out of poverty if give n
access to financial services. While some studies indicate that microfinance can play a role
in the battle against poverty, it is also recognized that is not always the appropriate method,
and that it should never be seen as the only tool for ending poverty.

10. Micro Finance Products

Microfinance offers many financial products and services to its clients - Income
Generation Loans, Mid-Term Loans, Mobile Loans, Sangam Store Loans, Housing
Loans, Funeral Assistance, Gold Loan, and Life Insurance. Some of the social benefits of
its financial product and service offerings as "providing self- employed women financia l
assistance to support their business enterprises, such as raising livestock, running loca l
retail shops called kirana stores, providing tailoring and other assorted trade and services."

Typical microcredit products look like this (the numbers are only hypothetical):

Product Purpose Terms Interest rate

Income Generation Income generation, asset 50 weeks loan paid 12.5% (flat) 24%
Loan (IGL) development weekly (effective)
Mid-Term Loan Same as IGL, available at 50 weeks loan paid 12.5% (flat) 24%
(MTL) middle (week 25) of IGL weekly (effective)
Emergency Loan All emergencies such as 20 weeks loan 0% Interest free
(EL) health, funerals,
hospitalization
Individual Loan (IL) Income generation, asset 1-2 years loan 11% (flat) 23%
development repaid monthly (effective)

Source: http://www.microfinanceinfo.com/microfinance-products

The Income Generating Loan is used for a variety of activities that generate income for their
families. Clients submit a loan application and based on approval receive the loan after one
week. Loans are paid in 50 equal, weekly installments. After completion of a loan cycle, the
client can submit a loan application for a future loan. The approach with smaller short-term
loan is to avoid long-term economic problems with bigger loans.
5.11 Role of Self help group

A self-help group (SHG) is a village-based financial intermediary committee usually

composed of 10–20 local women or men. A mixed group is generally not preferred. Most
self- help groups are located in India, though SHGs can also be found in other countries,
especially in South Asia and Southeast Asia.

Members make small regular savings contributions over a few months until there is enough
capital in the group to begin lending. Funds may then be lent back to the members or to
others in the village for any purpose. In India, many SHG's are 'linked' to banks for the
delivery of micro credit.

A self- help group may be registered or unregistered. It typically comprises a group of

micro entrepreneurs having homogeneous social and economic backgrounds, all
voluntarily coming together to save regular small sums of money, mutually agreeing to
contribute to a common fund and to meet their emergency needs on the basis of mutual
help. They pool their resources to become financially stable, taking loans from the money
collected by that group and by making everybody in that group self-employed. The group
members use collective wisdom and peer pressure to ensure proper end-use of credit and
timely repayment. This system eliminates the need for collateral and is closely related to
that of solidarity lending, widely used by micro finance institutions. To make the book-
keeping simple enough to be handled by the members, flat interest rates are used for most
loan calculations.( http://en.wikipedia.org/wiki/Self- help_group_%28finance%29).

Self- help groups are started by non-governmental organizations (NGOs) that generally
have broad anti-poverty agendas. Self- help groups are seen as instruments for a variety of
goals including empowering women, developing leadership abilities among poor people,
increasing school enrollments, and improving nutrition and the use of birth control.
Financial intermediation is generally seen more as an entry point to these other goals,
rather than as a primary objective. This can hinder their development as sources of village
capital, as well as their efforts to aggregate locally controlled pools of capital through
federation, as was historically accomplished by credit unions.
12. Micro Finance-the role of Post Offices
The loans are set up so that NABARD provides the funds and the Post Office disburses
the loans to SHGs. The interest rate is nine percent, three percent of which is commission
for the Post Office, the rest is returned to NABARD. SHGs must open accounts with their
local post office, and once they are identified by NGOs or recommended by NABARD
they are watched for six months. A committee made up of representatives from NABARD,
relevant NGOs and the Department of Post determine a credit rating and those SHGs with
qualifying marks are eligible for these loans. The upper loan limit is Rs 24,000 (USD 515)
or four times the deposit the SHG has in their post office. (http://www.thebetterindia.com)

Adequate infrastructure and manpower in India (154,919 branches), 90% in rural India. In
comparison, SBI, the largest commercial bank, has approx. 60,000 branches only Postmaster
and Postmen have good knowledge of the area and the people already providing financial
services and have good accounting system. Being a part of the Government, it is a safe place
for savings and the people also think of their money being safe if it is in the Post Office.

13. Role of Companies in Micro Finance

There are companies formed mainly for micro finance in India. SKS Microfinance Ltd,
Spandana Sphoorty Financial Ltd, Share Microfin Limited, Asmitha Microfin Ltd, Shri
Kshetra Dharmasthala Rural Development Project, Bhartiya Samruddhi Finance Limited,
Bandhan, Cashpor Micro Credit, Grama Vidiyal Micro Finance Pvt Ltd and Grameen
Financial Services Pvt. Ltd are the top ten micro finance companies in India.

Summary
RRBs were found out by the authorities and therefore the sponsoring business banks with the
target of developing the agricultural economy. IDBI, NABARD are SIDBI additionally
needed to supply social control and monetary help to RRB’s below RRB act. The capital
market might be a marketplace for financial assets that have a drawn-out or indefinite
maturity. Micro finance plays a role in the economic development of small businesses in rural
India through self- help group. Many companies including post offices are part of micro
finance.
KEY WORDS/ GLOSSARY

Regional Rural Banks give low-cost credit and different facilities to tiny and marginal
farmers, landless agriculture labourers and entrepreneurs, etc.
Microfinance is a general term to describe financial services to low- income individuals or to
those who do not have access to typical banking services.
A Self-Help Group (SHG) is a village-based financial intermediary committee usually
composed of 10–20 local women or men.

2 marks questions
1) What are the monetary resources of RRBs?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………
2) Define a SHG.
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………
3) What is mid-term loan?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………
4) State the functions of SHGs.
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………

5 marks questions

1. What are the objectives of RRBs?

2. Write a note on the functions of micro-financing.
3. How do SHGs help in economy development?
 SUGGESTED BOOKS/ARTICLES

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill
3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl
4. M Y Khan: Indian Financial System, TMH
5. E Gardon& K Natarajan: Financial Markets & Services.
 UNIT 6

CAPITAL MARKET
Structure

1. Meaning
2. Choices Of Capital Market
3. Importance Of Capital Market
4. Classification Of Capital Market
5. Primary Market
6. Functions Or Services Of Primary Market Or New Issue Market
7. Secondary Market
8. Functioning Of Secondary Market
9. Primary And Secondary Markets – Similarities
10. Characteristics/ Functions Of Capital Market
11. Demat Account
12. Procedure

Capital market: that means – functions – primary – secondary – functionaries in capital

market-D-mat Accounts – listing needs – role of exchange in capital mobilization.
Objective of the study
In order to understand the long term finance it becomes necessary to understand capital
market. You learn about primary and secondary market

1. Meaning

The capital market might be a marketplace for financial assets that have a drawn-out or
indefinite maturity. Usually it deals with future securities that have a maturity quantity of on
high of 1 year. It includes institutions and mechanism for the effective pooling of future funds
from individuals and institutional investors and making them on the market to industrial and
business undertakings. Capital market briefly, deals in shares, debentures, bonds and
securities.

1. Choices Of Capital Market

1. It deals in long and medium term funds.

2. It consists of primary market and secondary market and special financial institutions.
3. It covers every individual and institutional investors.

4. It makes funds on the market to industrial and business undertakings.

6.2 Importance Of Capital Market

Absence of capital market acts as a deterrent issue to capital formation and process.
Resources would keep idle if finances are not funneled through capital market. The
importance of capital market are typically briefly summarized as follows:
1.The capital market may be a very important provide for the productive use of economy’s
savings. It mobilizes the savings of the oldsters for any investment, then avoids their wastage
in unproductive uses.

2.It provides incentives to saving and facilitates capital formation by giving applicable rates
of interest as a result of the value of capital.

3.It provides associate as avenue for investors, considerably the organisation sector to invest in
financial assets that ar lots of productive than physical assets.

4.It facilitates increase in production and productivity among the economy then enhances the
economic welfare of the society.

5.The operations of assorted institutions among the capital market induce process. They
provide qualitative directions to the flow of funds and convey regarding rational allocation of
scarce resources.

6.A healthy capital market consisting of knowledgeable intermediaries promotes stability in

values of securities representing capital funds.

7. Moreover, it's a significant provide for technological upgradation among the economic
sector by utilizing the funds endowed by the Thus, a capital market overall public.
may be a very important link between people mean to invest these save and folks who
savings.

6.3 Classification of Capital Market

Capital market are typically classified into three, viz,

i. Industrial exchange.

ii. Government exchange.

iii. Future loan market.

Industrial securities market

It is because it is market for industrial securities,viz,

i. Equity shares or stock

ii.Stock.

iii.Debentures or bond

4. Primary Market
Primary market might be a marketplace for brand spanking new issue or new financial claims.
So it's jointly called New Issue Market. The primary market deals with those securities that
are issued to the overall public for the first time. Among the first market, borrowers exchange
new financial securities for future funds. Thus, the primary market facilitates capital formation.

There are three ways that by that an organization might raise capital throughout a primar y
market. They are:

Public issue.

rights offering.

non-public placement.

The foremost common technique of raising capital by new companies is thru sale of securities
to the overall public. It's called public issue. Once associate existing company needs to carry
any capital, securities are initial offered to the current shareholders on preventative basis. It's
called rights issue. Non-public placement might be a way of commerce securities in camera to
very little cluster of investors.

5. Functions Or Services Of Primary Market Or New Issue Market:

1.The Transfer: a significant perform rendered by primary market is to allow the transfer of
resources from capitalist to entrepreneurs World Health Organization establish new
companies. It's jointly called the perform of origination. The transfer perform is fast by
specialist agencies that assist in varied activities associated with such transfer.

2.Fact-Finding Services: The capitalist bankers and different agencies involved in primary
market offer the fact-finding services. These embrace, economic analysis, technical analysis,
financial associate degree analysis of the companies where associate degree capitalist ants to
invest. This information helps the investors in making a clear different on the type, quality and
quantity of investment to make.

3.Informative And Data Services: Varied informative services are on the market in primary
market with a scan to rising the quality of capital issues in primary market. The relevant
services embrace crucial the type, the mix, the price, the timing, the size, the commerce ways
that and thus the terms and conditions of issue of securities etc.

4.The Guarantee: If the company, stepping into capital market is not bound of raising full
amount of funds from the market, there are certain mechanism there by success of such issue
are secured. It's the perform of underwriting. Underwriting aims at guaranteeing the
subscription of public issue. Underwriters guarantee booming subscription of the matter by
enterprise to want up the securities among the event of the overall public failing to subscribe
constant. It edges all those involved in primary market rather like the provision company, the
finance public and capital market typically. The perform of underwriting is undertaken for a
commission.

5.The Distribution: The perform that facilitates the sale of securities from company to
investors is termed ‘Distribution’. The perform of distribution is rendered by the specialised
agencies like brokers and dealers in securities. They maintain a relentless and an in depth link
with the issuers on the one hand and thus the ultimate investors on the alternative.

6.6 Secondary Market:

Secondary market might be a marketplace for secondary sale of securities. In different words,
securities that have already seasoned the new issue market are listed throughout this market.
Generally, such securities are quoted among the exchange and it provides never-ending and
regular marketplace for buying and commerce of securities. This market consists of all stock
exchanges recognized by the govt..Of India. The stock exchanges in Republic of Republic of
primary
India are regulated below the securities contracts (Regulation) Act 1956. The town exchange market.
Througho
is that the principal exchange in Republic of Republic of India that sets the tone of the
ut a stock
alternative stock markets. market,
purchases
The secondary market provides liquidity to financial instruments that are already issued in and sales
of
securities
whether
or not
94
or not of presidency or semi- government bodies or different public bodies and jointly shares
and debentures issued by private joint stock companies are done.

6.7 Functioning Of Secondary Market:

For the effective functioning of secondary market, correct management ought to be exercised.
At present, management is exercised through the following three necessary processes.

1. Recognition of stock exchanges:

As a district of secondary market operation the stock exchanges ought to be compelled to be

recognized by administrative body. The securities that are issued in primary market are listed
entirely in recognized exchanges like town exchange, NSE, city exchange etc. In Republic of
Republic of India SEBI is recognizing the stock exchanges.

2. Listing Of Securities Accessible Exchanges:

Once the stock exchanges are recognized the securities that are required to be listed like shares
debentures etc. has to be listed accessible exchanges.

3. Recognition Of Broker:

The intermediaries, World Health Organization facilities swish functioning of secondary

market like brokers, deal in secondary market. Sub-brokers ought to be compelled to be
recognized by SEBI, them entirely the need be able to interchange stock exchanges.

Functions Or Services Of Secondary Market:

The Secondary market or stock market occupies a necessary position among the economy. I n
perform several economic functions and render valuable services to the investors, companies
and to the economy as whole. They're as follows:

1. Liquidity Of Securities:

Stock exchanges offer liquidity to securities, since securities are typically reborn in to securities
they hold
financial at any time per the discretion of the capitalist by commerce tem at the listed prices. or can
hold. So
that they
2.Marketability To Securities: Secondary market facilitate buying and commerce of manufact
securities at listed prices by providing continuous marketability to the investors in respect of ure a
ready
marketpla
ce for
securities.
95
3. Safety Of Funds Happiness To Investors:

Stock exchanges facilitate in maintaining safety of funds endowed as a results of they have to
perform below strict rules and laws and thus the bye- laws are meant to create certain safety of
investible funds. These rules are framed by SEBI. This could strengthen the investor’s
confidence and promote larger investment.

4. Accessibility Of Future Funds To Companies:

The securities listed among the stock, market are negotiable and transferable. As a result of it's
transferred from one capitalist to a distinct, one capitalist is substituted by another, but the
company is secured of future accessibility of funds.

5. Flow Of Funds To Profitable Projects:

The profit and recognition of companies are reflected accessible prices. The prices quoted
indicate the relative profit and performance of companies. Funds tend to be attracted towards
securities of profitable companies and this facilitates of profitable companies and these
facilities the flow of capital in to profitable channels.

6. Motivation For Improved Performance By Companies:

The performance of an organization is reflected on the costs quoted among the stock market
value of financial assets depends upon the company’s performance. These prices are lots of
visible among the eyes of the overall public. Stock market provides space for this value
quotation for those securities listed by it. This airing makes an organization aware of its
standing among the market and it acts as a motivation to spice up its performance any.

7. Promotion Of Investment Opportunities:

Stock exchanges mobilize the savings of the overall public and promote investment through
capital issues. Unless there is a sensible secondary market, investment opportunities will not
be with investors.

8. Accessibility Of Business Information:

The dynamic business conditions among the economy are immediate reflected on the
secondary market/stock exchanges. Booms and depressions are typically known through the
dealings among the stock exchanges. Relying upon the prevailing information policies are
96
typically taken by the govt... Therefore a stock market reflects the prevailing economic
situation to ball concerned. So as that applicable actions are typically taken.

9. Promoting Commerce Of Recent Issues By Companies:

If the new issues are listed accessible exchanges they're directly acceptable to the overall
public, since, listing is completed once analysis of such securities by concerned exchange
authorities. Costs of underwriting such issues would be less public response to such new issues
would be relatively really high. Therefore a stock market helps among the commerce of recent
issues jointly.

10. Different Services:

Stock exchange permits the investors to chop back their risks by heterogeneous portfolio of
investment. It jointly develops savings habits among the community and paves the strategy
for capital formation. It helps the investors in choosing securities by provide the daily
quotation of listed securities and by revealing the trends of dealings on the exchange. It
permits companies and thus the govt. To carry funds by providing a ready marketplace for his
or her securities.

6.8 Primary And Secondary Markets – Similarities

Both the primary and secondary markets are closely related .

1. Trading:

If securities are to be listed among the stock exchange/ secondary market, it's necessary that
they're initial issued among the first market.

2. Listing:

Solely those shares that are capable of listing in some putative stock exchanges are completely
signed in primary market.

3.Regulation:

The laws concerning every primary what is more as secondary market are regulated by the
SEBI and exchange. The item is to induce orderliness in every primary and secondary market.

4. Marketability:
The advantage of marketability provided by the secondary market greatly helps the
subscribers among the first market. For instance, the positive trends prevailing among the
secondary market immensely facilitate the investors to chop back their holdings and acquire
new shares among the secondary market.

5. Conditional Prevailing:

The conditions prevailing among the secondary market have a bearing on success or failure
of the matter created among the first market. Consequently, where the conditions are so
favorable among the secondary market that high market prices prevail, the issues created
among the first market will find yourself to be encouraging and booming. Issues would fetc h
smart premiums.

6. Survival:

The survival of the secondary market depends upon the efficiency of the primary market.
There may well be no stock exchanges if there is no primary market, among an equivalent
manner there will be no primary market among the absence of associate economical
functioning of exchange.

6.9 Characteristics/ Functions Of Capital Market

Capital market deals in future and medium term funds. Possession securities like equity shares
and stock and securities like debentures and bonds dealt in capital market.

Capital market arranges heap of funds.

Capital market makes future funds on the market i.e., produce funds on the marketplace for

investment on mounted assets.

Capital markets facilitates large scale nationwide mobilisation of savings and massive
amount of funds.

The dealers among the capital markets are the business and business enterprises and thus the
investors like individuals and institutional investors.
10. Demat Account

In India, a demat account, the abbreviation for dematerialized account, could be a form of
banking account that dematerializes paper-based physical stock shares. The dematerialized
account is employed to avoid holding physical shares: the shares are bought and
oversubscribed through a stock broker.

This account is in style in Republic of India. The Securities and Exchange Board of Republic
of India (SEBI) mandates a demat account for share commerce on top of five hundred shares.
As of Apr 2006, it became obligatory that anyone holding a demat account ought to possess a
Permanent Account variety (PAN), and therefore the point in time for submission of PAN
details to the deposit irreligious on January 2007.

11. Procedure

1.Fill demat request kind (DRF) (obtained from a deposit participant or DP with whom your
deposit account is opened).

2.Deface the share certificate(s) you wish to vanish by writing across given for
dematerialization.

3. Submit the DRF & share certificate(s) to DP. DP would forward them to the establishment
/ their R&T Agent .

4.When dematerialization, your deposit account together with your DP, would be attributable
with the dematerialized securities.

The edges

- a secure and convenient thanks to hold securities;

- Immediate transfer of securities;

- No taxation on transfer of securities;

-Elimination of risks related to physical certificates like unhealthy delivery, pretend

securities, delays, thefts etc.;

- Reduction in work concerned in transfer of securities;

- Reduction in dealing cost;

- No odd heap downside, even one share are often sold;

- Nomination facility;

-amendment in address recorded with DP gets registered with all firms during which capitalist
holds securities electronically eliminating the requirement to correspond with every of them
separately;

- Transmission of securities is completed by DP eliminating correspondence with companies;

-Automatic credit into demat account of shares, arising out of

bonus/split/consolidation/merger etc.

-Holding investments in equity and debt instruments during a single account. Required
Documents

The extent of documentation needed to open a demat account could vary consistent with your
relationship with the establishment. If you propose to open a demat account with a bank, a
savings, current and, or alternative account that the holder are issued a check book, such
holder has a footing over the non-account holder. In fact, banks sometimes supply further
incentives to customers World Health Organization open a demat account with them. In
conjunction with the appliance kind, your images (with co-applicants) and proof of
identity/residence/date of birth ought to be submitted. The dps conjointly enkindle a DP-
client agreement to be dead on non-judicial stamp paper. Here could be a broad list:
- A canceled check, ideally MICR

- Proof of Identification

- Proof of Address

- Proof of Pan card (mandatory)

- Recent images, one and, or more

For proof of identification and, or address self-attested facsimile copies of PAN card, Voter’s
ID, Passport, card, Driver’s license, citation card, worker ID card, Bank attestation, latest I T
returns and, or latest Electricity/Landline telephone bill are comfortable. Whereas they solely
enkindle photocopies of the documents, They are going to want the originals for verification.
Summary
Capital market briefly, deals in shares, debentures, bonds and securities. The capital market
may be a very important provide for the productive use of economy’s savings. It mobilizes the
savings of the oldsters for any investment, then avoids their wastage in unproductive uses.
Capital market deals in future and medium term funds. Possession securities like equity shares
and stock and securities like debentures and bonds dealt in capital market. In India, a demat
account, the abbreviation for dematerialized account, could be a form of banking account
that dematerializes paper-based physical stock shares. The dematerialized account is
employed to avoid holding physical shares. The capital market might be a marketplace for
financial assets that have a drawn-out or indefinite maturity. The capital market may be a very
important provide for the productive use of economy’s savings. It mobilizes the savings of the
oldsters for any investment, then avoids their wastage in unproductive uses. Primary market
might be a marketplace for brand spanking new issue or new financial claims. So it's jointly
called New Issue Market. Secondary market might be a marketplace for secondary sale of
securities. In different words, securities that have already seasoned the new issue market are
listed throughout this market. Capital market deals in future and medium term funds.
Possession securities like equity shares and stock and securities like debentures and bonds
dealt in capital market. A demat account, the abbreviation for demate rialized account, could
be a form of banking account that dematerializes paper-based physical stock shares.

KEYWORDS/ GLOSSARY
•The capital market could be a marketplace for money assets that have a protracted or
indefinite maturity.

•Capital market deals with future securities that have a maturity amount of on top of one
year. It includes establishments and mechanism for the effective pooling of future funds from
people and institutional investors and creating them on the market to industrial and business
undertakings.

• Capital market makes funds on the market to industrial and business undertakings.
•A healthy capital market consisting of knowledgeable intermediaries promotes stability in
values of securities representing capital funds.

•Primary market could be a marketplace for new issue or new money claims. Thus It is
conjointly known as New Issue Market. The first market deals with those securities that are
issued to the general public for the primary time.

•The commonest technique of raising capital by new firms is through sale of securities to the
general public. It is known as public issue.

•When associate degree existing company desires to lift further capital, securities are initial
offered to the present shareholders on preventative basis. It is known as rights offering.

•Private placement could be a method of commercialism securities in private to little cluster

of investors.

•Secondary market could be a marketplace for secondary sale of securities. In alternative

words, securities that have already seasoned the new issue market are listed during this
market.
•The secondary market provides liquidity to money instruments that are already issued in
primary market. During a securities market, purchases and sales of securities whether or not
of presidency or semi- government bodies or alternative public bodies and conjointly shares
and debentures issued by non-public joint stock firms are done.

•Only those shares that are capable of listing in some purported stock exchanges are totally
signed in primary market.

•Capital markets facilitates massive scale nationwide mobilisation of savings a nd enormous

quantity of funds.

•In India, a demat account, the abbreviation for dematerialized account, could be a form of
banking account that dematerializes paper-based physical stock shares. The dematerialized
account is employed to avoid holding physical shares: the shares are bought and
oversubscribed through a stock broker.

2 MARKS QUESTIONS

1) What is capital market?

 ………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………
2) What is D-mat account?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………
3) What is capital mobilization?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………
4) State any two functions of capital market?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………

5 MARKS QUESTIONS

1) State the functions of capital market?

2) Explain the role of stock exchange in capital mobilization?
3) Write a note on D-mat account?
4) State the Differences between capital market and money market?

SUGGESTED BOOKS/ARTICLES

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill
3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl
4. M Y Khan: Indian Financial System, TMH
5. E Gardon & K Natarajan: Financial Markets & Services.
 Unit 7

REGULATORY INSTITUTIONS

Introduction.RBI – Organization – Objectives – Role and Functions.The Securities and

Exchange Board of India – Organization and Objectives – IRDA and its functions.

1. Meaning And Significance:

2. Need / Importance:
3. Types:
4. Organization Of RBI:
5. Objectives:
6. Functions:
7. Main Functions:
7. Supervisory Functions:
8. Promotional Functions:
9. Methods Of Credit Control
10. Quantitative Methods:
11. Securities And Exchange Board Of India (SEBI)

Introduction.RBI – Organization – Objectives – Role and Functions.The Securities and

Exchange Board of India – Organization and Objectives – IRDA and its functions.

Objective: To understand the role of RBI and its functions. You also understand and lear n
about the role of SEBI who is a regulatory body of companies whose shares are dealt in the
market. You learn also about IRDAand its functions.

REGULATORY INSTITUTION
7.1 Meaning and Significance: The institutions which control and monitor the over all
activities or functions of financial institutions operating in the country like Banking
institutions, capital and money market, etc., are known as Regulatory institution.

7.2 Need /Importance

Economic Growth: Adequate and proper regulatory frame work shall be put in place for the
process of smooth financial growth in the country otherwise economic growth will be
effected. Promoting savings and investments in the country: The financial services industry
besides putting savings into investment helps economic activities to take place without much
difficulty. Provision of efficient financial services: The efficiency with which the various
institutions in the financial market render services such as bankers, credit card companies,
insurance companies, stock brokers etc. Depends upon functioning of the regulatory frame
work. Investors’ protection: Regulations of many types are required for safeguarding and
sustaining the interest of the investors especially the small and individual investors.

7.3 Types

Institutional regulations : These regulations are those that flow from regulatory institutio n
(RBI & SEBI) setup in a financial market by the government with an objective of promoting
healthy development of financial system in the country.

Investors’ regulations: Regulations that are designed to protect the interest of the small and
individual investors are called investors regulations. Investors’ regulations main objective is
to create confidence among the investors.

Internal regulations: Regulations regarding the internal management of financial institutions

regarding fund management, capital adequacy, liquidity, and solvency are called as interna l
regulations.

Self Regulations: In addition to the regulations framed by the RBI etc. There are self
imposed regulations for ex: the lead managers/ team leaders, stock brokers, etc. Have their
own regulations for the proper development.
Legislative Regulations: These are regulations brought out by the government form time to
time keeping in mind the need for overall development of the economy, ex: Banking
regulation Act of 1949, securities, contracts and regulation Act of 1972, etc.

4. Organization of RBI

1. It was started functioning as a share holder bank with a paid up capital of 5crore
divided into 5lakhs shares of Rs.10/- each.
2. The issue was over subscribed by 100% and all the major policy decisions were
dominated by British rulers.
3. After independence RBI was nationalized with a view to secure monitor cooperatio n
between government and the banks and it was nationalized by means of passing an
Act in 1948 and it began to function as a government owned central bank from
1.1.1949 by giving compensation to the private share holders at the rate of Rs.118 for
every 100.
4. Nationalization was done with a view to follow international attitude towards state
ownership of central banks.
5. Even though it has been nationalized it retaining all independent organization and
there is no interference of the government in day to day affairs of the bank.

5. Objectives

1. RBI functions within the framework of mixed economic system with regard to
framing policies to maintain close and continuous relation between government
and RBI.
2. The preamble of RBI Act of 1934 states that RBI is required to regulate the issue
of bank notes to maintain the reserve and to control the monetary system of the
country.
3. The other objectives of RBI are:
• To maintain monetary stability
• To maintain financial stability
• To maintain stable payment system
• To promote the development of financial infrastructure
• To ensure the credit allocation to all the sectors
• To regulate the over all volume of money
7.6 Functions

1. RBI discharges all the functions of central bank. Its main function is to maintain and
regulate monetary mechanism by means of controlling the currency and credit system in
India.
2. It enjoys complete monopoly of note issue it issues notes of all types of denominations
except one rupee and coins.
3. It is also banker to the scheduled banks and maintain stability in the external value of the
currency and undertake the responsibility of providing financial assistance to the
economic development and publishes various matter connecting on the economy,
currency and undertaken the responsibility of providing financial ass istance to the
economic development and publishes various matter connecting on the economy.

7.7 Main Functions

Central banking functions:

RBI Governor RaghuramRanjan (2014)

1. Monopoly of Note issue: RBI has the sole right to issue notes in the country under Sec 22
of the RBI Act. RBI has the monopoly right to issue currency notes except 1 rupee notes and
coins which is the responsibility of the central government. According to Sec 22 of the RBI
Act, the assets of issue department against which banks notes are issued comprise of gold
coins, bullions, foreign securities and bills of exchange and promissory notes payable by the
bank. There are 2 system of notes issue namely: 1. Proportional reserve system. 2. Minimum
reserve system.

To commence with RBI started with proportional reserve system of note issue accordingly
the issue had to cover 40% of the total note issue in the form of gold and foreign securities.
This system of note issue continued up to 1956 when the RBI amended its Act 1957 this
resulted in shift from the proportional system to the minimum reserve system the bank is at
present issuing note on the bases of minimum reserve system.

1. Banker to the government:

RBI transact banking business of central and state government as obliga tory function of the
bank as per sections 20, 21, 21A are the RBI Act accordingly it undertakes to accept money
makes payments and also carries out their exchange remittance and other banking operations
including the management of public debt as per the agreements with the government without
any remuneration for their service.

RBI of India authorized to issue of new loans and treasury bills on behalf of the central and
state government. The bank sells treasury bills whenever necessary to provide short term
finance to the government and to absorb any excess money in the money market.

RBI authorized to make ways and means advances to the central and state government these
advances are re-payable not later than 3 months from the date of issue and granted witho ut
any collateral security. It also acts as the agent of the government in its transactions with IMF
and IBRD.

2.Advisor to the government: RBI advises the government of a wide range of economic
issues it includes banking and financial matter resource mobilization planning etc. RBI advice
was sought on certain aspects of the formulation of 5 year plans. It also guides the
government in connection with the flotation of new loans small saving proposals, agricultural
credit, industrial finance, International finance and research and statistical organization for the
proper functioning of the government.

3. RBI acting as an agent of the governme nt: As an agent it collects taxes and other dues
on behalf of the government, floats public loans to the government manages the public debts
and represents the government in the international bodies.

4. As a financial advisor: It advices the government on all financial matters as it has very
close link with the money market. It can keep huge balances of the government without
paying the interest and management of the debts. The central bank is allowed some special
remuneration.

5. Central bank as a banker’s bank:

As a bankers bank it acts in 3 capacities:

• As a custodian of money reserves: All commercial

bank required to keep certain percentage of their deposit
with central bank in the form of money reserves. As it is a
statutory obligation that’s why it is called as central bank
of India as reserve bank.
• As a lender of last resort: The centralizing of money reserves of the commercia l
banks in its hands has enabled the central bank to serve as the lender of the last resort
for commercial bank.
• As a bank of clearance : Central bank acts as the clearing house for the commercial
bank. It helps in setting outstanding balances between commercial bank. Inter-bank
claims are settled by mere transferring from one bank to another bank maintained in
the book of central bank without actual payment of money by 1 bank to another
• Acting as a controller of credit: RBI has powers to influence the volume of credit
created by banks in India. It controls credit expansion by using bank credit policy,
open market operation, and variable reserve ratio.

7. Supervisory Functions

RBI performs certain non- monetary functions in the nature of supervision of banks and
promotion of sound banking in India. RBI has wide power of control over commercial bank
and cooperative bank in relation to licensing, establishment, branch expansion, management
and methods of working, amalgamation etc. RBI carries out periodical inspections on the
banks and call for returns and necessary information. The supervisory functions of RBI have
helped in improving banking standards in India.

8. Promotional Functions

In recent years RBI performs variety of development and promotional functions which are
considered to be outside the normal functions of RBI. They include promotion of banking
habit among the general public extending banking facilities to the rural and un banked India
establishment and promoting of specialized institutions like UTI, SFC, RBI developed
cooperative credit movement to encourage savings and to eliminate money lenders etc.

7.9 Methods of Credit Control

Quantitative Method:

• Bank rate policy

• Open market operations
• Variable reserve ratio
Qualitative Method:

• Regulation of consumer credit

• Regulation of margin requirement
• Control through directives
• Rationing of credit
• Moral request
• Direct action
• Publicity

7.10 Quantitative Methods

1. Bank rate policy: The bank rate is the official / minimum rate at which the centra l
banks of a country re-discount the eligible bills of exchange of a commercial bank and
other financial institutions for providing short term loans to them against approved
securities. In other words, it is a rate at which RBI lends the loans to the commercia l
banks. By offering bank credit RBI can control the circulation of money in the hands
of the banks and customers.
2. Open market operations : Deliberate and direct buying and selling of securities and
bills in the money market by the RBI on its own initiative called as open market
operations and influence the volume of credit and control the circulation of money.
3. Variable reserve ratio: In every country commercial bank keep a certain portion of
their money reserve with a central bank because of legal requirements by altering this
ratio. Central bank can control the supply of money.
Qualitative Methods:

1. Regulation of consumer credit: The credits of banks of purchase the durable

consumer goods. Such as radio, tele vision etc is called as consumer credit. The RBI
can regulate the type of goods, methods and purpose of consumer credit depending
upon the inflationary and deflationary condition.
2. Regulation of margin requirement: Under this method RBI controls the credit by
prescribing the margin (difference between loan value and security value) with the
commercial bank & other lending institution must maintain for advance granted by
them against shares, stocks & goods.
3. Control through directives: Under this method the central bank controls bank
advances by issuing directives to the commercial banks in respect of their lending
operations from time to time.
4. Rationing of credit: It is a method of controlling and regulating the purpose for which
credit is granted by commercial banks.
5. Moral request: It implies the persuasion and request made by the central bank to the
commercial bank to follow the general monetary policy of the RBI.
6. Direct Action: It is widely used method. It implies correction and punishable measures
taken by the RBI against commercial banks and other institutions which are borrowing
excessively for the central banks.
7. Publicity: Under this method RBI gives wide publicity to what is good and what is bad
in the credit system of the country and includes publishing the statement of
commercial banks, assets and liabilities.

7.11 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Introduction

It was started in India in 1988 through an executive resolution passed by the government of
India subsequently it became autonomous body as per the SEBI Act of 1992 which control all
the capital market transactions.

Organization

SEBI is managed by statutory board consisting of 6 members. The chairman and 2 members
are to be appointed by the Central government. Member is to be appointed by the reserve
bank and Members having experience of securities market to be appointed by the central
government. It has 6 operational departments:

• Primary market department: It deals with all policy matters and regulatory issues.
• Issue management and intermediaries department: It deals with matters like
registration, regulation and monitoring of issues related to intermediaries.
• Secondary market department: It looks after all matters related to secondary market
administration of stock exchanges etc.
• Institutional investment department: It deals with framing rules and regulations
relating to foreign institutional investors, mutual funds etc
• Legal department: It deals with the legal matter of the SEBI.
• Investigation department: It deals with market research activities of SEBI.

Objectives:

• To protect the interest of the investors in securities.

• To promote the development of securities market
• To regulate the securities market.
• For matters there with are incidental there to.
• Since its inception SEBI has been working, targeting the securities and is attending to
the fulfillment of its objectives.
• To improve the capitalization requirements, reducing the risk of credit.
• To introduce comprehensive regulatory measure, code of conduct for brokers.
• To make the dealing insecurities both safe and transparent to the investors.

Functions:

Section 11 of the SEBI Act specifies the functions as follows:

Regulatory functions:

• Regulation of stock exchange and other self regulatory organization in the country.
• Registration and regulation of stock brokers.
• Registration and regulation of various investment scheme including mutual funds.
• Prohibition of fraudulent and unfair trade practices in securities market.
 • Prohibition insider trading in securities market regulation acq uisition of shares
through mergers and acquisitions.

Development functions:

• Promote investors education to increase their participation.

• Training of intermediaries.
• Conducting research and publishing information.
• Promoting self regulatory organizations.
Powers:

SEBI has been vested with following powers in order to protect the interest of the investors.

• Power to call for any information / explanation from recognized stock exchange / their
members at anytime.

• Power to call periodical returns from stock exchange.

• Power to direct enquiries into the functioning of stock exchange.
• Power to amend bylaws of recognized stock exchange.
• Power to control and regulate stock exchange.
• Power to over see listing of securities.
• Power to grant registration to market intermediaries and controlling their activities.
• Power to levy fees or other charges for carrying out regulatory activities.
• Granting license to dealers in securities market.

KEY WORDS/ GLOSSARY

• The institutions which control and monitor the over all activities or functions of
financial institutions operating in the country like Banking institutions, capital and
money market etc. Are known as Regulatory institution.
• Regulations that are designed to protect the interest of the small and individual
investors are called investors regulations.
• Regulations regarding the internal management of financial institutions regarding
fund management, capital adequacy, liquidity, and solvency are called as internal
regulations.
• RBI functions within the framework of mixed economic system with regard to
framing policies to maintain close and continuous relation between government and
RBI.
• Present RBI Governor is Raghu Ram Rajan.
• RBI is a banker bank.
• RBI of India authorized to issue of new loans and treasury bills on be half of the
central and state government. The bank sells treasury bills whenever necessary to
provide short term finance to the government and to absorb any excess money in the
money market.
• RBI advises the government of a wide range of economic issues it includes banking
and financial matter resource mobilization planning etc…
• RBI authorized to make ways and means advances to the central and state government
these advances are re-payable not later than 3 months from the date of issue and
granted without any collateral security. It also acts as the agent of the government in
its transactions with IMF and IBRD.
• Central bank acts as the clearing house for the commercial bank. It helps in setting
outstanding balances between commercial bank.

• The bank rate is the official / minimum rate at which the central banks of a country re-
discount the eligible bills of exchange of a commercial bank and other financial
institutions for providing short term loans to them against approved securities. In other
words, it is a rate at which RBI lends the loans to the commercial banks. By offering
bank credit RBI can control the circulation of money in the hands of the banks and
customers.
• Central bank can control the supply of money.
• Rationing of credit it is a method of controlling and regulating the purpose for which
credit is granted by commercial banks.
• SEBI was started in India in 1988 through an executive resolution passed by the
government of India subsequently it became autonomous body as per the SEBI Act of
1992 which control all the capital market transactions.
2 MARKS QUESTIONS

1) What is RBI?
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2) What is IRDA?
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3) State any two objectives of regulatory institutions.
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4) What is SEBI?
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5) State any two objectives of SEBI.
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5 MARKS QUESTIONS

1) Explain the organization structure of RBI?

2) What are the functions of RBI?
3) State the objectives of SEBI?
4) What are the functions of IRDA?
5) Write a note onSEBI?
 SUGGESTED BOOKS/ARTICLES

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill
3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl
4. M Y Khan: Indian Financial System, TMH
5. E Gardon& K Natarajan: Financial Markets & Services.
 Unit 8
FINANCIAL SERVICES
Structure

1. Introduction
2. Meaning
3. Choices of Economic Services
4. Importance of Economic Services
5. Factoring
6. Partitioning Mechanism
7. Steps In Partitioning
8. Services rendered with difficulties
9. Features of Leasing
10. Venture Capital
11. Features of Venture Capital

Introduction – Meaning – Features – Importance. Types of Financial Services – factoring,

leasing, venture capital, Consumer finance; housing& vehicle.

Objective of the study

Having studied financial markets, you are learning financial services and their role in the
economic development of the country. India is turning from manufacturing to service oriented
industries.

8.1 Introduction
The Indian financial services trade has undergone a change since 1990. Throughout the late
seventies and eighties, the Indian financial services trade was dominated by industrial banks
and various service institutions that cater to the requirements of the Indian trade. Infact the
capital market vie a secondary role alone. The economic relaxation has brought in associate
extremely complete transformation inside the Indian financial services trade. Before the
economic relaxation, the Indian financial service sector was defined by such plenty of things
that restarted the enlargement of this sector. Variety of the many factors were:

(i) Excessive management inside the sort of rules of interest rates, financial rates etc.
(ii)Too many controls over the prices of securities beneath the erstwhile controller of capital
issues.

(iii)Non-availability of economic instruments on associate oversize scale additional as on

utterly totally different varieties

(iv) Absence of freelance credit rating and credit analysis agencies.

(v) Strict rules of the exchange market with too many restrictions on foreign investment and
foreign equity holdings in Indian companies.

(vi) Lack of information regarding international developments inside the money sector.

(vii) Non-availability of debt instruments on large scale.

However, once the economic relaxation, the full financial sector has undergone a sea-saw
modification and presently we tend to tend to are witnessing the emergence of recent
financial merchandise and services nearly every day. Thus, this scenario is defined by
financial innovation and financial ability and before going deep into it, it's imperative that one
got to understand the meaning and scope of economic services.

2. Meaning

In general, every kind of activities that are of a financial nature could be brought beneath the
term ‘financial services’. The term “financial services” in associate extremely broad sense
implies that “mobilizing and allocating savings”. Thus, it includes all activities involved inside
the transformation of saving into investment. The ‘financial service’ could also be referred to
as ‘financial intercession’ financial intervention may well be a way by that funds are
mobilized from associate oversize style of savers and build them on the market to any or all
people that are in wish of it and considerably to company customers. Thus, financial services
sector may well be a key area and it's very necessary for industrial developments. A well-
developed financial services trade is completely necessary to mobilize the savings associated
to allot them to various investable channels and thereby to plug industrial development in an
extremely country.

3. Choices of Economic Services

Financial services have certain basic choices as stand below:

(i)Customer-oriented: like all various business financial business is in addition a customer-

oriented one. The consumer is that the king and his wants ought to be happy absolutely got to
be basic tenent of any financial business. It involves turning out with innovative financial
merchandise acceptable to varied risk-return wants of shoppers. Above all, there got to be
timely delivery of services.

(ii)Intangibility: financial services are intangible and then, they can not be standardized or
reproduced inside a similar kind. Hence, there is a necessity to possess a documentation of
integrity, reputation, good company image and timely delivery of services.

(iii)Coinciding performance : however an added feature is that every production and supply
of economic services ought to be compelled to be performed at a similar time. Therefore,
every suppliers of services associated customers got to have an honest rapport, clear-cut
perception and effective communication.

(iv)Dominance of human component: financial services are dominated by human part and
then, they're people- intensive. It involves competent and skillful personnel to push the quality
financial merchandise. But, quality cannot be homogenized since it varies with time, place
and consumer to consumer.

(v)Perishability: financial services are quickly consumed and thus inventories cannot be
created. There is a larger wish for leveling demand and supply properly. In various words,
mercantilism and operations got to be closely inter-linked.

8.4 Importance of Economic Services

Financial services cater to the requirements of every individual and company customers. In
reality the eminent functioning of any economy depends upon the vary of economic services
offered by vendors of services. Financial services are typically made public to include not
alone the provision of a financial service but together sale of a financial product or every. The
importance of economic services typically accomplished from the following:
(i)Economic growth: The money business mobilizes the savings of the oldsters and channels
them into productive investment by providing varied services to the oldsters. In fact, the
economic development of a nation depends upon these savings and investment.

(ii) Promotion of savings : The money business promotes savings inside the country by
providing transformation services. It provides liability, and and size transformation service by
providing large loans on the concept of various small deposits. It together provides maturity
transformation services by giving short claim to savers on their liquid deposit and providing
long loans to borrowers.
(iii)Capital formation: the money business facilitates capital formation by rendering varied
capital market mediator services. Capital formation is that the very basis for process. It is the
principal mobilize, of surplus funds to finance productive activities and then, it promotes
capital accumulation.

(iv)Provision of liquidity : The money business promotes liquidity inside the system by
allocating and reallocating savings and investment into varied avenues of economic activity.
It facilitates easy voice communication of economic assets into liquid financial at the
discretion of the holder of such assets.

(v)Money intercession: The money business facilitates the operate of intervention betwee n
savers and investors by providing how and a medium of exchange and by endeavor
innumerable services.

(vi)Contribution to value : The contribution of economic services to GNP has been occurring
increasing year once year in most countries in recent times.

(vii)Creation of employme nt opportunities : the money business creates and provides

employment opportunities to voluminous of us all over the world.

8.5 Factoring
Factoring refers to the tactic of managing the sales ledger of a consumer by a financial
service company. In various words, it's a briefing beneath that a financial mediator assumes
the credit risk inside the assortment of book debts for its purchasers. The full responsibility of
aggregation the book debts passes on to the difficulty. His services are typically compared to a
del- credre agent international organization agency undertakes to collect debts, monitors the
sales ledger and provides finance against debts. Thus, he provides style of services except for
finance.

Factoring is in addition made public as a relationship between the financial institution or

banker (factor) and a business (the supplier), promoting product or providing services to trade
customers (the customers) whereby the difficulty purchases book debts e ither with or whereas
not recourse to the supplier and in relationship thereto management credit extended to the
consumers and administers the sales ledger of the supplier.
6. Partitioning Mechanism

Factoring business originates from credit sales. The foremost operate of partitioning services
is that the conclusion of credit sales. The difficulty enters into the idea of credit sales once the
sale dealings is completed. Principally three parties are involved inside the partitioning
transactions-the vendee, the seller and conjointly the difficulty.

7. Steps In Partitioning

(A)The vendee negotiates with the seller the terms of shopping for materials anreceives
delivery of product with invoice associated directions by the seller to create payment on the
day of the month or gets an extension of it slow.

(B)The vendor sells the product to the client. He sends copies of invoice, delivery note and
directions to create the payment to the difficulty. The seller receives 80-90% of the price of
product ahead from the difficulty and conjointly the balance minus the factor’s charges on the
maturity of the debts.

(C)The difficulty enters into an agreement with the seller for rendering issue services. On
receipt of copies of sale documents, he advances 80-90% of the price of the invoice. Then he
want gather the amounts due from the client and remits the balance minus his charges to the
seller.

8. Services rendered with difficulties

The difficulty in rendering services (i) body, (ii) assortment, (iii) finance, (iv) Credit
management and credit protection, and (v) informative services.

Administrative services

The issue manages the trade debts of a supplier. Throughout this association, he renders the
following services:

I. Maintains client’s sales ledger.

II. Keeps the invoice and collects the amounts promptly once they become due.
III. Relieves the seller of the chief burden.
IV. Offers periodic reports to the patron on this standing of his assets.
V. Maintains a consumer wise record of payments contact a quantity of it slow.

A lease is an agreement beneath that a company or a firm, acquires a right to create use of
a capital and like machinery, on payment of a prescribed fee referred to as “rental
charges”. The renter cannot acquire any possession to the and, but he can use it and have
full management over it. He's foreseen to induce all maintenance charges and repairing
 and operational costs. In countries similar to the U.S.A., the U.K and Japan
instrumentality leasing is extraordinarily fashionable and nearly twenty fifth of plant and
instrumentality is being supported by leasing companies. In India conjointly, many
financial companies have started instrumentality leasing business. Industrial banks have
together been permissible to carry on this business by forming subsidiary companies.

8.9 Features Of Leasing

• 100% finance facility on the market beneath leasing.

• It may well be a tax saving device.

• It provides the tax benefits on rental to the renter.

• It provides the tax benefits to the less on depreciation.

• Leasing is provided for a selected quantity of it slow.

• it's established through a deal or agreement.

8.10 Venture Capital:

A capital is another technique of finance inside the sort of equity participation. A

speculator finances a project supported the potentialities of a current innovative project.
It's in distinction to the quality “security based totally financing”. Lush through is given to
new ideas or technological innovations. Finance is being provides not only for ‘start-up
capital’ but together for ‘development capital’ by the money intermediaries.

8.11 Features Of Venture Capital

• Risk capital is provided by specialised financial institutions.

• Risk capital is provided inside the sort of capital.

• Rs 10 crores is provided inside the sort of capital.

• The number of capital is for 10 years.

• Risk capital operates through capital agreement.

•Risk capital funds are provided implies that of initial stage finance and later stage

finance.

• The banker not alone provides the finance but together provides the group action and
mercantilism facilitate.

Issues of capital

• Awareness level is low

• Risk capital may well be a replacement conception.

122
 • State and central government are not encouraging as per the expected lines.

• The conception of capital is extraordinarily risk connected activity.

• Conversion of information into product is extraordinarily difficult in India owing to

corruption, discrimination and favourism.

Summary

In this chapter the styles of economic services– factoring, leasing and venture capital were
discussed. These economic services are discussed in detail for clear understanding of the
concepts.

Keywords/ glossary

•The economic relaxation has brought in associate extremely complete transformation inside
the indianfinancial services trade.

•The consumer is that the king and his wants ought to be happy absolutely got to be basic
tenent of any financial business.

•Money services are intangible and then, they can not be standardized or reproduced inside a
similar kind.

•The contribution of economic services to worth has been occurring increasing year once
year in most countries in recent times.

•Money services are quickly consumed and thus inventories cannot be created. There is a
larger wish for leveling demand and supply properly.

•The money business facilitates capital formation by rendering varied capital market mediator
services.

•The money business creates and provides employment opportunities to voluminous of us all
over the world.

•Resolution refers to the tactic of managing the sales ledger of a consumer b y a financial
service company.

•A lease is an agreement beneath that a company or a firm, acquires a right to create use of a
capital and like machinery, on payment of a prescribed fee referred to as “rental charges”.

• Leasing is established through a deal or agreement.

• Lease has two parties specifically renter and lesser.

• Renter may well be a vendee and lesser frequently a banker.

• Risk capital is provided by specialised financial institutions.

•The banker not alone provides the finance but together provides the group action and
mercantilism facilitate.
TWO MARKS QUESTIONS

1) What are financial services?

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2) State any two objectives of financial services.
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3) What is leasing?
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4) What is factoring?
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5) What is venture capital?
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5 MARKS QUESTIONS

1) State the objectives of financial services?

2) What are the Importance of financial services?
3) Write a note on venture capital?
4) What are the types of financial services?
5) Write a note onleasing?
 SUGGESTED BOOKS/ARTICLES

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill
3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl
4. M Y Khan: Indian Financial System, TMH
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