1

2
 ABOUT ME
ü Mentoring, guiding and teaching
UPSC students since 8 years

ü Polity, Indian Economy, Essay,

Internal Security & Post
Independence India
ü Teaching Political Science Optional

GS by Kapil Sikka (https://t.me/kapillive)

@kapilsikkaa
3
• Comprehensive
Coverage

• Must for UPSC/SSC/

Banking Exams

• Doubts Clearing

• PDFs
4
 Chapter -11

Indian Financial
Market

5
 Contents of Chapter
• Indian Money Market
• Mutual Funds

6
 What is Financial Market
• Transaction between Fund Surplus and Fund Scarce entity

• On Interest or Dividend basis

• Organised vs Unorganised

• Long term vs Short Term

7
 Financial
Market

Short Term Long Term

Money Capital
Market Market

above 364
364 days
days

Organized Unorganized

8
 Money Market
• Short term market

• Money is core aspect here

• It is traded between individuals or financial institutions, banks,

government etc.

• The exchange is done on a rate known as discount rate

• Discount rate depends upon availability of funds

9
 Discount Rate
• The discount rate refers to the interest rate charged to the
commercial banks and other financial institutions for the loans

10
 Money Market
• Borrowings may be or may not be collateral free.

• financial assets having quick conversion quality into money and

carry minimal transaction cost are also traded.

• Hence the liquidity aspect is very high here

• This can work in both organized and unorganized way

11
 Why Money Market
• Easy availability of money

• Supports Income Generation

• Supports growth

• Supports day-to-day shortfalls of working capital.

• Supports Capitalistic goals

• Scarcity of Funds during lockdown/non availability can push a system into

distress
12
 Money Market in India
Three decades old

Earlier was serving Government only

Chakravarthy Committee (1985) first time, underlined the need

the Vaghul Committee (1987) laid the blue print

Existing in Both Organized and Unorganized way

13
Unorganised Money Market
Since centuries

Not regulated by the Government

Recognized by the Government

Since 1997 NBFCs included into organized

14
 Types of Unorganised Money Market
• Unregulated Non-Bank Financial Intermediaries

• Chit funds,
• Nidhis (operate in South India, which lend to only their members)
• Loan companies.
• Interest rates are exorbitant (i.e., 36 to 48 per cent per annum)
• Exploitative in nature
• Does not benefit Economy

15
https://economictimes.indiatimes.com/analysis/are-chit-funds-for-you-tips-to-gain-
from-them/articleshow/19879120.cms
16
 Indigenous Bankers
• Receive deposits and lend money in Individual Capacity or
Private Funds
• Gujarati Shroffs: Kolkata, Mumbai
• Multani or Shikarpuri Shroffs: Mumbai, Kolkata, North Eastern
India.
• Marwari Kayas: Gujarat, Mumbai and Kolkata.
• Chettiars Chennai and at the ports of southern India.

17
 Money Lenders
• Localized form of money market in India

• Works in exploitative way.

• The professional money lenders who earn income through

interest.

• The non-professional money lenders who lend their money as a

subsidiary business.

18
 Why unorganized market

• Under-developed money market

• Lack of penetration of organized sector

• Need based borrowing

• Restrictive System of lenders

19
 Organized Money Market
• Since 1980’s 8 instruments have been adopted and utilized
• Treasury Bills
• Certificate of Deposit
• Repo and Reverse Repo
• Commercial Paper
• Commercial Bill
• Call Money Market
• Money Market Mutual Fund
• Cash Management Bill
20
 Treasury Bills
• Organized only in 1986.

• Used by Central Government

• To meet short-term liquidity

• Upto the period of 364 days.

• Provide short term cushion to Govt

• Investment avenues for Banks

• Fulfils CRR and SLR Conditions

21
 Certificate of Deposit
• Certificate of Deposit (CD) is a negotiable money
market instrument and issued in dematerialised
form or

• as a Promissory Note against funds deposited at

a bank or other eligible financial institution for a
specified time period.
22
• Banks have the freedom to issue CDs depending on their funding
requirements

• CDs may be issued at a discount on face value. Banks / FIs are also
allowed to issue CDs on floating rate basis

• CDs can be issued to individuals, corporations, companies (including

banks and PDs), trusts, funds, associations, etc. Non-Resident Indians
(NRIs)

• The maturity period of CDs issued by banks should not be less than 7
days and not more than one year, from the date of issue.
23
Certificate of Deposit

24
Repo and Reverse Repo

LAF

Reverse.
REPO
REPO
25
• Sub-section (12AB) of section 17 of the RBI Act, 1934,
defines
• "repo" as "an instrument for borrowing funds by selling
securities of the Central Government or a State Government
or of such securities of a local authority as may be specified
in this behalf by the Central Government or foreign securities,
with an agreement to repurchase the said securities on a
mutually agreed future date at an agreed price which includes
interest for the funds borrowed".

26
Participants & Primary Dealers

27
WHAT IS REPO RATE

FUNDS

SECURITIES & COLLATERALS

28
WHAT IS REVERSE REPO RATE

SECURITIES & COLLATERALS

FUNDS

29
• Repurchase Options or Repo, is a money market instrument, which
enables collateralised short term borrowing and lending through
sale/purchase operations in debt instruments.

• Bank A is taking a loan of Rs.100 Crores from RBI for 1 day and
putting Government Bonds of same value as security with a promise
that they will buy these government securities back after 1 day.

• After one day, Bank A return (Rs.100 Crores + interest amount) to RBI
and get back his securities.

• Repo is thus, a money market instrument combining elements of two

different types of transactions viz., lending-borrowing and sale-
purchase.

30
• The interest rate at which the RBI borrows money from banks for
the short term is defined as Reverse Repo Rate.

• The Reverse Repo Rate helps the RBI get money from the banks
in times of need. In return, the RBI offers attractive interest rates
to them.

• The banks also voluntarily park excess funds with the central bank
as it provides them with an opportunity to earn higher interest on
surplus money lying idle.

31
 Urijit Patel Committee Recommendations

• Term Repo & Term Reverse repo

• A term repo is a repo of more than one-day

duration.

32
• A term repo is a repo of more than one-day duration.

• The word term denotes longer period (7, 14, 28).

• Interest rate is determined through the auction (above repo)

• the loan seeking bank should submit securities to the RBI.

• Since the loan is for more duration, the bank should give
higher interest than the repo rate.

33
 Reverse
Repo
Repo

High Rate

Low Rate Regulates

Liquidity

Sucks Liquidity Regulates

Inflation

34
Increase in Decrease in
Repo Repo

Less More
Borrowing Borrowing

Reduces Increase
Money Money
Supply Supply

Reduces Increases
Inflation Inflation

35
 Commercial Papers
• Commercial paper, also called CP, is a short-term debt instrument issued
by companies to raise funds generally for a time period up to one year.
• It is an unsecured money market instrument issued in the form of a
promissory note and was introduced in India for the first time in 1990.
• CPs have a minimum maturity of seven days and a maximum of up to
one year from the date of issue
• They are typically issued by large banks or corporations to cover short-
term receivables and meet short-term financial obligations, such as
funding for a new project.
• Good credit rating from an agency approved by the RBI is essential ( like
CRISIL, ICRA)

36
 Commercial bills
• These are instruments issued by banks that finance invoices raised by
a company.
• Banks issue advance payment in lieu of invoices that show sale of
goods.
• This is an instrument that comes into effect only after a sale has
taken place.
• This is an instrument used by banks to accept and/or discount the
bills of a customer.
• Commercial bills are issued for financing needs of medium term.

37
38
 Difference between Commercial Paper and
Commercial Bill?
• Commercial paper and commercial bill are both financial instruments
used by banks.
• Commercial paper is used by banks to raise finances for a short time
period. The buyer gets CP at a discounted rate, while he gets face
value on maturity.
• Commercial bill is an instrument that helps companies to get advance
payment for the invoices they raise after making sales to their
customers.
• Commercial paper is used by banks to meet their short-term
obligations, while commercial bills help companies to get money in
advance, for sales they make.
39
 Call Money Market
• Inter Bank money market
• Short term funding needs are fulfilled
• The loans in the call money market are very short, usually lasting
14 days .
• These call money market loans are often used to help banks
meet reserve requirements.
• Borrowing takes place against securities or without securities

40
 Borrowers and Lenders
All scheduled commercial banks, co-operative banks

Only Lenders
LIC, GIC, Mutual Funds, IDBI and NABARD

41
 Money Market Mutual Fund
• It was introduced/organised in 1992
• Provides short-term investment opportunity to individuals.
• Since 2000 under SEBI
• RBI helps in fighting with liquidity problems in mutual
fund industry also.
• commercial banks, public and private financial institutions
and private sector companies can set up MFs

42
43
 MFs
• Best wealth creation instruments

• Part of Capital Market as well (hence both SEBI and RBI)

• SEBI acts as first wall of defense

• Subjects to market risks (no fixed returns)

44
45
46
 Net Asset Value
• Net asset value (NAV) represents a fund's per unit market
value.

• This is the price at which investors buy fund units from

a fund company or sell it back to the fund house.

• It is calculated by dividing the total value of all the assets

in a portfolio, minus all its liabilities

47
48
 Exchange Traded MFs
• ETFs are a mix of open-ended and close-ended schemes.

• Investments in ETFs are highly liquid as they are held through a

Demat account and can be traded on a stock exchange like direct
equity shares.

• Also, being passively managed, they have lower expense ratios in

comparison to actively managed mutual funds.

49
 Advantages and Disadvantages
• Diversification of portfolio but Risks looms

• Liquidity but return issues

• government-backed regulatory help,

• Easy for investors

• No expertise required
50
51
52
 SBI Discount and Finance House of India Limited
• Set up in April 1988 by the RBI jointly with the public sector banks
and financial investment institutions (i.e., LIC, GIC and UTI)
• Now owned by SBI
• is a Primary Dealer, an institution created by RBI to support the book
building process in Primary Auctions of Government securities and
provide necessary depth and liquidity to the Secondary market in
Government Securities.
• Operating in ‘two way’ (as a lender and borrower) its objective is to
provide needful liquidity and stability in the financial market of the
country

53
 Capital Markets
• long-term financial market the ‘capital market’.
• to raise long-term money (capital), [365 days and above]
• Helps in Creation of productive assets
• Result of Industralization
• Banks are the primary pillars of capital market.
• Later on Insurance, Mutual Funds and Stock Markets were
added
• A vibrant capital market is sign of strong economy
54
 India and Capital Markets
• India’s long dream of Industrialization

• Capital market was well required for growth

• Hence, India’s market was established to cater growing needs

of country

• Various financial institutions were established in the country

55
 Project Financing
• Project finance is the funding (financing) of long-term
infrastructure, industrial projects, and public services.

• India had very low saving rate after independence

• Banks were deficit of funds

56
 Financial Institutions
• All India Financial Institutions (AIFIs)

• Specialized Financial Institutions

• Investment Institutions

• State Level Finance Institutions

57
All India Financial Institutions (AIFIs)
• FIs are IFCI (1948); ICICI (1955); IDBI (1964); SIDBI (1990) &
IIBI (1997)
• ICICI was a JV of RBI, some foreign banks and FIs, rest 3 were
Public Sector
• Public sector FIs were funded by central Government.
• AIFIs had fixed rate of interest
• Banks overtook them

58
 Narsimhan Commitee
• All India Development Banks (AIDBs).
• In 2000, ICICI reverse merger (when an elder enterprise is
merged with a younger one) with the ICICI Bank [no obligation
of project financing
• In a similar move, the IDBI was reverse merged with the IDBI
Bank in 2002 and the second AIDB emerged. [still the
obligation of carrying its project financing duties.]
• Merger IFCI and IIBI with the PNB created Universal Bank
• 4 financial institutions operating in the country as AIFIs
regulated by the RBI are the NABARD, SIDBI, Exim Bank and
the NHB. 59
Specialized Financial Institutions (SFIs)
• To finance risk and innovation in the area of industrial expansion
• Acted as India’s venture capital funding.
• IFCI Venture Capital Funds Ltd (IFCI Venture), 2000, Soft Loans to
financial assistance to first generation professionals and technocrat
entrepreneurs
• Venture Capital Unit Scheme (VECAUS-III) in 1991 with its funds
coming from the UTI and IFCI
• Tourism Finance Corporation of India Ltd (TFCI), 1989 on
recommendations of the National Committee on Tourism (Yunus
Committee) under the Planning Commission for providing financial
assistance to tourism-related activities/projects.
60
 Investment Institutions
• LIC (1956), the UTI (1964) and the GIC (1971)

• State Level Finance Institutions: Came up in Punjab (1955),

There are 18 SFCs working presently.

• State Industrial Development Corporations: for dedicated

industrialization

61
 FSDC
• The Financial Stability and Development Council (FSDC) was
constituted in December, 2010.
• The FSDC was set up to strengthen and institutionalize the
mechanism for maintaining financial stability, enhancing inter-
regulatory coordination and promoting financial sector
development.
• not a statutory body

62
63
Q1. Consider the following statements regarding the Mutual funds
1. A mutual fund is run by a group of qualified people who form a
company, called an asset management company (AMC)
2. Mutual funds are compulsorily registered with the RBI
3. Infrastructure investment Trust (InvIt) and Real estate Investment
Trust (ReITs) are examples of the Mutual Funds
Select the INCORRECT statement(s) using the codes given below
(a) 2 Only
(b) 3 Only
(c) 1 and 2
(d) 1 and 2

64
A

Statements 1 and 3 are correct.

• Statement 2: Mutual funds are compulsorily registered with the Securities and
Exchange Board of India (SEBI), which also acts as the first wall of defence for all
investors in these funds.
• A mutual fund is a fund that is created when a large number of investors put in
their money, and is managed by professionally qualified persons with experience
in investing in different asset classes-shares, bonds, money market instruments
like call money, and other assets like gold and property.
• Recent News: Franklin Templeton Mutual Fund (MF) in India recently made a
decision to wind up six yield-oriented managed credit funds.

65
Q2. Which of the following statements is not true about the Call Money
Market?

(a) It is an inter-bank money market where funds are borrowed and

lent generally for one day
(b) Fund can be borrowed/raised for a maximum period upto 14
days
(c) The scheduled commercial banks, cooperative banks operate in
this market as both the borrowers and lenders
(d) Mutual Funds are allowed to operate as only borrowers in this
market

66
D

• Call money market is also known as over-night borrowing market

(money at call).
• It is one of the instruments of Organized Money Market.
• Statement d: LIC, GIC, Mutual Funds, IDBI and NABARD are
allowed to operate as only lenders in this market.
• Borrowing in this market may take place against securities or
without securities.

67
Q3. With regard to the Hybrid Annuity Model (HAM), consider the following
statements
1. Under this model, the risks related to inflation and cost over-runs
are covered by the Private Sector
2. Private player is paid a fixed sum of economic compensation by
the government for a fixed tenure
3. In this model the project cost is shared by the government and the
private player in ratio of 40:60
Select the CORRECT statements using the codes given below
a) 1, 2 and 3
b) 1 and 3
c) 1 and 2
d) 2 and 3
68
Ans: d
Explanation:
Statements 2 and 3 are correct.
• Hybrid Annuity Model (HAM) is a mix of EPC and BOT-ANNUITY
models.
• Statement 1: The risks related to inflation and cost over-runs are
shared in ratio of the project cost sharing.
• In this model, most of the major risks are covered by the
government—land acquisition, clearances, operation, toll collection
and commercial.

69
Q4. Swiss Challenge Model is:
a) Public Procurement Model
b) Initial Pubic Offering
c) Method to control Inflation
d) Standard Operating Procedures for Start-ups

70
A
• Swiss Challenge Model: This is a very flexible method of giving contracts (i.e.,
public procurement) which can be used in PPP as well as non-PPP projects.
• Government of India, for the first time, announced the use of this model for
redevelopment of railway stations in the country (by late 2015).
• How it works:
- In this, one bidder is asked by the government to submit the proposal for the
project which is put in public domain.
- Afterwards, several other bidders submit their proposals aimed at improving
and beating the original (first) bidder— finally an improved bid is selected
(called counter proposal).
- If the original bidder is not able to match the counter proposal, the project is
awarded to the counter bidder.

71
Q5. Consider the following statements regarding the Viability Gap
Funding
1. It aims at supporting infrastructure projects that are
economically justified but fall marginally short of financial
viability
2. Support under this scheme is available only for infrastructure
projects
Select the CORRECT statement(s) using the codes given below
a) 1 Only
b) 2 Only
c) Both 1 and 2
d) None of the above

72
C
Both the statements are incorrect.
• Government of India has notified a scheme for Viability Gap Funding
to infrastructure projects that are to be undertaken through Public
Private Partnerships.
• It will be a Plan Scheme to be administered by the Ministry of
Finance with suitable budgetary provisions to be made in the Annual
Plans on a year-to- year basis.
• The quantum of VGF provided under this scheme is in the form of a
capital grant at the stage of project construction.

73
74