FMI Module 1 Notes

FINANCIAL MARKETS AND INSTITUTIONS-NOTES
NMIMS (HYDERABAD CAMPUS)

DR.CHANDRA KANTHA AWASTHI
AN INTRODUCTION TO A FINANCIAL SYSTEMS AND ITS

CONSTITUENTS
Meaning of financial systems

 A financial system refers to a system which enables the transfer of money between investors
and borrowers.
 A financial system could be defined at an international, regional or organization level.
The term “system” in “Financial System” indicates a group of complex and closely linked
institutions, agents, procedures, markets, transactions, claims and liabilities within an
economy.
Definition of Financial System
The financial system of a country is a system that manages the finances of a country through its
components.
Functions of Financial Systems
 A financial system allows its participants to prosper and reap the benefits. It also helps in
borrowing and lending when needed. In simpler words, it will circulate the funds to different
parts of an economy.
The following are the functions of financial system
Payment System – An efficient payment system allows businesses and merchants to collect money in
exchange for their products or services. Payments can be made with cash, checks, credit cards, and
even cryptocurrency in certain instances.
Savings – Public savings allow individuals and businesses to invest in a range of investments and see
them grow over time. Borrowers can use them to fund new projects and increase future cash flow, and
investors get a return on investment in return.
Liquidity – The financial markets give investors the ability to reduce the systemic risk by providing
liquidity. Liquidity is the ease of converting assets or securities into cash. It thus allows for easy
buying and selling of assets when needed.
Risk Management – It protects investors from various financial risks through insurances and other
types of contracts.
Government Policy – Governments attempt to stabilize or regulate an economy by implementing
specific policies to deal with inflation unemployment, and interest rates
Basic Components of Financial System
FINANCIAL INTERMEDIARIES
Banks
NBFC
Mutual Fund
Insurance organizations
Financial Intermediaries
 A financial Intermediary is an Institution that acts as a middleman in financial transactions.
Simply put, they help lenders meet borrowers and buyers meet sellers without either parties
having to actually meet. It saves time and effort for both parties by creating an economy of
scale. They can be seen as entities who accept deposits from depositors allowing them an
interest on their sum.
 Further, they lend the deposit to borrowers on a higher interest thus maintaining a margin.
This margin is the profits they earn. Financial intermediaries have emerged as an important
tool as they help channelize savings into investments.
Types of Financial Intermediaries:
Following are the types of common financial intermediaries
 1. Banks
‘Financial Intermediary’ is banks. They are the Classic and Conventional form of intermediaries that
are an essential part of our everyday lives. Heavy Regulations are imposed on commercial banks by
the apex bank of India, RBI and cater to the financial needs of a huge amount of public at large. Some
of the services include opening up accounts, sanctioning loans, Digital banking and more.
 2. NBFCs
Non Banking Financial Companies, are essentially like Banks without a Banking license and thus do
not come under the usual banking regulations. The other significant difference between a Bank and
NBFC is that the latter do not accept Demand Drafts.
Mortgage Lenders, Money Market funds, Insurance Companies, P to P lending are all examples of
NBFCs.
Types of NBFCs
 Asset finance company (AFC)
 Investment company (IC)
 Loan company (LC)
 Infrastructure finance company (IFC)
 Systematically important core investment company (CIC-ND*-SI)
 Micro finance institution (NBFC-MFI)
 Infrastructure debt fund (IDF-NBFC)
 NBFC factors
 Mortgage guarantee companies (MGC) and
 Non-operating financial holding companies (NOFHC).
Asset Reconstruction Company

An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad
assets from banks and financial institutions so that the latter can clean up their balance sheets. In other
words, ARCs are in the business of buying bad loans from banks.
In the Union Budget 2021-22, Finance Minister Nirmala Sitharaman announced the setting up of
Asset Reconstruction Companies in India to take care of Non-Performing Assets (NPAs) of stressed
banks. ARCs in India shall be set up by state-owned and private sector banks, as proposed. Also, there
will be no equity contribution from the government
3. Mutual Fund Companies

 As the name suggests A mutual fund is a pool of fund created by a number of investors by
putting their money in MF companies. These companies in turn invest this fund in various
equity and debt securities and generate returns out of it which is distributed among the
investors as Capital gain. These Funds are managed by professional Fund managers and
invests money in multiple securities at one time. Depending on size of capital investments
Mutual Funds are SmallCap, MidCap and LargeCap.
4. Insurance Companies
 An Insurance company drafts policies for various insurances like life,term,health,fire etc.
Thousands of people make periodic payments to the company for a policy that is to pay them
in case of an emergency or mishappening.
 Prominent companies that provide insurance services include All India insurance, SBI life
insurance company etc.
Definition of Insurance
Insurance is a legal contract between a person and an insurance business in which the insurer
promises to provide financial protection (Sum guaranteed) against unforeseen events for a certain
price (premium).
Types of insurance plans
• Life Insurance
• General Insurance
1. General Insurance
Some of the kinds of general insurance offered in India are as follows :
• Health Care Coverage
• Automobile Insurance
• Homeowners' Insurance
• Insurance against fire
• Insurance for Travel
2. Life Insurance
Life insurance comes in a variety of forms. The most prevalent types of life insurance policies offered
in India are as follows :
• Term Life Insurance
• Unit-Linked Insurance Plans
• Whole Life Insurance
• Endowment Plans
• Child Plans for Educations
• Retirement Plans
FINANCIAL MARKETS
Money market
Capital market
FINANCIAL MARKETS-
Types and functions
 Definition:
Financial Market refers to a marketplace, where creation and trading of financial assets, such as
shares, debentures, bonds, derivatives, currencies, etc. take place.
Financial markets perform a crucial function in the savings-investment process as facilitating
organizations. They are not sources of finance but they are a link between the savers and investors,
both individual as well as institutional.
It plays a crucial role in allocating limited resources, in the country’s economy. It acts as an
intermediary between the savers and investors by mobilizing funds between them.
Features of Financial Markets
• Acts as a Link: Financial markets connect the investors to the borrowers and bridge the gap
between the two for mutual benefits.
• Easy Accessibility: These markets are readily available anytime for both the investors and the
borrowers.
• Trades in Marketable and Non-Marketable Securities: Financial markets initiate buying
and selling of marketable commodities. Some of these are bonds, debentures and shares along
with non-marketable securities like bank deposits, post office deposits and other loans and
advances.
• Government Rules and Regulations: The government controls the operations of a financial
market in the country by imposing different rules and regulations.
• Involves Financial Intermediaries: These markets require financial intermediaries such as
a bank, non-banking financial companies, stock exchanges, mutual fund companies,
insurance companies, brokers, etc. to function.
• Deals in Long and Short-Term Investment: For the investors, financial markets provide an
opportunity of putting in their funds into various securities or schemes for short or long-term
investing benefits.
Types of Financial Markets

FINANCIAL MARKET BASING ON THE NATURE AND CLAIM

 Debt Market:
The financial market which facilitates the trading of debt instruments or instrument with fixed interest
such as bonds, fixed deposits, debentures are called debt market.
 Equity Market:
This market deals in financial instruments or securities whose value keeps on fluctuating and the
claimant receives the amount which persists on the date of redemption.
FINANCIAL MARKET BASING ON THE MATURITY OF CLAIM
 Money Market:
The financial market which provides very short-term loans or advances having a maturity period
within a year of issue is termed as a money market.
Types of Money Market Instruments in India
1. Call market
2. Treasury bills market
3. Bills market
4. CP market
5. CD market
6. Repo market
1. Call Money
It is a segment of the market where scheduled commercial banks lend or borrow on short notice (say a
period of 14 days). In order to manage day-to-day cash flows. The interest rates in the market are
market-driven and hence highly sensitive to demand and supply. Also, the interest rates have been
known to fluctuate by a large % at certain times.
2. Treasury Bills
Treasury Bills are one of the most popular money market instruments. They have varying short-term
maturities. The Government of India issues it at a discount for 14 days to 364 days. These
instruments are issued at a discount and repaid at par at the time of maturity. Also, a company, firm, or
person can purchase TB’s. And are issued in lots of Rs. 25,000 for 14 days & 91 days and Rs.
1,00,000 for 364 days.
3. Commercial Bills
Commercial bills, also a money market instrument, works more like the bill of exchange. Businesses
issue them to meet their short-term money requirements. These instruments provide much better
liquidity. As the same can be transferred from one person to another in case of immediate cash
requirements.
4. Commercial Paper
Corporates issue CP’s to meet their short-term working capital requirements. Hence serves as an
alternative to borrowing from a bank. Also, the period of commercial paper ranges from 15 days to 1
year.
The Reserve Bank of India lays down the policies related to the issue of CP’s. As a result, a company
requires RBI’s prior approval to issue a CP in the market. Also, CP has to be issued at a discount to
face value. And the market decides the discount rate.
Denomination and the size of CP:
Minimum size – Rs. 25 lakhs
Maximum size – 100% of the issuer’s working capital
5. Certificate of Deposit
Certificate of Deposit (CD’s) is a negotiable term deposit accepted by commercial banks. It is usually
issued through a promissory note. CD's can be issued to individuals, corporations, trusts, etc. Also,
the CD’s can be issued by scheduled commercial banks at a discount. And the duration of these varies
between 3 months to 1 year. The same, when issued by a financial institution, is issued for a minimum
of 1 year and a maximum of 3 years.
6. Repo market :
A repurchase agreement (repo) is a short-term secured loan: one party sells securities to another and
agrees to repurchase those securities later at a higher price
FINANCIAL MARKET BASING ON THE MATURITY OF CLAIM

 Capital Market:
This market exists for the trading of medium and long-term financial instruments between the
individuals and financial institutions.
It is further classified as
Primary Market: In a financial market, when the listed companies issue new securities, or new
companies take entry with new stocks, it is called as a primary market.
Secondary Market: It is commonly known as the stock market. It is a financial market where the
individuals, brokers, companies, banks and various other parties are involved in trading of existing
(already issued previously) securities.
FINANCIAL MARKET BASING ON THE TIMING OF DELIVERY

 Cash or Spot Market:
It is a spot or real-time market where all the trading and transactions are executed or take place
immediately.
 Forward or Futures Market:
Unlike cash market, in future and forward markets, the execution of the transaction takes place on a
future date. Here, the price of securities or transaction value is decided at present to minimize the loss
to either party.
FINANCIAL MARKET BASING ON THE ORGANIZATIONAL STRUCTURE

 Over-The-Counter Market:
Unlike an exchange, in this unregulated market, trading of various securities such as exotic options
and derivatives, swaps, credit derivatives, forward contracts take place directly between the two
parties without any involvement of the intermediaries.
 Exchange-Traded Market:
The market where trading of call, put, and futures options take place on an organized futures
exchange in a systematic manner is called an exchange-traded market.
A call option gives the holder the right to buy a stock
a put option gives the holder the right to sell a stock.
(A Future is a contract to buy or sell an underlying stock or other assets at a pre-determined price on a
specific date
A futures contract obligates the buyer to purchase a specific asset, and the seller to sell and deliver
that asset, at a specific future date)
FINANCIAL INSTRUMENTS (ASSETS OR SECURITIES)

Direct
Indirect
Derivatives
Financial Instruments (Assets or Securities)
 A financial instrument is defined as a contract between individuals/parties that holds a
monetary value. They can either be created, traded, settled, or modified as per the involved
parties' requirement. In simple words, any asset which holds capital and can be traded in
the market is referred to as a financial instrument.
Some examples of financial instruments are cheques, shares, stocks, bonds, futures, and
options contracts.
Financial assets fall into 3 broad categories
1. Direct/primary
2. Indirect
3. Derivatives
PRIMARY/DIRECT SECURITIES
 It is issued by non-financial economic units.
 The main type of primary securities are
I. Equity or ordinary shares

II. Debentures
III. Preference shares
IV. Innovative debt instruments
Equity or ordinary shares

Common stock (also known as common shares, ordinary shares, or voting shares) is the main type of
equity security issued by companies. A common share represents an ownership interest in a company.
Debentures
Preference shares
Preference shares are a long-term source of finance for a company. They are neither entirely similar to
equity nor equivalent to debt. The law treats them as shares, but they have elements of both equity
shares and debt. For this reason, they are also called ‘hybrid financing instruments.’ These are also
known as preferred stock, preferred shares, or only preferred in a different part of the world.
Innovative debt instruments
a variety of debt innovative instrument emerge with the growth of financial system. They are
participating debentures, convertible debentures with options, debt equity swaps, zero coupon
convertible notes, security premium notes etc.
Innovative debt instruments
 Convertible Debenture
A convertible debenture is a type of long-term debt issued by a company that can be converted into
shares of equity stock after a specified period.
 Non Convertible Debentures
Debentures are long-term financial instruments which acknowledge a debt obligation towards the
issuer. The debentures which can't be converted into shares or equities are called non-convertible
debentures (or NCDs).
 Secured premium notes SPN
Secured premium notes (SPNs) are financial instruments which are issued with detachable warrants
and are redeemable after certain period. SPN is a kind of non-convertible debenture (NCD) attached
with warrant. It can be issued by the companies with the lock-in-period of say four to seven years.
 Warrant
A warrant gives the holder the right to purchase a company’s stock at a specific price and a specific
date. In other words,
a warrant is a long-term option to buy a given stock at a fixed price. Such a type of warrant is called a
call warrant, which gives the right to buy the security.
A put warrant gives an investor the right to sell the security.
Indirect securities/financial assets

 Indirect securities are financial assets issued by financial intermediaries, such as.
 units of mutual funds,

 policies of insurance company,
 security receipts issued by securitization and assets reconstruction companies,
 security debt instrument issued by special purpose vehicle(SPV)
 they relate to variety of services and economies that are provided by the financial
intermediaries
Derivative Instruments
 Derivative instruments are financial instruments that have values determined from underlying
assets, such as resources, currency, bonds, stocks, and stock indexes.
The five most common examples of derivatives instruments are
 forwards,
 futures,
 options
 Forward: A forward is a contract between two parties that involves customizable derivatives
in which the exchange occurs at the end of the contract at a specific price.
 Future: A future is a derivative transaction that provides the exchange of derivatives on a
determined future date at a predetermined exchange rate.
 Options: An option is an agreement between two parties in which the seller grants the buyer
the right to purchase or sell a certain number of derivatives at a predetermined price for a
specific period of time.
FINANCIAL INSTRUMENTS-
FINANCIAL SERVICES
 Financial services are the services which are offered by the financial companies. The financial
companies comprise of both
Asset Management Companies and
Liability Management Companies.
In Asset Management Companies,-

leasing are companies,
mutual funds,
merchant bankers and
issue/portfolio managers
Liability Management Companies
bill discounting and
acceptance houses.
Definition of Financial Services

 The financial service industry is defined as,
"The collection of organizations which intermediate and facilitate financial transactions of individual
and institutional investors from their resource allocation activities through time".
The financial services comprise of various works related to change of savings into investment in the
following ways.
1) Fund Raising :
The required funds can be raised by the help of financial services from the individuals investors,
institutions and corporate. There are various instruments of finance being used for raising funds.
These kinds of funds are required by the corporate houses, individuals, etc.
2) Funds Deployment :
There are various kinds of financial services present in the financial markets which help the company
in proper deployment of funds. It also helps in decision-making of financial mix. The financial service
provide various types of services like bill discounting, factoring of debtors, shifting of short-term
funds in the money market, credit rating, e-commerce and securitisation of debts for effective funds
management.
3) Specialized Services :
The various specialized services are being provided by financial service except banking and insurance
like credit rating, venture capital financing, lease financing, factoring, mutual funds, merchant
banking, stock lending, depository, credit cards, housing finance, etc. These services are provided by
various kinds of institutions and agencies like stock exchanges, specialized and general financial
institutions and non-banking finance companies, subsidiaries of financial institutions, banks and
insurance companies. etc.
4) Regulation :
There are various kinds of regulatory bodies present in India like Securities and Exchange Board of
India (SEBI), Reserve Bank of India (RBI) and the Department of Banking and Insurance of the
Government of India which have different types of legislation's and also help in providing various
kinds of functions of financial services institutions.
5) Economic Growth :
The financial services help in increasing the economic growth and development of country. It is done
by the help of mobilizing the saving of the public by investing in productive investments. Due to this
reason, the various developed and developing countries which are engaged in the effective financial
market has increased the savings and investments.
IMPORTANCE OF FINANCIAL SERVICES

FINANCIAL SERVICES – need of financial services
The importance or need of financial services are as follows :
 1) Economic Growth and Development : The financial service is very important for economic
growth and development. The banking, saving and investment, insurance and debt and equity
provides help both to the private citizens and business. The private citizens get help in saving
money, getting protection against some causalities while helps the business in their formation,
increasing the efficiency and also for expanding the business both nationally and
internationally. It also helps the poor section of societies as these services helps in lowering
the vulnerability and helping people to control the availability of assets for making the
income and options which leads to poverty in the society.
 2) Contribution in GDP : The financial service sector has the largest earning which consists of
various type of business like merchant banks, credit card companies, stock brokerages and
insurance companies. It is largest in the world. The financial services contribute a larger part
of GDP.
 3) Promotion of Liquidity : The basic feature of the financial service is to use the money and
monetary assets for producing the goods and services so for this process there the requirement
of regular flow of money. The money and monetary assets are referred to as the liquidity in
finance. While liquidity can also be known as the money and other assets which can be
changed into cash and reduce the risk of loss.
 4) Generate Employment : The financial service also helps in generating employment in the
country as it is in the growth stage. It is helpful for the developing country like India. It also
helps in expanding the financial market. It helps in increasing the FDI flow in the country
which is required for the growth of the country.
 5) Link between Savers and Investors : The financial service helps in bridging the gap
between the depositors and investors which helps in increasing the savings and investments. It
helps in doing proper allocation of resources which help in mobilizing the saving of the
public. It also contributes in the continuous up-gradation of the technology. These all factors
have increased the growth of the country on the sustainable basis.
 6) Reduce Cost of Transaction and Borrowing : The financial services has helped in making
such financial structure which has the lower cost of transactions. It has increased the profit on
the return to the savers and it also lowers the cost of borrowing which increases the rate of
saving among the people. The financial services also help in providing the cheap and long-
term loans to different industries.
 7) Minimizes Situations of Asymmetric Information : The various financial services like
insurance, pension and portfolio adjustment helps in providing the financial protection and
reducing the conditions in which the information is not regular and may also affects the
performance of the operators or when one party has the details while the other does not have.
 8) Financial Deepening and Broadening : The financial services helps in developing the
process of financial deepening and broadening. Financial deepening means increasing the
financial assets according to the percentage of Gross Domestic Product (GDP). Financial
broadening means in increasing the number of financial assets and also the variety of
participants and instruments.
 9) Helps in Projects Selection : The financial services also help in improving the performance
of the investment. It also helps in providing the way for exchanging the goods and services
and also transferring the economic resources by time and also geographic region and
industries.
 10) Allocation of Risk : The financial service works in doing optimum allocation of risk
bearing. It reduces, merges and trade various kind of risks which is used in mobilizing the
saving and assigning the credit. The financial services work to make the risk within the limits
and also reduces the gathering cost and examining the information to help the operators in
decision making.
Types of Financial Services
Traditional Activities
The financial intermediaries from the past are providing various services including the money
and capital market activity.
The traditional activities are classified into
fund based activities and
non-fund based activities.
These are also known as assets based financial services and fee based financial services respectively.
Fund/Asset Based Financial Services
 In this, the financial services are used for making assets or are backed by assets in which the
funds are changed to assets which are known as asset based financial services. It consists of
the following :
1) Lease Financing :
A lease is known as the agreement between two parties known as lessor and lessee. The lessor is the
owner of the asset and lessee is the user of the asset. In this agreement, there is transfer of asset from
lessor to lesser for certain time period, in return the lessor receives the regular rent. As the lease
period gets over, the asset is returned back to lessor until there is renewal of the contract.
TYPES OF LEASE
Operating Lease: An operating lease is a cancelable contractual agreement whereby the lessee agrees
to make periodic payments to the lessor, often for 5 or fewer years, to obtain an asset set’s services.
Financial Lease: A financial (or capital) lease is a longer-term lease than an operating lease that is
non-cancelable and obligates the lessee to make payments for the use of an asset over a predetermined
.period of time.
Topics Operating Lease Financial Lease
An operating lease is short term A financial lease is the lease used in

lease used to finance assets & is connection with long-term assets &
Definition
not fully amortized over the life amortizes the entire cost of the asset
of the asset. over the life of the lease.
Duration Short term leasing Long term leasing
The lessor pays the maintenance

Cost Lessee pays the maintenance cost.
cost.
Cancel & Cancellable lease & It is a Non-cancellable lease & It is not a

Changeable changeable lease contract. changeable lease contract.
Risk lessor bears the risk of the asset. The lessee bears the risk of the asset.
At the end of the asset is hot At the end of the contract, the asset is
Purchase
purchasable. purchasable.
Renew It is a renewable contract. It is not a renewable contract.
Service lease, short term lease, A capital lease, long term lease, non-
Also called
cancellable lease. cancellable lease.
2. Hire Purchase :
The hire purchase refers to the hiring of an asset for certain time period and when the time period gets
over, there is purchase of same asset. At the time of sharing of asset, the person hiring the asset gets
the ownership and is allowed in use it. It is being used for financing of capital goods like industrial
finance, financing of consumer goods and for selling consumer good on hire purchase as it is a legal
advice.
3) Factoring :
Factoring is done when the company requires immediate money. It is done by selling the account
receivable like invoices to a third party known as factor at certain discount for immediate cash. This
cash is required for continuous working of the business.
4) Forfeiting :
Forfeiting is the way of financing of receivable related to international trade. It represents to the
purchase done by bank and financial institutions of trade bills/promissory notes instead of recourse to
the seller. The purchase is done by discounting the documents including the overall risk of non-
payment in collection. The various problems related to collection are accountability of the purchaser
who pays cash to seller after discounting the bills and notes.
5) Mutual Fund :
Mutual fund is the type of investment in which the pool of funds is sourced from various investors for
investing in various securities like stocks, bonds, money market instruments and similar assets. It is
managed by the money managers who invest the fund capital and tries to get capital gains and income
for the investors of the fund. The portfolio of mutual fund is organised and is according to the
investment objective given in the prospectus.
6) Exchange Traded Funds (ETFs) :
It is traded same like stocks in the stock exchange. It has the following assets like stocks,
commodities or bonds. They trade near to the net asset value according to the working of the trading
day. The ETFs also has a role to monitor various index like stock index or bond index. Exchange
traded funds is useful for investments as there are low costs, tax efficiency and stock-like features.
They are very famous among exchange-traded product.
7) Consumer Credit/Consumer Finance :
The term consumer credit means the activities related to giving credit to the consumers for
empowering them to acquire their own goods required for daily use. It is also known as credit
merchandising, deferred payments, installment buying, hire purchase, pay-out-of income scheme,
pay-as-you earn scheme, easy payment, credit buying, installment credit plan, etc.
8) Bill Discounting :
The bill discounting or a bill of exchange is known as the short-term, negotiable and can easily
liquidates money market instrument. It is used for financing a transaction in goods which is trade
related instrument.
9) Housing Finance :
The housing finance refers to the collection of all the financial arrangements which are offered by the
Housing Finance Companies (HFCs) for fulfilling the need of housing.
10) Venture Capital : Venture capital includes two words i.e. venture and capital Venture refers to the
way of doing something whose result is not known as it is present with various kinds of loss while
capital refers to human and non-human resources required for starting the business.
Fee/Non-Fund Based Financial Services
The fee based financial does not provide instant fund but instead it allows for the creation of funds by
the fee charged service. It consists of the following :
1) Merchant Banking :
The merchant banker can be individual or institutions like an underwriter or agent for the companies
and municipalities allocating securities. They are also involved in broker or dealer functions, maintain
the market for previously issued securities and also gives suggestion to the investors on the advisory
services. It plays important part in mergers and acquisitions, private equity placements and corporate
restructuring.
2) Credit Rating :
The credit rating is the process in which the symbol is assigned to the instrument for some special
work which is referred to as benchmark of present knowledge on related capacity on the issuer to
service its debt obligation on particular time. The symbols used in credit rating are basically
alphabetical or alphanumeric. The comparison of different instruments is easy by the help of credit
rating. The basic objective of credit rating is to inform the investors about the relative ranking of the
default-loss probability for required fixed income investment in comparison to other rated
instruments.
3) Stock Broking :
The stock broking refers to the method of bringing together the buyers and sellers of stock at the stock
exchange. It is the function of financial service intermediary. It is done by brokers, both main brokers
and sub brokers who are allowed by the SEBI. The stock broker can be individual broker, a firm of
brokers or a corporatised broker.
4) Securitisation :
The change of present or future cash inflow of an individual into trad-able security which can be sold
in the market is known as securitisation. These cash inflows can be from financial assets like
mortgage loans, automobile loans, trade receivables, credit card receivables, fare collections will be
security according to which borrowing can be raised. Though an individual can take the assistance of
securitisation instruments for efficient economic growth.
5) Letters of Credit (LC) :
A letter of credit is issued by the bank of the buyer to the seller which has a written undertaking for
repaying the cost of goods and services given by the seller to the buyer in place of producing
documents required within the precise time, place and to prescribed bank as stated in the documents
which is submitted according to the terms and conditions of the LC.
6) Bank Guarantees :
The guarantee is the contract between the issuing bank and the client in which the bank attempt to
take the claims presented by the client on the customer on behalf of which the bank had guarantee.
The payment of default can be taken from the bank by the client in case the customers do not fill the
obligation. The bank is only liable for the amount declared in the contract if the amount of default is
more than the bank will have to give the whole amount.
Modern Activities
 It provides various project advisory services starting from the preparation of the project report
until raising of funds along with the various government approvals.
 The planning and implementing the process involved in for merger and acquisition.
 It assists the corporate customers in capital restructuring.
 It acts as the trustees to the debenture holders.
 It helps in achieving the better outcome by giving required changes in the management
structure and management style.
 It helps in finding the better joint venture partners and also making the joint venture
agreements which directly help in structuring the financial collaborations and joint ventures.
 It also helps the sick companies by rehabilitating and restructuring the proper plans in the
execution of the scheme.
 It helps in reducing risk by the help of exchange rate risk, interest rate risk, economic risk and
political risk by using swaps and other derivative products.
 It helps in controlling the portfolio of large public sector company.
 It is involved in risk management service like insurance services, buy-back options etc.
 It also gives suggestions to clients on the way of choosing the better source of funds by taking
up the various funds, cost, lending time, etc.
 It also helps the client in lowering the debt cost and also for selecting the better optimum debt
equity ratio.
 It also helps the companies which are related in credit rating and want to go public by the
issue of debt instruments.
 It takes the various services associated to the capital market like :
 Clearing services
 Registration and transfers
 Safe custody of securities
 Collection of income on securities
FINANCIAL SERVICES – REGULATORY FRAMEWORK
Framework for Banking and Financing Services :
The banks handle two functions which also determine their growth. These functions are savings and
investments. The working of the banking and financial institutions is controlled by Central
Government and RBI. The central government and RBI help in maintaining the growth of economy
according to the requirement. The RBI by the help of RBI Act and Banking Regulation Act controls all
the financial institutions which are related to saving and capital formation. There are various other
laws for institution which are involved in raising and lending the capital.
The various regulations for banking institutions are as follows :
 i) New Branch :
It gives permissions for establishing new bank or new branch.

 ii) Capital :
It suggests the minimum capital, reserves and need of profit and reserves, dispersion of
dividends, the amount requirement for minimum cash reserve and other liquid assets.
 iii) Inspection :
The proper monitoring and maintenance on the functioning of the banks.
 iv) Appointment :
The various appointments of Chairman and Chief Executive Officer of private banks and nominating
members to the Board of Directors done.
 v) Monetary Policy :
The planning and implementation of monetary and credit policy for effective regulation of credit
flows. Maintenance of certain amount by t deciding Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR). The various treasury operations are done by the regular issue of bonds and repos.
 vi) Credit Control :
The various qualitative and quantitative credit control method are used for managing credit flow to
different industries.
 vii) Other Services :
The various other services like regulating, factoring, bill discounting and credit card services are
offered by the banks.
Framework for Insurance Services :
 The Insurance Act, 1938 was made for managing the insurers prior to the nationalization of
life and general insurance. The LIC formed in 1956 and GIC was formed in 1973 are the big
institutions in insurance service. The nationalization of the insurance companies has changed
the working of the Act. The regulatory functions came along with LIC and GIC.
 The RBI appointed the Malhotra Committee in 1993 for providing ways to enhance the
functioning of various insurance services present in India so the Insurance Regulatory
Authority (IRA) was framed in 1996.
The IRA performs the following works for both public and private insurance company :
i) Orderly Growth : The regulation and promotion of the insurance business leads to the orderly
growth.
ii) Exercise of Powers : The various powers and functions of the controller of Insurance under the
Insurance Act, 1938, LIC Act, 1956 and the General Insurance Business (Nationalization) Act, 1972 or
any other law relating to insurance in force at the time it is exercised and performed.
iii) Protecting Policy-Holders : The various interest of policy-holders like assigning of policy
nomination by policy-holders, insurable interest, settlement of insurance claims, surrender value of
policy and other terms and conditions of contract insurance, besides controlling and regulating the
rates. advantageous terms and conditions that are offered should be protected by the insurer.
iv) Professionalization : The professional organisation related to the insurance business should be
controlled and promoted.
v) Information : The various information of the inspection, inquiries and investigation including audit
of the insurers, insurance intermediaries and other organizations related to the insurance business
can be called by the governing body.
vi) Books Maintenance :The way of maintaining the books of accounts with all the statements of
accounts is prescribed to the insurers and other insurance intermediaries.
Framework for Investment Services :
The various fund-based activities like mutual funds and venture capital is related to the
investment services. In the same way, the stock exchange and stock broking institution is also
related with the investment activities. The regulations followed by them can be discussed with
other investment activities. The Securities Contracts (Regulations) Act (SCRA), 1956. SEBI
Regulations and Reserve Bank of India comprises of the regulatory is defined.
Framework for Merchant Banking and Other Services :
The working of different types of intermediaries related to the management of public and right
issue of capital, like merchant bankers, underwriters, brokers, market-makers, registrars,
advisors, collection bankers, advertisement consultant, debenture trustees, credit rating agencies
etc., are controlled by various guidelines of SEBI which are explained as follows :
 SEBI (Merchant Banker) Regulation, 1992
 SEBI Rules for Underwriters
 SEBI (Brokers and Sub-brokers) Regulation, 1992
 SEBI Rules for Registrars to an Issue and Share Transfer Agents, 1993
 SEBI (Bankers to an Issue) Regulations, 1994
 The regulations for merchant bankers and other intermediaries are as follows :
 The business should be registered with SEBI prior to the commencement of business
according the related rules and to regulations.
 The various rules and certification relating to the net-worth, capital adequacy and code of
conduct should be followed.
 The proper monitoring of the books and records should be done and also various
investigations should be done on the working of intermediaries. The accurate measure
should be suggested wherever required.
 All the guidelines of SEBI should he followed and the "due-diligence certificate" should also
be issued.
 The SEBI guidelines for Disclosure and Investor Protection, 1992 related to the issue of
capital and SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 related to
the method to be followed by the acquirer and the merchant banker for such acquisition of
shares should be followed.
Asset reconstruction companies (ARCs) is a type of finance company in India. They were formed as
part of steps taken by the Government to clean up the balance sheets of banks and financial
institutions and help revive the credit and investment cycle in India. The ARC industry was born out
of the Recapitalization and Financial Services Industry Development Act 2002. The Act gave an
opportunity to banks, insurance companies, and financial institutions that have been into losses for
some time, or are facing temporary capital problems.
Asset Reconstruction Company is a new concept in the Indian financial system. The company has
been formed by pooling of non-performing assets (NPAs) of various Banks/Financial Institutions. The
ARC has to be incorporated as a non-banking finance company (NBFC). It can be set up by Indian or
foreign individuals, companies, corporations, and Public Sector Undertakings.
REIT
Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing
real estate. A REIT is a company that owns and typically operates income-producing real estate or
related assets. REIT buys and develops properties primarily to operate them as part of its own
investment portfolio.
buy and sell REITs
You can invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing
shares through a broker. You can purchase shares of a non-traded REIT through a broker that
participates in the non-traded REIT’s offering. You can also purchase shares in a REIT mutual fund or
REIT exchange-traded fund.
InVITAn Infrastructure Investment Trust (InvITs) is Collective Investment Scheme similar to a

mutual fund, which enables direct investment of money from individual and institutional investors in
infrastructure projects to earn a small portion of the income as return.
The InvIT is designed as a tiered structure with Sponsor setting up the InvIT which in turn invests into
the eligible infrastructure projects either directly or via special purpose vehicle’s (SPVs).
014. SEBI
Basis of Difference REITs InVITs

Investment Objective REITs focus on making InvITs focus on making
real estate assets more infrastructure
accessible to individual investments more
investors and increasing accessible to private
retail participation. investors and expanding
retail participation in
the sector.
Minimum Investment The minimum The minimum subscription

Amount subscription amount for amount for InvITs is INR
REITs is INR 10,000 – 10,000 – 15,000. Earlier it
15,000. Earlier it was was INT 1,00,000.
INR 50,000.
Income REITs offer highly InvITs also offer stable

stable income. Since income. They invest more
they invest in than 80% of their assets in
commercial real estate operational and revenue-
with long-term leases, generating infrastructure
80% of REIT assets are with long-term contracts.
invested in income- Though they offer stability,
generating (rental) the income depends on
properties. The long- various circumstances,
term contract assures including tariff constraints,
that the REIT receives project deadlines, etc.
rent consistently. Thus, in comparison to
REITs, this is a less stable
investment.
Risks Since REITs own their Numerous InvITs invest in

real estate through sectors associated with
long-term leases or public welfare (Highways
freehold ownership, and Utilities), and any
they are safe from delay in regulatory
political and regulatory approvals or regulatory
threats. Furthermore, as changes could risk the
REITs serve corporate infrastructure project.
clients, they face less Additionally, any protests
political and regulatory by environmentalists
risk. against road building or
other such issues could
risk the revenue generated
by the infrastructure
project in which InvIT has
invested.
Liquidity Lower unit pricing and Large trading lot size and
smaller minimum higher unit price of InvITs,
trading quantities make make them less liquid.
REITs more liquid.
Ownership REITs either own the InvITs invest in

property or lease it on a infrastructure projects that
long-term basis. are given back to the
authority on completion or
rebid once the contract
period has expired.
 Primary Dealers
Primary dealers are registered entities with the RBI who have the license to purchase and sell
government securities. They are entities who buys government securities directly from the RBI
(the RBI issues government securities on behalf of the government), aiming to resell them to other
buyers. In this way, the Primary Dealers create a market for government securities.
The Primary Dealers system in the government securities market was introduced by the RBI in 1995.
The PDs are thus created to promote transactions in government securities market. A facilitating
arrangement is essential for selling of government securities as government is the single largest
borrower in the market who borrows through the issue of its securities – treasury bills and bonds.
The RBI instructs PDs to have a minimum turnover ratio, bidding ratio, underwriting ratio, secondary
market participation etc to ensure that they are active in supporting the trade in government securities.
PDs are active in the stock market also for enhancing the trading of government securities.
Eligibility Conditions for PDs
a. Subsidiary of scheduled commercial bank/s and All India Financial Institutions
b. Subsidiaries/ joint ventures set up in India by entities incorporated abroad.
c. Company incorporated under the Companies Act, 1956 and does not fall under (a) or (b).
The applicant for PD should register as an NBFC for at least one year prior to the submission of
application. Other conditions like net owned fund etc are mentioned by the RBI.
The decision to authorize PDs will be taken by RBI based on its perception of market needs,
suitability of the applicant and the likely value addition to the system. Some other functions
besides trading in government securities are also assigned to them.
Role and Functions of Primary Dealers
The role of Primary Dealers is to:
(i) commit participation as Principals in Government of India issues through bidding in auctions
(ii) provide underwriting services
(iii) offer firm buy – sell / bid ask quotes for T-Bills & dated securities
(iv) Development of Secondary Debt Market
PDs are performing an exceptional role in giving marketability to government securities. the RBI has
elaborated the role of PDs in the following words “PDs are expected to play an active role in the G-
Sec(government security) market, both in its primary and secondary market segments through various
obligations like participating in Primary auction, market making in G-Sec, predominance of
investment in G-Sec, achieving minimum secondary market turnover ratio, maintaining efficient
internal control system for fair conduct of business etc. A PD is required to have a standing
arrangement with RBI based on the execution of an undertaking and the authorization letter issued by
RBI every three years. Undertaking will be based on passing of a fresh Board resolution by the PD
every three years.”
As on January 2015, there was 21 Primary Dealers in the country. Most of the PDs are started
by scheduled commercial banks and are registered as NBFCs. Operations of the PDs are subject
to prudential and regulatory guidelines issued by RBI from time to time.
The RBI instructs PDs to have a minimum turnover ratio, bidding ratio, underwriting ratio, secondary
market participation etc to ensure that they are active in supporting the trade in government securities.
PDs are active in the stock market also for enhancing the trading of government securities.
 The applicant for PD should register as an NBFC for at least one year prior to the submission
of application. Other conditions like net owned fund etc are mentioned by the RBI.
 The decision to authorize PDs will be taken by RBI based on its perception of market needs,
suitability of the applicant and the likely value addition to the system. Some other functions
besides trading in government securities are also assigned to them.
Role and Functions of Primary Dealers
 The role of Primary Dealers is to:
 (i) commit participation as Principals in Government of India issues through bidding in

auctions
 (ii) provide underwriting services
 (iii) offer firm buy – sell / bid ask quotes for T-Bills & dated securities
 (v) Development of Secondary Debt Market
 PDs are performing an exceptional role in giving marketability to government securities. the
RBI has elaborated the role of PDs in the following words “PDs are expected to play an active
role in the G-Sec market, both in its primary and secondary market segments through various
obligations like participating in Primary auction, market making in G-Sec, predominance of
investment in G-Sec, achieving minimum secondary market turnover ratio, maintaining
efficient internal control system for fair conduct of business etc. A PD is required to have a
standing arrangement with RBI based on the execution of an undertaking and the
authorization letter issued by RBI every three years. Undertaking will be based on passing of
a fresh Board resolution by the PD every three years.”
 As on January 2015, there was 21 Primary Dealers in the country. Most of the PDs are started
by scheduled commercial banks and are registered as NBFCs. Operations of the PDs are
subject to prudential and regulatory guidelines issued by RBI from time to time.
 Portfolio Management Services (PMS)
Portfolio Management Services (PMS) is a type of investment service that provides personalized
portfolio management for high-net-worth individuals (HNIs) and institutions. They invest across
equities, fixed income, debt, cash, structured products and other individual assets that are
managed by a professional money manager. PMS allows investors to have direct ownership of
stocks and to customize their portfolios according to their specific needs and risk preferences.
PMS also offers differentiated and high-risk-high-return strategies that may appeal to more
sophisticated investors. Portfolio managers use a variety of investment strategies to build and
manage portfolios that meet the specific needs of their clients. PMS has a high investment
requirement of INR 50,00,000, thus limiting access to retail investors.
 Alternative Investment Funds (AIFs)
An AIF is defined as a fund formed or registered in India, under regulation 2(1)(b) of SEBI
Regulations 2012, as a Limited Liability Partnership (LLP), corporation, trust, or body corporate that:
It is a privately pooled investment entity that collects assets from investors, both domestic and
international, and invests them according to a stated investment policy to benefit its stakeholders.
Types of Alternative Investment Funds .
Category 1: Under this category, the AIF can invest in SMEs, start-ups, and new economically
viable corporations with high growth potential. The different funds in this category include:
 Infrastructure fund: These invest in companies engaged in infrastructural works like
constructing airports, railroads, etc.
 Venture Capital Funds (VCF): The fund invests money in promising entrepreneurial
businesses that need large amounts of capital.
 Angel funds: It invests in new-age start-ups that do not receive investment from VCF. Each
angel fund investor allocates a minimum of Rs 25 lakh.
 Social venture fund: The fund puts money into businesses that come under philanthropic
activities. They aim to bring a change in society through investments.
Category 2: Funds do not use leverage for any reason other than to cover operational needs that
do not fall under categories 1 and 3. Below are the funds under this category:
 Debt funds: These funds invest in the debt securities of unlisted companies that the fund
believes follow good governance models and have good growth potential.
 Funds of funds: Under this option, the money goes into other alternative investment funds.
 Private equity fund: Private equity funds invest in unlisted businesses that face problems
raising capital by issuing debt and equity instruments.

Category 3: Funds that engage in many complex trading techniques, for example, investing in
listed or unlisted derivatives. Below are the funds under this category:
 Private Investment in Public Equity Fund (PEF): These funds invest in public firms by buying
their shares at discounted prices.
 Hedge funds: They collect money from investors and corporations to invest in equity and debt
markets both on the domestic and international levels. These schemes follow an aggressive
investment strategy to provide a higher return to their investors.
 Mutual Funds (MFs)
 Mutual Funds (MFs) are pooled investment vehicles that invest in equities, debt, money
market instruments and other securities. MFs are managed by professional fund managers
who follow a predefined investment objective and strategy. MFs are regulated by
the Securities and Exchange Board of India (SEBI) and offer a variety of investment options
to suit different investor profiles. Mutual Funds offer investors the benefits of diversification,
low-cost access, tax efficiency, ease of operation and systematic investment plans. MFs also
have a wide range of schemes to suit different risk-return profiles and financial goals.
PMS Vs AIF Vs MF: Key Differences
Basis of Difference PMS AIFs MFs
Structure Individually managed Privately pooled Pooled investment vehicles

investment vehicles
Investment Objective High Returns High returns, capital Long term growth and
preservation, or income
diversification
Regulation SEBI (Portfolio Managers) SEBI (Alternative SEBI (Mutual Funds)
Regulations 2020 Investment Funds) Regulations 1996
Regulations 2012
Minimum Investment INR 50 Lakhs INR 1 Crore INR 500
Ownership Direct ownership of stocks Indirect ownership through Indirect ownership through
units or shares units
Customization High degree of Low to moderate degree of No customization

customization customization
Types Discretionary PMS, Category I AIFs, Equity,

Non-Discretionary PMS, Category II AIFs Debt,
Active Portfolio Category III AIFs Hybrid,
Management, Solution Oriented and
Passive Portfolio Other.
Management
Payment Banks
 Payment banks are the new type of bank in India. Like any other bank, payment banks also
perform banking operations on a minimal scale.
 In 2013, the Reserve Bank of India constituted a committee headed by Dr. Nachiket Mor to
study financial services for small businesses and low-income households. The committee
recommended the introduction of Payment banks in India to cater to the lower-income groups
in the country.
 Financial inclusion is the chief objective of payment banks in India.
 These banks accept savings and demand deposits up to Rs. 1 lakh per customer. However,
they do not accept NRI deposits and are not involved in lending activities.
 These banks use channels such as ATMs, payment bank branches, Business
Correspondents(BCs), etc, for transferring payments. They issue ATM/ debit cards, but cannot
issue credit cards.
 List of Payments banks in India
o Airtel Payments Bank Ltd
o India Post Payments Bank Ltd
o FINO Payments Bank Ltd
o Paytm Payments Bank Ltd
o Jio Payments Bank Ltd
o NSDL Payments Bank Ltd

Development bank
The Development Bank will be set up to provide credit enhancement for infrastructure and
housing projects.A strong national development bank is the need of the hour that will be in the
forefront of funding India’s strategic and long-term development.
Development banks are also known as term-lending institutions or development finance
institutions (DFIs).
Development banks are financial institutions that provide long-term credit for capital-intensive
investments spread over a long period and yielding low rates of return, such as urban infrastructure,
mining and heavy industry, and irrigation systems.Such banks often lend at low and stable rates of
interest to promote long-term investments with considerable social benefits.
Development banks are different from commercial banks which mobilise short- to medium-term
deposits and lend for similar maturities to avoid a maturity mismatch-a potential cause for a bank’s
liquidity and solvency.
Small Finance Banks are the

financial institutions that are
created by the central bank to
cater financial services to the
un-served and underserved sections of society.
These banks are registered under the Companies Act of 2013 as public limited companies. A
minimum capital of Rs.100 crores is required to establish a Small Finance Bank in India.
Like any other commercial bank, it offers loans and accepts deposits.
List of Small Finance Banks in India.
o Au Small Finance Bank Ltd
o Capital Small Finance Bank Ltd
o Fincare Small Finance Bank Ltd
o Equitas Small Finance Bank Ltd
o ESAF Small Finance Bank Ltd
o Suryoday Small Finance Bank Ltd
o Ujjivan Small Finance Bank Ltd
o Utkarsh Small Finance Bank Ltd
o North East Small Finance Bank Ltd
o Jana Small Finance Bank Ltd
o Shivalik Small Finance Bank Ltd

Commercial Bank
Definition: Commercial Bank is the banking platform for the general public and is described as an

institution whose primary business is to act as an intermediary for the purpose of settlement, i.e.,
receiving deposits and giving loans. These banks in India are formed as joint-stock firms and
recognized as banking firms.
Scheduled Banks
The second schedule of RBI Act incorporates a record of the bank which are specified as “scheduled
banks”. A bank to be nominated as a scheduled bank must have a paid-up capital and reserves as
recommended by the Act. According to section 42(6) of RBI Act, 1934, the obligatory amount is
only 5,00,000. Yet, in a short while to start a commercial bank, The Reserve Bank of India
recommended the least capital of 100 crores and its business should be handled apparently, which in
the assessment of Reserve Bank of India, is not damaging to the interests of its depositors.
The scheduled banks are also needed to manage with the RBI a deposit in the form of CRR (Cash
Reserve Ratio) established on its demand and time liabilities at the recommended rate. Scheduled
banks involve nationalized banks, thus it is necessary to understand the concept of a
Nationalized bank.
Non- Scheduled Banks
Non-Scheduled banks are those banks which are not the part of the 2nd scheduled of the RBI Act.
These banks are not well-known by the general public in comparison to scheduled banks, as they are
less popular. Many facilities are also not available in these banks such as refinancing, discounting of
bills, etc. In a matter of security also, these banks are much less secure than commercial banks as they
do not have to follow guidelines given by the RBI.
Functions of Commercial Bank
The functions of the Commercial Banks are basically divided into two parts, i.e., primary and
secondary function. They are as follows:
 Payment Banks
o Payment banks are the new type of bank in India. Like any other bank, payment banks also
perform banking operations on a minimal scale.
o In 2013, the Reserve Bank of India constituted a committee headed by Dr. Nachiket Mor to
study financial services for small businesses and low-income households. The committee
recommended the introduction of Payment banks in India to cater to the lower-income
groups in the country.
o he main objective is to advance financial inclusion by offering banking and financial

services to the unbanked and underbanked areas, helping the migrant labour force,
low-income households, small entrepreneurs etc.
o They are registered under the Companies Act 2013 but are governed by a host of
legislations such as Banking Regulation Act, 1949; RBI Act, 1934; Foreign Exchange
Management Act, 1999, Payment and Settlement Systems Act, 2007 and the like.
o India currently has 6 Payment Banks namely, Airtel Payment Bank, India Post
Payment Bank, Fino, Paytm Payment Bank, NSDL Payment Bank and Jio Payment
Bank.
Features of Payment Banks
 They are differentiated and not universal banks.

 These operate on a smaller scale.
 It needs to have a minimum paid-up capital of Rs. 100,00,00,000.
 Minimum initial contribution of the promoter to the Payment Bank to the paid-up
equity capital shall at least be 40% for the first five years from the commencement of
its business.
Activities That Can Be Performed By Payment Banks

 Payment banks can take deposits up to Rs. 2,00,000. It can accept demand deposits
in the form of savings and current accounts.
 The money received as deposits can be invested in secure government securities
only in the form of Statutory Liquidity Ratio (SLR). This must amount to 75% of the
demand deposit balance. The remaining 25% is to be placed as time deposits with
other scheduled commercial banks.
 Payments banks will be permitted to make personal payments and receive cross
border remittances on the current accounts.
 It can issue debit cards.
Objective type questions
1. _______ is a link between savers & borrowers, helps to establish a link between savers &
investors
(a) Marketing (b) Financial market (c) Money market (d) None of these
2. Which of the following is the function of financial market?
(a) Mobilization of savings (b) Price fixation
(c) Provide liquidity to financial assets (d) All of the above
3. __________ is the organisations, institutions that provide long term funds.
(a) Capital market (b) Money market (c) Primary market (d) Secondary market
4. When securities are allotted to institutional investors & some selected individuals is
referred to as _________.
(a) Initial public offer (b) Offer through prospectus (c) Private placement (d) Offer for sale
5. Stock exchange is known as __________ market for securities.
(a) Primary market (b) Secondary market (c) Capital market (d) None of the above
6. _________ is a market for lending & borrowing of short term funds.
(a) Money market (b) Primary market (c) Capital market (d) All of the above
7. ____________ is also called zero coupon bond.
(a) Trade bills (b) Call money (c) Treasury bills (d) Commercial papers
8. Which of the following are the instruments of money market?
(a) Call money (b) Certificate of deposits (c) Trade bills (d) All of the above
9. The short term financial instruments traded in money market is commonly called
(a) Call money (b) Certificate of deposits (c) Trade bills (d) Commercial Paper
10. Which of the following statements is not true with regard to money market?
(a) It involves low market risk. (b) It is situated at specific locations. (c) Deals in unsecured
and short-term debt instruments. (d) The instruments traded are highly liquid.

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FINANCIAL MARKETS AND INSTITUTIONS-NOTES

NMIMS (HYDERABAD CAMPUS)

AN INTRODUCTION TO A FINANCIAL SYSTEMS AND ITS

Meaning of financial systems

 Investment company (IC)

 Loan company (LC)

 Infrastructure finance company (IFC)

 Systematically important core investment company (CIC-ND*-SI)

 Micro finance institution (NBFC-MFI)

 Infrastructure debt fund (IDF-NBFC)

 Mortgage guarantee companies (MGC) and

 Non-operating financial holding companies (NOFHC).

Asset Reconstruction Company

3. Mutual Fund Companies

Types of Financial Markets

FINANCIAL MARKET BASING ON THE NATURE AND CLAIM

FINANCIAL MARKET BASING ON THE MATURITY OF CLAIM

FINANCIAL MARKET BASING ON THE TIMING OF DELIVERY

FINANCIAL MARKET BASING ON THE ORGANIZATIONAL STRUCTURE

FINANCIAL INSTRUMENTS (ASSETS OR SECURITIES)

 The main type of primary securities are

I. Equity or ordinary shares

Equity or ordinary shares

Indirect securities/financial assets

 units of mutual funds,

In Asset Management Companies,-

Definition of Financial Services

IMPORTANCE OF FINANCIAL SERVICES

Types of Financial Services

An operating lease is short term A financial lease is the lease used in

Duration Short term leasing Long term leasing

The lessor pays the maintenance

Cancel & Cancellable lease & It is a Non-cancellable lease & It is not a

Renew It is a renewable contract. It is not a renewable contract.

 It assists the corporate customers in capital restructuring.

 It acts as the trustees to the debenture holders.

 Registration and transfers

 Safe custody of securities

 Collection of income on securities

FINANCIAL SERVICES – REGULATORY FRAMEWORK

Framework for Banking and Financing Services :

The various regulations for banking institutions are as follows :

It gives permissions for establishing new bank or new branch.

The proper monitoring and maintenance on the functioning of the banks.

 vi) Credit Control :

 vii) Other Services :

Framework for Insurance Services :

Framework for Investment Services :

Framework for Merchant Banking and Other Services :

 SEBI (Merchant Banker) Regulation, 1992

 SEBI Rules for Underwriters

 SEBI (Brokers and Sub-brokers) Regulation, 1992

 SEBI (Bankers to an Issue) Regulations, 1994

InVITAn Infrastructure Investment Trust (InvITs) is Collective Investment Scheme similar to a

Basis of Difference REITs InVITs

Minimum Investment The minimum The minimum subscription

Income REITs offer highly InvITs also offer stable

Risks Since REITs own their Numerous InvITs invest in

Ownership REITs either own the InvITs invest in

 (i) commit participation as Principals in Government of India issues through bidding in

 (v) Development of Secondary Debt Market

 Portfolio Management Services (PMS)

 Mutual Funds (MFs)

Basis of Difference PMS AIFs MFs