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Sikkim Manipal University – Distant Education
Name: Registration Number: Learning Center:
Manik Pant 511017114 Chandigarh 03038
Learning Center Code: Course:
Masters of Business Administration
Financial Systems & Commercial
Directorate of Distance Education Sikkim Manipal University II Floor, Syndicate House Manipal – 576104
Reg no # 511017114
___________________ _______________ _________________ Signature of Coordinator Signature of Center Signature of Evaluator Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking (Book ID: 1202) Assignment Set – 1 1. Discuss the kinds of money market instruments, with emphasis on the prevailing yield from investing in the instruments. Ans- Money Market
The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period up to one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost. Money Market Instruments:Some of the important money market instruments are briefly discussed below; 1. Call /Notice-Money Market: - Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions. 2. Inter-Bank Term Money: -Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days. 2/45
Reg no # 511017114
3. Treasury Bills: - Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction. 4. Certificate of Deposits:- Certificates of Deposit (CDs) is a negotiable money market instrument and issued in dematerialized form or as a Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. CDs can be issued by (i) Scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and inter corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. 5. Commercial Paper: - CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowed account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. 6. Short Term Tax Exempts: - These instruments are short-term notes issued by state and municipal governments. Although they carry somewhat more risk than T-bills and tend to be less negotiable, they feature the added benefit that the interest is not subject to federal 3/45
Reg no # 511017114 income tax. For this reason, corporations find that the lower yield is worthwhile on this type of short-term investment. 7. Bankers Acceptances: - "A banker's acceptance begins life as a written demand for the bank to pay a given sum at a future date," Brealey and Myers noted. "The bank then agrees to this demand by writing 'accepted' on it. Once accepted, the draft becomes the bank's IOU and is a negotiable security. This security can then be bought or sold at a discount slightly greater than the discount on Treasury bills of the same maturity." Bankers' acceptances are generally used to finance foreign trade, although they also arise when companies purchase goods on credit or need to finance inventory. The maturity of acceptances ranges from one to six months.
Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking (Book ID: B1202) Assignment Set – 1 2. What are the financial services provided by a Merchant banker? Ans: The financial services provided by a merchant banker are: Corporate finance services: The most visible function of a
merchant banker is the function of mobilizing funds for the companies. Starting from public issue of securities, it extends to private placements, brought – out – deals, euro – issues and corporate valuation. Managerial or corporate finance is the task of providing the
Reg no # 511017114 funds for a corporation's activities (for small business. and may employ standard business valuation techniques or even extend to real options valuation. requires management to determine whether any inappropriate profit is to be retained for future investment / operational requirements. rather than from the general assets or creditworthiness of the project sponsors. known as sponsors. the role of a merchant banker’s advice on the financing package becomes very important due to the financial risk arising from exchange rate fluctuations. often in the form of bonds. creditors. The discipline of capital budgeting is devoted to this question. Usually. The financing is typically secured by all of the project assets. and relates to cash inventory and debtors management. and the firm's operations (cash flow). a project financing structure involves a number of equity investors. Short term financial management is often termed "working capital management". Project finance services: Merchant banker should carry out an independent appraisal of a project. however. which are secured by the project assets and paid entirely from project cash flow. The balance between these elements forms the company's capital structure. in the form of equity (privately or via an initial public offering). see Financial modeling. The loans are most commonly non-recourse loans. this is referred to as SME finance). "the financing decision" relates to how these investments are to be funded: capital here is provided by shareholders. including the revenue-producing contracts. financial accounting is more concerned with the reporting of historical financial information. and generically entails three interrelated decisions. In the first. These areas often overlap with the firm's accounting function. "the investment decision". and are able to assume control of a project if the project company has difficulties complying with the loan terms. Corporate finance generally involves balancing risk and profitability. Short-term funding or working capital is mostly provided by banks extending a line of credit. Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors. The third. "the dividend decision". and if so in what form. a decision in part supported by financial modeling. management must decide which "projects" (if any) to undertake. as well as a syndicate of banks or other lending institutions that provide loans to the operation. 5/45 . Project lenders are given a lien on all of these assets. while these financial decisions are directed toward the future of the firm. while attempting to maximize an entity's wealth and the value of its stock. The second. they also find the best package of financing mix necessary for such project. or instead to be distributed to shareholders. If there is foreign currency element in the project finance. Besides advising clients on project feasibility.
CDC.g. For infrastructure and green field projects.Reg no # 511017114 Generally. International finance services: Companies have gone to overseas capital markets to raise capital. External Commercial Borrowings and Trade Credits availed of by residents are governed by clause (d) of sub-section 3 of section 6 of the Foreign Exchange Management Act. the domestic merchant bankers and foreign investment banks play a major role. the project company has no assets other than the project. More recently. 1999 read with Notification 6/45 . project financing principles have been applied to other types of public infrastructure under public private partnerships (PPP) or. securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc. monitors and regulates ECB guidelines and policies. etc. floating rate notes and fixed rate bonds) availed of from non-resident lenders with minimum average maturity of 3 years. External Commercial Borrowings (ECB) basically refer to commercial loans in the form of bank loans. a special purpose entity is created for each project.g. In telecom sector too. Large merchant banking outfits have entered strategic alliances with international investment bankers and tapped the international markets for resources. Traditionally. suppliers' credit. Ministry of Finance. In this.. AFIC. project financing has been most commonly used in the extractive (mining). telecommunications and energy industries. buyers’ credit. Government of India along with Reserve Bank of India. buyers' credit. credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington). school facilities) as well as sports and entertainment venues. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound. Merchant banks play a role in arranging External Commercial Borrowings (ECBs). The DEA (Department of Economic Affairs). particularly in Europe. GDRs. transportation. ECBs cannot be used for investment in stock market or speculation in real estate. ECBs include commercial bank loans. in the UK. up to 50% funding through ECBs is allowed. or to assure the lenders of the sponsors' commitment. suppliers’ credit. funding up to 50% (through ECB) is allowed. thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. Private Finance Initiative (PFI) transactions (e. As a special purpose entity. securitized instruments (e. ADB. ECB (External Commercial Borrowings) is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (Public Sector Undertakings). Project finance is often more complicated than alternative financing methods. American Depository Receipts (ADRs) and FCCBs are issued foreign investors.
Advisory services for joint ventures 12.Reg no # 511017114 No.. 4. Investment research 8. 2. Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000. Forex advisory services 11. 2000. dated May 3. Portfolio management services 9. Commodities broking 10. Strategic services related to M & As 7/45 .viz. Distribution of financial products. FEMA 3 / 2000-RB. Insurance broking 5. Underwriting 7. Stock broking. for both institutional and retail investors. as amended from time to time. 3. Asset management 6. Miscellaneous services: The miscellaneous functions are 1. Dealing in currency derivatives.
like in times of high inflation. RBI by varying the CRR regulates the lend able funds of commercial banks. When RBI wants to reduce liquidity from the system. This would mean that funds are hard to come by and hence banks will have to pay more to depositors in order to induce them to keep their funds with banks. For example RBI has increased the CRR of scheduled banks by 6% of their Net Demand and Time Liabilities (NDTL). Interestingly. The banks therefore will also have to raise lending rates in order to meet the increased cost while maintaining their margins. bank has to deposit Rs.Reg no # 511017114 Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking (Book ID: B1202) Assignment Set – 1 3. about 12. and Open Market Operations (OMO) Cash Reserve Ratio: It is a quantitative tool of monetary and credit policy to regulate the money supply in the economy.500 crore of excess liquidity will be absorbed from the system. RBI does not pay any interest on this money to banks. This will push up cost of funds for banks. As a result of this increase in the CRR. 6 with RBI. An increase in CRR would also mean that money is being sucked out of the system. which the bank has to compulsorily deposit with RBI. A CRR of six per cent means that out of every Rs 100. Discuss the quantitative tools of Monetary policy by the Reserve Bank of India to reduce money supply in the economy. 8/45 . Ans: Quantitative Measures aim to control the quantity of money supply directly such as Cash Reserve Ratio (CRR). Cash reserve ratio (CRR) is that slice of a bank's deposits. it increases the CRR. Statutory Liquidity Ratio (SLR).
The main objective of this monetary policy instrument is to ensure solvency of commercial banks by compelling them to hold low risk assets up to a stipulated extent. These measures are Bank Rate. Bank Rate: An instrument of general credit control and represents the standard rate at which the RBI is prepared to buy or rediscount bills of 9/45 . To restrict the expansion of bank credit. 2. QUALITATIVE MEASURES: They aim to control the quantity of money supply indirectly through cost of credit. To augment the investment of the banks in Government securities. the effects are reversed. Open Market Operations: A monetary policy instrument which is used by the Reserve Bank mainly with a view to affect the reserve bases of the banks and thereby the extent of monetary expansion. Under the RBI Act. helps to create and maintain a desired pattern of yield on government securities (G-Sec) and to assist the government in raising resources from the capital market. or other unencumbered approved securities. It also. means 25 out of 100 are invested in prescribed liquid assets. It increases the liquidity and reserves of commercial banks. When RBI buys the securities in the open market. the RBI is authorized to purchase and sell the securities of the Union Government and State Governments of any maturity and the security specified by the Central Government on the recommendation of Bank's Central Board. The objectives of SLR are: 1. 3. It also helps to regulate the pace of credit expansion to commercial sector. Repo & Reverse Repo Rates. At present. This is known as supplementary reserve requirement or secondary reserve requirement. SLR refers to the ratio of holdings of the prescribed liquid assets to total time and demand liabilities. If RBI sells the securities. A reduction of SLR rates looks eminent to support the credit growth in India. against their demand and time liabilities as on the last Friday of second preceding fortnight in India.Reg no # 511017114 Statutory Liquidity Ratio: It is a quantitative tool of monetary and credit policy to regulate the money supply in the economy. making it possible for banks to expand their loans and investments. cash or gold. To ensure solvency of banks. Under the provision of Banking Regulation Act governing the banking operations. banks are required to hold liquid assets such as government securities. and Interest Rates etc. SLR is 25%. in the process. Open market operations are by way outright sale and purchase of securities through the Securities Department and repo and reverse repo transactions. Presently the RBI deals only in the securities issued by the Union Government.
whichwill help to kick-start the economy. Hence you will observe RBI focusing more on 10/45 . when banks need funding for the short term. it will reduce reverse repo rate. In short. In case of tight liquidity conditions (as you saw in 2008). Banks borrow from RBI or RBI lends to banks at this rate. Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. Take an example Repo refers to 'repurchase obligation'. they approach the RBI and ask for a temporary loan. an increase in bank rate results in commercial banks increasing their lending rates.Reg no # 511017114 exchange or other commercial paper eligible for purchase under the provisions of the Act. Changes in bank rate affect the lending rates through altering the cost of credit. In times of ample liquidity. The rate at which RBI pays interest is known as reverse repo rate. the cost of money for banks also increases. Usually. Repo is an instrument meant for injecting the funds required and Reverse Repo for absorbing the excess liquidity out of system. This prevents borrowers from taking loans from banks and thus RBI's objective of controlling money supply is achieved. and the RBI controls interest rates. In bond markets. The interest rate which RBI charges to banks for such short-term loan is known as the repo rate. it will give a signal to banks thatinstead of deploying surplus money with RBI for a low return they should deploy the same in projects in the economy. At present Bank rate is 6%. After the short-term period is over. When RBI wants the economy to grow. hence the word repurchase obligation. banks park their surplus money with RBI and earn some minimum interest. Reverse Repo Rate: Reverse repo is that rate which RBI pays to banks. When repo rate increases. banks have the obligation to repay the money back to RBI. RBI uses various rates like repo. It must be understood that when RBI does not want more money to go into the economy. It is also called the discount rate. reverse repo and CRR to give direction to interest rates in the country. When banks have surplus liquidity and there are not enough borrowings from banks by consumers (as is the condition now). Banks in turn increase the interest rates for their borrowers. So banks give G-Secs to RBI and take money to meet their temporary requirements. By this By doing so. interest rates are the most important factor. it will raise this rate. This collateral is Government Securities (G-Secs). In short. repo rate is practically redundant. Repo Rate: Repo and Reverse Repo Rates are Liquidity adjustment Facility (LAF) tools used by RBI. along with the interest and '' its G-Secs. RBI gives them a loan only after taking some collateral.
the RBI buys or sells government bonds in the secondary market. Under the OMO. Other instruments of liquidity management are Open Market Operations (OMO) in the form of outright purchase/sale of securities and Market Stabilization Scheme (MSS). Liquidity Adjustment Facility (LAF): LAF is a monetary policy instrument introduced in 2000 to modulate liquidity in the system in the short term and to send interest rate signals to the market. When it sells bonds. it drives up bond yields and injects money into the market. RBI conducts repo to inject liquidity into the system through purchase of government securities with an agreement to sell them at a predetermined date and repo rate. 11/45 . In the reverse repo transaction RBI sells securities with a view to absorb excess liquidity with a commitment to repurchase them at a predetermined date and reverse repo rate. What are the functions performed by NABARD. as was seen in the recent past. it does so to suck money out of the system. LAF operates through repo and reverse repo transactions. Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking (Book ID: B1202) Assignment Set – 1 4. By absorbing bonds.Reg no # 511017114 cutting reverse repo rates in times of slowdown.
Reg no # 511017114 Ans: NABARD is set up by the Government of India as a development bank with the mandate of facilitating credit flow for promotion and development of agriculture and integrated rural development. planning and operations in the field of credit for agriculture and for other economic and developmental activities in rural areas. With a capital base of Rs 2. it is a refinancing agency for financial institutions offering production credit and investment credit for promoting agriculture and developmental activities in rural areas. The mandate also covers supporting all other allied economic activities in rural areas. promoting sustainable rural development and ushering in prosperity in the rural areas. It is an apex institution handling matters concerning policy. 2. 3. Credit functions Development and promotional functions Supervisory functions Institutional and capacity building Role in training Credit functions NABARD's credit functions cover planning. Essentially. NABARD's Roles and Functions are summarized below: 1. it operates through its head office at Mumbai. 5. This activity involves: • Framing policy and guidelines for rural financial institutions • Providing credit facilities to issuing organizations • Preparation of potential-linked credit plans annually for all districts for identification of credit potential • Monitoring the flow of ground level rural credit Development and promotional functions 12/45 .000 crore provided by the Government of India and Reserve Bank of India. dispensation and monitoring of credit. 4. 28 regional offices situated in state capitals and 391 district offices at districts.
computerizations of operations and development of human resources Supervisory functions As an apex bank involved in refinancing credit needs of major financial institutions in the country engaged in offering financial assistance to agriculture and rural development operations and programmers. Pune.org. NABARD has been undertaking a number of developmental and promotional activities such as: • Help cooperative banks and Regional Rural Banks to prepare development actions plans for themselves • Enter into MoU with state governments and cooperative banks specifying their respective obligations to improve the affairs of the banks in a stipulated timeframe • Help Regional Rural Banks and the sponsor banks to enter into MoUs specifying their respective obligations to improve the affairs of the Regional Rural Banks in a stipulated timeframe • Monitor implementation of development action plans of banks and fulfillment of obligations under MoUs • Provide financial assistance to cooperatives and Regional Rural Banks for establishment of technical. etc. NABARD has been sharing with the Reserve Bank of India certain 13/45 . Hence strengthening of rural financial institutions. so that adequate and timely credit is made available to the needy.birdindia. National Bank Staff College. Lucknow www. • Provide financial support for the training institutes of cooperative banks • Provide training for senior and middle level executives of commercial banks. which deliver credit to the sector.in. Lucknow www. monitoring and evaluations cells • Provide organisation development intervention (ODI) through reputed training institutes like Bankers Institute of Rural Development (BIRD).Reg no # 511017114 Credit is a critical factor in development of agriculture and rural sector as it enables investment in capital formation and technological up gradation. Various initiatives have been taken to strengthen the cooperative credit structure and the regional rural banks. has been identified by NABARD as a thrust area.nbsc.in and College of Agriculture Banking. In order to reinforce the credit functions and to make credit more productive. Regional Rural Banks and cooperative banks • Create awareness among the borrowers on ethics of repayment through Vikas Volunteer Vahini and Farmer’s clubs • Provide financial assistance to cooperative banks for building improved management information system.
Reg no # 511017114 supervisory functions in respect of cooperative banks and Regional Rural Banks (RRBs). As part of these functions. Core Functions NABARD has been entrusted with the statutory responsibility of conducting inspections of State Cooperative Banks (SCBs). District Central Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs) under the provision of the Banking Regulation Act. etc • To ensure observance of rules. besides off-site surveillance of Cooperative Banks and Regional Rural Banks (RRBs) • Provides recommendations to Reserve Bank of India on opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs) • Administering the Credit Monitoring Arrangements in SCBs and CCBs. Objectives of Inspection • To protect the interest of the present and future depositors • To ensure that the business conducted by these banks is in conformity with the provisions of the relevant Acts/Rules. formulated and issued by NABARD/RBI/Government • To examine the financial soundness of the banks • To suggest ways and means for strengthening the institutions so as to enable them to play more efficient role in rural credit Instruments of Supervision • Periodic on-site inspection of 31 SCBs . on a voluntary basis. Marketing Federations. 1949 • Undertakes inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and apex non-credit cooperative societies on a voluntary basis • Undertakes portfolio inspections. it • Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other than urban/primary cooperative banks) under the provisions of Banking Regulation Act. 20 SCARDBs and 82 RRBs and other Apex level Cooperative institutions • Supplementary Appraisal • Off-site Surveillance System ( OSS ) 14/45 . systems study. guidelines. 1949. NABARD has also been conducting periodic inspections of state level cooperative institutions such as State Cooperative Agriculture and Rural Development Banks (SCARDBs). In addition. Apex Weavers Societies. 371 DCCBs. regulations/Bye-Laws. etc. etc.
NABARD. While the capital adequacy norm has not yet been made applicable to these banks. etc. Provide financial assistance to cooperatives and RRBs for establishment of technical. Lucknow. National Bank Staff College. Lucknow.Reg no # 511017114 • • Portfolio inspection/System study CMA returns Supervisory Strategy In the wake of the banking sector reforms. Pune. Accordingly. Institutional and capacity building • • • • • • Help cooperative banks and RRBs to prepare development actions plans for themselves Enter into MoU with state governments and cooperative banks specifying their respective obligations to improve the affairs of the banks in a stipulated timeframe Help RRBs and the sponsor banks to enter into MoUs specifying their respective obligations to improve the affairs of the RRBs in a stipulated timeframe Monitor implementation of development action plans of banks and fulfillment of obligations under MoUs. which were made applicable by RBI to the commercial banking sector had been extended to cover RRBs in 1995-96. the prudential norms were extended to them in phases. • • • • 15/45 . Provide financial support for the training institutes of cooperative banks Provide training for senior and middle level executives of commercial banks. Provide organisation development intervention (ODI) through reputed training institutes like Bankers Institute of Rural Development (BIRD). new set of international norms/practices were made applicable to Commercial Banks (CBs) to make them more competitive and sustainable in the changing scenario. through a concrete and time-bound supervision strategy. RRBs and cooperative banks Create awareness among the borrowers on ethics of repayment through Vikas Volunteer Vahini/farmer's clubs Provide financial assistance to cooperative banks for building improved management information system. The co-operative banks and RRBs were also to function in the general banking environment. SCBs and DCCBs in 1996-97 and to SCARDBs in 1997-98. monitoring and evaluations cells. development of human resources. computerisation of operations. etc. introduced by the GOI/RBI. facilities these banks to adjust to the new financial discipline so as to internalize prudential norms stipulated. income recognition. emerging out of the financial sector reforms. the other prudential norms viz. asset classification and provisioning. College of Agriculture Banking.
partner agencies and other developmental agencies is important. for dissemination of information and the promotion of research including the undertaking of studies. 16/45 . as may be agreed upon. techno-economic and other surveys in the field of rural banking. in the initial years the Bank had recruited expert staff from various technical disciplines and created a separate cadre of officers. appraising. the role of training in NABARD and the role played by it for capacity building in client institutions. For maintaining 'Expert Staff'.Reg no # 511017114 Role in training The provisions of the Act as stated below very clearly indicate the nature and scope of the developmental mandate of the Bank and its role in training and capacity building with the underlying belief that the process of development cannot be accomplished by credit/refinance alone. the State Governments and the other institutions engaged in the field of rural development • provide facilities for training. marketing and administrative assistance to any person engaged in agriculture and rural development activities. • provide technical. These officers were involved in formulating. promotional. developmental. on such terms and against such remuneration. monitoring and evaluating different agricultural projects implemented by different credit agencies. get involved in a variety of roles and functions including credit. The Bank also had access to their specialised skills which were utilised whenever needed. Section 38 of the NABARD Act provides that the Bank shall: • maintain expert staff to study all problems relating to agriculture and rural development and be available for consultation to the Central Government. supervisory and necessary support and information for decision making. financial. irrespective of their academic background. the bank needs to provide continuous exposure to its officers and staff for upscaling their knowledge and skills in core areas. researches. • may provide consultancy services in the field of agriculture and rural development and other related matters in or outside India. were imparted similar type of training as all other officers. Their placements and the regular job rotations helped in grooming them to take up assorted assignments. legal. However. agriculture and rural development.These officers. the Reserve Bank. In this context.
the Bank encourages the RFIs to set up their own training systems and provides these training institutes the necessary support to conduct meaningful and quality training. With a view to broadbase the training and capacity building efforts. Options and avenues for strengthening the training interventions at the client level are continuously examined so that the human resources in these institutions are developed to take on the challenges. reckon with the competition. improve customer service. expand outreach.Reg no # 511017114 In pursuance of the Bank's mandate as stated in the Act. the Bank provides training facilities for the RFIs and agencies involved in rural development through BIRD and the two RTCs. develop suitable products and thereby contribute to rural development Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking 17/45 .
This basically means that the entire bank's branches access applications from centralized datacenters. An overall service-oriented-architecture (SOA) helps banks reduce the risk that can result from manual data entry and out-of-date information. Banks make these services available across multiple channels like ATMs. Implementing a modular. This means that the deposits made are reflected immediately on the bank's servers and the customer can withdraw the deposited money from any of the bank's branches throughout the world. Core banking basically is depositing and lending of money. Internet banking. Ans: Core Banking is normally defined as the business conducted by a banking institution with its retail and small business customers. These applications now also have the capability to address the needs of corporate customers. Core banking solutions is new jargon frequently used in banking circles. mortgages and payments. Nowadays. What do you understand by core banking? Which banks in India offer core banking solutions. providing a comprehensive banking solution. Many banks treat the retail customers as their core banking customers. reduce costs. and the data from the server in each branch was sent in a batch to the servers in the data center only at the end of the day (EoD). A few decades ago it used to take at least a day for a transaction to reflect in the account because each branch had their local servers. and branches. The advancement in technology. increases management information and review. most banks use core banking applications to support their operations where CORE stands for "centralized online real-time exchange". and be prepared for growth. especially Internet and information technology has led to new ways of doing business in 18/45 . and have a separate line of business to manage small businesses. component-based enterprise solution facilitates integration with a bank's existing technologies. and avoids the potential disruption to business caused by replacing entire systems. Normal core banking functions will include deposit accounts. Core banking solutions Core banking solutions are banking applications on a platform enabling a phased.Reg no # 511017114 (Book ID: B1202) Assignment Set – 1 5. Larger businesses are managed via the corporate banking division of the institution. loans. strategic approach that is intended to allow banks to improve operations.
This software is installed at different branches of bank and then interconnected by means of communication lines like telephones. computer software is developed to perform core operations of banking like recording of transactions. ATM that offers him anytime anywhere banking facility. customer records. passbook maintenance. and posts updates to accounts and other financial records. • Better funds management due to immediate availability of funds. Core Banking Solutions (CBS) or Centralized Banking Solutions is the process which is completed in a centralized environment i. The platform where communication technology and information technology are merged to suit core needs of banking is known as core banking solutions. internet etc. balance of payments and withdrawal. a no. It allows the user (customers) to operate accounts from any branch if it has installed core banking solutions. satellite. working simultaneously on different issues and increasing efficiency. of banks in India in recent years have taken steps to implement the CBS with a view to build relationship with the customer based on the information captured and offering to the customer. Depending upon the size and needs of a bank. This task is carried through advance software by making use of the services provided by specialized agencies. it could be for the all the operations or for limited operations. Here. income. the customized financial products according to their need. This new platform has changed the way banks are working. family members etc. Hence accuracy in transactions. Banks: 19/45 . loan and credit-processing capabilities. profession. Core banking systems typically include deposit.Reg no # 511017114 banking. Advantages: The CBS process is advantageous both to the customers and the banks in the following manner: Customer: • Transaction of business from any branch.) is stored in the Central Server of the bank (that is available to all the networked branches) instead of the branch server. and interest calculations on loans and deposits. • Lower incidence of errors.e. Strategic spending on these systems is based on a combination of service-oriented architecture and supporting technologies that create extensible. financial dealings. These technologies have cut down time. under which the information relating to the customer’s account (i. with interfaces to general ledger systems and reporting tools. agile architectures. Gartner defines a core banking system as a back-end system that processes daily banking transactions. Due to its benefits.e.
Reg no # 511017114 • Standardization of process within the bank. IndusInd Bank Ltd. Axis Bank Yes Bank Ltd ABN-AMRO Bank N. • Better customer service leading to retention of customer and increased customer traffic.. • Increased business volume with better asset liability management and risk management Banks in India offering core banking solutions are: Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India Vijaya Bank State Bank of India State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore HDFC Bank Ltd ICICI Bank Ltd. • Availability of accurate data & Better use of available infrastructure • Better MIS and reporting to external agencies such as Govt.V 20/45 . RBI etc. Kotak Mahindra Bank Ltd.
and ROSCAs on the one hand. though SHGs can also be found in other countries. and formal actors like microfinance institutions and banks on the other. Barclays Bank PLC Citibank DBS Bank Ltd Deutsche Bank AG HSBC Ltd Standard Chartered Bank Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking (Book ID: B1202) Assignment Set – 1 6. collectors. many SHGs are 'linked' to banks for the delivery of microcredit. Ans: A self-help group (SHG) is a village-based financial intermediary usually composed of between 10-20 local women. Members make small regular savings contributions over a few months until there is enough capital in the group to begin lending.Reg no # 511017114 Abu Dhabi Commercial Bank Ltd American Express Bank Ltd. What is the advantage of giving loans via Self Help Groups. Other organizations in this transitional zone in financial market development include CVECAs and ASCAs. Funds may then be lent back to the members or to others in the village for any purpose. In India. SHGs are member-based microfinance intermediaries inspired by external technical support that lie between informal financial market actors like moneylenders. Most self-help groups are located in India. especially in South Asia and Southeast Asia. 21/45 .
Participants take great pleasure in being part of a group. Savings Groups provide important financial services. How do Savings Groups work? They are voluntary. Savings are maintained as a loan fund from which members can borrow in small amounts. determined by the members. and taking control of their lives and their futures. In some regions the savings groups open a bank account. financing through SHGs reduces transaction costs for both lenders and borrowers. widely used by microfinance institutions. and often set a maximum ratio of loan size to a member’s savings. and participants earn between 10 and 40% a year on their savings. save more. While lenders have to handle only a single SHG account instead of a large number of small-sized individual accounts. Almost all savings groups charge a service charge (interest rate). flat interest rates are used for most loan calculations. and receive the social and financial support they need to move forward in their lives. and rotate every few years. sending their children to school. The group decides the terms by which members may borrow. This system eliminates the need for collateral and is closely related to that of solidarity lending. voluntarily coming together to save regular small sums of money. It is a long-term. Groups elect officers democratically. 22/45 . The group members use collective wisdom and peer pressure to ensure proper end-use of credit and timely repayment. Seeing their own success and that of their peers. To make the book-keeping simple enough to be handled by the members. repairing their homes. Also it is a group of people who pool in their resources to become financially stable by taking loans from the money collected by that group and by making everybody of that group self-employed. An economically poor individual gains strength as part of a group.Reg no # 511017114 A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous social and economic backgrounds. they are inspired to earn more. and fulfill their dreams of providing food for their families. sustainable solution which plays a central role in the efforts of the very poor to improve and stabilize their livelihoods. mutually agreeing to contribute to a common fund and to meet their emergency needs on the basis of mutual help. although in others the cost and distance make this undesirable. Records are kept in individual pass books or by a paid accountant. Besides. borrowers as part of an SHG cut down expenses on travel (to & from the branch and other places) for completing paper work and on the loss of workdays in canvassing for loans. but also have a powerful social impact. community-based and self-managed groups of 15 to 25 individuals who meet regularly to contribute to their own savings.
Discuss the three basic types of lease.Reg no # 511017114 Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking (Book ID: B1202) Assignment Set – 2 1. What is the difference between lease and hire purchase? 23/45 .
etc.). 2. a tenant only pays base rent during the first calendar year (even if it is only part of a calendar year) and in subsequent years also pays a percentage of increases in building property taxes. In such a lease. In this type of lease some of the owner’s operating expenses – often times utility expenses – are passed through to the tenant. the investor will finance a significant portion of the purchase price on a property and pay the resulting mortgage with the lessee's monthly owed rent. Typically. usually five years . Office space leases are usually modified gross leases. There is usually a small amount left over as monthly profit for the investor (positive cash flow). Modified Gross Lease. The first calendar year is considered the base year and any increase in taxes. Sometimes these are called net leases as well.the typical commercial mortgage term. premises utilities. and other operating expenses.Reg no # 511017114 Ans: The names may vary from market to market. the tenant or lessee is responsible for all costs associated with the repair and maintenance of any common area. it has also been used in single family residential rental real estate properties. Sometimes the increase is only billed annually. The idea is that all (true triple net) or almost all of the owner’s fixed property expenses are passed through to the tenant. commercial and retail leases 24/45 . but the greater investment payoff comes from the shields afforded to the investor through the use of leverage or gearing. and maintenance (the three 'Nets') on the property in addition to any normal fees that are expected under the agreement (rent. The tenant must then pay its percentage of allocated expenses in addition to base rent. NNN Lease. The resulting property is then sold after a period of equity-building. insurance or operating expenses over the base year are allocated to tenants based on the percentage of space in the building or multi-building project that the tenant occupies. building insurance. This form of lease is most frequently used for commercial freestanding buildings however. Also known as triple net leases and sometimes called a true triple net lease. typically. but in general there are three types of lease agreements: 1. insurance. A triple net lease (Net-Net-Net or NNN) is a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes. A modified gross lease is a variation of a gross lease in which. For example. but usually the landlord charges a monthly amount estimated to cover the annual charges and after the end of the year reconciles the actual costs with the estimated amounts paid by the tenant. utilities. triple net leases (NNN) are 'equity investments'. rather than 'cash flow investments'.
Therefore. • • • • • • 25/45 . In hire purchase.Reg no # 511017114 are sometimes modified gross (but usually net) and residential leases are rarely modified gross (usually gross). it is the responsibility of the lessor. Difference between Lease and Hire Purchase: • Ownership of the Asset: In lease. Tax Impact: In lease agreement. Normally. the depreciation claim is allowed to the hirer in case of hire purchase transaction. Extent of Finance: Lease financing can be called the complete financing option in which no down payments are required but in case of hire purchase. it is derived with the cost of an asset over the asset life. the normally 20 to 25 % margin money is required to be paid upfront by the hirer. Rental Payments: The lease rentals cover the cost of using an asset. Gross Lease. the depreciation is claimed as an expense in the books of lessor. Repairs and Maintenance: Repairs and maintenance of the asset in financial lease is the responsibility of the lessee but in operating lease. ownership lies with the lessor. the hirer has the option to purchase. we call it a partial finance like loans etc. insurance and maintenance. 3. The lessee has the right to use the equipment and does not have an option to purchase. On the other hand. Whereas in hire purchase. In case of hire purchase. A type of commercial lease where the landlord pays for the building's property taxes. this type of lease has the tenant paying one fixed amount each month without add-ons. A gross lease can be modified in a number of ways to best meet the needs of a particular building's tenants (for example. Duration: Generally lease agreements are done for longer duration and for bigger assets like land. the responsibility lies with the hirer. the total lease rentals are shown as expenditure by the lessee. the hirer claims the depreciation of asset as an expense. installment is inclusive of the principal amount and the interest for the time period the asset is utilized. a gross lease may or may not require the tenant to pay utility bills). Often found in leases written for office space. The hirer becomes the owner of the asset/equipment immediately after the last installment is paid. In hire purchase. Hire Purchase agreements are done mostly for shorter duration and cheaper assets like hiring a car. property etc. machinery etc. Depreciation: In lease financing.
Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking (Book ID: B1202) Assignment Set – 2 2.Reg no # 511017114 The option of lease finance or the hire purchase can be opted by the businessmen but they should be analyzed properly as to how much the option suits to the business requirement and situations. covering the entire debt market. and independent opinion as to the issuer's capacity to meet its financial obligations. Which are the main credit rating agencies in India and the functions performed by each? Ans. In India. 26/45 . So far. ICRA and Brickwork Ratings. CARE. commercial credit rating agencies include CRISIL. CRISIL has rated 30. The debt obligations rated by CRISIL include: Non-convertible debentures/bonds/preference shares Commercial papers/certificates of deposits/short-term debt Fixed deposits Loans Structured debt CRISIL Ratings' clientele includes all the industry majors .23 of the BSE Sensex constituent companies and 39 of the NSE Nifty constituent companies.000 debt instruments. accounting for 80 per cent of the equity market capitalisation. objective. It is an unbiased. are CRISIL's clients. CRISIL A CRISIL rating reflects CRISIL's current opinion on the relative likelihood of timely payment of interest and principal on the rated obligation.
or the promoters. comparability. CARE is registered with the Securities and Exchange Board of India. standardisation. RBI has also recognized CARE Ratings as an eligible external credit rating agency for the purpose of Basel II implementation in India CARE is an independent rating agency promoted by major banks and financial institutions in India. NABARD. and effective communication of the ratings assigned and of every timely rating action. CARE is a board 27/45 . which ensures comprehensiveness. The assessment is based on the highest standards of independence and analytical rigour. including: Industrial companies Banks Non-banking financial companies (NBFCs) Infrastructure entities Microfinance institutions Insurance companies Mutual funds State governments Urban local bodies CARE CARE Ratings are recognized by Government of India and regulatory agencies in India.Reg no # 511017114 CRISIL's credit ratings are An opinion on probability of default on the rated obligation Forward looking Specific to the obligation being rated But they are not A comment on the issuer's general performance An indication of the potential price of the issuers' bonds or equity shares Indicative of the suitability of the issue to the investor A recommendation to buy/sell/hold a particular security A statutory or non-statutory audit of the issuer An opinion on the associates. NHB and NSIC. The three largest shareholders of CARE are IDBI Bank. affiliates. CARE Ratings are also recognized by RBI. directors. Canara Bank and State Bank of India. CRISIL rates a wide range of entities. or officers of the issuer CRISIL ratings are based on a robust and clearly articulated analytical framework. or group companies.
Mutual Fund Credit quality ratings. Structured finance Securitization transactions. Public Sector Undertakings (PSUs). CARE has a unique understanding of the local business. CARE is the only rating agency in India which operates with an independent rating committee comprising of senior and reputed professionals. Non-banking Finance Companies (NBFCs). Grading of Construction Entities and Issuer ratings. CARE assigned its first rating in November 1993 and upto March 31. In addition. CARE also follows a well defined Code of Conduct for its Directors. chartered financial analysts and financial risk managers. sector specialists. CARE is a full service rating company offering a wide range of rating and grading services which includes rating debt instruments/enterprise ratings of Corporate. With a large number of qualified and experienced multi-faceted analyst and presence in all major metros of India. This. Banks. cultural and value systems and factors which affect the Indian economy. CARE ratings are also used by a 28/45 . financial analysts. SMEs. which encompasses detailed analysis of risks that affect credit quality of an issuer. Municipal Corporations. economists. State Government bodies.Reg no # 511017114 managed company with eminent professionals on the board. chartered accountants. acknowledges the confidence of Indian Institutional Investors in CARE Ratings. CARE has a well established rating process and detailed rating methodologies covering various sectors. CARE had completed 7654 rating assignments for an aggregate value of about Rs23121 bn. CARE has over a decade of experience in rating various types of instruments. who are also amongst the major investors in the Indian bond markets. Rating Committee Members and Analysts for professional conduct and for avoidance of conflict of interests. CARE Ratings endeavor has been to provide investors and risk managers with independent. Claims Paying Ability rating of Insurance Companies. This provides access to international know-how on ratings. CARE's analyst strength consists of large number of well qualified and multi-faceted professionals from diverse backgrounds such as. 2010. CARE Ratings undertakes Corporate Governance ratings. authentic and insightful credit opinions based on detailed in-depth research. Financial Institutions (FIs). IPO grading. CARE is a founder member of the Association of Credit Rating Agencies in Asia (ACRAA) and is actively in dialogue with Asian and International rating agencies. Micro finance institutions. CARE has a significant rating coverage of the Indian Banks and Financial Institutions. The entire Board comprises of Independent Directors.
which assist businesses enhance the quality of their decisions and help issuers access a broader investor base and even lesser known companies approach the money and capital markets. Insurance companies. ICRA Ratings Code of Conduct is aligned with the Code of Conduct Fundamentals for Credit Rating Agencies issued by the Technical Committee of the International Organization of Securities Commissions to the extent it is within the applicable Statutes in India. What are the functions of the Reserve Bank of India? 29/45 . ICRA strongly believe that quality and authenticity of information are derivatives of an organization’s research base. ICRA ICRA information products. Corporate and Retail investors. Industry and Sector research and a panel of Advisors to enhance our in-house capabilities. Hyderabad and Pune. and solutions reflect independent. Brickwork Ratings Brickwork Ratings. Provident funds. professional and impartial opinions. Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking (Book ID: B1202) Assignment Set – 2 3. useful information is still scarce. Fiscal. Chennai. founded by bankers. Ratings. is committed to promoting Financial Literacy. credit rating professionals. ICRA also has responsibilities to the investing public and to issuers themselves. It has dedicated teams for Monetary.. former regulators as well as professors. having its corporate office in Bangalore and branches at New Delhi. While Indian financial markets have been liberalized in the past two decades. Mumbai. including a responsibility to protect the confidentiality of some types of information issuers share with ICRA. a SEBI licensed credit rating agency. Research base enables to maintain the highest standards of quality and credibility.Reg no # 511017114 wide range of investors including Mutual Funds.
Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors. Some of these problems are results of the dominant part of the public sector. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development. The RBI faces a lot of inter-sectoral and local inflation-related problems. because both objectives are diverse in themselves. Main Functions Monetary authority The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. The national economy depends on the public sector and the central bank promotes an expansive monetary policy to push the private sector since the financial market reforms of the 1990s. Objectives are to maintain public confidence in the system. protect depositors' interest and provide cost-effective banking services to the public. to maintain the currency and credit system of the country to utilize it in its best advantage. The RBI controls the monetary supply. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. The basic objectives of RBI are to issue bank notes. Issuer of currency The bank issues and exchanges or destroys currency and coins not fit for circulation. It formulates. 1999. 30/45 . Developmental role The central bank has to perform a wide range of promotional functions to support national objectives and industries. monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins. and to maintain the reserves. Manager of exchange control The central bank manages to reach the goals of the Foreign Exchange Management Act.Reg no # 511017114 Ans. implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors.
RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to affect a decrease or an increase in the money supply. banks are required to maintain liquid assets in the form of gold. As of 5 May. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition. Statutory Liquidity Ratio (SLR): Apart from the CRR. government securities are traded at market 31/45 . thus it is an antiinflationary impact. owing to the sprawling mandate described above. Cash Reserve Ratio (CRR): Every commercial bank has to keep certain minimum cash reserves with RBI. In well developed economies. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances. cash and approved securities. too. If the RBI wants to increase the liquidity and money supply in the market. Bank Rate: RBI lends to the commercial banks through its discount window to help the banks meet depositor’s demands and reserve requirements. it will increase the bank rate. The recent financial turmoil world-over.Reg no # 511017114 Related functions The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. has however. RBI can vary this rate between 3% and 15%. This will in turn decrease the money supply. In the open money market. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities. RBI is far out of touch with such a principle. it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system. vindicated the Reserve Bank's role in maintaining financial stability in India. central banks use open market operations--buying and selling of eligible securities by central bank in the money market--to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. It also acts as their banker. The institution maintains banking accounts of all scheduled banks. There is now an international consensus about the need to focus the tasks of a central bank upon central banking. The interest rate the RBI charges the banks for this purpose is called bank rate. The current rate is 6%. This will reduce the size of their deposits and they will lend less. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. 2011 the bank rate was 6%.
The RBI is resorting more to open market operations in the more recent years. 3. Part of the interest rate structure i. 3. Minimum margins for lending against specific securities. 2.e.Reg no # 511017114 related rates of interest. 32/45 . on small savings and provident funds. Direct credit controls in India are of three types: 1. Banks are mandatory required to keep 25% of their deposits in the form of government securities. 2. Discriminatory rate of interest charged on certain types of advances. Ceiling on the amounts of credit for certain purposes. Banks are required to lend to the priority sectors to the extent of 40% of their advances. are administratively set. Generally RBI uses three kinds of selective credit controls: 1.
management of market risk. It has been introduced in Indian Banking industry w.both mix and volume .Reg no # 511017114 Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking (Book ID: B1202) Assignment Set – 2 4. It is the management of structure of balance sheet (liabilities and assets) in such a way that the net earning from interest is maximized within the overall risk-preference (present and future) of the institutions. Benefits of ALM . It is an integrated approach to financial management.It is a tool that enables bank managements to take business decisions in a more informed framework with an eye on the risks that bank is exposed to.f.with the complexities of the financial markets in which the institution operates The concept of ALM is of recent origin in India. The ALM functions extend to liquidly risk management. ALM is concerned with 33/45 . monitoring and managing the market risk of a bank. 1999. How is asset liability management done in banks? Ans. requiring simultaneous decisions about the types of amounts of financial assets and liabilities . 1st April. Asset Liability Management (ALM) is a comprehensive and dynamic framework for measuring. trading risk management. funding and capital planning and profit planning and growth projection.e.
Reg no # 511017114 risk management and provides a comprehensive and dynamic framework for measuring. As per RBI guidelines. the Banking industry has been exposed to the market risks. To manage such risks. monitoring and managing liquidity. measuring and managing the market risk of a bank. banks are required to monitor their cumulative mismatches across all time buckets in their Statement of Structural Liquidity by establishing internal prudential limits with the approval of the Board / Management Committee. 181-365 days. ALM is used so that the management is able to assess the risks and cover some of these by taking appropriate decisions. expediency ALM Organization o Structure and responsibilities o Level of top management involvement ALM Process o Risk parameters o Risk identification o Risk measurement o Risk management o Risk policies and tolerance levels. based on 34/45 . With the deregulation of interest regime in India. accuracy. ALM Information Systems o Management Information Systems o Information availability. interest rate. banks use of maturity ladder and then calculate cumulative surplus or deficit of funds in different time slots on the basis of statutory reserve cycle. ALM is considered as an important tool for monitoring. With a view to measure the liquidity and interest rate risk. commercial banks are to distribute the outflows/inflows in different residual maturity period known as time buckets. 1-3 years and 3-5 years and above 5 years). The assets and liabilities of the bank’s balance sheet are nothing but future cash inflows or outflows. The ALM process rests on three pillars: i. adequacy and ii. 91-180 days. The Assets and Liabilities were earlier divided into 8 maturity buckets (1-14 days. As a measure of liquidity management. 29-90 days. iii. foreign exchange and equity and commodity price risks of a bank that needs to be closely integrated with the banks’ business strategy. Therefore. 15-28 days. which are termed as time buckets.
The Board’s of the Banks have been entrusted with the overall responsibility for the management of risks and is required to decide the risk management policy and set limits for liquidity..Reg no # 511017114 the remaining period to their maturity (also called residual maturity). 15 % and 20 % of the cumulative cash outflows in the respective time buckets in order to recognise the cumulative impact on liquidity. such situation may turnout to be risky for the bank. All the liability figures are outflows while the asset figures are inflows. the need for a sharper assessment of the efficacy of liquidity management and with a view to providing a stimulus for development of the term-money market. now we have 10 time buckets. RBI revised these guidelines and it was provided that • (a) The banks may adopt a more granular approach to measurement of liquidity risk by splitting the first time bucket (114 days at present) in the Statement of Structural Liquidity into three time buckets viz. Thus. each bucket of assets is matched with the corresponding bucket of the liability. 8-14 days and 15-28 days buckets should not exceed 5 % . After such an exercise. ALCO considers product pricing for deposits and advances. Asset-Liability Committee (ALCO) is the top most committee to oversee the implementation of ALM system and it is to be headed by CMD or ED.10%. the desired maturity profile of the incremental assets and liabilities in addition to monitoring the risk levels of the bank. In September. which creates liquidity surplus or liquidity crunch position and depending upon the interest rate movement. interest rate. Banks are required to monitor such mismatches and take appropriate steps so that bank is not exposed to risks due to the interest rate movements during that period. the level of sophistication of banks in India. It will have to 35/45 . 2-7 days and 8-14 days. 2-7 days. When in a particular maturity bucket. next day . having regard to the international practices. such position is called a mismatch position. • (b) The net cumulative negative mismatches during the Next day. 2007. the amount of maturing liabilities or assets does not match. foreign exchange and equity price risks.
Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking (Book ID: B1202) Assignment Set – 2 5.Reg no # 511017114 articulate current interest rates view of the bank and base its decisions for future business strategy on this view. 36/45 . What are the internet banking facilities provided to corporate.
This is useful for effecting multiple payments at a single click. The format of the text file basically contains account no. you will be a sent your user ID and password. approval process and transaction authority for various employees for complete security. deposit and external accounts (channel partner i.Reg no # 511017114 Ans: Corporate Internet Banking Corporate Internet Banking (CIB) is Development Credit Bank’s powerful online banking channel that helps our institutional customers manage their complex banking from their desktops. One can specify and set the user level limit and the transaction level limit. The duly filled application form can be submitted to your RM. CIB offers customers some key facilities: Single window view of all Development Credit Bank accounts mapped to a single user id. For bulk transfers you need to upload a text file (as per our prescribed format) containing the payment instructions. Corporate Internet Banking offers real time fund transfers. including • Loan.e. A fund transfer cap can be specified for each of the debit accounts in terms of amount and you can also specify a limit on the 37/45 . • MIS Integration: You can download your account details as an excel. To access CIB you need to register as a user. enter the amount and narration for fund transfer and affect the same. You can either do a one-to-one fund transfer or a bulk transfer. vendor/dealer accounts) • Intra-account and Inter-Bank fund transfer using NEFT/RTGS • Bulk payments • Trade Services and Cash Management Services • Requests for FD opening. On registration. For registering. PDF or text file. Cheque book and Stop Payment Key Benefits & Advantages: • 24*7 Banking Hours • Real time access to all your Account Information • Customization & Security: You can preset the information access.. you need to complete our CIB application form. In a one-to-one fund transfer the accounts are linked and you have to select the debit and credit account. date and narration for the payment. amount.
data encryption. digital certification are used so that no other person is able to access your account.Reg no # 511017114 amount of fund transfer that can be affected by your authorized users. which only you will know. This is similar to Cheque signing powers in the physical world. Other features include a separate password for transactions. You can affect fund transfers to accounts of non-DEVELOPMENT CREDIT Bank. Firewalls. 38/45 . The inter bank fund transfers are routed through the RBI-NEFT and RTGS mechanism. and even the Bank employees will not be aware about the same.
every governments of India took major steps in reforming the financial sector of the country.Reg no # 511017114 Master of Business Administration – MBA Semester 3 MA0036 – Financial Systems and Commercial Banking (Book ID: B1202) Assignment Set – 2 6. Private Sector Institutions played an important role. Ans : The last decade witnessed the maturity of India's financial markets. they started making debt in the market. They grew rapidly in commercial banking and asset management business. It was something between the nominal rate of interest and the expected rate of inflation. With the openings in the insurance sector for these institutions. Since 1991. Regulators 39/45 . The important achievements in the following fields are discussed under separate heads: • • • • • • • • • • Financial markets Regulators The banking system Non-banking finance companies The capital market Mutual funds Overall approach to reforms Deregulation of banking system Capital market developments Consolidation imperative Financial Markets In the last decade. The borrowers did not pay high price while depositors had incentives to save. Competition among financial intermediaries gradually helped the interest rates to decline. The real interest rate was maintained. Deregulation added to it. What has been the philosophy behind reforms in the banking sector.
The RBI has given licences to new private sector banks as part of the liberalisation process. Shares of the leading PSBs are already listed on the stock exchanges.2 crores. Hence. Several measures have been initiated and include new money market 40/45 . Now they have to approach the capital market for debt and equity funds. Capital adequacy norms extended to financial institutions. small business and agricultural finance.Reg no # 511017114 The Finance Ministry continuously formulated major policies in the field of financial sector of the country. in order to achieve an efficient banking system. DFIs such as IDBI and ICICI have entered other segments of financial services such as commercial banking. Convertibility clause no longer obligatory for assistance to corporates sanctioned by term-lending institutions. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance. asset management and insurance through separate ventures. The move to universal banking has started. The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constrait of limited number of branches. retail trade. Non-banking finance companies In the case of new NBFCs seeking registration with the RBI. Opinions are also there that there should be a super-regulator for the financial services sector instead of multiplicity of regulators. The Reserve Bank of India (RBI) has become more independent. the money market in India was narrow and circumscribed by tight regulations over interest rates and participants. Until recently. the onus is on the Government to encourage the PSBs to be run on professional lines. has been raised to Rs. Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) became important institutions. PSBs are still dominating the commercial banking system. Development finance institutions FIs's access to SLR funds reduced. The banking system Almost 80% of the business are still controlled by Public Sector Banks (PSBs). The Government accepted the important role of regulators. the requirement of minimum net owned funds. The secondary market was underdeveloped and lacked liquidity. The RBI has also been granting licences to industrial houses.
000 crores. The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out through repo auctions. the gilt. Primary dealers bid for these securities and also trade in them. strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI).up. The capital market The number of shareholders in India is estimated at 25 million. The RBI conducts its sales of dated securities and treasury bills through its open market operations (OMO) window. There has been a dramatic improvement in the country's stock market trading infrastructure during the last few years. Mutual funds The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations. Unfortunately. only an estimated two lakh persons actively trade in stocks. the SEBI has now decided to concentrate on the development of the debt market. The biggest shock to the mutual fund industry during recent times was the insecurity generated in the minds of investors regarding the US 64 scheme. The Securities Trading Corporation of India (STCI). Expectations are that India will be an attractive emerging market with tremendous potential. which has led to retail investors deserting the stock markets. which started operations in June 1994 has a mandate to develop the secondary market in government securities. On account of the substantial issue of government debt. Stamp duty is being withdrawn at the time of dematerialization of debt instruments in order to encourage paperless trading. With the issuance of SEBI guidelines. The DFHI is the principal agency for developing a secondary market for money market instruments and Government of India treasury bills. but its share is going down. 1996 and amendments thereto. With the growth in the securities markets and tax 41/45 . during recent times the stock markets have been constrained by some unsavoury developments.edged market occupies an important position in the financial set. The Unit Trust of India remains easily the biggest mutual fund controlling a corpus of nearly Rs. However. After bringing some order to the equity market.70. the industry had a framework for the establishment of many more players.Reg no # 511017114 instruments. Long-term debt market: The development of a long-term debt market is crucial to the financing of infrastructure. both Indian and foreign players.
42/45 . They are introducing new products. financial liberalization alone will not ensure stable economic growth. The foreign owned AMCs are the ones which are now setting the pace for the industry. The phenomenon of rich industrialists and bankrupt companies continues. Good regulation will.Reg no # 511017114 advantages granted for investment in mutual fund units. frauds cannot be totally prevented. which is often not the case in India. An indication of the strength of the reformed Indian financial system can be seen from the way India was not affected by the Southeast Asian crisis. an active corporate debt market and a developed derivatives market). The new players will need to bring in innovative products as well as fresh ideas on marketing and distribution. the cumulative effect of the developments since 1991 has been quite encouraging. Technology developments have improved customer service. The entry of foreign players has assisted in the introduction of international practices and systems. in order to improve the low per capita insurance coverage. It is too early to conclude whether the erstwhile public sector monopolies will successfully be able to face up to the competition posed by the new players. Further. but it can be expected that the customer will gain from improved service. be essential. However. setting new standards of customer service. However. with participation restricted to 26 per cent of equity. Some tough decisions still need to be taken. Foreign companies can only enter joint ventures with Indian companies. improving disclosure standards and experimenting with new types of distribution. The insurance industry is the latest to be thrown open to competition from the private sector including foreign players. financial stability cannot be ensured. The government and the regulatory authorities have followed a step-by-step approach. Overall approach to reforms The last ten years have seen major improvements in the working of various financial market participants. In the case of financial institutions. even with the best of regulation. Some gaps however remain (for example: lack of an inter-bank interest rate benchmark. Without fiscal control. the political and legal structures hve to ensure that borrowers repay on time the loans they have taken. not a big bang one. punishment has to follow crime. The fate of the Fiscal Responsibility Bill remains unknown and high fiscal deficits continue. mutual funds started becoming popular. On the whole. of course.
Several local stock exchanges changed over from floor based trading to screen based trading. Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets after registration with the SEBI. Recovery of debts due to banks and the Financial Institutions Act. 1947. 1993 was passed. 43/45 . Private mutual funds permitted The Depositories Act had given a legal framework for the establishment of depositories to record ownership deals in book entry form. the capital market regulator was established in 1992. Bank lending norms liberalized and a loan system to ensure better control over credit introduced. with nationwide stock trading and electronic display. provisioning for delinquent loans and for capital adequacy. clearing and settlement facilities was established. Derivative products such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced. market and operational risks. and special recovery tribunals set up to facilitate quicker recovery of loan arrears. The National Stock Exchange (NSE). Capital market developments The Capital Issues (Control) Act. office of the Controller of Capital Issues were abolished and the initial share pricing were decontrolled. PSBs were encouraged to approach the public for raising resources. repealed. Dematerialization of stocks encouraged paperless trading.Reg no # 511017114 Deregulation of banking system Prudential norms were introduced for income recognition. Interest rates on the deposits and lending sides almost entirely were deregulated. Indian companies were permitted to access international capital markets through euro issues. In order to reach the stipulated capital adequacy norms. RBI guidelines issued for risk management systems in banks encompassing credit. asset classification. A credit information bureau being established to identify bad risks. New private sector banks allowed to promote and encourage competition. SEBI. Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash reserve ratio (CRR) brought down in steps. Banks asked to set up asset liability management (ALM) systems. substantial capital were provided by the Government to PSBs.
Reg no # 511017114 Companies were required to disclose all material facts and specific risk factors associated with their projects while making public issues. even though facing difficult times. Steps were taken to improve corporate governance based on the report of a committee. Derivatives trading starts with index options and futures. the Life Insurance Corporation of India is a behemoth. SEBI reconstituted governing boards of the stock exchanges. but the situation is different now. The merger of Punjab National Bank and New Bank of India was a difficult one. First. SEBI empowered to register and regulate venture capital funds. Private sector banks will be self consolidated while co-operative and rural banks will be encouraged for consolidation. A system of rolling settlements introduced. 100 were abolished. Buy back of shares allowed The SEBI started insisting on greater corporate disclosures. which at one time were much sought after jobs. there is no need for 27 PSBs with branches all over India. The UTI is yet again a big institution. Consolidation imperative Another aspect of the financial sector reforms in India is the consolidation of existing institutions which is especially applicable to the commercial banks. The SEBI (Credit Rating Agencies) Regulations. No one expected so many employees to take voluntary retirement from PSBs. 1999 issued for regulating new credit rating agencies as well as introducing a code of conduct for all credit rating agencies operating in India. subject to conditions. and made rules for making client or broker relationship more transparent which included separation of client and broker accounts. and most other public sector players are already exiting the mutual fund 44/45 . while the four public sector general insurance companies will probably move towards consolidation with a bit of nudging. In India the banks are in huge quantity. To reduce the cost of issue. underwriting by the issuer were made optional. 10 and Rs. Companies given the freedom to issue dematerialized shares in any denomination. A number of them can be merged. In the case of insurance. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices stopped and fresh guidelines were issued by SEBI. and anyway play only a niche role. SEBI issued detailed employee stock option scheme and employee stock purchase scheme for listed companies. Standard denomination for equity shares of Rs. introduced capital adequacy norms for brokers.
There are a number of small mutual fund players in the private sector. However. Various forms of bancassurance are being introduced. The pensions market is expected to open up fresh opportunities for insurance companies and mutual funds. HDFC and SBI are already trying to offer various services to the customer under one umbrella. even though it has not always been a success till date. and the coming decade should be as interesting as the last one. The LIC has bought into Corporation Bank in order to spread its insurance distribution network. but the business being comparatively new for the private players. It is not possible to play the role of the Oracle of Delphi when a vast nation like India is involved. as there is a great deal of synergy among these businesses. Hi-tech and the need to meet increasing consumer needs is encouraging convergence. Where mergers may not be possible. the new buzzword internationally. 45/45 . In India organizations such as IDBI. This phenomenon is expected to grow rapidly in the coming years. alliances between organisations may be effective. a few trends are evident. it will take some time. with the RBI having already come out with detailed guidelines for entry of banks into insurance. Both banks and insurance companies have started entering the asset management business. ICICI. We finally come to convergence in the financial sector.Reg no # 511017114 business.
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