The Financial System

Group Members (MMS Finance)

Asiya Shaikh (25)
Douglas Morris (35)
Farhana Ansari (37)
Imad Faquih(48)
Imtiyaz Siddique (51)
Jayshree Iyer (54)
Financial System
Financial system comprises of variety of
intermediaries, market and instruments.

Financial system help in allocation of resources.

Financial manager negotiates loan from financial

intermediaries, raises resources and invest surplus
fund in financial instrument.
Functions of Financial system

Payment system

Pooling of funds

Transfer of resources
Risk management

Price information for Decentralised Decision making

Dealing with Incentive problem

Money Market
The money market is a market for short term funds –
up to one year maturity.

It covers money, and financial assets that are close

substitutes for money.

RBI is the most important participant in the money

market.
The Discount and Finance
House of India (DFHI)
The DFHI was set up in April 1988

To develop a secondary market in the existing money

market instruments by providing adequate liquidity
support
DFHI’s activities are restricted to:
Dealing in 91 days and 364 days Treasury Bills

Re-discounting short term commercial bills

Participating in the inert bank call money, notice

money and term deposits

Dealing in Commercial Paper and Certificate of

deposits.
Liquidity Adjustment Facility
History
ILAF (1999) – LAF (2000)
Need for Repo and Reverse Repo Transactions
(Repo: Infuse liquidity; Rev Repo: Mop up excess liquidity)
Repo Rate: 4.75%; Rev Repo Rate: 3.25%
Procedure followed by RBI.
Negotiated Dealing System (NDS)
SLR securities and/or Treasury Bills
Multiples of Rs. 5 Cr
Auction Conducted “Daily and 14 Day intervals”
Repurchase Agreements (Repo)
Short-term interest bearing loan against
collateral.
Spot sale of an asset coupled with a simultaneous
forward purchase of the same asset.
Borrower – Lender Dealing
Borrowing is at the repo rate
Collateralised lending
Transfer of title
Repo – RevRepo Relationship
Repo Market Sans RBI
Restricted to primary market
Secondary intermediaries – Rev Repo as lenders – in
past
Major Lenders: Mutual Funds, Financial Institutions
and Insurance companies
Major Borrowers: Primary Dealers and Scheduled Banks
Dated securities used are issued by:
Central Government
T-Bills
State Government securities – Limited extent
Risks in Repo Dealing
Credit Risk

Legal Risk

Operational Risk

Market Risks
 Benefits And Usages Of Repo:
The repo market increases the utility of government
securities

One of the primary usages of repo for market players

is for funding

Repo transaction can be used for arbitrage activity

It is also used for speculative activity

An active repo market leads to an increase in turnover

in the money market
The Repo Market – A Tool For Achieving Monetary Policy:

The LAF Is the principal monetary policy instrument

for managing short term liquidity and thus short term
interest rates in the economy

Reverse-repo rate attempts to provide the floor to the

movement of call rates and holds all other short-term
rates in reasonable alignment with the reverse-repo
rate
The RBI also uses the Open Market Operations
(OMO) for directly intervening in the market directly
by buying and selling securities and thereby managing
the liquidity and the short term interest rates in the
market
CBLO
Collateralized Borrowing and Lending Obligation
– A money market instrument developed by
Clearing Corporation of India Ltd. (CCIL)

Participants are required to open constituent SGL

accounts with CCIL

CCIL fixes borrowing limits

CCIL becomes the counterparty to every CBLO

transaction
Characteristics of CBLO
Liquidity
Accessibility
Acceptability
Availability for different tenors
Credit Risk
Call/Notice Money Market:
In this market, banks and primary dealers (PDs) are
allowed to both borrow and lend

This market is purely an unsecured market as no

collaterals are offered for securing the
lending/borrowing

Call/Notice money is designed for management of

liquidity for a very short period of time.
Participants
Participants in call/notice money market currently include
banks and Primary Dealers (PDs), both as borrowers and
lenders.

 Non Bank finance institutions are not permitted in the

Call/Notice money market from August 6, 2005
Interest rate
Eligible participants are free to decide on interest rates in
call/notice money market.

Calculation of interest payable would be based on

FIMMDA’s (Fixed Income Money Market and
Derivatives Association of India) Handbook of Market
Practices.
Dealing session
Deals in the call/notice money market can be done upto
5.00 pm on weekdays and 2.30 pm on Saturdays or as
specified by RBI from time to time.
Term Market
Longer end of Money Market
Money lent for 15 days to 1 year is called Term money
Advantage - reduce interest rate, liquidity or funding
risk
Funding long term assets with overnight liabilities
Need for credible pricing benchmarks
MIBOR and BIBOR - cannot price your assets on
overnight rates
Overdrafts - Term Loan – Floating rate – Fixed rate
MIBOR (Mumbai Interbank Offered rate)

NSE MIBOR has been designed to give the overnight

clean reference rate and generally tracks the call market.
The basic design behind the said rate is the polling
methodology– rates are polled from the traders over phone
as to what rate they would quote to borrow or lend
Rs.500million in the overnight call money market.
It is also equivalent to the daily call rate, or the
overnight rate at which funds can be borrowed, and it
changes every day, depending on the perception of the
market players on interest rates.
Financial Assets
A 10 year bond
A 7 year non-convertible debenture
A 3 year car loan
Equity shares issued by NIIT to the general
investing public through an initial public offering
A call option granted by Infosys technologies
limited to an employee that gives him the right to
buy 100 shares of Infosys at an exercise price of
Rs. 1500
Debt versus equity claims
Some securities straddle both the categories. For eg
preference share represent an equity claim that entitles the
owner to get a fixed rupee amount.
Financial Intermediaries
They are firms that provide services and products that
customers may not be able to get more efficiently by
themselves in financial markets.
Rationale for Financial Intermediaries
Diversification
Lower transaction cost
Economies of Scale
Confidentiality
Signaling
Key Financial Intermediaries

Commercial Banks:
They represent the most important financial
intermediary in the Indian financial system

Financial Institutions:
They have been set up to cater to the long-term
financing needs of the industrial sector and meet
specialized financing requirements
Insurance Companies:
Insurance companies have massive resources at their
command

Mutual Funds:
A mutual fund is a collective investment vehicle
Non-banking Financial Companies:
These companies engage in a variety of activities like
leasing finance, housing finance, etc.

Non-banking Financial Services Companies:

This group consists of merchant banks, credit rating
agencies, depositories, and others
Rates
Bank Rate: 6%
Repo Rate: 4.75%
Rev Repo Rate: 3.25%
CRR: 5%
SLR: 24%
Savings Bank Rate: 3.5%
Deposit Rate: 7.5% - 9.6%

Money Market Rates

Call Rate: 2.25% - 4.3%
Regulators and other Agencies

 Reserve Bank of India (RBI)

 The Clearing Corporation of India (CCIL)

 Fixed Income, Money Market and Derivatives

Association of India (FIMMDA)
Reserve Bank of India (RBI)

Monetary Authority
Financial Supervision
Manager of Foreign Exchange
Issuer of currency
Developmental roll
The Clearing Corporation of India (CCIL)
Providing exclusive clearing and settlement of
transactions
commenced operations on February 15, 2002
launched the Collateralised Borrowing and
Lending Obligation (CBLO) in January 2003
FX-CLEAR- August 7, 2003
NDS-OM and NDS-CALL
Fixed Income, Money Market and
Derivatives Association of India (FIMMDA)
An association- June 3rd, 1998
FIMMDA's represents Market Players
Undertake developmental activities
Provide training and development
An arbitrator for disputes
Thank you!