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Banks and Financial Institutions « Commercial Banks « Reforms in Financial System and Banking « Development Financial Institutions « Non Banking Financial Companies (NBFCs) Central Banking « Reserve Bank of India « Role of Reserve Bank « Functions of RBI; Credit Creation, Currency, Forex, Insurance Companies « LIC/GIC/ Private Players « IDRA/ Insurance Regulations Money Market Money Market « Money market players « Money market instruments Capital market « Capital market institutions « Security Exchange Board of India « Capital Market Instruments International Monetary System and Economic Environment « Brettonwood Twins; IMF and World Bank « WTO and GATT « Trade in Services and Economic Environment
BANKING & FINANCIAL INSTITUTIONS
Commercial banks ´ Cooperative banks ´ Central Bank ´ NBFCs ´ Development Financial Institutions
"commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses or common public.in 1/24/2011 COMMERCIAL BANK ´ A commercial bank is a type of financial intermediary accepting deposit for lending money to the needy.ac. Many banks offer both commercial and retail banking services 3 . Commercial banking may also be seen as distinct from retail banking. which involves the provision of financial services direct to consumers.shafi@nitc.
shafi@nitc. FT. DD. Saving. call « Term deposits Creation of credit ´ Ancillary function ´ « MT.in 1/24/2011 BANKING OPERATION ´ Deposits « Demand deposit: Current. Locker. Forex.ac. 4 .
in 1/24/2011 REGULATIONS Banking regulation act 1949 ´ Banking companies act 1970 ´ State bank of India act 1955 and subsidiary banks 1959 ´ Nationalization of Banks 1969 and 1980 ´ 5 .ac.shafi@nitc.
email@example.com 1/24/2011 TYPES OF BANKS ´ Scheduled commercial banks « Public sector banks « Private sector banks « Foreign banks « Regional rural banks « New generation banks ´ Scheduled cooperative banks 6 .
NPA from 3% to 0% by 2002 Capital adequacy to be 8-10% (investment in Risk weighted asset) Entry norms for private banks Capital market access for banks Asset reconstruction fund Debt recovery tribunals (ARC. quality.in 1/24/2011 REFORMS IN BANKING SECTOR ´ Narasimham committee 1991 and 1998 « « « « « « « « « « « « « « « « « « « Interest rate deregulation Reduction in pre-emptive reserves (SLR-CRR) Liberal Branch expansion policy Priority lending has been redefined Prudential norms for capital adequacy: asset classification. holding to be reduced from 55 to 33% in SBI and 51 % in other public sector banks Rapid computerization Mandatory disclosure policies . provision on NPAs. greater transparency Centralized monitoring agency for fund transfers Mergers and acquisition Increased capital base for public sector banks and private sector for 300 crore 7 .firstname.lastname@example.org. DRT) Dismantling BSRB Flexibility in remuneration for PSBs and permission for VRS Govt.
email@example.com 1/24/2011 COOPERATIVE BANKS ´ Urban cooperative bank « Scheduled /non scheduled ´ Rural cooperative bank « State cooperative bank « District cooperative bank « Regional/primary society 8 .
firstname.lastname@example.org 1/24/2011 DEVELOPMENT FINANCIAL INSTITUTIONS AND NBFCS All-India Development Banks ´ Specialized Financial Institutions ´ Investment Institutions ´ State-level institutions ´ Other institutions ´ 9 .
The primary function of a central bank is to provide the nation's money supply. regulates the money supply. that is one which operates under rules designed to prevent political interference.ac.shafi@nitc. and acting as a lender of last resort to the banking sector during times of financial crisis. Central banks often also oversee the commercial banking system within its country's borders. but more active duties include controlling interest rates. A central bank is distinguished from a normal commercial bank because it has a monopoly on creating the currency of that nation. or monetary authority is a public institution that usually issues the currency. It may also have supervisory powers. Examples include the European Central Bank (ECB) and the Federal Reserve System in the United State 10 ´ ´ . to ensure that banks and other financial institutions do not behave recklessly or fraudulently.in 1/24/2011 CENTRAL BANK ´ A central bank. and controls the interest rates in a country. Most developed nations today have an "independent" central bank. reserve bank.
shafi@nitc. Regulator: 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. protect depositors' interest and provide cost-effective banking services to the public.in 1/24/2011 RESERVE BANK OF INDIA ´ ´ ´ ´ The Reserve Bank of India is the central banking system of India and controls the monetary policy of the country 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. implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. It formulates. Objectives are to maintain public confidence in the system. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors.ac. Controller: The RBI controls the monetary supply. monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins 11 .
and to maintain the reserves. to maintain the currency and credit system of the country to utilize it in its best advantage. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. Stabilize Financial Mobility: The recent financial turmoil world-over.ac. 1999. The institution maintains banking accounts of all scheduled banks.shafi@nitc. Some of this problems are results of the dominant part of the public sector. Developmental role: The central bank has to perform a wide range of promotional functions to support national objectives and industries. too. because both objectives are diverse in themselves. The RBI faces a lot of inter-sectoral and local inflation-related problems. has however. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition. vindicated the Reserve Bank's role in maintaining financial stability in India ´ ´ ´ ´ 12 . It also acts as their banker.in 1/24/2011 ´ Manager of exchange control: The central bank manages to reach the goals of the Foreign Exchange Management Act. Issuer of currency: The bank issues and exchanges or destroys currency and coins not fit for circulation. The basic objectives of RBI are to issue bank notes. Related functions: The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development.
in 1/24/2011 Last resort: ´ Bankers Bank ´ Controller of Credit ´ Overdraft for state govts ´ 13 .ac.shafi@nitc.
it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system.in 1/24/2011 CONTROLLING MEASURES ´ ´ ´ ´ ´ ´ ´ ´ . The interest rate the RBI charges the banks for this purpose is called bank rate. 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. An increase in 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.ac. Statutory Liquidity Requirements (SLR): Apart from the CRR. This will in turn decrease the money supply. cash and approved securities and balances with current accounts of RBI. RBI can vary this rate between 3% and 15%.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 ² Open Market Operation Credit rationing Selective Credit Control REPO: rate offered for Purchase of securities /sanctions Reverse REPO rates offered for supply of securities /deposits « Fixation of marginal requirement « Minimum lending rate 14 .shafi@nitc. If the RBI wants to increase the liquidity and money supply in the market. Cash Reserve Requirements (CRR): Every commercial bank has to keep certain minimum cash reserves with RBI. banks are required to maintain liquid assets in the form of gold. This will reduce the size of their deposits and they will lend less. it will increase the bank rate.Bank Rate/ Interest Rate: RBI (Reserve Bank of India) lends to the commercial banks through its discount window to help the banks meet depositor·s demands and reserve requirements. RBI has stepped up liquidity requirements for two reasons: .
public sector.in 1/24/2011 INSURANCE COMPANIES Life insurance in India ´ Phase-1: 1818-1956: private sector only (246) ´ Phase 2: 1956-2000: nationalization. private and foreign companies General Insurance in India ´ Phase-1: 1850-1972: private sector only (246) ´ Phase 2: 1972-2000: nationalization.shafi@nitc. state monopoly ´ Phase-3: Post 2000: liberalization.ac. public sector. private and foreign companies ´ 15 . state monopoly ´ Phase-3: Post 2000: liberalization.
in 1/24/2011 REFORMS IN INSURANCE SECTOR ´ Malhotra Committee recommendations in 1993 « « « « « « « « « « « IDRA Act. 1999 LIC/GIC Capital base of LIC and privatization of LIC Govt. 100 crore Restructuring of GIC and delinking of four subsidiaries Freedom and autonomy Life and general as a single entity has been restricted Mandatory investments in G-Secs reduced to 50-25% Setting up of an ombudsman in insurance sector 16 .shafi@nitc. stake to reduce up to 50% Entry norms for foreign players with collaberation Minimum paid up capital of Rs.ac.
40000 crores daily In india RBI ensures liquidity.in 1/24/2011 MONEY MARKET The money market are market for financial assets that are close substitutes of money which consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time. federal.ac. Characteristics a) Not a single entity but collection of market for several instruments b) Wholesale market for short-term debt instruments c) Honor and creditworthiness of the participants are important d) Players are : a) RBI. b) DFHI c) NBFCs d) STCI e) PSUs and f) Mutual funds g) Banks h) Corporate investors i) State governments j) Non resident indians e) Need based market where demand and supply of money shapes the market Liquid and vibrant money market is necessary for the development of financial system and its capital market. state and local governments all issue paper to meet funding needs. 17 .shafi@nitc. typically up to one year. short term interest rates Ensures flow of credits Bring order to Forex market through money market In the United States. States and local governments issue municipal paper. Average turn over of indian money market is Rs. while the US Treasury issues Treasury bills to fund the US public debt.
).S.Time deposits.(in the U.Unsecured promissory notes with a fixed maturity of one to 270 days. usually sold at a discount from face value.in 1/24/2011 INSTRUMENTS ´ ´ ´ ´ ´ ´ Treasury bills . dollars at a bank or bank branch located outside the United States. commonly offered to consumers by banks.and asset-backed securities 18 ´ ´ ´ ´ ´ . Short-lived mortgage.S. and credit unions. Short-term notes issued by municipalities in anticipation of tax receipts or other revenues. Commercial Bills Collateral borrowings Other instruments: Eurodollar deposit . Municipal notes .ac. Commercial paper .Short-term debt obligations of a national government that are issued to mature in three to twelve months Call money market or money at short notice: Certificate of deposit . Repurchase agreements .shafi@nitc. thrift institutions.Deposits made in U.Short-term loans³normally for less than two weeks and frequently for one day³arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.
they do not pay interest prior to maturity. instead they are sold at a discount of the par value to create a positive yield to maturity.ac.in 1/24/2011 TREASURY BILL ´ ´ Treasury bills (or T-Bills) are issued by the central bank or government to tide over short term liquidity falls mature in one year or less(91/182/364) like zerocoupon bonds.shafi@nitc. « « « « « « Negotiable instruments Highly liquid Assured yield/discount and maturity at par Included in SLR requirement s for banks by RBI Available in multiples of Rs. 25000 Auctions by RBI every week 19 .
but are typically lower than banks' rate Means It is an unsecured P-Note in which the interest rates are determined by the market force in a dematerialized format at a discount Issuance of CPs « « « « « « Pass resolution by the company Execute reserve bank norms Rate by credit rating agencies IPA (issuing and paying agent) may be a scheduled commercial bank as an agent for the company to deal Each CP has be reported by IPA to RBI and the company has to identify the brokers to place the CP in market may be financial institutions. merchant banks and other dealers Banks use to deposit in CPs rather sanctioning loans to corporate which enhance their liquidity requirements and reduce the risks 20 . Commercial paper is usually sold at a discount from face value.shafi@nitc. Typically.in 1/24/2011 COMMERCIAL PAPER ´ ´ ´ ´ ´ ´ ´ In the global money market. commercial paper is an unsecured promissory note with a fixed maturity. In india the CPs were introduced by RBI in 1990 which was femilier in US since 19th century FIIs are eligible to invest in CPs as per the guidelines and restrictions of SEBI issued from time to time Since it is not backed by collateral. the higher the interest rate the issuing institution must pay. and carries higher interest repayment rates than bonds.ac. the longer the maturity on a note. Interest rates fluctuate with market conditions. only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial Paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note.
in which the maturity shall not normally exceed 30-90 days It is mostly foreign trade that is financed through bill market in india also the bill market is now not very attractive to the banks since the misuse of the bills in early 90s Inland Bills less attractive Foreign Bills attractive 21 . LIC.ac. UTI etc.in 1/24/2011 COMMERCIAL BILLS ´ ´ ´ ´ ´ ´ The working capital of a firm is through cash-credits. GIC. It is the order signed by the maker directing to pay the certain amount only to the concerned person/bearer of the instrument on a particular date The banks or financial institutions may be willing to discount the bills keeping a margin with them on behalf of interest which they can even further rediscounted from DFHI. purchase of discounting of commercial bills which is a short term negotiable instrument with low risk enhances the liability of payment on a fixed date when goods are bought/sold. overdrafts.shafi@nitc.
It is intended that the CD be held until maturity. CDs are issued by banks during the tight liquidity period CDs are also subject to SLR requirements by RBI.email@example.com 1/24/2011 CERTIFICATE OF DEPOSIT ´ ´ ´ ´ CDs unsecured negotiable short term instrument in the bearer form issued by banks and development financial institutions introduced in 1989 by government and are similar to FDs but different in term guidelines and its bearer format.ac. fixed term. 22 . usually. at which time the money may be withdrawn together with the accrued interest. a fixed interest rate. They are different from savings accounts in that the CD has a specific.
in 1/24/2011 CALL MONEY OR SHORT NOTICE Call money market is a market for very short term funds repayable on demand or short notice ´ The maturity period varies from 1 to 14 days without any collateral security ´ Banks are the important participants in call money market either to employ the surplus funds or to meet the cash reserve requirements ´ 23 .ac.shafi@nitc.
The party who originally buys the securities effectively acts as a lender. using their security as collateral for a secured cash loan at a fixed rate of interest.shafi@nitc. The original seller is effectively acting as a borrower. also known as a Repo or Sale and Repurchase Agreement. while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. sometimes called the repo rate. A repo is equivalent to a cash transaction combined with a forward contract.ac.in 1/24/2011 REPURCHASE AGREEMENT ´ A Repurchase agreement. is the sale of securities together with an agreement for the seller to buy back the securities at a later date. ´ 24 . The difference between the forward price and the spot price is effectively the interest on the loan while the settlement date of the forward contract is the maturity date of the loan. The cash transaction results in transfer of money to the borrower in exchange for legal transfer of the security to the lender. The repurchase price will be greater than the original sale price. the difference effectively representing interest.
25 .in 1/24/2011 EURODOLLAR ´ Eurodollars are deposits denominated in U. allowing for higher margins. Consequently.S.S. The term was originally coined for U. such deposits are subject to much less regulation than similar deposits within the U..ac. There is no connection with the euro currency. dollars in European banks.S. but it expanded over the years to its present definition: a U. and thus are not under the jurisdiction of the Federal Reserve.S. dollar-denominated deposit in Tokyo or Beijing would be likewise deemed a Eurodollar deposit.shafi@nitc. dollars at banks outside the United States.
publicly owned airports and seaports. 26 ´ . although municipal bonds issued for certain purposes may not be tax exempt. Potential issuers of municipal bonds include cities. public utility districts. redevelopment agencies.in 1/24/2011 MUNICIPAL BOND ´ A municipal bond is a bond issued by a city or other local government. school districts.ac. In the United States. special-purpose districts. or their agencies. counties. Municipal bonds may be general obligations of the issuer or secured by specified revenues. interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued. and any other governmental entity (or group of governments) below the state level.shafi@nitc.
in 1/24/2011 FOREX SWAP ´ In finance. where both transactions are for (different) forward dates.ac. 27 . a forex swap (or FX swap) is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward) Forex swap consists of two legs: ´ a spot foreign exchange transaction. These two legs are executed simultaneously for the same quantity. It is also common to trade forward-forward.shafi@nitc. and therefore offset each other. and ´ a forward foreign exchange transaction.
pay for day-to-day operations. a lack of cash experienced by one particular business or a credit crunch. Housing Finance Bubble in US. or meet its debt obligations when they are due. When "liquidity crisis" is used to refer to an economy as a whole it means that liquidity crises affecting principal players in the economy are resulting in diminished availability of credit.ac.shafi@nitc. causing it to default. A credit crunch is a sharp increase in the interest rates and a strong decrease in allocated credit A liquidity crisis occurs when a business experiences a lack of cash required to grow the business. Lehman Brothers AIG Morgan Stanly/Meryl Lynch 28 .in 1/24/2011 LIQUIDITY CRISIS ´ ´ ´ ´ ´ ´ ´ ´ The term liquidity crisis may refer to : a "general feeling of mistrust in the banking system conducting to a temporary disappearance of credit.