Commercial Banking

Session 1
Introduction
• Financial system is both arteries and veins of the economic growth
and development of any economy

• It facilitates the transfer of the funds from savers to deficit sector

owning productive assets.

• A complex set of integrated systems………

Formal and informal sector
• Financial system has both formal and informal sector set up….

• Financial Dualism……..

• Formal:- Organized, Regulated and Institutional system……..

• Informal:- Unorganized, Unregulated and Un-Institutional system……..

• Informal sector: Though not very desirable…but a result of social deprival of weaker sections of society…………..

• Bandhan Bank,IDFC bank, Suryoday Small Finance Bank…….

• https://www.codeforbanks.com/banks/blog/small-finance-bank-vs-commercial-bank/
Key Elements of a good financial
system…….
• A strong legal and regulatory environment…….
• Stable money……..
• Sound public finance and public debt management ……….
• A central bank………….
• Sound Banking System………………
• Information system……………
• Well functionating securities markets…………….
Financial System Design………
• Market Based System…..
• Financial Market Based System……..
Financial System Design………
• Bank Based system………..govt plays an important role in development……….
• Tendency of financial system to be more market oriented as they become
richer…………
• Countries with strong judiciary and low corruption records become market
oriented………….
• Advantages………..
• Efficient allocation of capital…
• Efficient Market pricing of securities………….
• Drawback….
• Tech instability…………….
• Moral Hazard..(low incentives of promoters)…………….
• Free Rider problem……………
Bank Based System……..
• Advantages…………….
• Builds closer relationship with parties…………..
• Provides tailor made contracts…………….
• Efficient intertemporal risk sharing………………
• No free rider………………
• Disadvantages…………….
• Retards innovation and growth…………..
• Impedes competition…………..
Nature and Role of Financial Intermediaries
and Financial markets….
• Financial Institutions provide three transformational services………
• Liability, asset and size transformation consisting of mobilization of
funds, and their allocation providing large loans on the basis of
numerous small deposits
• Maturity transformation by offering the savers tailor made short term
claims or, liquid deposits and so offering borrowers, long term loans
matching the cash flow generated by their investment………
• Risk transformation by transforming and reducing the risk involved in
direct lending by acquiring diversified portfolios……………
Money Market and Capital Market
• Money Market
• A market for short term debt………
• Highly liquid with heavy volume to reduce the transaction cost…….
• CP,CD,Tbills,…..
• Provides the fund access to entities who require immediate funding with
reasonable prices……………
• Capital Markets……….
• Provide risk capital to entrepreneurs……..
• Encourage broader ownership of productive assets…………….
• Improved allocation of capital through competitive pricing…………………
Money and capital market
• Financial institution participation is common to both capital and
money markets…………

• Funds raised in the money markets are used for financing activities in
the capital markets………………

• Money markets precedes the capital markets in development of an

economy………………………..
Primary Market and Secondary Market……..
• IPOs in primary market……
• Secondary market gives the basis for price determination at which
new issues can be issued in the primary market…………..
• The depth of the financial market is dependent on the primary
market…more ipos more availability of traded securities in the
financial markets………
• Bunching of new issues affect the prices in the secondary markets…..
Characteristics of Financial System
• Financial Markets are characterized by a large volume of transactions
and the speed with which financial resources move from one market
to another.
• Contagion effects…

• Integration of financial system to globalization…………..

Functions of Financial Markets
• Enabling the economic units to exercise their time preference..
• Separation distribution and diversification of risk.
• Efficient payment mechanism
• Providing information about companies………….
• Enhancing liquidity of financial claims through trading in
securities……..
• Providing portfolio management services…………