General Finance & Banking

Unissons nos Talents

TALENTED

TOGETHER 1

Financial System

Financial System

Financial Markets

Financial Institution

Financial Instruments

Financial Services

Financial System transfers funds from savers to consumers

Financial System-Functions

Financial Markets
Financial Markets

Organized

Unorganized

Primary Market

Secondary Market

Capital Markets

Money Markets

Price discovery process - when buyers and sellers trade the assets, they determine price at which financial assets can be sold or bought at Provision of liquidity by providing a mechanism for investors to sell financial assets Low cost of transaction and information, as buyers / sellers are able to access each other on a collective basis and therefore individual efforts of finding a buyer / seller need not be made
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Capital Markets Overview

Markets A place where exchange of goods and services happen
Money markets are financial markets where only short-term debt instruments (maturity of less than one year) are traded. Money markets are mainly wholesale markets (large transactions) where firms and financial institutions manage their short-term liquidity needs (i.e. to earn interest on their temporary surplus funds).

Capital Market Capital markets are markets in which long-term securities are
traded. These long-term instruments include equity instruments (infinite life), government bonds and corporate bonds (original maturity of one year or greater). Capital markets securities are often held by financial intermediaries, such as mutual funds, pension funds and insurance companies.
Place where capital (fund) requirements of the issuers are met; i.e. Issuers (Corporate, Government, etc) raise funds
Trades in these markets are for debt, equity securities or other instruments
Organized, as they are governed by regulatory bodies

[Securities &

Exchange Board of India, RBI]

Primary and Secondary Capital Markets

Primary Market
Sell (float) new stocks and bonds to the public for the first time. In the primary market the security is purchased directly from the issuer. A primary market is a financial market in which new issues of financial securities (both bonds and stocks) are sold to initial buyers. Secondary Market Secondary market is where investors trade among themselves. An investor purchases a security from another investor rather than the issuer. Auction market forms a part of this market. A secondary market is one in which securities that have been previously issued can be resold.

Primary markets facilitate new financing to corporations, but most of the trading takes place in the secondary markets.
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Financial Markets

Terms.

CB (Commercial Bills): A document expressing the commitment of a borrowing firm to repay a short-term debt at a fixed date in the future.
Repo Rate: Instrument of Money market, rate at which bank borrows money from central bank CD (Certificate of Deposits): Time Deposits, certificate issued by bank that indicates sum of money is deposited. Bears a maturity date, interest rate, duration can be max of 5 years. CP (Commercial papers): Short term promissory notes either unsecured or backed by assets such as loan or mortgages issued by corporation. ICD (Investment corporation of Dubai): Special instruments bi investment banking of Dubai to generate investment returns and support Dubai. Treasury Bills: Treasury Bills are money market instruments to finance the short term requirements of the Government. ALM :ALM is a comprehensive and dynamic framework for measuring, monitoring and managing the market risk of a bank.

Financial Institutions
Financial Institutions

Regulatory

Intermediaries

Non-Intermediaries

Others

Banking

Non-banking

Non Banking Intermediaries Insurance Cos. Pension Funds Credit Unions Non Intermediaries Asian Development Bank World bank Banks as Intermediaries ABN AMRO, CITI Bank, State Bank of India
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1.Money market is a place where banks deal in short term loans in the form of commercial bills and treasury bills. But capital market is a place where brokers deal in long term debt and equity capital in the form of debenture, shares and public deposits. 2.In money market maturity date of repayment may after one hour to 90 days. But in capital market, loans are given for 5 to 20 years and if issue of shares by co. , its amount will repay at winding of company . But investors have right to sell it to other investors if they need the money.

3.Rate of interest in money market is controlled by RBI or central bank of any country. But capital markets interest and dividend rate depends on demand and supply of securities and stock markets sensex conditions. Stock market regulator is in the hand of SEBI.
4.Main dealer of money market s are commercial banks like SBI, ICICI Bank, UTI and LIC and other financial institutions. Main dealers are all the public and private ltd. Co. and more than 30 million investors. It is increasing trend due to opening of online capital market. 5.In USA, money market is famous with dealing of money fund and bankers acceptance instruments. But capital market in USA is famous with New York stock exchange and stock regulator is Security exchange commission (SEC)

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Share & Bond

Bonds, debentures, government securities: These are all debt instruments. You are loaning your money to the entity issuing the security. It could be a corporation, a government entity, etc.

Shares: You own a portion of the company, thus another word for a stock is equity. You get to share in the success or failure of the company.
Deposits are like any bank deposit. Interest is paid in various ways on the deposits. difference between debenture and bond: according to companies act 1956 India Debenture includes stocks, bond and any other securities of company.

private sector companies issue debentures and public sector and financial institutions issue bonds . Bond is a long term debt instrument that promises to pay a fixed annual interest over a specific period. debentures may be convertible into equity shares while bonds are not. debentures may be redeemed in installment

To issue a share / bond / debenture, the company must be registered and must have the necessary minimum capital. Prior approval from the existing share holders, Company Law Board, SEBI, RBI etc is necessary

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Which is better investment? it totally depends on where you are in life and what your tolerance for risk is.

Id rather own something for a period of years in hope for growth, then lend somebody $20 and know Im getting $25 back in 5 years. Thus, I would probably consider myself more of a stock investor. However, the bondholder may very well feel safer and more secure with his/her investment choice. The ideal long-term portfolio would probably have a little bit of each. Equity Market: In Equity market we buy shares instead of certificates. These shares makes us a proportionate owner of the company of which we buy shares. Here also we lend money to the companies but like a owner. If companies makes profit we gain interest and if the companies makes loss we loose money. In short you can say in DEBT MARKET investment is very safe but gives low but fixed returns. In EQUITY MARKET investment is linked with a risk but when market if good given a much better returns than DEBT schemes.

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Debt Market: If a person invests in Debt funds it means he is either investing in Company bonds, Fixed Deposits, Debt linked mutual funds, bank bonds, municipal bonds, central/state government securities etc. As the name suggest companies/Institutions line central government, state government, Private/Public sector companies, banks etc needs funds to run their daily business. They issue securities/certificates against which we lend them money against a chargeable interest. Mainly in Debt market we lend money in the form of DEBT. The interest promised by companies, banks, government here is secured.

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Some Story.

The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth. However, traces of banking activity can be found even in ancient times. In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome- that of the Imperial Mint

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Why do Banks exist?

To Provide Financial products and Services

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What is a Bank?
A bank is a business. Banks sell services - financial services such as car loans, home mortgage loans, business loans, checking accounts, savings accounts, certificates of deposit, and credit card services. Some people go to the bank in search of a safe place to keep their money. Others go to the bank seeking money for loans to buy houses or cars, start businesses, expand farms, or do any of the other things that require borrowing money.

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More Facts
Where do banks get the money to lend? They get it from all the people who open savings and other types of accounts. Banks act as a go between the people who save and people who need to borrow. If savers didn't put their money in banks, the banks would have little or no money to lend.

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More Facts
Your savings are combined with everyone else's savings to form a big pool of money.
The bank uses that pool of money to make loans. The money doesn't belong to the bank's president, board of directors, or stockholders. It belongs to the depositors. That's why banks have a special obligation not to take big risks when they make loans.

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Banking as a Whole
One of the worlds leading

Major provider of financial services

including corporate finance, cash management, & credit

Comprises of five national business

Commercial Banking

investment banks

Investment Bank

Services provided: Advice on

segments: Middle Market Banking, Mid-Corporate Banking, Commercial Real Estate, Asset Based Lending and Commercial Leasing

Retail Financial Services

Clients

Treasury and Securities Services

corporate strategy and structure, raising and placing capital, making markets in financial instruments and offering sophisticated risk management services

Includes Auto Finance,

Consumer Banking, Home Finance, Insurance and Small Business Banking

Provides mutual fund, insurance

& home finance and workplace banking products to consumers and small businesses

Asset and wealth Management

Global leader in transaction

Card Services

processing and information services to wholesale clients

Three Businesses: Institutional

Trust Services, Investor Services(WSS) and Treasury Services

Provides investment & wealth management

Delivers credit card and other related

services to institutional investors, high net worth individuals & retail customers
Provides personalized advice and solutions to

payment products to cardholders and merchant outlets

Aims to be the preferred payment card in

wealthy individuals

existing customers wallets and to increase access to new customers

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A Bank is?
A bank is defined as a commercial institution licensed as a receiver of deposits and giver of loans both short and long term.

An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks.

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Terms

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets,

The working capital requirement of business firms is provided by banks through cash-credits / overdraft and purchase/discounting of commercial bills. Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk. It enhances he liability to make payment in a fixed date when goods are bought on credit. Treasury Bills: A short-term debt obligation backed by the U.S. government with a maturity of less than one year. The purchase price is less than the face value. At maturity the government pays the Treasury Bill holder the full face value. The Treasury Bills are marketable, affordable and risk free. The security attached to the treasury bills comes at the cost of very low returns.

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Money Market instruments

Certificate of Deposit: The certificates of deposit are basically time deposits that are issued by the commercial banks with maturity periods ranging from 3 months to five years. The return on the certificate of deposit is higher than the Treasury Bills because it assumes a higher level of risk.

Commercial Paper: Commercial Paper is short-term loan that is issued by a corporation use for financing accounts receivable and inventories. Commercial Papers have higher denominations as compared to the Treasury Bills and the Certificate of Deposit. The maturity period of Commercial Papers are a maximum of 9 months. They are very safe since the financial situation of the corporation can be anticipated over a few months
Banker's Acceptance: It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance is traded in the Secondary market. The banker's acceptance is mostly used to finance exports, imports and other transactions in goods. The banker's acceptance need not be held till the maturity date but the holder has the option to sell it off in the secondary market whenever he finds it suitable. Euro Dollars: The Eurodollars are basically dollar- denominated deposits that are held in banks outside the United States. Since the Eurodollar market is free from any stringent regulations, the banks can operate at narrower margins as compared to the banks in U.S. The Eurodollars are traded at very high denominations and mature before six months. The Eurodollar market is within the reach of large institutions only and individual investors can access it only through money market funds. Repos: The Repo or the repurchase agreement is used by the government security holder when he sells the security to a lender and promises to repurchase from him overnight. Hence the Repos have terms raging from 1 night to 30 days. They are very safe due government backing.

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Who is a Banker?
Halsburys Laws of England defines a banker as An individual, partnership or corporation whose sole predominating business is banking, that is the receipt of money on current account or deposit account and the payment of cheques drawn by and the collection of cheques paid in by a customer.

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Meaning of Customer
In General Western Railway C. vs. London and County Banking Co. Ltd., it was stated, A customer is a person who has some sort of account, either deposit or current or some similar relation with a bank and from this it follows that any person may become a customer by opening a deposit or current account or having some similar relation with a bank.

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Role of Banks
Intermediary role between lenders and borrowers

Lenders Deposits funds with Banks

Liability products (Liability for Banks)

Borrowers Borrows funds from Banks

Asset Products (Assets for Banks)

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Different types of Banks

Types of Banks Central Bank (RBI)

Commercial Banks

Non Banking Finance Companies (NBFCs)

Term Financial Institutions

Public Sector E.g. SBI PNB BOB

Private Sector E.g. HDFC Bank UTI Bank ICICI Bank

Foreign E.g. Citibank ABN Amro HSBC

Cooperative Banks

Regional Rural Banks

State Finance Corporations (SFCs)

Indian Financial Institutions E.g. IFCI NABARD SIDBI

State/Central

Private

Primary Credit Societies

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Banking Types

Retail Banking Wholesale Banking

Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so forth.

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Wholesale Banking

Wholesale banking is the provision of services by banks to the likes of large corporate clients, mid-sized companies, real estate developers and investors, international trade finance businesses, institutional customers (such as pension funds and government entities/agencies), and services offered to other banks or other financial institutions. In essence, wholesale banking services usually involve high value transactions.
(Wholesale finance means financial services, which are conducted between financial services companies and institutions such as banks, insurers, fund managers, and stockbrokers.)

Wholesale banking contrasts with retail banking, which is the provision of banking services to individuals

Wholesale Banking Products

Term Loans / Working Capital Finance Bills Discounting Guarantees Letter of Credit

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Structure of Banks

Front Office

Middle Office

Back Office

Customer Relationships Trading Reports

Mark to Market
Valuations Risk Management

Settlements Payments

Reconciliations
Confirmations

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Banking & Financial Markets

Customer Delivery Channels

Internet

Teller

ATM

Phone

Mobile

POS

Internet Banking Suite

PORTAL RETAIL CORPORATE

SECURITY

Current & Savings Acct

Loan Syndication Money Market

Deposits Bills & Collections Dealer

Loans Letters of Credit Investor Services Derivatives

Loan App Processing Foreign Exchange Cash & Liq Management Securities Elect Msg System Expense Processing

Institutional Delivery

ACH

INVESTOR SERVICES

Asset Management Signature Verification Workflow Management

SWIFT

Funds Transfer

Standing Instructions Fixed Assets Management

3rd Party 3rd Party Interfaces Interface CRM Systems Dealing Systems

Nostro Reconciliation

CENTRAL BANK REPORTING

Risk Management

Clearing

Management Information System & Regulatory Framework (Basel II) & SOXA RATE FEEDS Customer Information System Other Systems General Ledger

Information Center Analytical CRM Capacity Management

Product Profitability

Customer Profitability

ALM

Credit Risk

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Banking Activities
Banking is defined as accepting deposits for the purpose of lending and investment.
Dimensions of Banking

Deposits

Loans

Services

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Banking and Banking operations

Bank is a commercial institution licensed as a receiver of deposits. Banks are mainly concerned with making and receiving payments as well as supplying short-term loans to individuals. Exists to help you make the most of your money Assist you with your monetary requirements and promote savings How do they do it ?? By offering different products and Services Banking Services

Deposits E.g. Savings Current Fixed Short Term

Loans

Services

Capital Market E.g. DP

Long Term E.g.

Retail E.g. DDs Lockers Bill Pay

Institutional E.g.

Custodian Merchant Banking

E.g.
Overdraft

Auto Loan
Home Loan

Bank Guarantee
Trade Finance

Debenture Trustees

Fund based activities, greater market risk Fee based activities, lesser market risk

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Activities of a Bank
Accepting deposits from Public Lending money to public Remittances/Collection Business Keeping valuables in safe custody Government business Acting as trustee

Treasury services
Capital Market activity

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Lets Discuss

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How to be Happy

Three essentials for happiness:

1. Something to do, 2. Someone to love, 3. Something to hope for.

Thank You ALL & be Happy

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Repo Rate

A repo or Repurchase Agreement is an instrument of money market. Usually reserve bank (RBI) and commercial banks involve in repo transactions but not restricted to these two. Individuals, banks, financial institutes can also participate in repurchase.

Repo is a collateralized lending i.e. the banks which borrow money from Reserve Bank to meet short term needs have to sell securities, usually bonds to Reserve Bank with an agreement to repurchase the same at a predetermined rate and date.

The party who originally buys the securities effectively acts as a lender (RBI). The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest (BANK). Borrower of funds is called as seller of repo and lender of funds is called as buyer of repo. When the term of the loan is for one day it is known as an overnight repo and if it is for more than one day it is called a Term Repo .

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Reverse Repo

CRR (Cash Reserve Ratio): Cash reserve Ratio (CRR) is the amount of Cash (liquid cash like gold) that the banks have to keep with RBI. This Ratio is basically to secure solvency of the bank and to drain out the excessive money from the banks. If RBI decides to increase the percent of this, the available amount with the banks comes down and if RBI reduce the CRR then available amount with Banks increased and they are able to lend more.
Repo Rate: Repo rate is the rate at which our banks borrow rupees from RBI. This facility is for short term measure and to fill gaps between demand and supply of money in a bank. when a bank is short of funds they borrow from bank at repo rate and if bank has a surplus fund then the deposit the funds with RBI and earn at Reverse repo rate. Reverse Repo rate is the rate which is paid by RBI to banks on Deposit of funds with RBI.A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. To borrow from RBI, bank have to submit liquid bonds /Govt Bonds as collateral security ,so this facility is a short term gap filling facility and bank does not use this facility to Lend more to their customers. present rate is 3.25 as on 29.01.2010) SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit. Generally this mandatory ration is complied by investing in Govt bonds. present rate of SLR is 24 %.(as on 29.01.2010)But Banks average is 27.5 %, the reason behind it is that in deficit Budgeting ,Govt lending is more so they borrow money from banks by selling their bonds to banks. so banks have invested more than required percentage and use these excess bonds as collateral security (over and above SLR) to avail short term Funds from the RBI at Repo rate.

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Inflation: Cause

Inflation is caused by a combination of four factors; those factors are:

The supply of money goes up. The supply of goods goes down. Demand for money goes down. Demand for goods goes up.

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Money A view

MONEY IS WEALTH..

The key thing to remember is that wealth is not money. money is only one of many forms of wealth, it has plenty of substitutes. The interaction between money and its substitutes explain why the demand for money changes.

People hold money because money has purchasing power and the purchasing power of money is determined by the supply of, and demand for, money. If a rise in the money supply is accompanied by an equal rise in money demand, overall prices and the purchasing power of money remain unchanged. Tooooo optimistic a view..

DEMAND FOR MONEY IS INFINITE

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Demand for Money

The demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits. The demand for money is a result of the form in which a person's wealth should be held motivations for holding one's wealth in the form of money:

Transaction motive Asset Motive

Two Advantages of Holding Money

the liquidity advantage (carry out transactions) of holding money and the interest advantage of holding other assets

Demand for money is defined as the nominal amount of money demanded divided by the price level

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Money Demand Function

A typical money-demand function may be written as

where Md is the nominal amount of money demanded, P is the price level, R is the nominal interest rate, Y is real output, and L(R,Y) is the liquidity preference function.

Quantity Theory: The most basic "classical" transaction motive can be illustrated with reference to the Quantity Theory of Money.

According to the equation of exchange MV = PY, where M is the stock of money, V is its velocity (how many times a unit of money turns over during a period of time), P is the price level and Y is real income. Consequently PY is nominal income or in other words the number of transactions carried out in an economy during a period of time. Rearranging the above identity and giving it a behavioral interpretation as a demand for money we have

Hence in this simple formulation demand for money is a function of prices and income, as long as its velocity is constant.

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Money Demand Function

while workers may get paid only once a month they generally will wish to make purchases, and hence need money, over the course of the entire month. an economic model that is based on such considerations is the Baumol-Tobin model. In this model an individual receives her income periodically, for example, only once per month, but wishes to make purchases continuously.

where t is the cost of a trip to the bank, R is the nominal interest rate and P and Y are as before.

Micro foundations for money demand

Asset motive: The asset motive treats money, focuses on the potential return on various
assets (including money) as an additional motivation

Speculative motive Portfolio motive: hold the wealth in a form of a low risk/low return asset (here, money) or
high risk/high return asset (bonds or equity).

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Factors which can change the demand for money

Interest Rates: Two important stores of wealth are bonds and money, these are substitute to oneself. a
fall in interest rates cause the demand for money to rise.

Consumer Spending: if the demand for consumer spending increases, so will the demand for
money.

Precautionary Motives:
the demand for money will go up

If people think that they will suddenly need to buy things in the immediate future (say it's 1999 and they're worried about Y2K), they will sell bonds and stocks and hold onto money, so

Transaction Costs for Stocks and Bonds: If it becomes difficult or expensive to quickly buy
and sell stocks and bonds, they will be less desirable. People will want to hold more of their wealth in the form of money, so the demand for money will rise.

Change in the General Level of Prices: If we have inflation, goods become more expensive,
so the demand for money rises.

International Factors:

An increase in the demand of that country's goods abroad. An increase in the demand for domestic investment by foreigners. The belief that the value of the currency will rise in the future. A central banking wanting to increase its holdings of that currency.

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Factors Which Increase the Demand for Money

A reduction in the interest rate.

A rise in the demand for consumer spending. A rise in uncertainty about the future and future opportunities. A rise in transaction costs to buy and sell stocks and bonds. A rise in inflation causes a rise in the nominal money demand but real money demand stays constant. A rise in the demand for a country's goods abroad.

A rise in the demand for domestic investment by foreigners.

A rise in the belief of the future value of the currency. A rise in the demand for a currency by central banks (both domestic and foreign).

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