MBA 20FM07 BANKING MANAGEMENT

UNIT – I INDIAN FINANCIAL SYSTEM

Basic Concepts of Indian Financial System: Structure and Components:
Financial system in India, Market, Institution / Intermediaries,
Instruments and Regulators. Role of financial system in economic
development. Introduction to financial Institutions – Banking – Non
Banking Institutions. Role and Functions of Banks and their Contribution
to Indian Economy.
UNIT – II MONEY MARKET
Money Market: Structure and components: Participants in Indian
Money Market, Money Market Instruments, Structure of Money
Market, Role of central bank in money market; Players in the Indian
Money Market, The reforms in Indian Money Market
UNIT – III CAPITAL MARKET

Capital Market: Components & Functions of Capital Markets, Primary &

Secondary Market Operations, Capital Market Instruments - Preference
Shares, Equity Shares, Non-voting Shares, Convertible Cumulative
Debentures (CCD), Fixed Deposits, Debentures and Bonds, Global Depository
receipts, American Depository receipts, Global Debt Instruments, Role of
SEBI in Capital Market.

UNIT – IV BANKS AND NBFCS

Banks and NBFCs: Types of Banks & NBFCs: Central Bank, Nationalized &Co-
Operative Banks, Regional Rural Banks, Scheduled Banks, Private Banks &
Foreign Banks, Mudra Bank, Small Finance Banks, Specialized Banks, NBFCs.
Types of Banking: Wholesale and Retail Banking, Investment Banking,
Corporate Banking, Private Banking, Development Banking.
UNIT – V ELECTRONIC BANKING
Electronic Banking: Electronic Banking, RTGS, ATM, MICR, OCR, OMR,
and DATANET, Petty Cash, Electronic Clearing Service (ECS), National
Electronic Funds Transfer (NEFT) System, Real Time Gross Settlement
(RTGS) System, IMPS.
 The Role of Financial System in Economic Growth
• Financial mediators perform a significant role in the development process, mainly
through their role in allocating resources to their maximum productive uses.

• More efficient financial markets aid economic agents trade, hedge, pool risk,
raising investment and economic growth.

• Financial institutions provide consumers and commercial customers with a wide

range of services and different types of banking products. The importance of
financial institutions to the broader economy is apparent during market booms and
recessions..
The Role of Financial System in Economic Growth (Cont…)

• During economic growths, financial institutions provide the financing that

drives economic development, and during recessions, banks curtail lending.

• This can exacerbate a state's financial problems and draw consideration to the
fact that economies are heavily dependent upon the financial sector

• The importance of financial institutions and passed legislature made it easier

for more people to obtain products and services from these entities
The Role of Financial System in Economic Growth
(Cont…)
• In many states, banks are encouraged or even compelled to lend
money to home purchasers and small businesses.

• Willingly available loans encourage consumer spending, and this

spending leads to economic development.

• There is now a clear realization that sustainable growth will not and
cannot be achieved by governments acting alone.

• In this situation, the expertise of the private sector plays a vital role.
 Financial Institutions roles in economic development;
Development & Introduction of Niche strategies
• Through the development and introduction of financial institutions
we can see the strategies for different sector specially for the niche
sector of the country.
• The institutions develop and spread knowledge about financial
products to assist the efficiency for the accomplishment of
sustainable economic growth.
• In 2003 union bank introduced 'RAAS Financing Scheme' for the small
community of Gujranwala division involved in surgical industry.
• For this approach to offer attractive opportunities for the financial
help for growing & profitable market section.
• SME bank introduced Express loan scheme for niche area as well in
2004-2005.
 Motivating the Financial Sector

• Generally Financial Institutions will only use their resources for the benefit of
their interest - i.e. help to make profits, either directly or indirectly.

• The considerations are important because with the help of development of

institutions there is rise in the investment business in the country.

• With presence of more institutions there will be motivation in the financial area to
perform better and take steps for the strengthening of country.

• This will lead towards the prosperity in the country by removing the risk.
 Financing the Small Scale Sector

• Credit is the key input for sustained growth of small scale sector and its
availability is thus a matter of great importance.

• The provision of short term credit or working capital to small businesses for its
day to day requirement for purchasing raw material and other inputs like water,
electricity, etc. and for payment of salaries and wages; and long term credit for
creation of fixed assets like building, land, plant and machinery help the SME
sector to perform better.
 Development and Support Services

• With the existence of different organizations development and support services in

the form of grants and loans to different agencies working for the promotion and

development of industries like associations, chambers are available.

• The core example of import of thermos bonded machines for the production of

thermos bonded footballs is possible with the help of banks in Sialkot.

• Other support was observed in rural development, technology up-gradation, human

resource development, and marketing & promotion in the country.

 Micro Finance Credit

• With the expansion of different institutions like KHUSHHALI Bank, Tameer Micro
finance, First Microfinance Bank etc. Micro Credit is offered to the poorest sector of
country.

• This active step to facilitate growth of the micro finance sector in country is very
commendable.

• It is envisaged to emerge as the apex community by providing a broad range of

financial and non-financial services such as grant support, loan funds, equity and
institution building support.
 Introduction of more Institutions

• The Financial Institutions and Banking system play an important role in the
economy.

• First and foremost is in the form of catering to the requirement of credit for all the
sections of society.

• The recent economies in the world have developed mostly by making best use of
the credit availability in their systems.

• An efficient banking system must accommodate to the needs of high end investors
by making available high amounts of capital for vast projects in the industrial,
infrastructure & service sectors.
 Introduction of more Institutions (Contin..)
• At the same time, the medium and small projects must also have credit available
to them for new investment and extension of the existing units.

• Rural sector in a country like India, and Pakistan can grow only if inexpensive
credit is available to the farmers for their short and medium term needs.

• This expected potential help the investors for the introduction of more Financial
Institutions in the country.
 Mopping up Savings

• The banks and financial institutions also accommodate to another important need
of the society that is mopping up small savings at sensible rates with several
options.

• The common man has the choice to park his savings under a few alternatives,
together with the small savings schemes introduced by the government from time
to time and in bank deposits in the form of recurring deposits, savings accounts,
and time deposits.

• Another choice is to invest in the mutual funds or stocks

 Trade Facilitation Programme

• Trade Facilitation Programme aims to foster trade in the countries of operations,

both intra regional and global. Through the programme, institutions provide
promises to confirming banks, taking the political and commercial payment risk
of international trade transactions take on by banks in the countries of operations.

• This pioneering programme remains an important source of trade finance in many

of countries of operations.
 Availability of Financial services to households &
individuals
• Individuals have a key impact on the environment through their doings and
consumption of goods and services, and in some cases their effect is proving more
intractable than commercial effects.

• Financial institutions can have a major effect on the activities of individuals by the
provision of appropriate financial arrangements - for example, access to cheap
mortgage finance is a requirement of widespread home ownership, and car
ownership has been critically increased by the accessibility of car loans and hire
purchase.

• In the absence of suitable financing arrangements, products may struggle to achieve

sales, mainly if they have high capital costs.
 Capital mobilization

• Capital mobilization is commonly one of the most necessary conditions for

economic development.

• The role played by Financial Institutions in the process of financial integration in

developing countries is very important. With the help of this channel advantage of
integration materialized. With the help of capital mobilization capacity building,
good governance and economic reforms can easily be achieved.
 Insurance and financial services

• Financial institutions are supporting a wide range of financial services to help

expand local capital markets and develop local financial infrastructure.

• In 2002-2008 there was a strong focus on leasing transactions and investment with
new commitments made to insurance corporations; a pension funds etc.

• The Bank also contributed in a number of structured finance transactions,

encouraging the use of capital market products in the area.

• Development in this sector will continue as demand for more diverse financial
services rises and as improved legislation provides the essential infrastructure for
financial sector development.
 Managing Risk in Financial Institutions

• Risk factor is very critical factors while dealing with finance.

• The assistance of issuance of new securities e.g., the sale of new Treasury
securities or new corporate stock or facilitation of trading of existing securities
e.g., the sale of existing stock etc. involve factor of risk.

• We are not self-assured either the securities traded in secondary markets are liquid
or not.

• Focusing on risk management in the financial institution is very essential

 Achievement of Growth

• Developed financial systems allow economies to reach their potential since they
allow companies which have successfully recognized profitable opportunities to
exploit these opportunities as intermediaries by channelling investment funds
from those in the economy who are prepared to defer their consumption plans into
the future.

• Achievement of development in country becomes easy with introduction of

financial institutions.

• Different steps of financial development require adequate institutional procedures

to be in place.
 Financial Innovation

• Its influence on how financial products are delivered.

• Funds are transferred straight from ultimate savers to ultimate borrowers.

• With reduction of trust deficit financial innovation is possible on improved

grounds.

• We know the stream of short-term funds is facilitated by money markets and the
flow of long-term funds is facilitated by capital markets.

• These activities also assist in financial innovations.

 Tailor made schemes

• With the help of different institutes several tailor made schemes for the
improvement of economic sector of the country are available at door steps.
• Introduction of country wide schemes cannot give projected growth.
• As discussed previous RAAS Financing Scheme, Green tractor scheme, Express
loan, Yellow Cap Scheme etc. showed extensive results for the improvement of
growth in the country.
 Definition of a Non-Banking Financial Company
(NBFC)
• A Non-Banking Financial Company (NBFC) is an organization that provides
banking and financial services without having a banking license.

• They provide traditional banking services like loans and deposits, but are not
allowed to accept demand deposits. NBFCs are regulated by the Reserve Bank of
India (RBI).

• NBFCs have grown in importance in India over the past few years, becoming an
important source of credit for businesses and consumers alike.

• Most NBFCs operate in lending, leasing, hire-purchase activities, and other allied
financial services. Some of them also specialize in money transfer services, foreign
Overview of the Indian NBFC Industry in 2023

• The NBFC industry in India is growing at an exponential rate with its impact
becoming more visible across different sectors. As on 2023, the size of the NBFC
sector is estimated to be around USD 326 billion. This is driven by rising demand
for niche financial services provided by non-bank lenders, such as micro lending
and small business financing.

• The growth of the NBFC sector can be attributed to two key factors:

• The demand for loans by the MSME (Micro, Small and Medium Enterprises)
sector who finds it difficult to borrow from banks due to stringent eligibility
criteria
 The 10 Top NBFCs in India in 2023

• Aditya Birla Capital. ...

• Bajaj Finserv. ...
• L&T Finance Holdings Limited. ...
• Cholamandalam Investment and Finance Company Limited. ...
• Muthoot Fincorp. ...
• Reliance Capital. ...
• Shriram Finance Ltd. ...
• Poonawalla Fincorp.
 What is Money Market
• As per RBI definitions “ A market for short terms financial assets that are close
substitute for money, facilitates the exchange of money in primary and secondary
market”.

• The money market is a mechanism that deals with the lending and borrowing of
short term funds (less than one year).

• A segment of the financial market in which financial instruments with high

liquidity and very short maturities are traded.
 CONTINUED…..
• It doesn’t actually deal in cash or money but deals with substitute of cash like
trade bills, promissory notes & government papers which can converted into cash
without any loss at low transaction cost.

• It includes all individual, institution and intermediaries .

 Objectives of Money Market

• Development of trade & industry.

• Development of capital market.

• Smooth functioning of commercial banks.

• Effective central bank control.

• Formulation of suitable monetary policy.

• Non inflationary source of finance to government.

 Structure of Indian Money Market
ORGANISED STRUCTURE

1. Reserve bank of India.

2. DFHI (discount and finance house of India).

3. Commercial banks

i. Public sector banks SBI with 7 subsidiaries

ii. Cooperative banks

iii. Nationalized banks

iv. Private banks (Indian Banks Foreign banks)

4. Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
 Continued…

UNORGANISED SECTOR
• Indigenous banks Money lenders Chits Nidhis.
CO-OPERATIVE SECTOR State cooperative
i. Central cooperative banks
ii. Primary Agri credit societies
iii. Primary urban banks
iv. State Land development banks
v. Central land development banks
vi. Primary land development banks
 Composition of Money Market
• Money Market consists of a number of sub-markets which collectively constitute
the money market. They are,

• Call Money Market

• Commercial bills market or discount market

• Acceptance market

• Treasury bill market

 Instrument of Money Market
• A variety of instrument are available in a developed money market.

• In India till 1986, only a few instrument were available.

• They were Treasury bills

• Money at call and short notice in the call loan market.

• Commercial bills, promissory notes in the bill market.

 New instrument

• Now, in addition to the above the following new instrument are available:

• Commercial papers.

• Certificate of deposit.

• Inter-bank participation certificates.

• Repo instrument

• Banker's Acceptance

• Repurchase agreement

• Money Market mutual fund

 Commercial paper (CP)

• CP is a short term unsecured loan issued by a corporation typically financing day

to day operation.

• CP is very safe investment because the financial situation of a company can easily
be predicted over a few months.

• Only company with high credit rating issues CP’s.

 Treasury Bills (T-Bills)
• (T-bills) are the most marketable money market security.

• They are issued with three-month, six-month and one-year maturities.

• T-bills are purchased for a price that is less than their par(face) value; when they
mature, the government pays the holder the full par value.

• T-Bills are so popular among money market instruments because of affordability

to the individual investors.
 Certificate of deposit (CD)
• A CD is a time deposit with a bank.
• Like most time deposit, funds can not withdrawn before maturity without paying a
penalty.
• CD’s have specific maturity date, interest rate and it can be issued in any
denomination.
• The main advantage of CD is their safety.
• Anyone can earn more than a saving account interest.
 Repurchase agreement (Repos)
• Repo is a form of overnight borrowing and is used by those who deal in
government securities.

• They are usually very short term repurchases agreement, from overnight to 30
days of more.

• The short term maturity and government backing usually mean that Repos provide
lenders with extremely low risk.

• Repos are safe collateral for loans.

 Banker's Acceptance
• A banker’s acceptance (BA) is a short-term credit investment created by a non-
financial firm.

• BA’s are guaranteed by a bank to make payment.

• Acceptances are traded at discounts from face value in the secondary market.

• BA acts as a negotiable time draft for financing imports, exports or other transactions
in goods.

• This is especially useful when the credit worthiness of a foreign trade partner is
unknown.
 MONEY MARKET

• A place for trading in money and short term financial assets that are close
substitutes for money.

• It provides an opportunity for balancing the short term surplus funds of the
lenders/investors with the short term requirements of borrowers.
 Definition of Money Market
• The definitions by various personalities are given as :Geoffrey Crowther in his
book “An Outline of Money” has stated :“Money market is a collective name give
to the various forms and institutions that deal with the various grades of near
money.”J M Culbertson in his book “Money and Banking” has defined money
market as “a network of markets that are grouped together because they deal in
financial instruments that have a similar function in the economy and are
substitutes from the point of view of holders. thee instruments of money market
are liquid assets: that mature within a short period of time or callable on demand.”
 Maturity of less than one year

• Money or near money assets having high liquidity.

• No fixed place of activity

• Homogenous market

• Money and short term financial assets

• Transactions with or without brokers

 Features of Money Market
• Following are the general features of a money market:

• Liquidity of assets: The assets dealt here are highly liquid i.e. Money or near
money assets that could be easily converted into cash.

• Maturity of assets: The assets enjoy a maturity period of less than one year.

• Place of dealing: There is no fixed place of activity; it could be conducted over

telephone, mail etc

• Type of assets: The market trades in short term financial assets.

• Type/nature of market: The market comprises of several sub-markets making it

homogenous in nature.
Objectives of Money market Surplus funds Deficit funds
• Transferring surplus of funds from one to another.

• Access to users of short term funds to meet their requirements.

• MONEY MARKET: A-Surplus funds B - Deficit funds

(Equilibrium in market)

• Following are some of the important objectives of a money market:

• Provides access to users of short term funds to meet their requirements at reasonable cost.

• Helps in transferring surplus from one sector to another.

• Provides a mechanism for maintaining equilibrium in the short term surplus and deficits of
funds in the market.
 Importance/Functions of Money Market
Economic development : The market provides funds to both public and private
institutions who need money to finance their capital needs.

• The advantage of liquidity help to promote trade, commerce and industry.

Borrowings by the government : Money market helps the govt. To borrow short
term funds at a low rate of interest.

• Else the govt will resort to deficit financing or printing more notes increasing the
money supply and the price level.

• Mobilisation of funds : Money market helps in transferring funds from one sector
to another, thus mobilising the resources and contributing in country’s
development.
 Self sufficiency of commercial banks :
• Money market relieves commercial banks to borrow from central banks at higher interest
rates instead they can recall some of their loans.

• Savings and investments : By promoting liquidity and safety of assets money market
encourages savings and investment.

• More savings and investments will mean more funds.

• Importance for central bank : Money market is of utmost importance for the central bank
to control the banking system and to contribute towards the development of trade and
commerce.

• Money market being homogenous market is affected by a change in one of its sub-markets.
Thus bank can affect the whole market by changing just one sub-market.
Call Money Market for very short period

• Brokers and dealers in stock exchange borrow money at call from commercial
banks

• For very short period

• No collateral securities, high liquidity

• ROI changes several times during a day

 Collateral loan market

• Loosely organized and specialized

• Loans advanced by commercial banks

• Collateral loans are backed by securities, stocks and bonds

• If borrower is unable to pay, collateral becomes property of lender

 Acceptance Market

• Market where bankers’ acceptances are easily sold and discounted .

• Short term credit by exporters to get paid faster for their exported goods.

• Are used in primarily international trade

• Were used in London money market

• Lost significance in Indian Money Market.

 Bill Market

• A market in which short term bills are dealt in.

The duration of bill is generally 90 days

• Types of bills: Bills of exchange and treasury bills

 The Institutions of Money Market
• The institutions of money market are those which deal in lending and borrowing of short
term funds.

• These are not same in all countries of the world , rather they differ from country to
country.

Some major institutions of money market are :

• Commercial Banks.

• Central Bank.

• Acceptance Houses.

• Non-Banking Financial Intermediaries.

1. COMMERCIAL BANKS Back bone of the money market.
They lend against promissory notes and through advances and overdrafts .The
commercial banks put their excess reserves in different forms or channels of
investment.

2. CENTRAL BANKS. It is regarded as an apex institution (the monetary

authority). No money market can exist without the central bank. It raises or reduces
the money supply and credit to ensure economic stability in the economy .The
performance of the central bank depends on the character and composition of the
money market .But it does not enter into direct transactions, it controls the money
market through changes in the bank rate and open market operations.
3. ACCEPTANCE HOUSES The institution of acceptance houses developed in
England where merchant bankers transferred their headquarters to London money
market in late 19th and the early 20th century. They function as intermediaries
between importers and exporters, and between lenders and borrowers in the short
period.

4. NON BANKING FINANCIAL INTERMIDIARIES In non-banking financial

intermediaries we include :Savings banks Investment houses Insurance companies
Building societies Provident funds Other business corporations like chit funds.
 MONEY MARKET INSTRUMENTS
• The following are the instrument that are available in the money market.

• Commercial Bills

• Treasury Bills

• Call and Short Notice Money Market

• Certificate of Deposits

• Commercial Paper

• Repurchase Agreement

• Inter Bank Participation Certificate

 COMMERCIAL BILLS TREASURY BILLS (TBS)
• Commercial Bills or Bills of exchange is a return instrument containing an
unconditional orders.

• Once the buyer signifies his acceptance the bill itself it becomes a legal document.

• RBI stated making efforts in this direction in however, a new and proper bill market
was introduced in 1970.

• TREASURY BILLS (TBS) The treasury bill is a short-term government security.

Usually of the duration of 91 days. Sold by the central bank on behalf of the
government. Treasury bills are highly secured and liquid because of guarantee of
repayment assured by RBI who is always willing to purchase or discount them.
 CALL AND SHORT NOTICE MARKET
• Call money refers to a money given for a very short-period.

• For a day or overnight but not exceeding 7 days.

• The interest rate is very low on call funds.

• Any variation of call money is NOTICE MONEY which can be for a period up to 14
days.

• CERTIFICATE OF DEPOSITS (CDS) As per the Reserve Bank of India, Certificate

of Deposits(CD)is a negotiable money market instrument and issued as a promissory
note against funds deposited at a bank or other eligible financial institutions for a
specified time period. They are liquid and riskless in terms of default of payment of
interest and principal.
 COMMERCIAL PAPERS (CPS)

• CPs are short-term promissory notes issued by reputed companies with good
credit standing and having sufficient tangible assets.

• CPs are unsecured and are negotiable by endorsement and delivery.

• CPs are normally issued by :

• The bank Public utilities

• Insurance and finance companies

• The buyers of CPs includes :

• Banking financial institutions

• Non-banking financial institutions.

 INTER BANK PARTICIPATION CERTIFICATES (IBPCS)

• IBPCs are the inter bank money market instruments used by commercial bank to
park their surplus funds.

• These IBPCs are of two types :

• With risk sharing IBPCs

• Without risk sharing IBPCs .

 FEATURES OF THE INDIAN MONEY MARKET
• In Indian money market, RBI occupies the pivotal position. The Indian money market can be
divided into two sub sections:

1) UNORGANISED

2) ORGANISED

• The organised sector comprises of:

• Reserve Bank of India

• SBI group and commercial banks

• Foreign, public sector and private sector banks

• The unorganised sector comprises of : Money lenders Indigenous bankers.

 PLAYERS IN THE INDIAN MONEY MARKET
• Reserve Bank of India,

• Financial institutions like FCI, ICICI, LIC, UTI.

• Commercial banks including scheduled as well as non scheduled banks,

• Discount and Finance House of India,

• Brokers Provident Funds ,

• Public sector Undertakings,

• Corporate Units etc.

 THE REFORMS IN THE INDIAN MONEY MARKET

• VAGHUL COMMITTEE on money market, SUKHMOY CHAKRAVARTY

COMMITTEE on the Review of the working of the Monetary system and the
NARSIMHAM COMMITTEE on the working of the financial system have made
important recommendations on the Indian money market.

• The RBI has started the process of implementation of these recommendations:

(1) DEVELOPMENT OF THE MONEY MARKET INSTRUMENTS: This includes

the introduction of new instruments such as 182 days treasury bills, longer maturity bills,
dated government securities , certificate of deposits & commercial papers, 3-4 days repos
and one day repos. It also includes the reintroduction of 182 days treasury bills.
Contin..

(2) DEREGULATION OF INTEREST RATES: IN 1988, RBI removed the

ceiling of 16.5 percent and fixed a minimum of 16 percent p.a.

(3) INSTITUTIONAL DEVELOPMENT

(4) MONEY MARKET MUTUAL FUNDS

(5) PERMISSION TO FOREIGN INSTITUTIONAL INVESTORS (FIIs).