FINANCIAL SYSTEM

What is Financial System?

 Financial System is a set of institutional

arrangements through which financial surpluses are
mobilised from savers and transferred to users.
Savers to users
The financial system helps production, capital
accumulation, and growth by (i) encouraging savings,
(ii) mobilising them, and (iii) allocating them among
alternative uses and users.
Each of these functions is important and the
efficiency of a given financial system depends on
how well it performs each of these functions.

 Encouraging savings: Financial system promotes

savings by providing different types of financial
assets / Products. These products are provided by
different markets and different financial services
units
Mobilising Savings : Financial system is a highly
efficient mechanism for mobilising savings and thus
monetise the economy .
Supply of credit : Another important function of a
financial system is to arrange smooth, efficient, and
socially equitable allocation of credit

 What are the institutions which are a part of

Financial System?.
Regulators: The regulators which are vested with powers to
regulate these markets, Institutions and products are : RBI,
SEBI, IRDA, FMC, PFRDA and NHB

What are the institutions regulated by RBI?

 REGULATOR FOR
DFIs[ IFCI, NABARD, SIDBI, EXIM
BK,NHB,TDFCI,IDFC, IIFC ]
BANKING SYSTEM
CICs
ARCs
PDs
NBFCs

IFCI
The fst Development finance institution
formed in 1948.
Purpose: Industrial Finance
IDBI [1964 ] IDBI Bank
ICICI [ 1955] ICCI Bank
UTI [ 1964 ] First mutual fund

NABARD

Formed in 1982
Agl development
Rural development[ both firm and non-firm activities
Long term credit, short term credit
Allied activities . small industries
Refinance
Co-operative banks refinance, inspection
RRbs- inspection
SHGs Introduction of concept
Kishan Vikash Card
Farmers CLUB
RIDF

8 . SIDBI

MICRO SMALL AND MEDIUM ENTERPRISES

INDUSTRY , SERVICES
DIRECT FINANCE,
JOINT FINANCE
REFINANCE
CLUSTER DEVELOPENT
INDUSTRY DEVELOPMENT
CGTMSE
SMERA Rating Ltd

EXIM BANK

APEX BANK FOR INTERNATIONAL TRADE

LONG TERM FINANCE FOR EXPORT
DIRECT FINANCE
REFINANCE
BUYERS CREDIT
SHORT TERM FINANCE

NHB
REFINANCE TO PRIMARY LENDERS
HOUSING FINANCE INSTITUTIONS [ HDFC, LIC HF.
GIC HF, ]
REGULATOR FOR HFCs
NEW SCHEMES FOR HOUSING FINANCE
REVERSE MORTGAGE
INDIA MORTGAGE GUARANTEE COMPANY
CREDIT RISK GUARANTEE FUND FOR RAY.
RESIDEX

TDFCI, IDFC , IIFC

TDFCI- Tourism projects

IDFC- Infrastructure financing
IIFC Infrastructure financing
Very long term finance
Take out finance

RESERVE BANK OF INDIA

CENTRAL BANK
CASH RESERVE [ slide 11]
NOTE ISSUE [ slide1
BANKER TO GOVT
CURRENT ACCOUNT,
PUBLIC DEBT: TB, CMB, GOVT BOND , DTD SECURITY
BANKERS BANK
CURRENT ACCOUNT
SUBSIDIARY GENERAL LEDGER ACCOUNT
LIQUIDITY ADJUSTMENT FACILITY ;REPO / REVERSE REPO
MARGINAL STANDING FACILITY
Monetary Policy

REGULATOR FOR THE BANKING

SYSTEM

Bank licensing
Regulator for opening of branches
Regulator for deposits
Regulator for advance / intt. Rates
Regulator for ancillary / Para banking services
Customer service.
Customer Service guidelines
Banking Ombudsman Scheme [ Slide 18 ]

CASH RESERVE RATIO

SCBS are required to maintain CRR as per sec 42
of RBI Act
Current Account Balance with RBI
A percentage of NDTL
The % can be varied by RBI without any limit
The CRR is to be maintained on an average basis.
Min 70%, Form A , reporting Friday, A gap of one
fort night
No interest by RBI on CRR
Penalty for non-maintenance

Statutory Liquidity Ratio

Sec 24 of BR Act
A % of NDTL . Max 40%
Maintained by keeping liquid assets like Cash.
Bank balance. RBI balance exceeding CRR, SLR
securities , Gold, Foreign assets.
Daily basis
Report to RBI

Contd
BCSBI
Regulator for Payment and Settlement System [Slide
20]
Bank inspections
Directives / Guidelines
Regulator for Management of banks
Foreign Exchange Market [ FEMA]
Monetary control
Credit and Monetary Policy
General Credit Control
Selective Credit Control

Monetary control

Annual Credit and Monetary Policy

Once a year in the month of April
Review bimonthly [ inflation, M3, growth rate]
How to control inflation/ M3/
Cash reserve
Statutory Liquidity Ratio
Bank Rate
Repo Rate / Reverse Repo rate
Open Market Operation

Bank Rate
Sec 49 of RBI Act.
Rate at which RBI discounts B/E or commercial
papers eligible for purchase under this Act
from SCBs.
Bank Rate is thus a lending rate.
Bank Rate affects money supply and inflation.
What happens to money supply if it is hiked?

Repo rate
Repo rate is the rate at which RBI buys Govt
securities from SCBs and thus gives loan to
SCBs
Reverse Repo Rate is the rate at which RBI
sells Govt Bonds to SCBs and thus borrows
money.
Repo rate/ Reverse repo affects money supply
and inflation

OMO

Purchase and sale of securities to SCBs. PDs

Affects , money supply and thus inflation,
Sale means sucking money
And Purchase means injecting money supply,

Banking Ombudsman Scheme

Scheme 2006
RBI appoints BOs/ GM or CGM
Deficiency of service , write to bank
Wait for 30 days. No reply or no redressal of
grievance to your satisfaction
Complain to BO
Method of Complain
BO sends to bank, No Soln. gives award
Implementation of Award

BCSBI
Banking Code and Standard Board of India
Formed by RBI
Voluntary membership/ but in effect
compulsory
COBCTC / Code of Banks Commitment for
MSEs.
Different commitment for opening . Transfer
of deposits, loans, ATM operations, and all
services

Payment and Settlement System

RBI is the regulator

Cheque Truncation Clearing
Remittances
RTGS,
NEFT,
NECS
ATM /Internet banking
Credit Card/ Prepayment Card

Foreign Exchange

FEMA
Appointment of ADs
Opening of NR accounts
Exports
Remittance by residents
Exports
Imports

SEBI
Regulator for the capital market.
What is capital market: Pubic Limited
Companies can raise share capital and also
by borrow from public through debentures or
put money in mutual funds who in turn
invest in shares and debentures.
Difference between share capital / equity
capital and borrowing
.

 Capital Market can be Primary Market and

secondary market.
Primary mkt : IPO and FPO
Merchant Bankers
Book Building Process / Red Herring
Prospectus
ASBA : Application for Share against Blocked
Account
Secondary market : Provides liquidity

27
Stock Exchanges : NSE , BSE and mSXI
Listing of shares. Listed shares
Online trading of shares and mutual funds and
debentures
Nifty, Sensex, MCX-SX
Depositories to keep electronic accounts of
shares of shareholders called Demat Accounts
Two Depositories: NSDL , CDSL
Depository Participants

SEBI contd.
Mutual Funds: Pools funds from investors and
makes investments in shares, debentures, real
estates etc to provide a better return on
investments
Third party product Sale
Brokers
Wealth Management / Portfolio management

Insurance Regulatory and Dev.

Authority
What is insurance ?
Four Types : Life, non-life / general, Crop and
Health
Insurance Companies : PSU and private
Contingent Contracts
Third Party Products/ Bancainsurance
Insurance Brokers
Insurance Repository
Functions of IRDA

Forward Market Commission

Commodity Market
Five Companies
NCDEX[ National Commodities and Derivative Exchange of India Ltd]
NMCE[National multi commodities and Exchange of India Ltd ]
MCX [ Multi commodities and Exchange of India Ltd,]
ICEX[ Indian Commodties Exchange Ltd
ADCE[ ACE Derivative Exchange],

BANKING SYSTEM
1. Broadly there are 6 types of banks:
2. PSBs State Bank and associates, Nationalised
banks, IDBI Bank , BMB
3. Pvt Sector banks Old generation Pvt banks,
New Generation Pvt Banks,
4. Regional Rural Banks,
5. Local Area Banks,
6. Co-operative Banks.
7 .How do they differ

 SBI and Associates

SBI [ Conglomerate, Highest branches/ ATMs, Many

subsidiaries, Functions in many countries, ]

Associates : Five[ SBM, SBH, SBBJ, SBP, SBTra] [ SBI and SBS]
Wholly owned by SBI
Proposed to be merged with SBI
The history of nationalization of Indian banks dates back to
the year 1955 when the Imperial Bank of India was
nationalized and re-christened as State Bank of India (under
the SBI Act, 1955).

 Later on July 19, 1960, the 7 subsidiaries of

SBI viz. State Bank of Hyderabad (SBH), State
Bank of Indore, State Bank of Saurashtra (SBS),
State Bank of Mysore (SBM), State Bank of
Bikaner and Jaipur (SBBJ), State Bank of
Patiala (SBP), and State Bank of Travancore
(SBT) were also nationalized with deposits
more than 200 crores.

NATIONALISED BANKS
19 numbers
Two stages of nationalization [ 19th July 1969,
15Apl 1980 ]
First Phase 14 banks [ Kol- ALB, UBI, UCO] Che- IOB
, IB] [Karna- Canara, Syndicate] Mum- Union,
Central, BOI ] Pune- BOM, Del- PNB,, Baroda- BOB

Second [ Andhra, Corp. Bank, PSB, Dena, OBC

Vijaya, NBI]
IDBI Bank
BMB

Old Private Sector Banks

Kerala 4[ Federal, Catholic ,South Indian,
Dhanalakshmi ]
Tamilanadu4 [ TMB, LMB, KVB, CUB]
Karnatak 2 [ Karnatak Bk , ING Vysya Bank
Uttarakhand 1 [ Naintal Bank]
Maharastra 1 [ Ratnakar Bk Ltd]
J&K 1

New Gen Banks

7 Banks
HDFC/ 1994
ICICI/ 1994
AXIS/ 1994
DCB / 1995
KMB/ 2003
Indus Ind/ 2003
Yes/ 2004

Foreign Banks

Stan Chat
Bank of America
BNP Paribas
HSBC
ABN Amro
Citi Bank

RRBs

Owners [ 50/35/15]
Capitals
Local feel, low cost
Scheduled banks
Functions
52 banks

LABs
Coastal l Abank
KBSLAB
Capital LB

Co-operative Banks
SCBs
DCBs
PCBs

Credit Rating Companies

What they do?
What are the companies ? CIBIL, Equifax,
Experian and CFIR High Mark
Regd with RBI
Whether membership is compulsory?
Submission of data mothly
Drawing Credit Report
What is the content of Credit Report ?
Wh

Functions of a Comm Bank

Sec 5 (b) of BR Act

Ancillary services
Accepting Deposits
Types [ Demand / Term]
SB/ BSBD/ Jan Dhan/ Small SB ac / CA/
FDR/ RDP/ SFD/ C cert/ RD/CD/ Bank Deposit
for Tax purpose / capital gain acc/ Swipe
facility / /NR / premature closure/ Flexi
deposit/ holiday intt/ renewal of deposit/
payment of deposit exceeding Rs 20 000/- /
Loan ag deposit/ TDS/

 DICGC
How to open a SB Account / PAN Card/ KYC /
Photo/ introduction/ cheque of other bank/
Features of a SB Account /op bal/ min bal /
intt/ transfer/ core banking / Debit
Cards/number of with drwals/ Add ons
/personalized ch bk/ / Insurance cover / Credit
Card/ Demat/ Swipe/ Issue of Draft/ RTGS
free/ DD free/ Collection of che free /
How to open a Current Account in the name
of individual / OD/ Ch bk

 Giving Loans
Loans [ Demand loan and term loan]
Demand Loans [ Ag FDR. LIC, NSC KVP, JEWEl, Shares,
Govt sec, ]
Term loan[ Hsg, Edu, machinery ]
Cash Credit
Overdraft

Retail Loans [ Education/ Hsg/ Vehicle/ Travel/

Marriage/ Purchase of gold /
Whole sale credits
Priority sector Loans [ Ag/ MSE mg/ MSE ser / HSg/
Edu/ other priority /

 DIDGC
Covers Deposits of all types of firms [ Primary Coop socy a/c , not covered.]
A/Cs not covered . Central / State Govt, Banks,
Govt corporations , foreign Govt
Cover upto Rs 1 lakh in the name of the a\c
holder in all branches of the bank.
Premium 10 paise per annum
Payable in advance in for a half year [ Apl- Sept][
Oct Mar]
Borne by the bank
Only after setoff amount

IT attachment Order
Statute : Sec 226 of IT Act
What is attached: Not only due and accruing
due and payable but all money held on
account of the assesee. Bill sent for collection.
Joint Account : Yes / 50%
Deceased Account: Attached
Future deposits: Not attached even if the sec
226 mentions that money subsequently held
can be attached.
Penalty: As if an assesee in default .