BANKING AND FINANCIAL INSTITUTIONS

The term "finance" in our simple understanding is generally perceived

as equivalent to 'Money'. We read about Money and banking,
Monetary Theory and about "Public Finance" in Economics. But
finance exactly is not money, it is the process of “acquisition of funds
for a particular activity , for optimum utilization thereof in various
assets of the firm .

Similarly public finance does not mean the money with the
Government, but it refers to sources of raising revenue for the
activities and functions of a Government.

The word "system", in the term "financial system", implies a set of

complex and closely connected or interlined institutions, agents,
practices, markets, transactions, claims, and liabilities in the
economy.  The financial system is concerned about money, credit and
finance-the three terms are intimately related yet are somewhat
different from each other. Indian financial system consists of financial
market, financial instruments and financial intermediation.

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 Constituents of a Financial System

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 Financial System

Providers Users

Institution Markets

Unorganized Organized Stock Market Agriculture

Indigenous Bankers Financial Non Industries

Banking Money Market

Money Lenders Regulatory Financial Mfg;
Trading
Banking Fund based [Instruments Service
Pawn Brokers viz. Shares,
Co-operative Non Fund Bonds, C P
Based C D,D. W.]
Developmental SEBI
Banking
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 Post-1991 Phase Organization of the Indian financial System

Reorganization of Structure
Privatization of
financial
institution DFIs/PFIs Banks NBFCs Mutual-funds Capital Money-
Market Market
Banks
Stock-
Mutual-Fund Primary
exchange
Insurance
Investor Protection:
Companies
SEBI

Prudential Norms:
Credit/advance Securitization,
Exposure Asset
portfolio Asset-Liability
Norms: Reconstruction Management Credit Risk Country Risk
Investment And Enforcement Management Management
Of Security
Portfolio
Interest
Capital adequacy
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 FINANCIAL MARKETS
 A Financial Market can be defined as the market in which financial assets
are created or transferred. As against a real transaction that involves
exchange of money for real goods or services, a financial transaction involves
creation or transfer of a financial asset. Financial Assets or Financial
Instruments represents a claim to the payment of a sum of money sometime
in the future and /or periodic payment in the form of interest or dividend.
 FINANCIAL MARKETS
Financial
Financial Assets / Intermediarie
 Instruments s
 FOREX CAPITAL MONEY CREDIT

 Primary Market
 Secondary Market

 Money market Instru. Call Market Instru. Hybrid Instru.

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Call /Notice-Money Market :
Call/Notice money is the money borrowed or lent on demand
for a very short period. When money is borrowed or lent for a
day, it is known as Call (Overnight) Money. Intervening
holidays and/or Sunday are excluded for this purpose. Thus
money, borrowed on a day and repaid on the next working
day, (irrespective of the number of intervening holidays) is
"Call Money". When money is borrowed or lent for more
than a day and up to 14 days, it is "Notice Money". No
collateral security is required to cover these transactions.
Inter-Bank Term Money:
Inter-bank market for deposits of maturity beyond 14 days is
referred to as the term money market. The entry restrictions
are the same as those for Call/Notice Money except that, as
per existing regulations, the specified entities are not allowed
to lend beyond 14 days.

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 Treasury Bills:
Treasury Bills are short term (up to one year) borrowing
instruments of the union government. It is an IOU of the
Government. It is a promise by the Government to pay a stated
sum after expiry of the stated period from the date of issue
(14/91/182/364 days i.e. less than one year). They are issued at a
discount to the face value, and on maturity the face value is paid
to the holder. The rate of discount and the corresponding issue
price are determined at each auction.

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 FORX MARKET:
One of the important Financial markets in the Country as also
in the International Financial System.
In India it operates in a Three – Tire System.

FOREX MARKET

R B I (Controller of Foreign Exchange)

D.G.F.T. --- Customs (Controller of Foreign Trade)

Authorised Dealers (A. D.)

Banks Other Exchange Companies

Customers – F. Exchange Money Changers

Instruments

T.T. M.T. D.D. Travelers Cheques Cheques

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 FINANCIAL INSTRUMENTS

Money Market Instruments :

The money market can be defined as a market for short-term money

and financial assets that are near substitutes for money. The term
short-term means generally a period up to one year and near
substitutes to money is used to denote any financial asset which can
be quickly converted into money with minimum transaction cost.

Some of the important money market instruments are ;

1. Call/Notice Money 2. Treasury Bills

3. Term Money 4. Certificate of Deposit
5. Commercial Papers 6. Capital Market Instruments
7. Hybrid Instruments

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 Capital Market Instruments
Capital Market Instruments:
The capital market generally consists of the following long term
period i.e., more than one year period, financial instruments; In the
equity segment Equity shares, preference shares, convertible
preference shares, non-convertible preference shares etc and in
the debt segment debentures, zero coupon bonds, deep discount
bonds etc.

Hybrid Instruments
Hybrid instruments have both the features of equity and
debenture. This kind of instruments is called as hybrid
instruments. Examples are convertible debentures, warrants etc.

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 Certificate of Deposits : Certificates of Deposit (CDs) is a negotiable
money market instrument and issued in dematerialized form or as a Usance
Promissory Note, for funds deposited at a bank or other eligible financial
institution for a specified time period. Guidelines for issue of CDs are
presently governed by various directives issued by the Reserve Bank of
India, as amended from time to time. CDs can be issued by (i) scheduled
commercial banks excluding Regional Rural Banks (RRBs) and Local Area
Banks (LABs); and (ii) select all-India Financial Institutions that have been
permitted by RBI to raise short-term resources within the umbrella limit
fixed by RBI. Banks have the freedom to issue CDs depending on their
requirements. An FI may issue CDs within the overall umbrella limit fixed
by RBI, i.e., issue of CD together with other instruments viz., term money,
term deposits, commercial papers and interoperate deposits should not
exceed 100 per cent of its net owned funds, as per the latest audited B/ sheet .
Commercial Paper: CP is a note in evidence of the debt obligation of the
issuer. On issuing commercial paper the debt obligation is transformed into an
instrument. CP is thus an unsecured promissory note privately placed with
investors at a discount rate to face value determined by market forces. CP is
freely negotiable by endorsement and delivery. A company shall be eligible to
issue CP provided - (a) the tangible net worth of the company, as per the latest
audited balance sheet, is not less than Rs. 4 crore; (b) the working capital
(fund-based) limit of the company from the banking system is not less than
Rs.4 crore and (c) the borrowal account of the company is classified as a
Standard Asset by the financing bank/s. Min. maturity period of CP is 7 days.
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 FINANCIAL INTERMEDIARIES - I

Banks NBFC Mutual Insurance

Funds Organization
Central - Leasing Companies
-Regulatory Hire-Purchase/
Commercial- Consumer Finance Co.
-Nationalized Housing Finance Co.
-Co-operative Venture Capital Funds
- Private-Foreign Merchant Bankers
Developmental Credit Rating Agencies
Factoring Org.,
Stock broking firms
Depositories

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A Non-Banking Financial Company (NBFC) is a
company registered under the Companies Act, 1956 and
engaged in the business of loans and advances,
acquisition of shares/stock/bonds/debentures/ securities
issued by Government or local authority or other securities
of like marketable nature, leasing, hire-purchase, insurance
business, chit business but does not include any
institution whose principal business is that of agriculture
activity, industrial activity, sale/purchase/construction of
immovable property.

It has its principal business of receiving deposits under

any scheme or arrangement or any other manner, or
lending in any manner is also a non-banking financial
company (Residuary non-banking company).

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 NON BANKING FINANCIAL INTERMEDIARIES

Fund Based Activities Non-Fund Based

(financial services )

NBFC NBFSC
Loan Companies Merchant Banks
Investment Companies Venture Capital funds
Hire Purchase finance Factors.
Lease finance companies Credit Rating Agencies
Housing finance Companies Depository Services
Mutual Benefit financial
Companies (NIDHI’S)
Residuary Non- Banking Co;
(Chit funds)

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 NON BANK STATUTORY FINANCIAL ORGANISATION’S
NBSFO
Industrial financial corporation and India
(IFCI) July 1988- IFEIACT 1948
National industrial Development Corporation.
(NIDC)Oct-1954- Statutory Corporation of the Govt. of India
Industrial Credit and Investment Corporation of India.
(ICICI) 5TH Jan 1955 -Public Lt Co- constituted by The G.O.I.
- The World Bank and Representatives of Indian Industries.
Industrial Development Bank of India.
(IDBI Act) 1ST July 1961 –as Subsidiary of the RBI (statute) by
merging Industrial Refinance Corporation of India which was set
up by the G.O.I. in 1958 -delinked from the RBI in Feb.1976 and
established as separate Govt . Entity.
Export - Import Bank of India (Exim-Bank)
Jan 1982, by statute -wholly owned by the Central Govt.
Industrial Reconstruction Bank of India (IRBI)
April 1971 (by GOI&IRCI) IRCI reconstituted in 1985 by statute
To IRBI y IRBI Act.

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 Shipping Credit and Invertment Corporation of India-(SCICI
Pub. Ltd Co. 1986

Infrastructure Leasing & Financial Services LTD.(IL and FS)

- May 1988 by CBI, UTI, HDFC as subsidiary of
the Central Bank of India)

Technology Development Information Co. of India Ltd

(TDICI) - July 1988 – set up under Co. Act - by ICICI, UTI

Risk capital and technology finance corpn LTD. (RCTFC)-

-Venture Capital fund of IFCI, Jan 1988.

Tourism Finance Corporation of India P Ltd (TFCI)

set up as public Ltd; Co; on 1 Feb 1989, by IFCI and other .

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 NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT
(NABARD)-12 July 1982 by statute, c. Govt. –by GOI, the RBI . taking over
(Agricultural Refinance and Development Grlm) 1963.
Agricultural finance consultants Ltd. (AFC) 88-89 by Feconstitution of Agnil.
Fin. Corpm .of 1968.

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