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Financial Institutions Markets & services
Its importance to economy
Financial system
10/04/2023 2
Indian Financial system
Evolution
Stage-1Underdeveloped economy- Low per capita incomeSelf financing as the development is at low level.Non existence of financial intermediaries.
Stage-2
Increase in per capita incomeBilateral borrowings & higher financial intermediationBirth of financial intermediariesFurther increase in per capita incomeFinancial intermediaries become largeBig banks, investments, Mutual funds, NBFC, stock markets Financial system becomes more market oriented.
Financial Dualism
Formal Informal
Organized & regulated
Under purview of RBI & MoF/ SEBI
(Banks/NBFC/ Financial instruments /financial services .)
Unorganized & unregulated
Flexibility in operations
Low transaction cost
Minimum default risk
High interest rates
(money lenders/ land lords/Local chits/ savings clubs/Pawn brokers)
Coexistence
Well integrated set of subsystems which facilitates the flow o f funds from
area of surplus to the areas of deficit in efficient & effective way.
Indian Financial systemIndian Financial system
Financial Institutions
Financial markets
Regulators
RBISEBIIRDAPDRA
Financialinstruments
Financialservices
Formal Informal
Money lendersLocal bankersTradersLand lordsPawn brokers
DepositoriesCredit ratingFactoringMerchant bankingLease & hire purchaseUnderwriting
EquityDebts/BondsTime depositsMF unitsInsurance policies
BankingInsuranceNBFCDFIM F
CapitalMoneyForex
Indian Financial system (cont’d)Indian Financial system (cont’d)
BankingInstitutions
Non BankingFin.
Companies
SCB Sch Co–op Banks
P.S.BanksPvt Banks (Old/New)Foreign BanksRRB
Mutual funds
Insurance & Pension
Financial Institutions
NBFC DFI
National State others
IFCI, IDBI,SIDBI, NABARD, HDFCExim bank, NHB
SFCSIDC
ECGC DICGC
Public MF’sPrivate MF’s
Public sectorPvt sector
Indian Financial system (cont’d)Indian Financial system (cont’d)
Capital market Money market
Equity Debt Market Market
Forex market
Financial Markets
Decentralized financial market for trading currencies Banks & other s
Primary SecondaryDerivatives Private corporate debtPSU Bond marketGovernment securities market
Primary/ secondary
Domesticinternational
Stock exchanges
FuturesOptions (Stock/Index)
Treasury BillsGuilt edged paperCall moneyCommercial paperCommercial billsCertificate of Deposit
Primary /secondary
Characteristics / Functions of Fin Mkts
Characteristics Larger volume Speed of resource movement from one market to other Saver decides the place to invest Scope for instant arbitrage among various instruments in the market High volatility ( Failure of one segment affects others both domestic & international)
Functions Efficient payment mechanism Providing information's to the company Gives sufficient indications to investors to track their
portfolio.
Money Markets
Call Money market
Call Money /Inter Bank money market is short term ( over night/fortnight)
Overnight is Call Money( C M) & otherwise is Notice money ( N M )
Surplus funds of Banks are traded . They are USL.
Participants are Banks/ Co-Op Banks/ Discount finance houses/ Security trading Corporation
C M M is located primarily in Mumbai, also at Kolkata/ Chennai/Ahmedabad/ Delhi/Bangalore
Only banks can participate in Call money market .
Commercial Bills market
• Important mode of financing working capital requirement for Industry & trade.
• BoE is a written instrument / unconditional order signed by the maker , directing a person to pay a certain amount only to or order of a certain person or to the barer of the instrument as per N I act 1881
• BoE is a freely exchangeable instrument evidencing a commercial transaction.
• Three parties are involved , drawer of the bill, drawee to whom direction is given & payee to whom payment is to be made.
• C B’s can be endorsed & by the endorser & the person to whom it is endorsed is endorsee.
• Bills can be Sight/ Usance/ Supply / Accommodation. It can be Indian or foreign
• A strong bills market can support liquidity in the M M & in turn to the financial system.
• Its important character is self liquidating capability. It is next best to cash & TB
• Banks can meet short term liquidity as the bills can be rediscounted with central bank
Treasury bills marketShort term rupee borrowing instrument of the Government.
More liquid /safe/ . Default risk absent.
Regularly available / RBI auctions on weekly/fortnightly basis.
Eligible for inclusion as SLR securities.
Participants are all entities registered in India
Types of T bills
91 days 182 days 364 days
Introduced in 1993
Weekly auction on Wednesday& payment on following Friday
Best way to park surplus funds
Size- Rs 25,000 & multiples thereafter
Reintroduced in April 2005.
Weekly auction on Wednesday Of non reporting week & payment on following Friday
Introduced in 1992
Fortnightly auction on Wednesday Of reporting week & payment onfollowing Friday.
Good opportunity for Banks& other market participants.
Size- Rs 1 crore & multiples & thereafter
Guilt edged securities (G securities)
Government needs funds for development & non Development expenditure & to repay existing loans and they raise funds through G securities
These are debt market instruments and is a larger than Industries securities market
Traded both in primary & secondary markets .
These are unconditionally guaranteed by central & State governments.
All G securities are issued by RBI & are normally coupon.
Coupon rate is fixed during the tenor of the term of the security.
The market players are all entities registered in India.
Commercial Paper market
• A promissory note issued by large companies to raise short term funds with high credit rating
• These are unsecured but backed by lines of credit from their Bankers.
• C P’s are redeemable at par on maturity which ranges from one week to an year
• The denominations Rs 5 lakhs & multiples thereof
• Involved parties are a) issuing company b) Issuing & Paying agent c) Credit rating agency (ICRA - A2, CRISIL- P2, CARE – PR2 ,) d) investor (Individuals, Banks, FI’s other corporates, MMMF’s, NRI’s, FII’s ) e) Banker (indirectly)
• The eligibility for the company to issue CP’s are 1) latest TNW not less than Rs 4 crs 2) Working capital limits from banks not less than Rs 4 crs, 3) Company to be classified as standard asset by the Bank
Certificate of Deposits
• CD is a Unsecured , marketable short term instrument introduced by RBI in 1989 .
• Can be issued only by Banks & specified FI’s
• The buyers are individuals, cos, trusts, associations, Banks , NRI’s etc. ( MF’s are banned) • They are issued in demat form & transferable after 7 days of issue.
• Minimum denomination is Rs 1.00 lakh and is issued at discount (stamp duty/issuing cost)
• The minimum period of maturity is 7 days & max is 1 year.
• To support banks to maintain their share in Financial markets & acts as intermediary .
• Helps banks to mop up excess liquidity from the system .
• The advantages of CD’s are
( Short term investment, highly liquid (transferable by endorsement) , availability of secondary market through DFHI), traded in NSE.
Capital Markets
Capital markets Capital markets
Primary Secondary Derivatives
Private corporate debtPSU Bond marketGovernment securities
Domestic(IPO)International(ADR/GDR)
Stock ExchangesTrading of securities
Futures / Options (Stock/Index)
Equity Market Debt Market
Regulators- SEBI
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Capital Market
CapitalMarketIntermediaries
MutualFunds
Venturecapital
FII’s CorporateBondmarket
Set up in 1988 & got legal teeth since 1992 with wide range of powers.
Role & Functions of SEBI
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To Protects investors interest, educate & address their grievances .
Develop & regulate securities market through appropriate measures.
Register & regulate all the market intermediaries, regulate the working of stock brokers, sub brokers, share transfer agents .
Inspection of stock exchanges, brokers, sub brokers, depositories, Mutual funds , review operations & administrative control of each exchange.
Proactive oversight on market monitoring & market surveillance on continuous basis.
Promote self regulatory organizations for making regulations more effective.
Strengthening insiders trading regulations to make the securities market moretransparent.
Can suspend/ cancel license if the dealers / brokers/ participants violate norms
Concluded