Financial Institutions Markets & services

Its importance to economy

Financial system

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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