Institutional FinanceBy Radhika

Financial System

• Plays a Vital role in economy• Bridges the gap between…• Channelize/ mobilize the vital resources

Financial System

Supplier of Funds

IndividualsBusinessGovernment

Financial Market

Money MarketCapital Market

Financial Intermediaries

Commercial BanksInsurance CompanyMutual FundsNon-banking financial co.

Demander of Funds

IndividualsBusinessGovernment

SECURITIES

LOANSDEPOSITES/SHARE

FUNDS

FUNDSFUNDS

SECURITIES

FUNDS

Financial intermediaries • Commercial Banks– Public Sector Banks– Foreign Banks– Private Sector Banks

• Financial Institutions– IFCI– SIDBI– ICICI– NABARD

Cont.• Insurance Companies

LIC GIC Private sectors

Cont.• Mutual Funds– It is financial intermediary that collect savings from

investors– Different types of investment– Pool of funds from investors– Advantages of mutual funds are reduction in risk,

expert professional mgt., liquidity of investment & tax benefits

– SEBI (Mutual Funds) Regulation, 1993

Cont.• Non-banking Financial Intuitions [NBCI/NBFC]• According to RBI,– NBFC means;

i. a financial institution which is a co.;

ii. a non-banking inst. whiz a co. & has, as its principal business, the receiving of deposits under the scheme or mgt. or any other manner or lending in any manner;

iii. such other non-banking institution or class of such inst. as the bank may with the previous approval of the Central Govt. specify

Cont.• NBFC are Categorized into:– An equipment leasing co. [EL]– A hire-purchase co. [HP]– A housing finance co. [HFC]– An investment co. [IC]– A loan co. [LC]– A mutual benefit co. [MBFC] i.e Nidhi Companies– A miscellaneous non-banking co. i.e Chit fund co.

Money Market• Introduction • It is a whole sale market• No need of place• Transactions generally settled in daily basis• Important Segment• Market for monetary assets of a shot-term nature• Money market instruments have the characteristic of

liquidity

Money Market instruments 1. Treasury Bills– One of the safest instruments– Short term borrowing instruments of Central Govt.

issued by…– Zero Risk instruments hence…– Short term securities that will mature... – Issued at discounted rate and with promise to pay

full face vale on maturity– Generally available in minimum of 25K & in

multiples thereof

Cont.• Currently, T-bills are generally available in– 91-Day T-bills - auctioned every Friday– 182- Day T-bills - auctioned every alternate Wed.– 364-Day

• Types of T-bills– On Tap Bills– Ad-hoc Bills– Auctioned Bills

Cont.2. Commercial Paper [CP] – It is an unsecured short term promissory note issued

by creditworthy corporate, primary dealers & all financial inst.

– basically negotiable & transferrable by…– Fixed maturity period– Issued to meet w.c requirements of the firms– Also known as Finance Paper, Industrial Paper or

Corporate Paper

Cont.

– RBI introduced commercial papers in 1990– CP can be issued to banks, individuals, companies &

other registered bodies– It can also be issued to NRI but…– FII are also permitted to subscribe but to a certain

limit fixed by SEBI

Cont.3. Commercial Bills– CB are negotiable instruments drawn by the seller on

the buyer which, are in turn, accepted & discounted by Commercial Banks

– These are basically called trade bills & when these bills are accepted by commercial banks, they called..

– Bank accepts the bill from the seller & pays the amount of the bill after charging some discount.

– after expiry of the bill collected from the buyer...

Cont.–Meanwhile, if the bank requires fund then it can also

re-discount the same with RBI,UTI,LIC,ICICI etc.–Maturity period varies from 30 to 180 days.– Example:• Bill Amt. – rs. 10000• Discount - 2%• Payment made by Bank to seller – 9800• Payment received by bank from buyer – rs.10000• Commission earned by bank – rs. 200

Cont.

• Seller

Trade Bill

Cont.• Major Types of Commercial Bills

I. Demand Bill v/s Usance Bill

II. Inland Bill v/s Foreign Bill

III. Export Bill v/s Import Bill

Cont.4. Call/ Notice Money:• Call Money Market– It is a short term funds market with maturity period 1

day to 2 weeks– Call money– Notice money–Main aim of growth of this instrument is due to

commercial banks requirements

Cont.– To fulfill mandatory requirements of RBI

commercial banks borrow money from the other banks & institutions

– The interest rate paid on the call/notice money loan is called “CALL RATE”

Cont.5. Certificate of Deposit– It was introduced in 1989– CDs are unsecured, negotiable, short term

instruments in bearer form issued by commercial banks & financial institutions

– Generally CD are time deposits (FD)– CD are transferable & tradable while FD are not.– It can be issued to all even to NRI.

Capital Market• To achieve growth in various sectors• To meet the requirements of various investors, borrower

& entrepreneurs• A platform for investors to get greater returns• Provide funds to the Organization to get developed• Buying and selling of long-term debt or equity-

backed securities• Provides effective & efficient way to support exchange

of various financial instruments for mutual benefit.

Primary Market

Cont.

Primary market

IPO

Right Issue

Private Placem-ents

Offer for Sale

Issue of Tender

Secondary market

Cont.• Secondary market popularly known as stock market• Where outstanding or existing securities are purchased

& sold on a continuous basis• Unlike primary markets it facilitates changing of hands

(ownership)• Securities issued in primary market are traded• Like ordinary market where there is buyer & seller• Likewise the prices will be determined by the demand

& supply forces

Cont.• Distinguishing feature

• In India Secondary market functions as a recognized stock exchanges operating under certain rules & regulations duly approved by the government.

• Thus, these stock exchanges constitute an organized mechanism under which various public & private securities are traded.

Functions of Secondary market1. Marketability

2. Safety

3. Performance check

4. Valuation

5. Promotion & development

Nature & Role Of Financial System• Mobilizing funds to productivity• Provides excellent mechanism for exchange of goods

&services• Establishment of different institutions• Crucial role in reducing risk