Microfinance Impact on Borrowers and Challenges of Karnataka Cooperative Apex Bank Ltd

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MICROFINANCE IMPACT ON BORROWERS AND CHALLENGES OF KSCABL INTRODUCTION INDIAN FINANCIAL SYSTEM The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector

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MICROFINANCE IMPACT ON BORROWERS AND CHALLENGES OF KSCABL INTRODUCTION INDIAN FINANCIAL SYSTEM The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities. Financial System;

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

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MICROFINANCE IMPACT ON BORROWERS AND CHALLENGES OF KSCABL financial market, financial instruments and financial intermediation. These are briefly discussed below; 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. Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions. Capital Market- The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year. Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe. Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.

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MICROFINANCE IMPACT ON BORROWERS AND CHALLENGES OF KSCABL The functions performed by these Banks are 1. Commercial Banks Commercial Banks perform all the business transactions of typical Bank. Commercial Banks accept three types of deposits, like Saving Bank Deposits, Fixed Deposit and Current Deposits. They provide funds of short-term needs of trade of commerce. 2. Investment or Industrial Banks Investment Banks are those Banks, which provide fund for long-term industries. These Banks have specialized in providing long term loans to industries with a view to buy plant and machinery. The investment Banks obtain funds through share capital plus, debentures and long term deposits from public. 3. Exchange Banks These Banks are known as foreign exchange Banks. They provide exchange for import trade. Their main function is to make international payment through purchased Bank of exchanges Bills. 4. Co-operative Banks They are promoted to meet the Banking requirements of consumers. They established not only in the urban areas but also in the rural areas. In the rural areas these Banks supply finance to agriculture while in these urban areas they provide finance to consumer goods.

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MICROFINANCE IMPACT ON BORROWERS AND CHALLENGES OF KSCABL 5. Land Mortgage Banks Whenever agriculturist requires investment loans, they have to approach land development Banks, where loans are given on long term basis. They provide loans on the security of the land. 6. Central Banks Central bank is an apex bank in the country, which keeps the entire Banking system unified, controlled and regulated. It regulates the note issue. RBI is the Central Bank of India. FINANCIAL INSTRUMENTS IN INDIA We took a look at the players in the financial markets earlier. Let us now look at the Financial Instruments these players have. They van be braodly classified into Government securities and Industrial securities. Government Securities( G-Sec ) : In India G- Sec are issued by the Central Government , State Governments and Semi Government Authorities such as municipalities, port trusts, state electricity boards and public sector corporations. The Central and State

Governments raise money through these securities to finance the creation of new infrastructure as well as to meet their current cash needs. Since these are issued by the government, the risk of default is minimal. Therefore, interest rates on these securities often serve as a benchmark for the level of interest rates in the economy. Other issues may price their offerings by `marking up this benchmark rate to reflect the credit risk specific to them.

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MICROFINANCE IMPACT ON BORROWERS AND CHALLENGES OF KSCABL These securities may have maturities ranging from five to twenty years. These are fixed income securities, which pay interest every six months. The Reserve Bank of India manages the issues of the securities. These securities are sold in the primary market mainly through the auction mechanism. The RBI notifies issue of a new tranche of securities. Prospective buyers submit their bids. The RBI decides to accept bids based on a cut off price. The G -sec are primarily bought by the institutional investors. The biggest investors are commercial banks who invest in G-secs to meet the regulatory requirement to maintain a certain percentage of Statutory Liquidity Ratio (SLR) as well as an investment vehicle. Insurance companies, provident funds, and mutual funds are the other large investors. The Primary Dealers perform the function of market makers through buying and selling activities. The Government of India also borrows short term funds for up to one year. This is through the issue of Treasury Bills which are sold at a discount to the face value and redeemed at the full face value. Industrial Securities: These are securities issued by the corporate sector to finance their long term and working capital requirements. The Major Instruments that fall under Industrial Securities are Debentures, Preference Shares And Equity Shares.

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MICROFINANCE IMPACT ON BORROWERS AND CHALLENGES OF KSCABL

Debentures Debentures have a fixed maturity and pay a fixed or a floating rate of interest during their lifetime. The company has an obligation to pay interest and the principal amount on the due dates regardless of its profitability position. The debenture holders are not members of the company and do not have any say in the management of the company. Since these carry a predefined rate of return, there is no scope for any major capital appreciation. However, in case of fixed rate debentures, their market price moves inversely with the direction of interest rates. The debenture issues are rated by the professional credit rating agencies regarding the payment of interest and the repayment of the capital amount. Apart from the `plain vanilla variety of debentures (periodic payment of interest during their currency and repayment of capital on maturity), a number of variations have been devised. For example, zero coupon bonds are issued at a discount to their face value and redeemed at the full face value. The difference constitutes return for the investor. Preference Shares Preference Shares carry a fixed rate of dividends. These carry a

preferential right to dividends over the equity shareholders. This means that equity share holders cannot be paid any dividends unless the preference dividend has been paid in full. Similarly on the winding up of the company, the preference share holders get back their capital before the equity share holders. In case of

cumulative preference shares, any dividend unpaid in past years accumulates and is paid later when the company has sufficient profits. Now all preference shares inPage 6

MICROFINANCE IMPACT ON BORROWERS AND CHALLENGES OF KSCABL India are `redeemable, i.e. they have a fixed maturity period. Thus, preference shares are sometimes called a `hybrid variety incorporating features of debt as well as equity. Equity Shares Equity Shares are regarded as high return high risk instruments. These do not carry any fixed rate of return and there is no maturity period. The company may or may not declare dividend on equity shares. Equity shares of major companies are traded on the stock exchanges. The major component of return to equity holders usually consists of market appreciation. Call Money Market: The loans made in this market are of a short term nature overnight to a fortnight . This is mostly inter-bank market. Those banks which are facing a short term cash deficit, borrow funds from the cash surplus banks. The rate of interest is market driven and depends on the liquidity position in the banking system. Commercial Paper (CP) and Certificate of Deposits (CD) : CPs are issued by the corporates to finance their working capital needs. These are issued for short term maturities. These are issued at a discount and redeemed at face value. These are unsecured and therefore only those companies who have a good credit standing are able to access funds through this instrument. The rate of interest is market driven and depends on the current liquidity position and the creditworthi

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