principle & practices of banking-jaiib financial system principle & practices of...

MODULE-A

INDAIN FINANCIAL

SYSTEM

PRINCIPLE & PRACTICES OF BANKING-JAIIB

CHAPTER 1 INDIAN FINANCIAL SYSTEM

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Indian Financial

System



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INDIAN FINANCIAL SYSTEM

FIN INSTITUTIONS

BANKING

PRIVATE

PUBLIC

FOREIGN

RRB

NON BANKING

NBFC

DEVELP FIN INSTI

MUTUAL FUND INSURANCE

FIN MARKET

CAPITAL MARKET

EQUITY

PRIMARY

PUBLIC ISSUE

PRIVATE PLACEMENT

SECONDARY

NSE

BSE

REG STOCK EXC

OCTEI

DERIVATIVE

FUTURE

OPTION

DEBT

MONEY MARKET

TRESURY BILLS

CALL MONEY

CP

CD

BILLS OF EX

FIN INSTRUMENT

SHORT, MED LONG

FIN SERVICE

DEPOSITORIES

CREDIT RATING

FACTORING

HIRE PURCHASE

MARCHANT BANKING

PORTFOLIO MGMT

REGULATORY

MIN OF FINANCE

RBI

SEBI

IRDA

A financial system is the system that covers financial transactions and the exchange of money between investors, lender and borrowers. A financial system can be defined at the global, regional or firm specific level. Financial systems are made of intricate and complex models that portray Financial Institutions, Services, Markets, and Instrument & Regulatory that link depositors with investors.



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COMMERCIAL BANK

Commercial Banks are banking institutions that accept

deposits and grant short-term loans and advances to their

customers. In addition to giving short-term loans,

commercial banks also give medium-term and long-term

loan to business enterprises. Now-days some of the

commercial banks are also providing housing

loan on a long-term basis to individuals. There are also

many other functions of commercial banks, which are

discussed later in this lesson.

NON- BANKING FINANCIAL

COMPAINIES (NBFC)

Non-banking financial companies, or NBFCs, are

financial institutions that provide certain types of banking

services, but do not hold a banking license. Generally,

these institutions are not allowed to take deposits from

the public, which keeps them outside the scope of

traditional oversight required Under Banking Regulation.

NBFCs can offer banking services such as loans and

credit facilities, Retirement planning money markets,

under writing, and merger activities.

PRIMARY DEALAR

A pre-approved bank, broker/dealer or other financial

institution that is able to make business deals with the

U.S. Federal Reserve, such as underwriting new

government debt. These dealers must meet certain

liquidity and quality requirements as well as provide a

valuable flow of information to the Fed about the state of

the worldwide markets.

FINANCIAL INSTITUTION

A financial institution (FI) is a company engaged in the

business of dealing with monetary transactions, such as

deposit, loans, investments and currency exchange.

Financial institutions encompass a broad range of

business operations within the financial services sector,

including banks, trust companies, and brokerage firms or

investment dealers. Virtually everyone living in a

developed economy has an ongoing or at least periodic

need for the services of financial institutions.

COOPERATIVE BANK

Established by the Farm Credit Act of 1933, these

regional, privately-owned and government-sponsored

banks make loans to farmer-owned marketing, supply

and service cooperatives, and rural utilities. The loans



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are financed primarily by the sale of debt securities

issued by the Federal Farm Credit Bank. Banks for

cooperatives are part of the Federal Farm Credit System

and are subject to regulation by the Farm Credit

Administration.

PAYMENT AND SETTLEMENT SYSTEM

An efficient and effective payment system is a necessary

condition for smooth functioning of financial system.

Maintenance of clearing houses at various centers,

creation of necessary holdings chest in different

geographical area and creation of the mechanism for

electronic transfer of fund are other activities under taken

by the central bank.

MANAGEMENT OF GOVERNMENT DEBT

Debt management refers to strategies state and local

governments use to manage their debt. There is a variety

of debt management strategies state and local

governments employ. Common strategies include

adopting policies on debt, such as limits, structure

practices, issuance practices, and general management

practices. Debt limits are acceptable levels of debt and

may be determined by legal restrictions, internal

standards, and/or financial restrictions. Debt structuring

practices refers to the term, maturity, and debt service

payments. Debt issuance practices relates to determining

the sale method and investment of proceeds and use of

credit and bond services and ratings as well as

professional service providers to assist with such matters.

General debt management practices refer to disclosure

and compliance practices associated with debt issuance

as well as investor relations efforts.

BANKERS TO GOVERNMENT

Most of the central banks provides liquidity support on a

temporary basis through the facilities of repurchase

(REPO) of securities to bank to meet there short term

liquidity requirement

LENDER OF LAST RESORT TO BANK

A lender of last resort is an institution, usually a country's

central bank that offers loans to banks or other eligible

institutions that are experiencing financial difficulty or are

considered highly risky or near collapse. In United States,

the Federal Reserve acts as the lender of last resort to

institutions that do not have any other means of

borrowing and whose failure to obtain credit would

dramatically affect the economy.



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CASH RESERVE RATIO (CRR)

Cash Reserve Ratio (CRR) is a specified minimum

fraction of the total deposits of customers, which

commercial banks have to hold as reserves either in cash

or as deposits with the central bank. CRR is set according

to the guidelines of the central bank of a country.

STATUTORY LIQUIDITY RATIO

Statutory liquidity ratio (SLR) is the Indian government

term for reserve requirement that the commercial banks in

India require to maintain in the form of gold, government

approved securities before providing credit to the

customers. Statutory Liquidity Ratio is determined by

Reserve Bank of India maintained by banks in order to

control the expansion of bank credit.

The SLR is determined by a percentage of total demand

and time liabilities. Time Liabilities refer to the liabilities

which the commercial banks are liable to pay to the

customers after a certain period mutually agreed upon,

and demand liabilities are such deposits of the customers

which are payable on demand. An example of time liability

is a six month fixed deposit which is not payable on

demand but only after six months. An example of demand

liability is a deposit maintained in saving account or

current account that is payable on demand through a

withdrawal form such as a cheque.

CAPITAL MARKET

Capital markets are markets for buying and selling equity

and debt instruments. Capital markets channel savings

and investment between suppliers of capital such as retail

investors and institutional investors, and users of capital

like businesses, government and individuals. Capital

markets are vital to the functioning of an economy, since

capital is a critical component for generating economic

output. Capital markets include primary markets, where

new stock and bond issues are sold to investors, and

secondary markets, which trade existing securities.

EQUITY AND DEBT MARKET

The debt market is the market where debt instruments

are traded. Debt instruments are assets that require a

fixed payment to the holder, usually with interest.

Examples of debt instruments include bonds

(government or corporate) and mortgages. The equity

market (often referred to as the stock market) is the

market for trading equity instruments. Stocks are

securities that are a claim on the earnings and assets of

a corporation. An example of an equity instrument would

be common stock shares, such as those traded on the

New York Stock Exchange.



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STOCK EXCHANGE

A stock exchange or bourse is an exchange where stock

brokers and traders can buy and/or sell stocks (also called

shares), bonds, and other securities. Stock exchanges

may also provide facilities for issue and redemption of

securities and other financial instruments, and capital

events including the payment of income and dividends.

Securities traded on a stock exchange include stock

issued by listed companies, unit trusts, derivatives, pooled

investment products and bonds. Stock exchanges often

function as "continuous auction" markets, with buyers and

sellers consummating transactions at a central location,

such as the floor of the exchange.

BROKERS

A broker is an individual person who arranges

transactions between a buyer and a seller for a

commission when the deal is executed. A broker who also

acts as a seller or as a buyer becomes a principal party to

the deal. Only the brokers approved by the capital market

regulator can operate on the stock exchange

EQUILITY AND DEBT RAISERS

Companies wishing to raise equality to debt through stock

exchanges have to approach a capital market regulator

with the prescribed application and a preforma prospectus

for permission to raise equity and debt and to get them

listed on a stock exchange.

INVESTMENT BANKERS (MERCHANT

BANKERS)

Merchant banks under takes a number of activities such

as under taking the issue of stock, fund raising and

management. They also provide advisor services and

counsel on mergers and acquisition etc. They are licensed

by the capital and market regulators.

FORIGN INSTITUTIONAL INVESTORS

(FLLS)

Fill is an investor or investment fund that is form or

registered in a country outside of the one in which it is

currently investing. Fill are foreign-based funds authorized

by the capital market regulator to invest in the Indian

equity and debt market through stock exchanges.

DEPOSITORIES

Depositories hold securities in demat form (as opposed

to physical form), maintain accounts of depository

participants who, in turn, maintain sub-accounts of their

customers. On instructions of the stock exchange

clearing house, supported by documentation, a



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depository transfers securities from the buyers to seller’s

accounts in electronic form.

MUTUAL FUNDS

A mutual fund is a form of Collective Investment that

pools money from investors and invests in Stocks, Debt

and other Securities. It is a less risky investment option

for an individual investor. Mutual funds require the

regulators’ approval to start an asset management

company (the fund) and each scheme has to be

approved by the regulator before it is launched.

REGISTRARS

Registrars maintain a register of share and debenture

holders and process share and debenture allocation,

when issues are subscribed. Registrars too need

regulators’ approval to do business.

INSURANCE REGULATORY &

DEVELOPMENT AUTHORITY (IRDA)

Regulator for Insurance business, both general and life

assurance. Regulates all aspects of insurance business,

including licensing of insurance companies, framing

regulations about the conduct of business and

supervising all insurance activities in the country etc..

THE MULTI COMMODITITY EXCHANGE

OF INDIA LIMITED (MCX)

Multi Commodity Exchange of India Ltd (MCX) is an

independent commodity exchange based in India. It was

established in 2003 and is based in Mumbai. It is India's

largest commodity futures exchange where the clearance

and settlements of the exchange happens and the

turnover of the exchange for the year 2015 was 55.52

trillion rupees (865.55 billion US dollars). MCX offers

futures trading in bullion, non-ferrous metals, energy, and

a number of agricultural commodities (menthe oil,

cardamom, crude palm oil, cotton and others).



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