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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 financial market, financial instruments and financial intermediation.

Functions and Role of financial system, markets are given below.

1. Pooling of Funds, 2. Capital Formation, 3. Facilitates Payment, 4. Provides Liquidity, 5. Short and Long Term Needs, 6. Risk Function, 7. Better Decisions, 8. Finances Government Needs, 9. Economic Development

WORLD BANK

The World Bank Group is an international organization of more than 180 member countries. Its

objective is poverty reduction, and it uses its resources and collaborates with other organizations to

help client countries achieve sustainable and equitable growth. The Bank Group offers an array of

customized servicesincluding loans, technical assistance, and adviceto its developing and in-transition member countries. This booklet describes the lending instruments of the International

Bank for Reconstruction and Development (IBRD) and the International Development Association

(IDA), which together are the World Bank. IBRD provides loans and development assistance to

middle-income countries and creditworthy lower-income countries. IDA provides low-interest

loans and other services to the poorest countries. IBRD and IDA loans are made to member

countries; IBRD also makes loans to borrowers in a member country, with the countrys guarantee. The other members of the World Bank Group offer different kinds of services. The International

Finance Corporation (IFC) finances private sector ventures in developing countries, in partnership

with private investors. The Multilateral Investment Guarantee Agency (MIGA) encourages direct

foreign investment in developing countries by providing guarantees against noncommercial risk to

foreign investors. And the International Center for the Settlement of Investment Disputes (ICSID)

provides facilities for the settlement of investment disputes between foreign investors and their host

countries. The world bank is an internationally supported bank that provides financial and technical

assistance to developing countries for development programs (e.g. bridges, roads, schools)with the

stated goal of reducing poverty.

President :- Robert B. Zoellick

Membership :- 185 countries

Affiliates :- IFC, MIGA, ICSID

Headquarters :- Washington, DC and more than 100

country Staff :- about 10000 all over the world

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Established :- July 1,1944

The world bank is one of the two Bretton Woods Institutions which were created in 1944 to

rebuild a wartorn europe after World War II . Later ,largely due to the contributions of the

Marshall Plan ,the World Bank was forced to find a new area in which to focus its efforts.

Lending operation of WB:

A. Investment Lending 1. Specific Investment Loan 2. Sector Investment and Maintenance Loan 3. Adaptable Program Loan 4. Learning and Innovation Loan 5. Technical Assistance Loan 6. Financial Intermediary Loan 7. Emergency Recovery Loan

B. Adjustment Lending and Other Non-project Lending 1. Structural Adjustment Loan 2. Sector Adjustment Loan 3. Programmatic Structural Adjustment Loan 4. Special Structural Adjustment Loan 5. Rehabilitation Loan 6. Debt Reduction Loan

C. World Bank Guarantees 1. Project-based Partial Risk Guarantee 2. Project-based Partial Credit Guarantee 3. Policy-based Guarantee

IBRD WORLD BANK

Also known as World Bank

Type - International organization

Purpose/focus - Crediting

Location - Washington DC

Membership - 188 countries

President Jim Yong Kim

Established in 1944 as the original institution of the World Bank Group, IBRD is structured

like a cooperative that is owned and operated for the benefit of its 188 member countries.

The World Bank is an international financial institution that provides long term capital

assistance to developing countries for capital programmes.

The World Bank has a goal of reducing poverty.

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By law, all of its decisions must be guided by a commitment to promote foreign

investment, international trade and facilitate capital investment

Functions of IBRD

To assist in the reconstruction & development of its member countries.

To promote private foreign investment.

To promote balanced growth of international trade.

To bring about a smooth transition from a war time economy to peace time economy.

IBRD aims to reduce poverty in middle-income and creditworthy poorer countries by

promoting sustainable development through loans, guarantees, risk management products,

and analytical and advisory services.

Membership

All countries which are members of IMF are members of World bank.

A country holding the membership of bank must subscribe to the charter of the bank.

If a country resigns its membership, it is required to pay back all loans granted to it through

interest on due date.

Each member of the world bank has a capital subscription which is similar to but not

identical with its quota in the fund.

The members subscription also measures roughly its voting power, but again the smaller

nations have a slightly higher vote.

Activities by IBRD

Basic education

and health services

Safety needs

Infrastructure development

Environment protection

Private sector development

Governance and investment climate

Technical assistance

Purposes

To assist in bringing about a smooth transition from wartime to peaceful economies,

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To promote economic development that benefits poor people in developing countries.

Loans are provided to developing countries to help reduce poverty and to finance

investments that contribute to economic growth.

Investments include roads, power plants, schools, and irrigation networks, as well as

activities like agricultural extension services, training for teachers, and nutrition-

improvement programs for children and pregnant women.

Some World Bank loans finance changes in the structure of countries' economies to make

them more stable, efficient, and market oriented.

The World Bank also provides technical assistance to help governments make specific

sectors of their economies more efficient and more relevant to national development goals.

What are the biggest global challenges for IBRD?

Population growth

Elimination of global poverty

Global life expectancy

Aid to education

Millennium Development

Goals (MDGs)

Goal 1: Wipe out extreme

poverty and hunger

Goal 2: Offer all children a

good basic education

Goal 3: Help women get equal

rights and empower them

Goal 4: Reduce death rate of young children

Goal 5: Improve the health of mothers

Goal 6: Combat HIV/AIDS, malaria, and other diseases

Goal 7: Help countries protect their environments

Goal 8: Promote a global partnership for development

How IBRD is financed?

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At its establishment, the IBRD had an authorized capital of US$ 10 billion. IBRD raises

most of its funds on the world's financial markets. It has become one of the most established

borrowers since issuing its first bond in 1947 to finance the reconstruction of Europe after

World War Two. Investors see IBRD bonds as a safe and profitable place to put their

money and their cash finances projects in middle-income countries.

IBRD became a major player on the international capital markets by developing modern

debt products, opening new markets for debt issuance, and by building up a broad investor

base around the world of pension funds, insurance companies, central banks, and

individuals.

The World Bank's borrowing requirements are primarily determined by its lending activities

for development projects. As World Bank lending has changed over time, so has its annual

borrowing program. In 1998 for example, IBRD borrowing peaked at $28 billion with the

Asian financial crisis. It is now projected to borrow between $10 to 15 billion a year.

Where does the money come from?

IBRD raises funds on capital markets

Donors give money to IDA for the worlds poorest countries, with additional money coming

from repayments and from the Banks earnings

World Bank funding

Education: $1.9 billion

HIV-AIDS: $2.5 billion for UNAIDS

Health: $2.2 billion for health, nutrition, and population projects.

Debt Relief: 27 countries

Environment: $2.49 billion

Partnerships: $4.8 billion

Governance: $2.6 billion

World Bank Borrowers

France was the first borrower for $250 million to finance post-war reconstruction in 1946

Many developed nations who are now donors, were also borrowers, such as Austria,

Australia, Denmark, Japan, Italy, Finland, and Greece

Lending operations

The IBRD lends to member governments, or, with government guarantee, to political

subdivisions, or to public or private enterprises.

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The IBRD normally makes long-term loans, with repayment commencing after a certain

period.

The length of the loan is generally related to the estimated useful life of the equipment or

plant being financed.

Since July 1982, IBRD loans have been made at variable rates. The lending rate on all loans

made under the variable-rate system is adjusted semiannually, on 1 January and 1 July, by

adding a spread of0.5% to the IBRD's weighted average cost during the prior six months.

Projects in India

Agriculture

Infrastructure:

Power

Transport

Water

Urban development

Skills

International Development Association (I.D.A.): Objectives and Working!

The International Development Association (IDA) was established in 1960, affiliated to the World

Bank.It was started to provide finance to less developed members on a soft loan basis, that is, on

terms imposing a lower servicing charge on loans than what the conventional bank charges.

Objectives:

The following are the principal objectives of the IDA:

1. To provide development finance on easy terms to less developed member countries.

2. To promote economic development, increase productivity and thus, raise the standards of living

in the underdeveloped areas.

Working:

Thus, IDA is looked upon as a means of furthering the development activities of the World Bank

and as a supplementary to the Banks activities. Under its charter, the IDA is to support projects

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which are calculated to contribute to the development of the country concerned, whether they are

directly productive or not.

The IDA credits would be called development credits to distinguish them from conventional loans,

and these would be repayable mostly in the currency lent rather than in the currency of the

borrower. Since IDA charges nominal rates of interest on its loans, it has also been nicknamed the

Soft-Loan Window.

IDA has granted a number of credits to India for her development schemes. The grant of credits for

development projects given by IDA to India has been in the nature of a continuous flow. But for the

funds that have been made available by IDA to India, our development pace would have been

considerably slower.

In fine, it may be said that the IDA is expected to make a distinct contribution to the economic

development of backward nations, furthering their development projects and supplementing the

activities of the World Bank. Moreover, unlike the World Bank loans which are meant to cover

only the foreign exchange costs, the IDA loans can be utilised to finance both foreign exchange and

local currency costs.

How IDA Resources are allocated:

IDAs 78 eligible recipients have very significant needs for concessional funds. But the amount of

funds available, which is fixed once contributions are pledged by donor governments, tends to be

well below the countries needs.

IDA, therefore, must allocate scarce resources among eligible countries. This is done on the basis

of recipients policy performance and institutional capacity in order to concentrate resources where

they are likely to be most helpful in reducing poverty.

1. Eligibility:

Two criteria are used to determine which countries can access IDA resources:

i. Relative poverty defined as Gross National Income (GNI) per capita below an established

threshold and updated annually (in fiscal year 2009: $1,095).

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ii. Lack of creditworthiness to borrow on market terms and therefore, a need for concessional

resources to finance the countrys development program.

2. Allocation Criteria:

i. The main factor that determines the allocation of IDA resources among eligible countries is each

countrys performance in implementing policies that promote economic growth and poverty

reduction. This is assessed by the Country Policy and Institutional Assessment (CPIA), which for

the purposes of resource allocation is referred to as the IDA Resource Allocation Index (IRAI).

The IRAI and portfolio performance together constitute the IDA Country Performance Rating

(CPR). In addition to the CPR, population and per capita income also determine IDA allocations.

Beginning 2005, the numerical IRAI as well as the CPR are disclosed.

3. Allocation Process:

The allocation of IDAs resources is determined primarily by each recipients rating in the annual

CPIA. In addition, the IDA15 Agreement recommends that because the acceleration of economic

and social development in Sub-Saharan Africa remains foremost among IDAs priorities, these

countries should receive priority in the allocation process, provided their policy performance

warrants it.

In the case of countries that are eligible for both IDA and IBRD funds (Blend countries), IDA

allocations must also take into account those countries creditworthiness for and access to other

sources of funds. Individual country performance-based allocations serve as an anchor for the

formulation of Country Assistance Strategy (CAS) lending programs

International Finance Corporation (I.F.C.): Objectives and Working!

The International Finance Corporation was established in July 1956, with the specific subject of

providing finance to the private sector.

Though it is affiliated to the World Bank, it is a separate legal entity with separate fund and

functions. Members of the World Bank are eligible for its membership.

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Objectives:

IFCs objective is to assist economic development by encouraging the growth of productive private

enterprise in its member nations, particularly in the underdeveloped areas.

Thus, it laid down the following objectives:

1. To invest in productive private enterprises, in association with private investors, and without

government guarantee of repayment, in cases where sufficient private capital is not available on

reasonable terms.

2. To serve as a clearing house to bring together investment opportunities, private capital (both

foreign and domestic) and experienced management.

3. To help in stimulating the productive investment of private capital, both domestic and foreign.

Working:

The IFC considers only such investment proposals whose objective is the establishment, expansion

or improvement of productive private enterprises which will contribute to the development of the

economy of the country concerned. Industrial, agricultural, financial, commercial, and other private

enterprises are eligible for IFC financing, provided their operations are productive in character.

The IFC is authorised to invest its funds in many forms it deems appropriate, with the exception of

capital stocks and shares. It does not have a policy of uniform interest rates for its investments. The

interest rate is to be negotiated in each case in the light of all relevant factors, including the risks

involved and any right to participation in profits, etc.

IFC makes investments only when it is satisfied that the enterprise has or will have experience and

competent management and it looks to that management to conduct the business of the enterprise. It

does not itself assume responsibility of managing the enterprise.

In India the IFC has so far made six investment commitments totaling over $ 7 million.

However, the actual working of the IFC has been rather slow. That there is great scope for its work

is quite evident from its resources and investment portfolios. It is hoped that IFC will in future be

more fully able to play a dynamic investors role in the economic development of the poor nations.

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Member Countries:

IFC has 181 member countries. To join IFC, a country must:

i. Be a member of the World Bank (IBRD);

ii. Have signed IFCs Articles of Agreement; and

iii. Have deposited with the World Bank Groups Corporate Secretariat an Instrument of

Acceptance of IFCs Articles of Agreement

IFCs Vision, Values, & Purpose:

IFCs vision is that people should have the opportunity to escape poverty and improve their lives.

IFCs values are excellence, commitment, integrity and teamwork.

IFCs Purpose is to create opportunity for people to escape poverty and improve their lives by;

i. Promoting open and competitive markets in developing countries.

ii. Supporting companies and other private sector partners where there is a gap.

iii. Helping to generate productive jobs and deliver essential services to the underserved.

In order to achieve its Purpose, IFC offers development impact solutions through: firm-level

interventions (direct investments and advisory services); standard-setting; and business enabling

environment work