money capital intro

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INTRODUCTION TOINDIAN FINANCIAL SYSTEM

Management Of Financial

Services(MFS)



INTRODUCTIOJN TO INDIANFINANCIAL SYSTEM

POINTS TO BE COVERED

•

Meaning• Types of financial system

• Components

•

Functions• Key elements of good financial system



Meaning/Components of financial system

It is Set of sub system:

i. Financial institution

ii. Financial marketsiii. Financial instruments

iv. Financial services

facilitates transfer of funds



Types of financial system

• Formal

•

Informal



COMPONENTS OF FINANCIALSYSTEM



FINANCIAL MARKETS

It is link between saver and investor.

Types

1.Money market

2.Capital market

Primary market

Secondary market



Financial Instruments

• Equity

• Debenture

•

Preference shares• MFs

• Insurance policies



Financial Services

• Credit Rating

• Factoring

•

Leasing• Hire purchase

• Underwriting



Evolution of Indian FinancialSystem

3 Phases:

i. Upto 1951

ii.1951 to Mid Eightiesiii.Post Nineties



UPTO 1951

• Initiation of eco. Dev.

• Semi-organised,narrow security

market• Absence of participation by FIs in

financing industry

•

Low industrial growth,lessinvestment opportunity



1951 TO MID EIGHTIES

• Planned economic dev initiated- 5year plans started

Public/Govt ownership of FI

Nationalisation of RBI,SBI,LIC Fortification of Institutional structure

DFIs were established

diversification of forms of financingenlargement of fin. coverage



1951 TO MID EIGHTIES

Protection to investors

CO’s Act,1956

Cap.issue Act,1947(now SEBI)

MRTP Act,1970

FERA,1973

Participation of FIs in corporatemgmt.

through shareholding in Pvt. Cos



POST NINETIES

New economic policy in 1991

Privatisation of FIs

Pvt.MFs were allowed

DFIs converted into Public co

IRDA was set up-foreign insurance cosallowed to enter

Pvt sector banks emerged



POST NINETIES

Reorganisation of Institutional Structure

• FIs started providing service in addition tofinancing

• Changes in banking industrybranch expansion in rural and semi-urban areagrowth in deposits,priority sector lending



Evolution-POST NINETIES

• Narsimham committee(1991)

framework regarding SLR, Int. rate,CAR(9%)

foreign bank entry, branch licensing

Investor Protection

SEBI got statutory status to :

monitor cap. Mkt.,regulate cap. Mkt.,

protect investor interest.



RBI AND FINANCIAL SYSTEM

1. Financing Functionliquidity mgmt.,

issue currency,

banker to govt.2. Regulatory Function

protect depositor’s interest,

maintain public confidence in systemregulate banks thro Banking

Regulation Act,1949



CONT…

3. Promotional/Dev. Function

Encourage to set up DFIs

encourage banks to open branches in

rural,less developed areasmade priority sector lending compulsory for

public & pvt sector banks

encourage agriculture finance,micro-credit



CAPITAL MARKET

Management Of Financial

Services(MFS)



A market for long term funds

Aids economic growth through capitalformation by: Issue of primary securities Issue of secondary securities Secondary market transactions

Capital Market



Mobilise savings Provide risk capital Provide liquidity Lower costs Disseminate information Enable valuation of assets Provide operational efficiency

Develop integration among markets andsegments Channelise funds to productive sectors

Functions of a CapitalMarket



A market for new issues

Leads to capital formation

Nature of fund raising

Domestic

• equity and debt issues

External

• GDRs, ADRs and ECBs• FDI, FII and NRI deposits

Primary Market



• FDI

Foreign direct investment is investment of foreign assets into domestic structures,equipment, and organizations. It does notinclude foreign investment into the stock

market.

FDI and FII



The FDIs may acquire 10% or more of the voting

power of an enterprise in an economy throughany of the following methods:

• by incorporating a wholly owned subsidiary orcompany.

• by acquiring shares in an associated enterprise

• through a merger or an acquisition of anunrelated enterprise

• participating in an equity JV with another investoror enterprise

Cont..



Under British rule – Not organised and developed

Post independence – Small size and supervised by

CCI

In 1950s – Rampant speculation; Government enacted

Securities Contract (Regulations) Act and Companies Act,1956;Development of Financial Institutions.

In 1960s – Ban on badla, UTI set up in 1964

History of the Indian CapitalMarket



In 1970s – Badla resumed; circulation of theDividend Restriction Ordinance – slump in BSEsensex; FERA issues revive stock markets

In 1980s– Small investor participation;

Introduction of PSU bonds; popularity of convertible debentures.

In 1990s – Capital Issues (Control) Actrepealed. Emergence of SEBI; Free pricing;entry of new players and new tradingmechanism; Capital market scams.

Cont…



The 1991-92 Securities Scam (HarshadMehta Scam) Misuse of public sector banks,

mutual funds, bank receipts, and SGL

ledger accounts; a bank scam, repos banned

The 2001 Ketan Parekh Scam

Misuse of pay orders, private sector banksand cooperative banks; a securities scam;

badla banned.

Capital Market Scams



Specialised Regulator

Emergence of specialised intermediaries

Entry to FIIs

Pricing of securities through book building

Access to international markets

Emphasis on corporate governance

Screen-based trading system

Reforms in the Capital Market



Rolling settlement

Dematerialisation of securities

Derivatives trading

Comprehensive risk managementsystems

Cont…



MONEY MARKET

Management Of financial

Services(MFS)



Introduction

- Market for short term funds havingmaturity

< 1year

- No physical location

- Main players are RBI,mutualfunds,banks,NBFCs,primarydealers,corporate investors



Functions

• mechanism to even out demand &supply of short term funds

• focal point for central bank intervention

for influencing liquidity and int. rate• provide access to suppliers and users of

short-term funds to fulfill their borrowing

and invt.requirements.



Money Market Instruments

1. TREASURY BILLS(T-BILLS)

2. COMMERCIAL PAPERS(CPs)

3. COMMERCIAL BILLS(CBs)4. CERTIFICATE OF DEPOSITS(CDs)

5. CALL/NOTICE MONEY MARKET



TREASURY BILLS(T-BILLS)

Meaning

Features

negotiable instrumenthighly liquid

absence of default risk

low transaction cost,assuredyield,eligible for inclusion in SLR



Cont…

TYPES• Ad-hoc T-bills

• Auctioned T-bills

Participants RBI, banks, mutual funds, primarydealers, corporates,

Sale of T-bills (done thro

Auctions) Multiple-price Auction

Uniform-price Auction



COMMERCIAL PAPERS(CPs)

An unsecured short-term promissory note issuedat a discount

Issuers

Creditworthy corporates

primary dealers All India financial institutions

Largest issuers of CPs–Leasing and Financecompanies

Usually privately placed with investors

Attracts stamp duty

Underwriting not mandatory



Process for Issuing CP

A resolution to be passed by the Board of Directors

CP issue to be rated

Select an Issuing and Paying Agent forverification of documents

Arrange for dealers for placement of CP

Report to the RBI regarding the issue



Guidelines Relating to CPs

Corporates, primary dealers and all India

financial institutions eligible to issue aCP

Minimum credit rating P2 of Crisil

Maturity period of minimum of 7 days andmaximum up to one year from the dateof issue

Minimum of Rs 5 lakh and multiples To be issued in demat form



COMMERCIAL BILL

•

A short-term, negotiable and self liquidating instrument with low risk.

• Types

Demand bill

Usance bill

Clean bill

Documentary bill

Inland bill

Foreign bill Hundi

Derivative Usance Promissory Note



CERTIFICATES OF DEPOSITS

A short- term tradable time deposit issued bycommercial banks and financial institutions.

Issued at a discount to face value.

Minimum amount Rs 1 lakh and in multiples

thereof Maturity period

7 days to one year for banks

1 to 3 years for FIs No lock-in period



Cont…

Transferable by endorsement

Banks to maintain appropriate reserverequirement on issue of CDs.

Issued in demat form Key investors--Mutual Funds

CALL/NOTICE MONEY



CALL/NOTICE MONEYMARKET

Banks borrow/lend money for a periodranging between 1 and 14 days.

No collateral security required

Highly liquid, risky, and volatile market

Banks trade money to adhere to CRRrequirement

F t I fl i C ll R t



Factors Influencing Call RateVolatility

Liquidity conditions

Reserve requirement prescriptions

Structural factors

Liquidity changes and gaps in the foreignexchange market



Collateralised Borrowing andLending Obligations (CBLO)

MEANING: IT IS• An obligation by the borrower to returnthe money borrowed, at a specified futuredate;

• An authority to the lender to receivemoney lent, at a specified future date withan option/privilege to transfer the authorityto another person for value received;• An underlying charge on securities held

in custody (with CCIL) for the amountborrowed/lent.

•



CONT…

Launched by CCIL

To provide liquidity to non-bankentities

No lock-in period

Original tenure varies between oneday and one year

Trading volumes have grown



Money Market Intermediaries

DFHI AND MMMsThe Discount and Finance House of

India--set up in 1988 by RBI.

Role is to stimulate activity in money

market.

DFHI is an recognised primary dealer.

Money Market Mutual Funds: Introduced

in April 1991. Mobilize savings from smallinvestors.

Invest in money market instruments



Link Between Money Market andMonetary Policy in India

Objectives of the monetary policy Price stability

Growth

Instruments used to influence monetary

conditions

Direct instruments such as reserverequirements,limits on refinance,administrative interest rates, restrictions on

credit

Indirect instruments such as open marketoperation and repos

Tools of Managing Liq idit in the



Tools of Managing Liquidity in theMoney Market

Reserve requirements: CRR & SL

Interest rates

Prime lending rate

Bank rate

Refinance from RBI Liquidity Adjustment Facility: operates through

repo and reverse repo auctions; coupled withOMOs and MSS provides RBI greater flexibilityin managing liquidity

Market stabilisation scheme (MSS): deals withenduring capital inflows without affecting short-term liquidity management role of LAF.



CONT…

• Types of Repos: Interbank repos,

RBI repos: Reverse Repo (Borrowing of overnight funds by RBI)- rate 6% and

Repo (Lending to banks)- rate 7%(Short-term rates)

Refinance from RBI

money capital intro

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