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Banking, Financial Markets

and Systems

Set - 1

The Financial System an overview

P C Narayan

IIMB PCN BFMS L01

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SAVERS/

INVESTORS

Households

Business

BORROWERS

Government

Business

Households

IIMB PCN BFMS L01

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SAVERS/

INVESTORS

Households

Business

BORROWERS

Government

Business

Households

INDIRECT FINANCE

Financial

Intermediaries

IIMB PCN BFMS L01

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Financial Intermediaries

Banks

Financial Institutions

Insurance companies

Mutual Funds

Pension Funds

-----------------------------------------------

Objective : To intermediate funds from savers to Borrowers in the most risk free

manner

IIMB PCN BFMS L01

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SAVERS/

INVESTORS

Households

Business

BORROWERS

Government

Business

Households

INDIRECT FINANCE

Financial

Intermediaries

DIRECT FINANCE

Financial Markets

IIMB PCN BFMS L01

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Financial Markets

Money market

Foreign Exchange Market

Debt market (G-Sec and Corporate Bonds)

Stock Market

Derivatives Market

Private Equity Market

-----------------------------------

Over The Counter (OTC)

Exchange Traded Primary / secondary

IIMB PCN BFMS L01

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Let us break out

the balance sheet and P&L

of a Bank

IIMB PCN BFMS L01

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Balance Sheet of ABC Bank Ltd as of ( All figures in Rs. Lakhs)

Capital and Liabilities Capital 1 25,00 Reserves & Surplus 2 234,09 Deposits 3 3865,55 Borrowings 4 29,00 Other Liabilities & Provisions 5 102,11 Total 4255,75

Assets Cash & balances with RBI 6 781,01 Balances with banks & 7 8,49

money at call / notice

Investments 8 1392,33 Advances 9 2017,45 Fixed Assets 10 11,71 Other assets 11 44,76 Total 4255,75

Contingent Liabilities 12 371,78 IIMB PCN BFMS L01

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Balance Sheet of ABC Bank Ltd as of ( All figures in Rs. Lakhs)

Capital and Liabilities Capital 1 25,00 Reserves & Surplus 2 234,09 Deposits 3 3865,55 Borrowings 4 29,00 Other Liabilities & Provisions 5 102,11 Total 4255,75

Assets Cash & balances with RBI 6 781,01 Balances with banks & 7 8,49

money at call / notice

Investments 8 1392,33 Loans & Advances 9 2017,45 Fixed Assets 10 11,71 Other assets 11 44,76 Total 4255,75

Contingent Liabilities 12 371,78 IIMB PCN BFMS L01

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Schedule 8 Investments

Investments

Govt. Securities 983,52

Other Approved Securities 378,04

Shares 15,60

Debentures and Bonds 15,17

Total 1392,33

IIMB PCN BFMS L01

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P & L Account of ABC Bank Ltd.as of

(All figures in lakhs) 1. Income Interest Earned 13 489,52

Other Income 14 50,12

Total 539,64

2. Expenditure

Interest Expended 15 232,48

Operating Expenses 16 164,19

Provisions and Contingencies 73,98

Total 470,65

3. Profit

Net Profit for the year 68,99

Profit brought forward 35,00

Total 103,99

4. Appropriation

Transfer to Statutory reserve 13,80

Bal carried to B/S 90,19

Total 103,99

IIMB PCN BFMS L01

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P & L Account of ABC Bank Ltd.as of

(All figures in lakhs) 1. Income Interest Earned 13 489,52

Other Income 14 50,12

Total 539,64

2. Expenditure

Interest Expended 15 232,48

Operating Expenses 16 164,19

Provisions and Contingencies 73,98

Total 470,65

3. Profit

Net Profit for the year 68,99

Profit brought forward 35,00

Total 103,99

4. Appropriation

Transfer to Statutory reserve 13,80

Bal carried to B/S 90,19

Total 103,99

IIMB PCN BFMS L01

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Schedule 13 Interest Earned

Interest/ discount on Advances/bills 311,43

Income from Investments 143,62

Interest on balance with RBI and Banks 34,47

Total 489,52

IIMB PCN BFMS L01

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Schedule 14 Other Income

Commission, exchange and brokerage 50,52

Profit from sale of Investments 1,75

Profit/loss on revaluation of Investments -2,15

Total 50.12

IIMB PCN BFMS L01

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SAVERS/

INVESTORS

Households

Business

BORROWERS

Government

Business

Households

INDIRECT FINANCE

Financial

Intermediaries

DIRECT FINANCE

Financial Markets

This is where

the

trouble starts

IIMB PCN BFMS L01

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SAVERS/

INVESTORS

Households

Business

BORROWERS

Government

Business

Households

INDIRECT FINANCE

Financial

Intermediaries

DIRECT FINANCE

Financial Markets

Monetary Policy and Regulation

IIMB PCN BFMS L01

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SAVERS /

INVESTORS

Households

Business

BORROWERS

Government

Business

Households

INDIRECT FINANCE

Financial

Intermediaries

DIRECT FINANCE

Financial Markets

Monetary Policy and Regulation

Money supply

Interest rate

Exchange Rate

Inflation

Credit flow

Supervision

IIMB PCN BFMS L01

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SAVERS

Households

Business

BORROWERS

Government

Business

Households

INDIRECT FINANCE

Financial

Intermediaries

DIRECT FINANCE

Financial Markets

Risk Management

Clearing & settlement

Advisory

Monetary Policy and Regulation

Money supply

Interest rate

Exchange Rate

Inflation

Credit flow

Supervision

Money supply

Interest rate

Exchange Rate

Inflation

Credit flow

Supervision

IIMB PCN BFMS L01

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SAVERS

Households

Business

BORROWERS

Government

Business

Households

INDIRECT FINANCE

Financial

Intermediaries

DIRECT FINANCE

Financial Markets

Risk Management

Clearing & settlement

Advisory

Monetary Policy and Regulation

Trading

Hedging

Money supply

Interest rate

Exchange Rate

Inflation

Credit flow

Supervision

IIMB PCN BFMS L01

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Session-wise schedule

Session 1 Overview of the Financial System

Session 2,3 Theory and Structure of Interest rates

Session 4,5 The Financial Intermediation process

Session 6, 7, 8, 9 Financial Markets

Session 10, 11 Derivatives and its application

Mid-Term Exam Date and venue to be informed PGP office

Session 12,13 Liquidity and Solvency of Banks

Session 14,15 Risk Management measurement and mitigation

Session 16 Capital Adequacy and Basel II

Session 17, 18, 19 Asset Securitization, CDOs, etc., Basel III

Session 20 Regulation and Monetary Policy

End Term Exam Date and venue to be informed by PGP office

IIMB PCN BFMS L01

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Course Material and

Reference Books

Financial Markets and Institutions Frederic Mishkin & Stanley Eakins, 6th Edition, Prentice Hall

Additionally, course handouts will be given for most topics at the start of the term

All PPT slides used in Class will be made available in PDF format, via email

Reference Text Books

Financial Institutions, Markets and Money

Kidwell, Peterson and Blackwell (Harcourt College Publishers)

Financial Markets and Institutions

Anthony Saunders and Marcia Cornett, Tata McGraw Hill

Financial Markets and Institutions

Jeff Madura ( Thomson Publishing)

IIMB PCN BFMS L01

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Course Evaluation Mid- Term Exam (25 marks)

End- term Exam (50 marks)

Quiz X 2 (10 marks each), after session 5 and session 15 Duration 30 minutes per quiz

Attendance (5 Marks) 20 sessions : 5/5 marks

19 sessions : 4/5 marks

18 sessions: 3/5 marks

17sessions: 2/5 marks

16 sessions: 1/5 mark

15 sessions or less: 0/5 marks

Caught for proxy during the term 0/5 marks; inform PGP Chair

IIMB PCN BFMS L01