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FINANCIAL SERVICES, MARKETS AND INSTITUTIONS A brief and handy note OCTOBER 17, 2012 M.COM, I YEAR

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FINANCIAL SERVICES, MARKETS AND INSTITUTIONS

A brief and handy note

OCTOBER 17, 2012

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INDIAN FINANCIAL SYSTEM

1. In 1947, financial system was semi-organized and narrow structure.2. Lack of growth in industrial sector.3. Non-supportive or Non-responsive financial intermediaries.4. Government planned to create financial institution.5. Nationalization of RBI-the process started in 1948. On 1st January 1949 legal announcement was

made.6. 1948-56 Nationalization of Imperial Bank as SBI.7. In 1956, 245 Life insurance companies were nationalized as LIC.8. In 1969-Nationalization of 14 commercial banks.9. In 1980, 10 more commercial banks were nationalized.10. General Insurance companies organized as General Insurance Corporation (GIC).

DEVELOPMENT BANK/FINANCIAL INSTITUTIONS

1. Gap fillers in institutional credit.2. Develop the backward region, small & new entrepreneurs.3. Lending support to financial institution.4. Advisory function.

1948-IFCI-Industrial Financial Corporation of India was set up at all India level.

1951-SFC-State Financial Corporations were started at regional levels under the State Financial Corporation Act, 1951. SFCs provide medium and long term finance to medium and small industries.

1955-ICICI-Indian Credit &Investment Corporation of India was established to meet the growing needs of the private corporate sector. It directed the flow of foreign currency loans from the World Bank to industrial securities market.

1958-RCI-Refinance Corporation of India was established to provide refinance to banks against term loans granted by them to medium and small industries.

1964-IDBI-Industrial Development Bank of India was set up on July 1, 1964, as a subsidiary of the RBI. Subsequently IDBI became an apex institution providing finance and coordinating the activities of all the financial institutions. Further, State Industrial Development Corporations were created at the state level to meet the financial requirements of the States and to promote balanced regional development.

1964-UTI-Unit Trust of India was started.

1964-RCI was merged with the IDBI.

1971-IRCI-Industrial Reconstruction Corporation of India was set up jointly by the IDBI and LIC to rehabilitate sick mills. In March 1985, the IRCI was reconstructed into a statutory corporation, namely Industrial Reconstruction Bank of India (IRBI). Subsequently IRBI became sick due to financing of sick industries. After reconstructing the same, it is at present called Industrial Investment Bank of India (IIBI). It provides finance for expansion, diversification and modernization of industries.

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The Small industries Development Bank of India which is the wholly owned subsidiary of IDBI commenced its operations on April 2, 1990. The SIDBI administers the Small Industries Development Fund and the National Equity fund.

OBJECTIVES OR FUNCTIONS OF FINANCIAL SERVICES

1. Fund raising.2. Fund deployment.3. Specialized services.4. Regulation (SEBI, RBI, IRDA)5. Economic growth.

Specialized Services:

1. Credit rating.2. Venture Capital.3. Lease financing.4. Mutual funds.5. Merchant Banking.6. Credit cards.7. House finance.8. Banking & Insurance.

CHARACTERISTICS OF FINANCIAL SERIVICES:

1. Intangibility.2. Customer Orientation3. Inseparability.4. Perishability.5. Dynamism.

CONSTITUENTS OF FINANCIAL MARKET:

1. Market Players.2. Instruments.3. Specialized Institutions.4. Regulatory bodies.

Market Players: Mutual funds, Stock brokers, Consultants, Underwriters, Financial Institutions, and Merchant Bankers-These people are part of the market.

Instruments: Receipts Pass book, Bond, Certificates, Policy Documents, Mutual fund statements.

Specialized Institutions: Acceptance house, Discount houses, Credit rating agencies, Venture capital organization.

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Regulatory Bodies: RBI, IRDA, Central Government, SEBI, Finance Ministry of Central Government etc., (they focus and monitor)

GROWTH OF FINANCIAL SERVICES IN INDIA

DEFINITION OF INDIAN MONEY MARKET:

“Centre in which financial institutions congregate for the purpose of dealing impersonally in monetary assets”. –JSG Wilson.

MEANING OF INDIAN MONEY MARKET:

Large, wholesale market where Crores of Rupees of Low risk, unsecured, short term debt instruments are issued and traded every day.

Treasury bills, Commercial paper, Commercial bills, Certificate of deposits. These are the popular instruments which are often traded in money market.

CHARACTERISTICS OF DEVELOPED MONEY MARKET OR FEATURES:

1. Integrated structure between sub-markets.2. Free flow of funds between sub-markets.

MERCHANT BANKING ERA

INVESTMENT COMPANY’S ERA

MODERN SERVICES ERA

DEPOSITARIES ERA

LEGISLATIVE ERA

FOREIGN INSTITUTIONAL INVESTORS

FINANCIAL

SYSTEM

FINANCIAL

INSTITUTION

FINANCIAL MARKET

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3. A high degree of specialization.4. A single price for each of the instruments traded.

INDIAN CAPITAL MARKET

DEFINITION: (Common, unique)

“A Market for borrowing & lending long term capital funds required by business enterprise”.

CHARACTERISTICS OF CAPITAL MARKET:

1. Securities Market: It mainly deals with shares & debentures. Another name for shares & debentures is securities.

2. Security Price: Prices of these securities are based on the demand and supply.3. Participants: Who are all dealing with Indian capital market, are considered to be its

participants. (ex) Stock exchanges, Brokers, Foreign institutional investors, Indian Institutional investor’s custodians, portfolio depositories, merchant bankers, share transfer agents, underwriters, venture capital funds, mutual funds, regulators etc.,

4. Location: It does not confine to any specific location. Wherever the business is being taken place all those places are considered to be Indian Capital Market.

FUNCTIONS OF CAPITAL MARKET:

1. Allocation function.2. Liquidity function.3. Other functions.

1. Indicative function2. Savings & Investment function3. Transfer function4. Merger function

CONSTITUENTS OF INDIAN CAPITAL MARKET:

CONSTITUENTS OF INDIAN CAPITAL MARKET

GUILT EDGED SECURITIES INDUSTRIAL SECURITIES MARKET

SECONDARY MARKET

PRIMARY MARKET

(NEW ISSUE MARKET)

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GUILT EDGED SECURITIES:

1. Government and semi-government securities.2. Guaranteed return on investment.3. Institutional based investors have to do certain percentage as per law. Indian Institutional

investors have to buy some percentage of shares when the government issue bonds.4. Heavy volume of transaction.

SECONDARY MARKET:

1. Deal with securities already issued by companies.2. Buying & selling of shares & debentures.3. Stock exchange or share Market.

NEW ISSUE MARKET (NIM):

It is the backbone of secondary market.

FUNCTIONS OF NIM:

1. Transfer function: transfer resources from saver to entrepreneurs.2. Investigative function: Merchant bankers & other agencies, technical analysis, economical,

financial analysis, legal aspects & environmental factors.3. Advisory services: Determining the type, Mix, timing, size, selling strategies of investments,

terms & conditions of issue.4. Guarantee function: Function of underwriting.5. Distribution function: Sale of securities to ultimate investors, Brokers and dealers are involved,

they act as mediators between investors and issuers.

DIFFERENCE BETWEEN NIM & SECONDARY MARKET:

ASPECTS NIM SECONDAY MARKET

Issue of Securities Fresh ExistingLocation No proper Location A place or proper locationTransfer of Securities Company to a person Person to personAdministrative set up Not Required RequiredAIM Long term borrowing Liquidity tradingPrice Movement Secondary market movement Various factors

PLAYERS OR PARTIES INVOLVED IN NIM:

Players or parties means, who are all part of it or who are all playing a role in NIM.

1. Managers to issue. (Administrative power)2. Registrar to issue. (Financial power)3. Underwriters.

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4. Bankers.5. Advertising agencies.6. Financial Institutions.7. Government & Statutory agencies or bodies.

MANAGERS TO ISSUE:

1. Appointed by Issuing Company.2. Manages the entire activity.3. Merchant banking division, subsidiary of commercial banks, foreign banks, private banks and

private agencies can act as a managers to issue.

DUTIES ARE:

1. Drafting prospectus.2. Preparing expenses budget.3. Determining the appropriate timing of the issue.4. Advising the company on various aspects of the issue.

REGISTRAR TO ISSUE:

1. Appointed with the consultation of the manager.2. SEBI has given guidelines.

GENERAL DUTIES ARE:

1. Identifying the collection centre and collecting banker.2. Collect application from various centres.3. Reclassify the valid application for allotment.4. Finalize the bases of allotment with stock exchange’s approval.5. Arrange for dispatch of share certificate.6. Arrangement to pay brokerage & underwriting commission.7. Assist the company in getting the shares listed in the stock exchange.

UNDERWRITERS:

1. Contract between company & underwriters.2. Underwriter guarantees subscription.3. Financial institutions, Banks & approved investment company can act as underwriters.4. At the time of appointment the company verifies:

1. His financial strength.2. Experience in primary market.3. Past underwriting performance.4. Outstanding underwriting commitment.5. Investor clientele. (pronounced as clainclit means contacts)

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6. Unsubscribed shares will be taken up by him.7. If not company can claim damage.

BANKERS:

1. They collect application money & application forms.2. They charge commission for their service.3. If the issue is big, more than one banker may be appointed.4. They may be called coordinating banker or collecting banker.

ADVERTISING AGENCY:

At the time of appointment the company can see:

1. The competency (Calibre)2. Past record.3. Quotation from various agencies.4. Consult the manager for appointment.5. Give wide publicity in media.

FINANCIAL INSTITUTIONS:

1. Sometimes they underwrite.2. Extend term loans.3. Manager sends a copy of all documents.4. Loan size will be decided based on the document.

GOVERNMENT & STATUTORY BODIES OR AGENCIES:

1. SEBI2. Registrar of companies.3. RBI in case of issue involving foreign investment.4. Stock Exchange.5. Industrial licensing authority(Giving license to start the business)6. Pollution control authority etc.,

PROBLEMS OF NEW ISSUE MARKET:

1. In effective mobilization of savings: Around 5% of financial savings come to the stock market. Entire savings is not invested in stock market. Influence of foreign institutional investors.

2. Functional & Institutional Gap: Merchant bankers and other middle men are not playing their role. Investors are not got attracted on NIM. The message is not being carried to the public or investors.

3. Risk aversion: Capital damage. Public is not interested in equity. Preference is given for safety.

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4. Inordinate delay in the Allotment process: Loss of interest for investors, time delay in allotment, sometimes shares are not allotted, refund will be in the form of cheque.

5. Problems of the company:1. Rosy pictures about projected turnover, profit etc.,2. Exaggerated claims in the prospectus.3. False information about oversubscription.

TYPES OF NEW ISSUE:

PUBLIC ISSUE: (Company is offering its shares to public)

1. Issuing company offers to public2. Fixed number of shares3. Through a legal document called prospectus.

CONTENTS OF THE PROSPECTUS: (What all to be mentioned)

1. Company name2. Address of Company’s Registrar office.3. Existing & Proposed business activities.4. Location of the industry.5. List of Directors.6. Minimum subscription.7. Date of opening & close of subscription.8. Details of Institutional underwriters.9. Declaration of listing the shares.10. Future plans of the company. (such as business expansion, turnover expansion, profitability

expansion etc.,

MERITS OF PUBLIC ISSUE:

1. No intermediaries.2. Reaches a large section of investing public.

TYPES OF NEW ISSUE

PUBLIC ISSUE OFFER FOR SALE PLACEMENT RIGHTS ISSUE

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3. Wide distribution of shares.4. Increases the performance of the company.5. No Discrimination or partiality.6. Transparency.

DEMERITS OR DISADVANTAGES OF PUBLIC ISSUE:

1. High cost. (At every state it has to meet certain expenses)2. Contract with underwriters.3. Damage for any misleading statement in prospectus.4. Lengthy procedure.5. Suitable for large issues.

RIGHTS ISSUE:

DEFINITION: According to section 81 of Indian Companies Act 1956, “A Company which issue new shares either after two years of its formation or after one year of its first issue of shares, whichever is earlier has to offer to existing holders”.

1. Existing Company.2. Listed in the Stock Exchange.3. Offer to Existing shareholders.4. Existing shareholders have the right to sale or transfer.5. Detailed circular to existing shareholders.6. Sufficient time to be given.

CONDITIONS FOR RIGHTS ISSUE: (As per Section 81)

1. Offer based on Existing Proportion.2. Details about no of shares.3. Time period not less than 15 days.4. Right to transfer the right to others.5. If any balance can be given to most beneficial to the company. (i.e. Promotor)

These conditions should be satisfied by the company.

MERITS OF RIGHT ISSUE:

1. Less Expensive.2. No need of prospectus.3. No advertisement required.4. No underwriting required.5. Equitable distribution of shares.6. It prevents favourtism & Nepotism.

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OFFER FOR SALE:

1. Company issues shares to issue house or brokers at fixed rate.2. Then issue house resell to investors with margin.3. Margin is known as Turn or spread.

PLACEMENT:

Company issues shares to limited financial institution, corporate bodies, Net worthy individuals. Then they sell the shares to investors at suitable price.

STOCK EXCHANGE

DEFINITION: As per the Securities Contract and Regulation Act 1956, “An Association, Organization or Body of individuals whether incorporated or not established for the purpose of assisting, regulating & controlling business in buying or dealing in securities”.

“Stock Exchange or Securities market comprises of all the place where buyers & sellers of stock & bonds or their representatives undertake transactions involving the sale of securities”. –Hasting

CHARACTERISTICS OF STOCK EXCHANGE:

1. An Association of Individuals: (Group of people joining together and doing the business)1) Registered body as per law.2) No business for themselves.3) Assist, regulate & control trading.4) Brokers & agents are authorized to deal in trading.

2. Control by the Governing Body: (Separate body is there)1) Only members can enter in the floor.2) Members can do trading-They can sit and watch how the trading is being done.3) Commission for brokers & dealers.4) Frame by-laws (Rules & Regulation) of Exchange.

3. Abiding by Rules & Regulations:1) Function as per Rules & Regulation.2) Members follow rules otherwise penalized.3) Member’s admission is based on Rules.

4. Listed Securities:1) Listed securities transacted.2) Enlisting to protect the interest of investors.3) Procedure for listing.

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MANAGEMENT OF STOCK EXCHANGE:

ORIGIN:

a) In India, Second half of 19th Century.b) First Stock Exchange in 1975 at Mumbai by native Share & Stock Brokers’ Association.c) Later started at Madras, Nagpur, Kanpur, Hyderabad, Bangalore etc.,d) Securities Contract and Regulation Act Established.e) At present around six thousand stock brokers & 24 Recognized stock exchanges.

MANGEMENT:

a) Managed by Governing Board.b) Director of Board elected from among stock brokers’ members, public representatives &

Government Nominees.c) President and Vice President will be appointed by the Government.d) Major Stock Exchanges managed by CED (Chief Executive Director)e) Small Stock Exchanges managed by the Secretary.

POWERS OF GOVERNING BOARD:

1. To make, amend rules & by-laws of Stock Exchange. (Rules can be made in the same way it can be changed)

2. To Admit & Expel members.3. To manage the properties & finance of the stock exchange.4. To determine the mode & conditions of stock exchange business. (How the stock exchange

business has to be conducted)5. To supervise, direct & control all activities that affect the stock exchange.

MEMBERS OF STOCK EXCHANGE:

Members here refer to Stock Broker.

A person who obtains license from a stock exchange to do trading business in that Exchange is called member of that stock exchange.

He applies & gets the license. Individuals & Organization can become brokers if they want.

QUALIFICATION OF MEMBERS:

According to Securities Contract & Regulation Act 1956:

1. He should be an Indian Citizen.2. Minimum age should be 21 years.3. He should not have been adjudged (Declaration of Court) insolvent.4. He should not have been convicted for fraud or dishonesty.

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5. He should not have been defaulted by any other Stock Exchange.6. He should not be engaged in any business connected with the company.7. Minimum qualification- Pass in Higher Secondary.8. Individuals or Corporations can become members.9. After 5 years of completion, he or she can apply for other Stock Exchange.

CONTROL OVER STOCK EXCHANGE: (How the Stock Exchanges are being controlled by Indian Government?)

Stock Exchanges in India are controlled by Central government through the following processes:

1. Granting recognition to Stock Exchanges. (It has the power to start a Stock Exchange)2. Listing of Securities3. Registration of Brokers.

GRANTING RECOGNITION TO STOCK EXCHANGES:

1. In India it is recognized by Central Government.2. Recognition under Securities Contract and Regulation Act 1956. (Based on the provision of this

Act they are giving license)3. Stock Exchange submits application to Central Government.4. A Copy of bye-laws.5. A Copy of Constitution, Governing body etc.,6. Government will scrutinize the application & check for two conditions:

1) The bye-law should protect the interest of investors.2) Their intention to follow the conditions of Central

Government.7. Granting Recognition.

RENEWAL OF RECOGNITION:

Recognition means, getting license. It will be given only for a specific period. Apply before 3 months prior to expiry of recognition.

WITHDRAWAL OF RECOGNITION:

If they act against the interest of trade, Central Government is empowered to withdraw the Recognition.

LISTING

MEANING:

(Admission of the shares of a public limited company on a recognized stock exchange for trading)

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OBJECTIVE OF LISTING:

1. To provide Marketability, Liquidity & transferability for the Securities.2. To ensure fair (decent) dealing in securities.3. To safeguard the interest of the investors and General investing public. (Interest-give protection

to investor’s money)

ADVANTAGES OF LISTING:

1. To the Company.2. To Shareholders or investors.

ADVANTAGES TO THE COMPANY:

1. Broadens & diversify shareholding.2. Compiles with Statutory provisions. (Section 73 & 81 of Companies Act)3. Ensures a saving in the cost of rising new capital.

ADVANTAGES TO THE SHAREHOLDERS OR INVESTORS:

1. Ensures liquidity.2. Ensures Re-finance facility. (loan against de-mat a/c)3. Protect Investor’s interest. (investors will not get affected)4. Income tax concession.

DISADVANTAGES OF LISTING:

1. Hard rules & Regulation by SEBI. (It will be difficult for them to understand)2. Speculators misuse price fluctuations to make money.3. Managerial personal misuse available information.4. Vital information published may be advantage for competing companies.5. High Cost.

LISTING PROCEDURE:

1. Attaching listing application & documents: When the company submit the application to the stock exchange it has to attach some documents with the application. The documents to be attached with the application are :

a) Copies of MOA & AOA.b) Copy of statement in lieu of prospectus. (in lieu of- instead of)c) Specimen copy of Share certificate, Debenture certificate, letters of

Allotment, Letter of Acceptance, Transfer receipts, Renewal Receipts, Letter of Renunciation etc.,

d) Capital Structure details.e) Statement showing the distribution of shares.

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f) Dividends & Bonus details in the last 10 years.g) Details of shares & Debentures.h) Brief history of the company.

2. Scrutiny of Listing Application: After receiving the application they have to check for the following things.

Check Articles for the following provisions:

a) Whether they have used Common transfer form.b) Fully paid shares should be completely free from lien. (There should not be

any pledging loan against the assets or shares of the company)c) If at all, any calls in advance paid, it will carry only interest not any other

benefits.d) Unclaimed dividends should not be forfeited before the time limit.e) Whether 60% of each class of securities was offered to the public and

minimum issued capital should be 3 crores.f) Whether the company is of fair size, has a broad base capital structure.

3. Listing agreement:

It is an agreement between the Stock exchange and the Company.

It contains or covers,

1) Letter of Allotment2) Share transfer form3) Book closure format for payment of dividend4) Issue procedure for rights shares5) Issue procedure for convertible debentures6) Holding of Directors’ meeting, directors’ Report, annual report, resolution

etc.,

Once listing agreement is done, one copy of this agreement will be sent to SEBI and also to Government of India.

OTCEI: (Over the Counter Exchange of India)

In November 1992, it was started in India. It was incorporated under section 25 of Indian Companies Act 1956. It is being supervised by SEBI and Government of India.

It is being promoted by a group of Institutions, ICICI, IDBI, SBI, IFCI, LIC, GIC, CAN Bank.

FEATURES OF OTCEI:

1. Use of Modern Technology.2. Restriction for other stocks. (Small companies are only allowed not for all the companies, purely

meant for small companies)

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3. Minimum issued Capital 30 lakhs to 20 crores.4. Minimum subscription would be 40% or 20 lakhs whichever is higher.5. Base Capital requirement for member minimum of 4 lakhs.6. All India Network.7. Satellite facilities are being used.8. Deals with Equity shares, preference shares, bonds, debentures etc.,9. Computerization of transactions.

ADVANTAGES OF OTCEI:

1. Nationwide listing and trading.2. Screen based scripts. (computerized)3. No physical delivery.4. Fast settlement procedures.5. Ensuring investment worthiness to small companies. (For small companies-OTCEI is a biggest

support)6. Highly professional approach.

MUTUAL FUNDS

BENEFITS OF MUTUAL FUNDS:

1. Attractive return on investment.2. Minimum risk.3. Promote savings among lower & middle class people.4. Different types of investment.5. Corporate sector made available for common man.6. Transparency in Activities.7. Liquidity for investors.8. Convenience & flexibility (switch over to other schemes is allowed)

TYPES OF MUTUAL FUND:

1. From the point of Investors.2. From the point of Promotors.

INVESTORS:

1. Open-ended mutual fund.2. Close-ended mutual fund.3. Growth oriented mutual fund.4. Income oriented mutual fund.5. Specialized mutual fund.6. Domestic mutual fund.7. Off-shore mutual fund.

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PROMOTORS:

1. Stock funds.2. Bond funds.3. Balanced funds.4. Index fund.5. Money market fund.6. Dual fund.7. Specialized fund.8. Taxation fund.9. Real estate funds.10. Junk-Bond fund.

DISADVANTAGES OF MUTUAL FUND:

1. Risk (somebody else is going to play with your money)2. Close-ended mutual fund.3. Fund manager4. New Company5. Based on Stock market performance.6. Transparency-problem

MERCHANT BANKERS

Merchant Bankers: Banker or banking division. It is in the form of bank, a Company, a firm or even a proprietary concern.

*To provide non-financial services like arrange for funds rather than providing it.

*In 1969-By Grind lays Bank-UK, In India 1973-SBI (State Bank of India)

FUNCTIONS OF MERCHANT BANKERS:

1. Corporate counseling.2. Project counseling.3. Capital Structure.4. Portfolio management.5. Issue management.6. Credit syndication.7. Working Capital Management.8. Venture Capital Management.9. Lease finance.10. Fixed Deposit.11. Other functions:

a) Treasury management

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b) Stock Brokingc) SSI Counseling (Small Scale Industry)d) Equity research & investment counseling.e) Assistance to NRI investors.f) Foreign collaboration.

DEMERITS OR DRAWBACKS OF MERCHANT BANKERS:

1. Lack of Entrepreneurial ability.2. Lack of professionals.3. Lack of control.4. Unhealthy practices.5. Speculation at times.6. Misleading the investors.

NBFC: (Non-Banking Financial Corporation)

FINANCIAL SERIVICES OF NBFC:

1. Provide micro finance (Small traders, formers)2. Form Self Help groups in villages.3. Provide consultancy services.4. Provide training programmes on certain art & arrange finance for self-employment.5. Provide loan facility to small farmers.6. Assist small formers with technology up gradation.

FINANCIAL SERIVICES, MARKETS AND INSTITUTIONS

EVOLUTION OF FINANCIAL SYSTEM IN INDIA:

1. Barter system.2. Money lenders.3. Nithi and Chit funds.4. Co-operative movement5. Joint stock Companies.6. Consolidation of commercial banks.7. Nationalization of banks.8. Investment banks.9. Development of financial institutions.10. Investment & Insurance Companies.11. Stock exchange & Market operations12. Specialized financial Institutions.13. Merchant Banking or bankers.14. Universal Bankers.

Co-operative Banks

Co-operative Societies

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FINANCIAL SYSTEM:

1. Financial Market (Buying and selling of financial instruments)2. Financial Institutions.3. Financial services.4. Financial Instruments (A paper which carries money)

FINANCIAL INSTITUTIONS:

It consists of Central bank, commercial banks, Co-operative bank, Development banks, Merchant banks, Hire purchase financing company, leasing company, factoring company, asset-liability management company, underwriters, mutual fund companies etc.,

FINANCIAL MARKET & CLASSIFICATIONS:

1. Capital Market.2. Money Market.3. Foreign Exchange Market.4. Government Securities Market.

INDIAN MONEY MARKET

Organized

Unorganized

ORGANIZED UNORGANIZED

1. Indigenous Bankers2. Money lenders

1. Commercial Banks2. Co-operative banks3. Regional rural banks4. NABARD5. Foreign Banks

In Organized Money Market Rules, Regulation, Policy, Controlling Authority is there

RESERVE BANK OF INDIA

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FOREIGN EXCHANGE MARKET:

GOVERNMENT SECURITIES MARKET:

1. Treasury bills (short period)2. Bonds (long period)

TREASURY BILLS: Issued by RBI with the advice of Government of India. When it is issued,it is compulsory for the commercial banks and financial institutions to purchase it.

BONDS: It is issued for the development activities in India.

LENDING POLICY OF COMMERCIAL BANKS:

1. Risk factor.2. Rate of return.3. Diversification (for various purpose)4. Provide finance to Government.5. Finance to all types of sector.6. Finance to all locations.7. Satisfy moral & ethical values.

FOREIGN EXCHANGE MARKET

UNDER THE DIRECT CONTROL OF RBI

AUTHORISED DEALERS, MONEY CHANGERS, FOREIGN BANKS, IMPORTERS & EXPORTERS are the Authorized people to deal in the foreign exchange market or to deal with foreign currency.

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MONEY MARKET:

FEATURES OR IMPORTANCE OF MONEY MARKET:

1. Provide short term funds.2. Commercial bank’s role.3. Government’s role4. Channelize the savings into investment.5. Inflation Controller.6. Funds transfer.7. Stimulate Capital Market activities.

ROLE OF CALL MONEY MARKET:

1. Deal with short period loan. (Maximum 14 days, in practical 7 days)2. Repayable based on demand & negotiations.3. The main location-Big centers.4. LIC, GIC, UTI, IDBI, ICICI, IFC are participate.5. It provided for: Bill Market, Interbank use, trading in Stock Exchange, Trading in Bullion market,

to individual traders for saving interest.6. Initial stage-Brokers operate.7. In 1970-RBI prohibited brokers.8. RBI implement restrictive monetary policy-Call money market will be active. RBI has liberal

policy-Call money market will become dull.9. It is popularly used in all types of banks.

MONEY MARKET

BORROWERS LENDERS

1. Government2. Agriculturalists3. Traders4. Business man5. Commercial banks6. NBFC’S

1. Central bank2. Commercial banks3. Co-operative banks4. Foreign banks5. NBFC’S6. Money lenders

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TREASURY BILLS:

1. Issued by RBI on behalf of Government.2. The purpose is to meet temporary Government deficits.3. It is a place where the treasury bills are bought and sold.4. It is guaranteed by Government.5. Repayment will be on the due date.6. Duration may vary from 91 to 364 days.7. No trade transactions.8. Considered as Finance bill.9. Two types:

a) Ordinary billb) Ad-hoc bill (Very short period)

Ordinary Treasury bills:

1. Issued for short term fund requirement.2. Issued for public & commercial banks3. No restriction for buying and selling4. They have secondary market also.

Ad-hoc Treasury bills:

1. Issued in favour of RBI.2. State Government, Semi-Government departments, foreign central banks can invest their

surplus in this.

CERTIFICATE OF DEPOSITS:

1. Introduced in 1987.2. Popularly known as CD & NCD. (N –Negotiable)3. Deposit cash with bank & get promissory note from banks.4. Amount & maturity date will be mentioned.5. It can be traded in the Secondary market.6. Holder on the maturity date is eligible for the payment.7. Banker will make the payment on the maturity date or due date.

ROLE OF COMMERCIAL PAPERS:

1. Popularly known as CP.2. Introduced by RBI in 1990.3. Leading financial institutions can issue.4. Unsecured promissory note by the issuer.5. Anyone can buy & discount with the commercial banks.6. On the due date issuer will make the payment.

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7. Interest also paid on the due date.8. It is another form of fund raising.9. Credit rating can be obtained.10. Issuer’s net worth should be 4 crores.11. Current ratio should be 1.33:1