Worksheet questions (to be written with answers

in blue book.....
1) explain the following
i) financial asset.
A financial asset is a non-physical asset whose value is derived from a
contractual claim, such as bank deposits, bonds, and stocks. Financial
assets are usually more liquid than other tangible assets, such as
commodities or real estate, and may be traded on financial markets.

According to the International Financial Reporting Standards (IFRS), a

financial asset can be:

• Cash or cash equivalent,

• Equity instruments of another entity,
• Contractual right to receive cash or another financial asset from
another entity or to exchange financial assets or financial liabilities
with another entity under conditions that are potentially favourable to
the entity,
• A contract that will or may be settled in the entity's own equity
instruments and is either a non-derivative for which the entity is or
may be obliged to receive a variable number of the entity's own
equity instruments, or a derivative that will or may be settled other
than by exchange of a fixed amount of cash or another financial asset
for a fixed number of the entity's own equity instruments.

ii) financial institutions

Financial institutions, otherwise known as banking institutions,
are corporations which provide services as intermediaries of financial
markets. Broadly speaking, there are three major types of financial
institutions

1. Depository institutions – deposit-taking institutions that accept and

manage deposits and make loans, including banks, building
societies, credit unions, trust companies, and mortgage
loan companies;
 2. Contractual institutions – insurance companies and pension funds
3. Investment institutions – investment
banks, underwriters, brokerage firms.
Some experts see a trend toward homogenisation of financial
institutions, meaning a tendency to invest in similar areas and have
similar business strategies. A consequence of this might be fewer banks
serving specific target groups, and small-scale producers may be under-
served.[3]
Classification of financial institutions:
1. Banking institutions

a) Commercial Banks
b) Cooperative Banks

2. Non Banking institutions

Financial institutions are the institutions which offers financial services
for clients or members.

iii) scheduled bank

Scheduled Banks in India refer to those banks which have been included
in the Second Schedule of Reserve Bank of India Act, 1934. RBI in turn
includes only those banks in this Schedule which satisfy the criteria laid
down vide section 42(6)(a) of the said Act. Banks not under this
Schedule are called Non-Scheduled Banks.

The Scheduled banks comprise Scheduled Commercial Banks and

Scheduled Co-operative banks. The further classification is as follows:
• Scheduled Commercial banks
• Public Sector Banks
• State Bank of India and its associates, and
• Other Nationalised banks
• Private Sector Indian Banks
• Old private-sector banks
• New private-sector banks
• Private-sector Foreign banks
• Regional Rural Bank (RRBs)
• Scheduled Co-operative banks
 • Scheduled State Co-operative Banks
• Scheduled Urban Co-operative Banks

iv) difference between banking and non banking

financial institutions
BASIS FOR
NBFC BANK
COMPARISON

Meaning An NBFC is a company Bank is a government

that provides banking authorized financial
services to people without intermediary that aims at
holding a bank license. providing banking services to
the general public.

Incorporated under Companies Act 1956 Banking Regulation Act, 1949

Demand Deposit Not Accepted Accepted

Foreign Investment Allowed up to 100% Allowed up to 74% for private

sector banks

Payment and Not a part of system. Integral part of the system.

Settlement system

Maintenance of Not required Compulsory

Reserve Ratios

Deposit insurance Not available Available

facility

Credit creation NBFC do not create Banks create credit.

credit.

Transaction Not provided by NBFC. Provided by banks.

services
 2) explain the functions of financial system?
A financial system is a network of financial institutions, financial
markets, financial instruments and financial services to facilitate the
transfer of funds. The system consists of savers, intermediaries,
instruments and the ultimate user of funds. The level of economic growth
largely depends upon and is facilitated by the state of financial system
prevailing in the economy. Efficient financial system and sustainable
economic growth are corollary.

The functions of financial system can be enumerated as follows:

• Financial system works as an effective conduit for optimum allocation

of financial resources in an economy.
• It helps in establishing a link between the savers and the investors.
• Financial system allows ‘asset-liability transformation’. Banks create
claims (liabilities) against themselves when they accept deposits from
customers but also create assets when they provide loans to clients.
• Economic resources (i.e., funds) are transferred from one party to
another through financial system.
• The financial system ensures the efficient functioning of the payment
mechanism in an economy. All transactions between the buyers and
sellers of goods and services are effected smoothly because of
financial system.
• Financial system helps in risk transformation by diversification, as in
case of mutual funds.
• Financial system enhances liquidity of financial claims.
• Financial system helps price discovery of financial assets resulting
from the interaction of buyers and sellers. For example, the prices of
securities are determined by demand and supply forces in the capital
market.
• Financial system helps reducing the cost of transactions.
3) bring out the difference between money and capital
market?
BASIS FOR
MONEY MARKET CAPITAL MARKET
COMPARISON

Meaning A segment of the financial A section of financial market

market where lending and where long term securities are
borrowing of short term issued and traded.
securities are done.

Nature of Market Informal Formal

Financial Treasury Bills, Commercial Shares, Debentures, Bonds,

instruments Papers, Certificate of Deposit, Retained Earnings, Asset
Trade Credit etc. Securitization, Euro Issues etc.

Institutions Central bank, Commercial Commercial banks, Stock

bank, non-financial exchange, non-banking
institutions, bill brokers, institutions like insurance
acceptance houses, and so on. companies etc.

Risk Factor Low Comparatively High

Liquidity High Low

Purpose To fulfill short term credit To fulfill long term credit needs
needs of the business. of the business.

Time Horizon Within a year More than a year

Merit Increases liquidity of funds in Mobilization of Savings in the

the economy. economy.

Return on Less Comparatively High

Investment
4) bring out the difference between primary and secondary
market?

BASIS FOR SECONDARY

PRIMARY MARKET
COMPARISON MARKET

Meaning The market place for new The place where formerly
shares is called primary issued securities are traded
market. is known as Secondary
Market.

Another name New Issue Market (NIM) After Market

Type of Purchasing Direct Indirect

Financing It supplies funds to budding It does not provide funding

enterprises and also to existing to companies.
companies for expansion and
diversification.

How many times a Only once Multiple times

security can be sold?

Buying and Selling Company and Investors Investors

between

Who will gain the Company Investors

amount on the sale of
shares?

Intermediary Underwriters Brokers

Price Fixed price Fluctuates, depends on the

demand and supply force

Organizational Not rooted to any specific spot It has physical existence.

difference or geographical location.
5) explain the objectives and functions of IDBI?
Objectives and Functions of IDBI
Objectives
The main objectives of IDBI is to serve as the apex institution for term
finance for industry in India. Its objectives include:
• Co-ordination, regulation and supervision of the working of
other financial institutions such as IFCI , ICICI, UTI, LIC, Commercial
Banks and SFCs.
• Supplementing the resources of other financial institutions and
there by widening the scope of their assistance.
• Planning, promotion and development of key industries
and diversification of industrial growth.
• Devising and enforcing a system of industrial growth that conforms
to national priorities.

Functions
The IDBI has been established to perform the following functions-
• To grant loans and advances to IFCI, SFCs or any other financial
institution by way of refinancing of loans granted by such institutions
which are repayable within 25 year.
• To grant loans and advances to scheduled banks or state co-
operative banks by way of refinancing of loans granted by such
institutions which are repayable in 15 years.
• To grant loans and advances to IFCI, SFCs, other institutions,
scheduled banks, state co-operative banks by way of refinancing
of loans granted by such institution to industrial concerns for exports.
• To discount or re-discount bills of industrial concerns.
• To underwrite or to subscribe to shares or debentures of industrial
concerns.
• To subscribe to or purchase stock, shares, bonds and debentures
of other financial institutions.
• To grant line of credit or loans and advances to other financial
institutions such as IFCI, SFCs, etc.
• To grant loans to any industrial concern.
• To guarantee deferred payment due from any industrial concern.
• To guarantee loans raised by industrial concerns in the market
or from institutions.
• To provide consultancy and merchant banking services in or
outside India.
• To provide technical, legal, marketing and administrative
assistance to any industrial concern or person for promotion,
management or expansion of any industry.
• Planning, promoting and developing industries to fill up gaps in the
industrial structure in India.
• To act as trustee for the holders of debentures or other securities.

6) explain the role of commercial banks?

Some of the major important role of commercial banks in a
developing country are as follows:

The role of a commercial bank in a developing country is

discussed as under.
1. Mobilising Saving for Capital Formation:
The commercial banks help in mobilising savings through
network of branch banking. People in developing
countries have low incomes but the banks induce them to
save by introducing variety of deposit schemes to suit the
needs of individual depositors.

2. Financing Industry:
The commercial banks finance the industrial sector in a
number of ways. They provide short-term, medium-term
and long-term loans to industry.
3. Financing Trade:
The commercial banks help in financing both internal and
external trade. The banks provide loans to retailers and
wholesalers to stock goods in which they deal.

4. Financing Agriculture:
The commercial banks help the large agricultural sector in
developing countries in a number of ways. They provide
loans to traders in agricultural commodities.

5. Financing Consumer Activities:

People in underdeveloped countries being poor and
having low incomes do not possess sufficient financial
resources to buy durable consumer goods.

6. Financing Employment Generating Activities:

The commercial banks finance employment generating
activities in developing countries. They provide loans for
the education of young person’s studying in engineering,
medical and other vocational institutes of higher learning.

7. Help in Monetary Policy:

The commercial banks help the economic development of
a country by faithfully following the monetary policy of the
central bank. In fact,
7) explain the investment policy of commercials
banks?
A bank makes investments for the purpose of earning profits. First
it keeps primary and secondary reserves to meet its liquidity
requirements.

This is essential to satisfy the credit needs of the society by granting

short-term loans to its customers. Whatever is left with the bank
after making advances is invested for long period to improve its
earning capacity.

Before discussing the investment policy of a commercial bank, it is

instructive to distinguish between a loan and an investment because
the usual practice is to regard the two as synonymous. The bank
gives a loan to a customer for a short period on condition of
repayment.

It is the customer who asks for the loan. By advancing a loan, the
bank creates credit which is a temporary source of fund for the
bank. An investment by the bank, on the other hand, is the outlay of
its funds for a long period without creating any credit. A bank
makes investments in government securities and in the stocks of
large reputed industrial concerns, while in the case of a loan the
bank advances money against recognised securities and bills.
However, the goal of both is to increase its earnings.
The investment policy of a bank consists of earning high returns on
its unloaned resources. But it has to keep in view the safety and
liquidity of its resources so as to meet the potential demand of its
customers.

Since the objective of profitability conflicts with those of safety and

liquidity, the wise investment policy is to strike a judicious balance
among them. Therefore, a bank should lay down its investment
policy in such a manner so as to ensure the safety and liquidity of its
funds and at the same time maximise its profits. This requires
adherence to certain principles.

8) explain the credit control measures of RBI?

There are two methods that the RBI uses to control the money supply in
the economy-

• Qualitative method
• Quantitative method
During the period of inflation Reserve Bank of India tightens its policies
to restrict the money supply, whereas during deflation it allows
the commercial bank to pump money in the economy.
Qualitative method
By Quality we mean the uses to which bank credit is directed.
For example- the bank may feel that spectators or the big capitalists are
getting a disproportionately large share in the total credit, causing
various disturbances and inequality in the economy, while the small-
scale industries, consumer goods industries and agriculture are starved
of credit.
Correcting this type of discrepancy is a matter of qualitative credit
control.
Qualitative method controls the manner of channelizing of cash and
credit in the economy. It is a 'selective method' of control as it restricts
credit for certain section where as expands for the other known as the
'priority sector' depending on the situation.
Tools used under this method are-
Marginal requirement
The marginal requirement of a loan is the current value of security
offered for a loan or the value in totality of the loans granted. The
marginal requirement is increased for those business activities, whose
flow of credit is to be restricted in the economy.
ex- a person mortgages his property worth Rs. 100,000 against loan.
The bank will give loan of Rs. 80,000 only. The marginal requirement
here is 20%.
In case the flow of credit has to be increased, the marginal requirement
will be lowered.
The Reserve Bank of India has been using this method since 1956. If
margin percent is more, then fewer loans will be given for a certain value
of security. If margin percent is less , more loans will be given.[2]
Rationing of credit
Under this method there is a maximum limit to loans and advances that
can be made, which the commercial banks cannot exceed. RBI fixes
ceiling for specific categories. Such rationing is used for situations when
credit flow is to be checked, particularly for speculative activities.This is
all fake Minimum of"capital: total assets" (ratio between capital and total
asset) can also be prescribed by Reserve Bank of India
Publicity
RBI uses media for the publicity of its views on the current market
condition and its directions that will be required to be implemented by
the commercial banks to control the unrest. Though this method is not
very successful in developing nations due to high illiteracy existing
making it difficult for people to understand such policies and its
implications.
Direct Action
Under the banking regulation Act, the central bank has the authority to
take strict action against any of the commercial banks that refuses to
obey the directions given by Reserve Bank of India. There can be a
restriction on advancing of loans imposed by Reserve Bank of India on
such banks. e.g. – RBI had put up certain restrictions on the working of
the Metropolitan co-operative banks. Also the 'Bank of Karad' had to
come to an end in 1992.[3
Moral Suasion
This method is also known as "moral persuasion" as the method that the
Reserve Bank of India, being the apex bank uses here, is that of
persuading the commercial banks to follow its directions/orders on the
flow of credit. It also be part of meetings between RBI and Commercial
Banks. RBI persuades the commercial bank to follow their policies. RBI
puts a pressure on the commercial banks to put a ceiling on credit flow
during inflation and be liberal in lending during deflation.

9) explain narashimann committee rep report on

banking reforms?
From the 1991 India economic crisis to its status of third largest economy in the
world by 2011, India has grown significantly in terms of economic development. So
has its banking sector. During this period, recognising the evolving needs of the
sector, the Finance Ministry of Government of India (GOI) set up various committees
with the task of analysing India's banking sector and recommending legislation and
regulations to make it more effective, competitive and efficient. Two such expert
Committees were set up under the chairmanship of M. Narasimham. They submitted
their recommendations in the 1990s in reports widely known as the Narasimham
Committee-I (1991) report

Autonomy in Banking[edit]
Greater autonomy was proposed for the public sector banks in order for them to
function with equivalent professionalism as their international counterparts. For this
the panel recommended that recruitment procedures, training and remuneration
policies of public sector banks be brought in line with the best-market-practices of
professional bank management. Secondly, the committee recommended GOI equity
in nationalized banks be reduced to 33% for increased autonomy.

Reform in the role of RBI

First, the committee recommended that the RBI withdraw from the 91-day treasury
bills market and that interbank call money and term money markets be restricted to
banks and primary dealers. Second, the Committee proposed a segregation of the
roles of RBI as a regulator of banks and owner of bank. It observed that "The
Reserve Bank as a regulator of the monetary system should not be the owner of a
bank in view of a possible conflict of interest". As such, it highlighted that RBI's role
of effective supervision was not adequate and wanted it to divest its holdings in
banks and financial institutions.

Stronger banking system

The Committee recommended for merger of large Indian banks to make them strong
enough for supporting international trade. It recommended a three tier banking
structure in India through establishment of three large banks with international
presence, eight to ten national banks and a large number of regional and local
banks. This proposal had been severely criticized by the RBI employees union.
Non-performing assets had been the single largest cause of irritation of the banking
sector of India. Earlier the Narasimham Committee-I had broadly concluded that the
main reason for the reduced profitability of the commercial banks in India was the
priority sector lending. The committee had highlighted that 'priority sector lending'
was leading to the buildup of non-performing assets of the banks and thus it
recommended it to be phased out. Subsequently, the Narasimham Committee-II also
highlighted the need for 'zero' non-performing assets for all Indian banks with
International presence

Capital adequacy and tightening of provisioning

norms
To improve the inherent strength of the Indian banking system the committee
recommended that the Government should raise the prescribed capital
adequacy norms.] This would also improve their risk taking ability] The committee
targeted raising the capital adequacy ratio to 9% by 2000 and 10% by 2002 and
have penal provisions for banks that fail to meet these requirements. For asset
classification, the Committee recommended a mandatory 1% in case of standard
assets
10) explain features and importance of financial
services?
Financial service is part of financial system that provides different types of
finance through various credit instruments, financial products and services.

In financial instruments, we come across cheques, bills, promissory notes,

debt instruments, letter of credit, etc.

In financial products, we come across different types of mutual funds.

extending various types of investment opportunities. In addition, there are
also products such as credit cards, debit cards, etc.

In services we have leasing, factoring, hire purchase finance etc., through

which various types of assets can be acquired either for ownership or on
lease. There are different types of leases as well as factoring too.
Thus, financial services enable the user to obtain any asset on credit,
according to his convenience and at a reasonable interest rate.

Importance of Financial services

It is the presence of financial services that enables a country to improve its
economic condition whereby there is more production in all the sectors
leading to economic growth.

Importance of Financial Services

▪ Vibrant Capital Market.
▪ Expands activities of financial markets.
▪ Benefits of Government.
▪ Economic Development.
▪ Economic Growth.
▪ Ensures Greater Yield.
▪ Maximizes Returns.
▪ Minimizes Risks.
▪ Promotes Savings.
▪ Promotes Investments.
▪ Balanced Regional Development.
▪ Promotion of Domestic & Foreign Trade.
Financial Services offered by various financial institutions
▪ Factoring.
▪ Leasing.
▪ Forfaiting.
▪ Hire Purchase Finance.
▪ Credit card.
▪ Merchant Banking.
▪ Book Building.
▪ Asset Liability Management.
▪ Housing Finance.
▪ Portfolio Finance.
▪ Underwriting.
▪ Credit Rating.
▪ Interest & Credit Swap.
▪ Mutual Fund.

Features:-

1. Promoting investment

2. Promoting savings

3. Minimizing the risks

4. Maximizing the Returns

5. Ensures greater Yield

6. Economic growth

7. Economic development

8. Benefit to Government

9. Expands activities of Financial Institutions

10. Capital Market

11. Promotion of Domestic and Foreign Trade

12. Balanced Regional development