INDIAN FINANCIAL SYSTEM

Syllabus

Unit 1: FINANCIAL SYSTEM

Introduction – Meaning – Classification of Financial System. Financial Markets – Functions and

Significance of Primary Market, Secondary Market, Capital Market, & Money Market.

Unit 2: FINANCIAL INSTITUTIONS

Types of Banking and Non-Banking Financial Institutions. Constitution, objectives & functions of
IDBI, SFCs, SIDCs, LIC, EXIM Bank. Mutual Funds – features and types.

Unit 3: COMMERCIAL BANKS

Introduction – Role of Commercial Banks – Functions of Commercial Banks – Primary Functions and
Secondary Functions – Investment Policy of Commercial Banks. Narasimaham committee report on
banking sector reforms.

Unit 4: REGULATORY INSTITUTIONS

Reserve Bank of India (RBI) – Organization – Objectives – Role and Functions. The Securities
Exchange Board of India (SEBI) – Organization and Objectives.

Unit 5: FINANCIAL SERVICES

Meaning& Definition – Features – Importance. Types of Financial Services – factoring, leasing,

venture capital, Consumer finance - housing & vehicle finance
 Indian Financial System
Chapter 1: Introduction To Financial System
Meaning:
Financial system bridges the gap between present and the future requirement and helps in
mobilization of savings
To know the resources are used efficiently, effectively and there
there is equitable allocation for
investment, where financial system performs its functions that sets pace for the achievement of
broader national objectives.
Functions Of Financial System
 Provision of liquidity:: it is the primary function , it states the aability
bility of meeting the obligations
as and when required , it is the ability of converting assets into liquid cash
 Mobility of savings:: helps in mobilising savings from savers to investors
 Size transformation function
function(small
(small savings to big investment): it channelizes
cha small funds
received from the savings group to the industries for the purpose of investment
 Maturity transformation function
function: fixed deposits for 2-3 3 years, it acts as an intermediary ,
receives deposits from public for a specific tenure and lends them to the people in need
 Risk transformation function : financial institutions takes the function of risk in investing their
fund in profitable and safe ventures by bearing the risk
Components Of Financial System
1. Financial assets
2. Financial markets
3. Financial institutions/intermediaries
/intermediaries
4. Financial instruments
5. Financial services

I. Financial Assets

Non- marketable
assets
Marketable assets
Financial Assets Is One Which Is Used For Production Or Consumption Or For Further Creation
Of Assets
Eg: A Buys Equity Shares And These Shares Are Termed As Finan
Financial
cial Assets As They Earn Income
In Return(dividend And Interest)
Eg: Building : Own Purpose : Physical Asset
 For Hiring: Financial Asset
Marketable Assets
Marketable assets are those which can be easily transferred from one person to another person without
much hindrance and restrictions
Eg: shares of listed companies, government securities, bonds of public sector undertaking
Non Marketable Assets
If assets cannot be transferred easily , it is termed as non marketable assets
Eg: Bank Deposits, provident fund, national savings certificate, insurance policies etc
Other Kinds Of Financial Assets
 Cash Assets
 Debt Assets
 Stock Assets
CASH ASSETS
In India, all coins and currencies are issued by RBI.
But, when a loan is sanctioned for the customer, Liquid cash is not granted, instead an account is
opened in the borrowers name and a deposit is created, it is also called money assets. (any cash In
hand or cash at bank, used for day to day activities)
DEBT ASSETS
Debt assets is issued by various organisations, for the purpose of raising debt capital
It has a fixed repayment schedule with regard to interest and principal
Eg: issue of debentures, raising of term loans, working capital advances
STOCK ASSETS
It is issued by business organisations for raising their fixed capital
There are two types of stocks/shares: Equity and Preference
Equity shares holders are the owners of the company, they will have the same risk and profits
Preference share holders are given the preference in payment of dividends at fixed rate of interest
 Shares
Government Securities
Bonds
Marketable Assets
Mutual Funds Units
UTI Units

Financial Assets Bearer Debentures

Bank Deposits

Provident Fund
Non Marketable
LIC Schemes
Assets
Commission Deposits
Post Office Certificates

II. Financial Markets

Financial market is a place or location where many financial transactions takes place.
There is no specific place or location to indicate financial market
It includes issue of equity shares, granting of loans by term lending institutions, deposit of money into
banks, purchase of debentures, sale of shares
UNORGANISED MARKET
It includes money lenders, indigenous bankers, traders who lend money to the public and are not
controlled by RBI.
The regulations concerning these financial dealings are inadequate and the financial instruments are
not standardised.
ORGANISED MARKETS
In organised markets , there are standardised rules and regulations governing their financial findings
They have strict supervision and control by RBI and other regulatory authorities
They include:
Capital Market
Money Market
 CAPITAL MARKET
It deals with those financial assets which have a long or indefinite maturity
It deals with long term securities which have a maturity period of above one year.
Eg:
 Industrial securities market
 Government securities market
 Long term loans market

i. The capital market serves as an important source for the productive use of economy savings.
ii. It mobilizes the savings of the people for further investment, and thus avoids the wastage in
unproductive use
iii. It provides incentives to savings and facilitates capital formation by providing suitable rate of
interest as the price of capital
iv. It provides an avenue for investors, particularly in house hold sector to invest money into the
financial assets which is more productive than physical assets
v. It facilitates increase in production and productivity In the economy and thus enhances
economic welfare of the society
vi. It promotes stability in values of security which represents capital funds
vii. It promotes technological up gradation in the industrial sector by utilising the funds invested by
the public
Industrial Securities Market
It deals with industrial securities
Eg:
 Equity Shares Or Ordinary Shares
 Preference Shares
 Debentures Or Bonds
It is further divided into
 Primary market
 Secondary market or stock exchange
Government securities market
It is also called Gilt- edged securities market
It is a market where government securities are traded
Government securities are issued in denominations of Rs 100.interest is payable half yearly and they
carry tax exemption.
Eg:
 stock certificates
 Promissory notes
 Bearer bonds
Government securities are sold through the public debt office of the RBI, while treasury bills are sold
through auctions
Long Term Loans Market
 Term loans market
 Mortgages market
 Financial guarantees market
Term loans market
 They supply long term and medium term loans to customers directly as well as indirectly
 Institutions like IDBI, IFCI, ICICI and other state financial corporations come under this
category
 These institutions meet the growing and varied long term financial requirements of industries
by supplying long term loans
 They also help in identifying opportunities, encourage new entrepreneurs and supports
modernisation efforts
Mortgages market
 It refers to those centres which supply mortgage loan mainly to individual customers
 A mortgage loan is a loan against the security of immovable property like real estate
 The transfer of interest in a specific immovable property to secure a loan is called mortgage
 The housing and urban development corporation and LIC plays a dominant role in financing
residential projects
 Land development banks provide cheap mortgage loans for the development of lands, purchase
of equipment
 These development banks raise finance through sale of debentures which are trustee securities
Financial guarantees market
 A guarantee market is a centre where finance is provided against the guarantee of a reputed
person
 Guarantee is a contract to discharge the liability of a third party in case of his default
 In case the borrower fails to repay the loan, the liability falls on the shoulders of the guarantor
 Hence the guarantor must be known to both the borrower and the lender , lender should have
the means to discharge his liability
Types of guarantee
 Performance guarantee
 Financial guarantee
These guarantees are provided mainly by commercial banks, development banks,
ECGC(export credit guaranteed corporation), DICGC(deposit insurance and credit guarantee
corporation)
Money Market
Money market(short term loans)
 It Is a market for the lending and borrowing of short term funds
 It includes trade bills, promissory notes and government papers drawn for a short period not
exceeding one year
 No personal contact or presence is essential for negotiations in money market
Functions of a money market
  It is a market for short term funds
 It has a maturity period of one year
 It deals with only those assets which can be converted into cash without any loss, with
minimum transaction cost.
 Generally, transactions takes place through phone i.e oral communication. There is no formal
place like stock exchange as in the case of capital market
 There are no brokers involved in money markets
Objectives of money market
 Helps to overcome short term deficits
 To enable the central banks to influence and regulate liquidity in the economy through its
interventions in this market
 To provide a reasonable access to users of short term funds to meet their requirements quickly,
adequately and at reasonable costs
Importance Of Money Market
• Development of trade and industry
• Development of capital markets
• Smooth functioning of commercial banks
• Effective central bank control
• Formulation of suitable monetary policy
• Non inflationary source of finance to government
Composition Of Money Market
• Call money market
• Commercial bills market
• Treasury bills
• Shot term loan market
Call Money Market
 It deals with short term lending of loans
 From one day to fourteen days
 It has good liquidity
 They loans are repayable on demand at the option of either lender or the borrower
 It is associated with the presence of stock exchange
 The interest varies from day to day and even from hour to hour
 It is very sensitive to changes in demand and supply of call loans
Commercial Bills Market
 It is a market for bills of exchange arising out of genuine trade transactions
 In case of sale, the trader may draw bills of exchange on the buyer
 The buyer accepts the bill promising to pay at a later date specified in the bill
 The seller did not wait for the due date, instead he can get immediate payment on discounting
the bill
Treasury Bills Market
  A treasury bill is a promissory note or a finance bill issued by the government
 It is a important instrument for short term borrowings of the government
 Treasury bills are issued to the public, banks and other financial institutions with a view to
raising resources for the central government to meet its short term financial needs
 Treasury bills have a maturity period of 91 days, 182 days, 364 days.
Short Term Loan Market
 It is a market where short term loans are given to corporate customers for meeting their
working capital requirement
 Commercial banks provide short term loans in the form of cash credit and overdraft
 Overdraft facility is given to business people
 Cash credit is given to industrialist

Difference Between Money Market And Capital Market

Money market Capital market

 It Is A Market For Short Term Lending Of  It Is A Market For Long Term Funds
Loans Exceeding A Period Of One Year
 The Market Supplies Funds For Financing  It Supplies Funds For Financing The
Business Operations, Working Capital , Fixed Capital Requirement , And Long
Short Term Requirements Term Finance
 They Deal With Bills Of Exchange ,  This Market Deals With Shares,
Treasury Bills, Commercial Papers, Debentures And Government Bonds
Certificate Of Deposits  Each share value is Rs 10, each debenture
 A treasury bill is of minimum of one lakh, value is Rs 100
certificate of deposit or commercial papers  Development banks and insurance
is for minimum of Rs 25 lakhs companies , stock exchange plays a
 The central bank and commercial banks dominant role in capital market
are the major institutions  They generally have secondary markets
 Money market instrument do not have  There Is A Formal Place Known As Stock
secondary markets Exchange
 There Is No Formal Place  Transactions Should Be Conducted Only
 Transactions Have To Be Conducted Through Authorised Dealers
Without The Help Of Brokers

Primary Market(New Issue)

The primary market deals with securities which are not previously available to the investing public i.e
securities which were not previously available to the investing public, and are offered to investing
public for the first time
Secondary market(old issue)/ stock exchange
It is the market for old securities which is already issued and listed in the stock exchange
These securities are purchased and sold continuously among the investors without the involvement of
the companies
Difference Between Primary Market And Secondary Market
 Primary market Secondary market
 It deals with new securities which are  It deals with old securities which is
issued for the first time already dealt in primary market
 It renders services to the borrowers and  It is done by stock exchanges, where
lenders at the time of any particular dealers meet regularly at a time announced
operation and services . And are taken up by the market
by banks , brokers and underwriters  It provides ready market for shares and
 It helps the company to raise funds to start securities
the new business or expansion and
diversification

Functions Of Primary Market Or New Issue

 To facilitate the transfer of resources from savers to the users
 The savers are individuals, commercial banks, insurance companies
 The users are public limited companies and the government
 Helps in mobilisation of funds from savers and transfers them to the borrowers
Advantages of primary market
 Avenue for investments
 Mobilisation of savings
 Channelizing savings for productive use
 Source of large supply of funds
 Rapid industrial growth
 Source for expansion and technological upgradation
Disadvantages Of Primary Market
 Possibility of deceiving investors
 No fixed norms for project appraisal
 Lack of post issue seriousness
 Ineffective role of merchant bankers
 Delay in the allotment process
 Poor mobilisation of savings
 Hesitency to invest on shares
Meaning Of Secondary Market
The market where existing securities are traded is referred to as secondary market
A stock exchange is defined as an association, organisation or body of individuals, whether
incorporated or not, established for the purpose of assisting , regulating, and controlling business In
buying, selling and dealing in securities
It constitutes a market where securities are issued by the central and state government , public bodies
and joint stock companies are traded.
Secondary Market - functions
 It is a market for secondary sale of securities
 These securities are traded in stock exchange
 The market consists of all stock exchanges recognised by Government of India.
 Bombay stock exchange was the first stock exchange in India.
Functions Of Stock Exchange
 Liquidity and marketability of securities
 Safety of funds
 Supply of long term fends
 Flow of capital to profitable ventures
 Motivation for improved performance
 Promotion of investment
 Reflection of business cycle
 Marketing of new issue
 Miscellaneous services
Foreign Exchange Market
It refers to the process of converting home currencies into foreign currencies
Foreign exchange is the system or process of converting one national currency into another, and
transferring money from one country to another
The market where foreign exchange transaction take place is called a foreign exchange market
Functions Of Foreign Exchange Market
 To transfer purchasing power
 To provide adequate credit facilities
 To cover foreign exchange risks

III FINANCIAL INTERMEDIARIES

It includes all kinds of organisations which intermediate and facilitate financial transactions of both
individuals and corporate customers
 Capital market intermediaries
 Money market intermediaries
Money Market Intermediaries
 They supply only short term funds to individuals and corporate customers
 They consists of commercial banks, cooperative banks etc.
Capital Market Intermediaries
 They provide long term funds to individuals and corporate customers
 They consists of term lending institutions like financial corporations and investing institutions
like LIC
Financial Intermediaries In India
 Development banks

Insurance companies

UTI

Agricultural financing
Capital market institutions
intermediaries
Govt. PF

IRBI

EXIM banks

NBFC

RBI

Cooperative banks

Money market
POSB
intermediaries

Government (treasury bills)

Commercial banks
 IV.Financial Instruments
Financial instruments refers to those documents which represent financial claims on assets
Eg: Bill Of Exchange, Promissory Note, Treasury Bill, Government Bonds, Deposit Receipts, Shares,
Debentures
Types Of Financial Instruments
 Primary or direct securities
 Secondary or indirect securities
Primary Securities
These securities are directly issued by the ultimate investors to the ultimate savers
Eg: share, debentures
Secondary Securities
These securities are issued by intermediaries called financial intermediaries to the ultimate savers
Eg: Unit Trust of India, mutual funds
They issue securities in the form of units to the public and money pooled is invested in the business
 Short term securities
 Medium term securities
 Long term securities
Short term securities: They mature within a period of one year
Bills of exchange, treasury bills
Medium term securities: They have a maturity period from one year to 5 years
Eg: debentures maturing within a period of 5 years
Long term securities : They have maturity period more than 5 years
Eg: Government bonds maturing after 10 years
Features Of Financial Instruments
 Easily transferred
 It has a ready market
 It possess liquidity
 It has a security value
 Some securities are exempted from tax
 There is uncertainty with regard to payment of principal, interest and dividend
 It facilitates future trading , to overcome risks due to price fluctuations, interest rate
fluctuations
 It involves less handling costs since the expenses involved in buying and selling these
securities are generally less
 The return on investments are equal to the risk taken.
 It can be short term , medium term or long term
V Financial Services
Financial services: Financial services are can be defined as facilities such as savings accounts,
checking accounts, confirming leasing and money transfer which are provided by banks and finance
companies
Financial services refers to the services offered by financial institutions like banks, credit companies,
insurance companies to the people.
Features of financial services
 Intangibility
 Customer oriented
 Perishable in nature
 Inseparable
 Direct sale
 Dynamism
 Intangibility- Financial services are intangible in nature these services are invisible and can
only be felt by customers.
 Customer oriented- Financial services are customer oriented and provides services based on
customer expectation.
 Perishable in nature- Financial services cannot be stored or reproduced. The services are
created and delivered to the target customers immediately.
 Inseparable- Financial services cannot be separated from production and supply activity takes
places simultaneously.
 Direct Sale- There are no intermediary or agents in providing financial services and it is given
directly to the customers.
 Dynamism- Financial services are non constant and keeps changing as per the requirements of
customers.
Importance of financial services
 Economic Growth
  Promotion of savings
 Capital Formation
 Provision of liquidity
 Creation of employment opportunities
 Classification of Financial services
I. Fund Based Financial Services
a. Leasing
b. Factoring
c. Venture Capital
d. Housing Finance
e. Hire purchase system
f. Discounting of Bills
II. Fee Based Financial Services
a. Portfolio Management
b. Corporate Counselling
c. Foreign Collaboration
d. Mergers and Acquisitions
e. Capital Restructuring

I. Fund Based Financial Services

i. Leasing : It is an agreement between lessor and lessee where lessor allows lessee to use his
property for a specified period of time for rent is called leasing.
ii. Factoring: Factoring is a service of financial nature involving the conversion of credit bill into
cash.
iii. Discounting of bills: It refers to selling of bills to financial institutions prior to its maturity
period for discount rate is called discounting of bills.
iv. Venture Capital: Venture capital is a way of financing by investor to companies for its start
up and promote projects, it is a kind of long term investments.
Features of Venture Capital
 It is a kind of long term investment
 It aims at capital appreciation
 It includes high degree of risk
 It is generally for small scale and medium scale industries
 It helps in achieving full employment balanced regional growth and development
 v. Hire Purchase System: It is a method of selling goods on credit where purchaser is allowed to
purchase goods and the amount will be paid on instalment basis and the title of the goods will
be transferred from seller to buyer at the end of financial settlement.
vi. Housing Finance: Housing finance is a finance facility provided by housing finance company
on acquisitions or construction of houses and development of land.
purpose of Housing Finance
 Construction: Housing finance is provided to construct houses including all the facilities.
 Extension of House It is provided for expanding the house.
Various Institutions Providing Housing Finance
 Industrial Development Bank of India(IDBI)
 Housing Development Finance Corporation(HDFC)
 ICICI
 LIC Housing Finance

II. Fee Based Financial Services

It refers to the services where fixed fees is paid and does not include commission charges.
1. Loan Syndication: It is the process of involving several different lenders in providing loan, it
refers to granting large amount of loan for undertaking infrastructure or power projects.
2. Portfolio Management: It is a method of managing and allocating funds on various best
alternatives to reduce the uncertainty.
Advantages of Portfolio Management
 It provides security for invested amount
 It provides guaranteed growth of returns
 It promotes capital growth
 It provides liquidity for investments
 It provides marketability for funds.
3. Corporate Counselling: It refers to set of activities performed to ensure the efficient running of
corporate enterprise and to improve its performance.
4. Foreign Collaboration: It is the collaboration of domestic company and foreign company which is
formed to undertake projects
Advantages of Foreign Collaboration
 Optimum utilisation of resources
 Technical assistance
 Economic development
 It improves the standard of living
 It improves balance of payment
  It helps in international relationship
5. Mergers and acquisitions: Mergers refers to combining of two or more companies to start a new
company
Acquisition refers to taking over the business activity of one or more company by another company.
Advantages
 It reduces competition
 It provides tax benefits for acquiring company
 It helps in efficient and effective management
 It reduces the cost of operation
 It provides scope for expansion of business
 It helps in diversification of business
Demerits
 It may lead to over capitalization of funds
 There are chances of managerial problems
 Mergers may create monopoly situation.
6. Capital restructuring
It is the process of reorganising the capital and to have proper composition of equity and debt.
Role of Financial System in Economic growth and Development
 Mobilisation Of Savings
 Promoting Investments
 Encouraging Investments In Financial Assets
 Allocating Savings On The Basis Of National Priorities
 Creating Credit
 Providing A Spectrum Of Financial Asset
 Financing Trade, Industry And Agriculture
 Encouraging Entrepreneurial Talents
 Providing Financial Services
 Developing Backward Areas
Weakness of Indian financial system
 Lack of coordination between different financial institutions
 Monopolistic market structures
 Dominance of development banks in industrial financing
 Inactive and erratic capital market
 Imprudent financial practice
Revision questions:
1. Give the meaning of financial system
2. State the features of financial system
3. State the functions of financial system
4. Define merchant bankers
5. Define venture capital
6. Define money market
7. Define capital market
8. Define liquidity
9. What is treasury bill
10. What is factoring
11. Define bank
12. What is leasing
13. Defects in Indian money market
14. Explain the various components of financial system
15. What are financial assets
16. Give the meaning of financial intermediaries
17. What is commercial paper
18. State the role of financial markets
19. What is money market? Explain its advantages and disadvantages
20. Give the meaning of primary market
21. Give the meaning of secondary market
22. What is capital market? discuss the importance of capital market
23. Who is a indigenous banker?
24. Explain the components of money market
25. Explain the difference between money market and capital market
26. Discuss the role and functions of capital market
27. Explain the role and weakness of Indian financial system.
 Chapter 2
FINANCIAL INSTITUTIONS
Financial Institution : Meaning
A financial institution is basically a term lending institution .It is generally called as development
bank. A development bank may be defined as a financial institutions concerned with providing all
types of financial assistance to business units in form of loans, underwriting, investment, guarantee
operations and promotional activities for economic development and industrial development.
Features
 It is an institution as well as intermediaries.
 It channelizes savings into investments.
 It creates financial assets such as deposits loans and securities.
 It includes banking and non banking financial institutions.
 It creates deposits which is regulated by the government and regulating authority.
 It includes both organised and unorganised institutions
Types of Banking Institutions
 Commercial Banks
 Investment banks or Industrial Banks
 Exchange banks
 Cooperative banks
 Land Development banks
 Savings banks
 Central banks
Types of Banking Institutions
 Commercial Banks: They mobilise deposits from the public which are repayable on demand
or an short notice, they provide working capital to business in the form of cash credit and
overdraft.
 Investment banks or Industrial Banks: They provide medium term and long term finance to
industries to meet there fixed capital requirement and also provides technical guidance for the
efficient management of industries.
 Exchange Banks: It specialises in financing of foreign trade, they provide necessary foreign
exchange required for settlement of transaction in foreign trade.
 Cooperative Banks: They provide term credit to agriculturalists, small farmers and small scale
industries. They accept all kinds of deposits and make loan to the members at the low rate of
interest.
 Land development Banks: these banks provide long term loans to agriculturalists for
purchasing tools and equipments and cattle and making permanent improvement on land. They
are know as agricultural and rural development banks.
 Savings bank: savings banks are specialized institutions to collect savings from the poor and
middle income people of the society. These banks primarily intended to encourage habits of
savings among people with small incomes. The govt runs savings bank and they are managed
by the postal department.
 Central Bank: The central bank acts as the leader of the money market, supervising,
controlling and regulating the activities of the commercial banks and other financial
institutions.
Non Banking Financial Companies(NBFC)
Non Banking Institutions are those which are not controlled by reserve bank of India. It includes
Insurance Companies, equipment leasing, Hire purchase, Mutual benefits financial companies and chit
fund companies.
Services/ Functions Non Banking Financial Companies
 Mobilisation of savings
 Provision of easy, simple and adequate credit
 It acts as a financial super market
 It channelizes funds for productive use
 It encourages the savings habit of public
 It increases the standard of living of people
 Promotes economic growth and development
 Investment advice.
Functions of Financial Institutions
Primary Functions
 Accepting deposits: this is the important function of financial institution (Commercial
bank and cooperative societies), they accept deposits from public and thus encourage
savings among public.
 Providing commercial loans: Deposits accepted from public are used for commercial
lending operations in the form of loans, cash credit and overdraft facility.
 Providing real estate loans: Banks provide loans to real estate industries to purchase sites,
construction.
 Providing mortgage loans: Financial Institutions provides loan to the people on mortgage
of properties and other collateral securities.
 Issuing of share certificates: Shares are issued by the companies to raise capital, financial
institutions undertake the job of issuing share certificates of any established corporate
towards share holders.
2. Secondary Functions:
Financial institutions acts as an intermediary/AGENT: It acts as an intermediary between the
saving community and industrialists.
 As a trustee, Bailee , lessor ETC
TYPES OF FINANCIAL INSTITUTIONS
 TYPES OF FINANCIAL INSTITUTIONS
 TERM LENDING INSTITUTION:
1. IFCI : Industrial Financial Corporation of India
2. IDBI : Industrial development bank of India
3. ICICI : Industrial credit and investment corporation of india
4. IIBI : Industrial investment bank of India
5. EXIM : Export and Import banks
 REFINANCING INSTITUTION
1. NABARD : National Bank for agriculture and Rural Development
2. SIDBI : Small Industrial Development Bank of India
3. NHB : National Housing Board
 INVESTMENT INSTITUTIONS
1. LIC : Life Insurance Corporation
2. GIC : General Insurance Corporation
3. UTI : Unit trust of India
 STATE LEVEL INSTITUTIONS
1. SFC : State Financial Corporation
2. SIDCO : Small industrial Development Corporation

TERM LENDING INSTITUTION:

1. INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

 It was established on 1st July 1964
 Its head office is in Mumbai
 It is among 26 commercial bank
 It has 1000 branches including one overseas bank in Dubai
Role of IDBI
 It helps in planning, promoting and developing industries for industrial development.
 It provides technical and administrative assistance for promotion, management or
expansion of industry.
 It undertakes market and investment research and conducts survey which contributes to the
development of industries
Functions of IDBI
 To grant loans and advances to other financial institutions by way of refinancing of loan
which is repayable within 25 years.
 To underwrite and to subscribe shares, debentures of industrial concern
 To discount or rediscount bills of industrial concern.
  To provide technical, legal, marketing and administrative assistance to any industrial
concern
 Assistance to small scale industries
 Promotion and development of entrepreneurs
2. INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)
The Industrial Credit and Investment Corporation of India was founded by the Government of
India, World Bank and representatives of the Indian Private Industry on January 1955.
Objectives of ICICI
 To stimulate the promotion of new industries
 To assist in the creation, expansion and modernization of Private concerns.
 To encourage Private ownership
 To furnish technical and managerial aid so as to increase production and employment
opportunities.
Functions of ICICI
 It provides long term and medium term loans in rupees and other foreign currency
 Underwriting new issues of shares and debentures
3.INDUSTRIAL FINANCE CORPORATION OF INDIA(IFCI)
Established on 1st July 1948
It provides medium and long term credit to industrial concerns.
Objectives
 To subscribe, underwrite and sell shares, debentures and bonds.
 To carry on business of leasing and hire purchase.
 To undertake activities pertaining to warehousing, factoring, custodial service etc.
 To set up investment company.
 To deal transact, buy and sell foreign currencies as an authorised dealer.
 It provides finance for hydro power projects & thermal power projects.
 It provides corporate advisory services
Functions
 For setting up a new industrial undertaking
 For expansion and diversification of industrial undertaking
 For meeting the working capital requirement of industrial concern.
4. INDUSTRIAL INVESTMENT BANK OF INDIA (IIBI)
Set up in the year 1971
 Grants loans and advances to industrial concerns
 To underwrite shares, bonds and debentures
 To guarantee loans and deferred payment
 To act as an agent of central and state government and other financial institutions.
5. EXIM Bank (Export & Import Bank)
 Established in the year 1982
 Its headquarters is in Mumbai
 It is established to finance Export and Import activities
Objectives/Functions of EXIM Bank
  Financing of export and import of goods and services.
 Financing of joint ventures in foreign countries
 Financing of export and import of machinery and equipment on lease basis.
 Undertaking merchant banking function
 Providing technical, administrative and financial assistance in connection with export or
import.
 To pay specific attention to export of capital goods
 To be responsive to export problems of Indian exporters and pursue policy resolutions.
Role of EXIM Bank
 Export Credits
 For Indian Companies
 For Commercial Banks
 For overseas Bank
 Finance for EOU(Export Oriented Units)
 Term Finance
 Working capital Finance
a. Export Credit
Export credit are provided to Indian companies which are executing contracts and business in other
foreign countries
Export Credit for Indian Companies include
 Preshipment credit
 Suppliers credit
Credit for Commercial Banks includes
 Export bills rediscounting
 Refinance of credit
Export credit facility for overseas entity includes:
 Buyers Credit
 Relending facility for foreign banks
b. Export Oriented Units(EOU)
It refers to providing loans and advance to domestic based products produced in home country.
Term finance for Exporting Companies include
Project finance
Equipment finance
Import of technology
Working Capital Finance for Exporting Companies include:
 Loans for less than 2 years
 Export bills discounting
 Export packing credit

REFINANCE INSTITUTIONS
NATIONAL BANK OF AGRICULTURAL AND RURAL DEVELOPMENT (NABARD)
 It was established in the year 12th July 1982
It is the apex development bank of India
Objectives
 It helps in formulating polices, planning operational aspects in the field of agriculture,
cottage and village industries and encourages cattle breeding and poultry farming
 The bank provides institutional credit such as short term and long term loans for promotion
of activities in rural areas.
 The bank provides direct lending to other institutions as it is approved by central
government.
2. Small Industrial Development Bank of India(SIDBI)
Established on April 2nd 1990
Objective/Functions
 It provides loans and advances to small scale units.
 It discounts and rediscounts bills arising from sale of any asset manufactured by small scale
units.
 It provides services like factoring, leasing to small scale units.
 It provides financial support to small scale industries in providing raw materials and
marketing the products to Small Scale Industries.
 it provides finance for technological up gradation and modernisation of existing units.
3. National Housing Board(NHB)
It was established on July 8 1998
Its headquarters is in New Delhi
Objectives of NHB
 To promote the sound healthy and cost effective housing finance which focuses on all
segments of population
 To make housing credit more affordable and cheaper.
 To encourage purchase of land and construction of house to upgrade the housing sector of
the country
INVESTMENT INSTITUTIONS
LIFE INSURANCE CORPORATION (LIC)
Came into existence on 1st September, 1956
Its headquarters is at Mumbai.
Functions of LIC
 Spread Life Insurance widely and in particular to the rural areas and to the socially and
economically backward classes with a view to reaching all insurable persons in the country
and providing them adequate financial cover against death at a reasonable cost.
 To meet the various life insurance needs of community that would arise in the changing
social and economic environment.
 Maximize mobilization of people’s savings by making insurance linked savings adequately
attractive.
 Conduct business with utmost economy and with the full realization that the money
belongs to the policy holders.
 To act as trustees of the insured public in their individual and collective capacities.
  To lend money upon the security of any immovable property.
2. GENERAL INSURANCE CORPORATION
 Established on November 1972.
 Its head quarters is at Mumbai
 The role of GIC is to set policies to influence and manage the General Insurance Industry
 It control over other companies which deals in providing Insurance for goods and services.
UNIT TRUST OF INDIA(UTI)
The Unit Trust of India was established in 1964 as a public sector financial institution by the
Government of India.
Functions/Objectives
 To encourage and pool the savings of the middle and low income groups
 To sell National Saving Certificates (NSC) to investors in different parts of the country.
 Investing the sale proceeds of the units in the corporate securities.
 Grants loans and advances.
 Provide merchant banking and investment advisory service.
 Invest in any security floated by Central Government, RBI or foreign bank.
 Buy or sell or deal in foreign exchange dealing.
STATE LEVEL INSTITUTIONS
STATE FINANCIAL CORPORATIONS
Established in the year 1948
Functions:
 To meet the financial requirements of small and medium scale industries.
 To provide incentives to new industries
 Granting of loans or advances to industrial concerns, repayable within a period of not
exceeding 20 years.
 Underwriting the issues of stock, shares bonds or debentures by industrial concerns.
 It pays payments due from any industrial concern in connection with its purchase of capital
goods within India.
2. STATE INDUSTRIAL DEVELOPMENT CORPORATION (SIDCO)
Established on 29th April 1960
Functions
 Formation of Industrial Estate: SIDCO is constructing industrial work sheds with all
infrastructural facilities in selective locations.
 Marketing Assistance: SIDCO participates in the tenders floated by government
departments on behalf of small scale units and obtain orders for them. It also arranges
buyer seller meet so that the government department will aware of the SSI products
 Hire Purchase and Equipment Leasing Scheme: Under this scheme, SIDCO renders a
package assistance to the allottees of sheds at Industrial Estates for the supply of
machinery and equipment under hire purchase and on lease.
 Export House: SIDCO has been recognised as Export House. It identifies potential
industrial units supplying export worthy products and prospective buyers of the products
abroad.
MUTUAL FUNDS
A Mutual Fund is a trust that pools savings of public who share a common financial goal, the money
collected from public is invested on capital market instruments such as shares, debentures and
securities.
Or
It is an investment vehicle that is made up of funds collected from public for the purpose of investing
on securities such as stocks, bonds & other similar assets.
Types/Classification of Mutual Funds
1. Classification on the basis of Operations:
Open ended Scheme: open ended scheme is that whose subscription is open throughout the year
with no definite closing period.
Closing ended Scheme: The Subscription of these scheme is open only for a specified period of
time, investors can invest in this scheme only during that time.
Interval Scheme: It is the combination of open ended and closed ended schemes, subscription is
open during pre determined intervals.
2. Classification on the basis of Investment:
Income Schemes: The aim of this scheme is to provide regular income to the investors, investors
generally invest on fixed income securities such as bonds and debentures.
Growth Scheme: To achieve capital appreciation is the objective of this scheme. Investments is
made in growth oriented securities like equity shares.
Balanced Scheme: This scheme is the combination of growth scheme and income scheme,
investors invest their earnings both in equity and fixed income securities.
Money Market Scheme: The aim of this scheme is to provide easy liquidity for funds and
generally invest on Short term instruments such as treasury bills, certificate of deposits, commercial
papers etc.
3. Other Schemes:
Tax saving scheme: This scheme offers tax rebates and provides tax exemption under specific
provisions of Indian Income tax law.
Sector Scheme: under this scheme the investors invest their money only in one particular sector or
group of industries.
Advantages of Mutual Funds
 It provides good rate of returns
 It is less expensive when compared to directly investing in capital market
 It provides liquidity as per the convenience of investors.
 The information about security value is transparency.
 It is well regulated by SEBI
 Promoting Industrial Development of the Country.
Limitations of Mutual Funds
 There is no guarantee
 Greater management risk
 Fluctuating returns
 Political risk
 Misleading advertisements.
 Chapter 3
COMMERCIAL BANKS
Meaning of banks
A bank is a financial institution which accepts deposits from public and lends money to the
required individuals and other institutions
Features of banks
 Accepting various types of deposits (S.B, C.A, F.A AND R.D)
 Lending money to the he needy customers
 A financial institution which transacts with money and money oriented transactions
 An intermediary between depositors and the needy group
 It channelizes the deposits into lending, directly or through capital markets
 Acts as a payment age
agents to customers
 Paying cheques drawn by customer bank and collecting cheques deposited to customers
account
 Enables customer payments through automated clearance house and automated teller
machines
COMMERCIAL BANKS
A commercial bank is also called as bus
business
iness banks, it is a type of financial institution and
intermediary that lends money and provides transactional, saving and money market accounts and
accepts time deposits
Definition
According to Indian banking company act 1949 :” a banking company means any company which
transacts the business of banking , banking means accepting deposits for the purpose of lending
money to public
Role of commercial banks
 Banks promote capital formation
 Investment in new enterprises
 Promotion of trade and industry
 Development
lopment of agriculture
 Balanced development of different regions
 Influencing economic activity
 Implementation of monetary policy
 Monitors the economy
 Export promotion cells
Structure of commercial banks

COMMERCIAL
BANKS

NON SCHEDULED
SCHEDULED BANKS BANKS

PUBLIC SECTOR PRIVATE FOREIGN

BANKS SECTOR BANKS BANKS
Scheduled banks
A scheduled bank is one which is registered in the second schedule of the reserve bank of India act
of 1934
 The bank must be carrying on a business in india
 Bank should have a paid up capital of RS 5 lakhs
Public sector banks
 These banks are those in which majority of shares are held by the government
 Eg: SBI, SYNDICATE BANK, CANARA BANK ETC.
Private sector banks
 These banks are those in which majority of the share holders are private individuals
 Eg: ICICI BANK, HDFC, AXIS
Foreign Banks
 These are the banks with head office outside the country
 Eg: standard chartered bank, bank of America, bank of Tokyo etc
Non scheduled banks
These banks are not included in the second schedule of the reserve bank of India act of 1934
Functions of commercial banks

1. Acceptance Of Deposits
 Current deposits
 Savings deposits
 Fixed deposits
 Recurring deposits

Accepting deposits is one of the primary functions of commercial banks. Banks receives
deposits from individuals, house hold and corporate and non corporate customers. Deposits
serve as a major source of funds to the commercial banks
2. Creation of credit:
Credit creation is an important function of commercial banks. They create credit for the
purpose of lending to all types of customers. When a commercial banks advances loan to its
customers, liquid cash will not be lent. Instead, it opens an account in the name of the
borrowers’ name and credits his account with the amount of loan.
3. Lending Of Funds
The basic purpose of commercial banking is to do the business of lending. Money received by
way of deposits should not be kept idle. Banks earn income in the form of interest through
granting loans and advances of various kinds

 Loan: in the case of loan , the banker advances a lumpsum for a certain period at an agreed
rate of interest. Interest is charged on the money lent
 Cash credit: A cash credit is an agreement by which the customer is allowed to borrow
money upto a certain limit. This is a permanent arrangement and the customer need not
draw the sanctioned amount at once, but can withdraw when ever needed.
 Overdraft : Overdraft Is an agreement between a banker and his customer by which the
customer is allowed to withdraw over and above his credit balance in the current account
upto an agreed limit. This is only a temporary credit
 Bills discounted: Banks grant advances to their customers by discounting of exchange . the
amount deducting the interest from the amount of the instrument is credited in the account
of the customer
4. Use of cheque system:
Cheque is a negotiable instrument which can be transferred from one person to another person

5. Remittances of funds:
Bank helps the customers in transferring of funds from one place to another . It includes:
REMITTANCE OF FUNDS
 Demand draft
 Mail transfer
 Telegraphic transfer
 Electronic transfer
AGENCY FUNCTIONS:
 Payment and collection function
 Purchase and sale of securities
 Acting on executor, administrator and trustee
 Acting as attorney
GENERAL UTILITY FUNCTION
 Safe custody function
 Issue of letter of credit
 Merchant banking
 Foreign exchange function
 Leasing
 Factoring
 Housing finance
 Underwriting of shares
 Tax consultancy
 Credit cards
 Teller system
 Cash reserve ratio
Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers, which
commercial banks have to hold as reserves with the central bank (RBI).
Present CRR is 3%
Statutory liquidity ratio
Statutory liquidity ratio. Statutory liquidity ratio (SLR) is the Indian government term for reserve
requirement that the commercial banks in India require to maintain in the form of gold,
government approved securities before providing credit to the customers
Present SLR is 21.5%
Bank rate policy
Bank Rate is the rate at which central bank of the country (in India it is RBI) allows finance to
commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any
upward revision in Bank Rate by central bank is an indication that banks should also increase
deposit rates as well as Base Rate / Benchmark Prime Lending Rate. Thus any revision in the
Bank rate indicates that it is likely that interest rates on your deposits are likely to either go up or
go down, and it can also indicate an increase or decrease in your EMI.
Narasimhan committee
 The First Narasimhan Committee Was Appointed By Man Mohan Singh As Indias Finance
Ministers In The Year 1991
 The Second Narasimhan Committee Was Appointed By P Chidambaran In The Year 1997
NARASIMHAN COMMITTEE REPORT
 To Study All Aspects Relating To The Structure, Organisation , Functions And Procedures
Of The Financial System
 To Recommend Improvements In Their Efficiency And Productivity
 To Reform The Indian Banking Sector
Objective of the committee
 Higher Rates Of Cash Reserve Ratio And Statutory Liquidity Ratio
 Direct Credit Programs
 Political And Administrative Interference
 Subsidizing Of Credit
 Mounting Expenditures Of Banks
Narasimhan Committee Report 1991
It was set up in order to study the problems of the indian financial system and to suggest some
recommendations for improvement in the efficiency and productivity of the financial system
Objectives of reforms
 To increase the allocation and efficiency of credit
 To improve the efficiency and effectiveness of the banking system with special reference to
economy of operations accountability and profitability
 To provide greater opportunity into banking system so as to make the banks respond more
effectively in the emerging needs of the economy
 To ensure rationalisation in the interest rates structure by replacing the administered system
of interest rates
  To build a financial infrastructure relating to supervision, audit, technology and legal
matters
 To develop competitive, diversified and transparent banking system
Recommendations of Narasimhan committee I
 The RBI should be the only agency to regulate the banking system in india, ministy of
finance should not interfere in the banking affairs
 The public sector banks should function as free and autonomous institution without the
interference of head office
 The interest rates shall be determined by the market forces and there should be complete
deregulation of interest rates
There should be 4 tier hierarchy in the banking system
 3-4 banks international banks
 8-10 national banks
 Local banks confining their operation to specific regions only
 Rural banks confining operations to rural areas only
Narasimhan committee II
 To wind up unhealthy banks and merge with the weak ones
 Banks with high non performing assets should take up only riskless business
 Private banks should be permitted to enter into the banking sector
 Banks should introduce effective risk management techniques: to overcome credit risks,
interest risks, market risks and operational risks
 Capital adequacy ratio should be enhanced to improve their financial strength
 Asset reconstruction fund should be set up to take over the bad debts of banks at a discount
 Banks are directed to bring down NPA to 3%
 RBI act, SEBI act and other banking regulation act should be updated to achieve the
current needs of the banking industry
 The bank should achieve 8% capital adequacy ratio
 The bank licensing should be abolished
 The priority sector should be redefined to include only weaker sections of the society
 Non banking financial companies lending activities should be integrated with the financial
system
Investment policy of commercial banks
The main aim of any bank is to earn profits, the capacity of a bank to earn profits depends upon its
investment policy
Investment policy of commercial banks
 Liquidity
 Profitability
 Safety for security
 Diversity
 Ready to sale securities
 Tax exemption of investments
Liquidity
 It refers to the ability of a bank to honour the claims of the depositors
 It is the ability of the bank to convert its non cash assets into cash
 It also means the ability of the bank to convert its non cash assets into cash easily without
any loss
Profitability
Bank has to earn profits to earn income to pay salaries to the staff , interest to the depositor,
dividend to the share holders and to meet day to day expenditure, it includes money at call, bills
discounted, loans and advances etc
Safety or security
It takes care of safety of its funds, and for smooth working condition, it includes credibility,
capacity and collateral security of the borrower
Loans and investment made by the bank should be adequately secured, so the bank always insist
on security by the borrower
Saleability of securities
The bank insist on investing funds on those securities which can be easily marketed purchased,
sold at the time of emergencies
Stability in the value of investment
The banks should invest its funds in those securities which are more or less stable and not on those
securities which has high variation and subject to frequent variations
Principles of tax exemption of investments
The banks should invest on those securities which are exempted from income and other taxes
Profitability of banks
The bank should earn profits to meet the following expenses:
 Cost of running the banks
 To pay interest on deposits
 The income to a bank is earned from:
 The receipt from an asset
 Variable cost incurred in owning the assets
 The cost of acquiring the assets
Causes for low profitability of Banks
 Undue branch expansion without considering costs and returns
 Mounting undues and rising bad debts
 Granting loans at concessional rate
 Widespread small loans
 Lending to sick industries
 Merger of small banks with the big ones
 Low capital asset ratio
 Deregulation of interest rates
 Competition from private banks
 High cost of operation
Recent developments to improve profitability
 Managing assets portfolio in a profitable way
 Diversify fee based and fund based activity
 Providing mutual funds, factoring and forfeiting services
 Adopting assets and liability managing techniques
 Encouraging retail banking as against wholesale banking
 Maintain capital adequacy ratio
 Supporting week public sector banks
 Adopting new technology and providing other services