Ifs Sem Iv Notes
Ifs Sem Iv Notes
Ifs Sem Iv Notes
Serial Modules/Units
No.
1 MONEY MARKET
Components of organized money market – Call and Notice Market, Treasury Bills
Market, Commercial Bills Market, Market for Certificate of Deposits, Market for
Commercial Papers, Discount Market and Market for Collateralized Borrowing and
Lending Obligations - Features of Indian Money Market-
Reforms in Indian money market.
2 CAPITAL MARKET & FOREIGN EXCHANGE MARKET
Capital Market: Structure of the Indian Capital Market –Recent Developments in the
Primary Market and the Secondary Market - Overview of Debt Market in India – Role
of SEBI - Foreign Exchange Market: components and functions.
4 FINANCIAL SERVICES
Merchant Banking-Functions & Role, Credit Rating-Concept & Types, Functions &
Limitations, Leasing Companies, Venture Capital Funds, Micro Finance.
QUESTION PAPER PATTERN Semester IV
Time: 2 .5 Hours
A) Explain the following Concepts (Any Five from Eight) (Two from each module) (10 Marks)
B) Multiple Choice question (Ten questions at least Two from each Module) (10 Marks)
It is a market for short-term loans in the sense that it provides money for working capital or
circulatory capital.
Most important short-term instruments with different degrees of maturity that are used in the
money market often are: inter-bank call money, short-notice deposits, Treasury Bills of 91 days
and 364 days, commercial bills, certificate of deposits and commercial paper.
A well-developed money market is essential for the efficient functioning of a central bank.
Money market is an institution through which surplus funds move to the deficit areas so that
temporary liquidity crisis can be tackled. Money market enables inter-bank transactions of
short-term funds. A well-knit money market acts as a ‘barometer’ for central banking
operations. It enables the central bank to implement its monetary policy efficiently.
In the absence of a well-coordinated banking system and other constituents of money market,
the central bank may not be able to achieve its desired goals. Above all, government deficits
are financed in a non-inflationary way through the money market institutions. Thus, the
existence of a well-developed money market is essential for an economy.
A money market is one where money is bought and sold. Technically, a money market is one
where money is borrowed and lent. It deals in borrowing and lending of short- term funds. In
the money market, the short- term funds of banking institutions and individuals are bid by
borrowers and the Government.
The main building blocks of money market are:
(i) Central bank,
India’s short-term credit market or money market has, invariably, a dichotomy. It consists of
two sectors: (i) organised sector comprising the Reserve Bank of India and commercial banks,
and (ii) unorganised sector having an indigenous stint. The organised market comprises the
RBI, the State Bank of India, commercial banks, the Life Insurance Corporation of India, the
General Insurance Corporation of India, and the Unit Trust of India.
These are the organised components of money market since the functions and activities of these
institutions are systematically coordinated by the RBI and the Government. Also, cooperative
banks fall in this category. In India, we have three-tier cooperative credit structure: State
cooperative banks, District or Central cooperative banks, and primary credit societies. Except
the last one, the other two types of cooperative banks lie in the organised compartment of the
money market.
The organised sector of the Indian money market can be divided into sub-markets:
(i) Call Money Market:
The call money market—an important sub-market of India’s money market is the market for
very short- term funds such as overnight call money and notice money (14 days’) known as
‘money at call’. The rate at which the funds are borrowed in this market are called ‘call money
rate’. Such rate is market-determined—influenced by demand for and supply of short-term
funds.
The unorganised market is largely made up of indigenous bankers and non-bank financial
intermediaries like chit funds, nidhis, etc. It is unorganised since these institutions are not
systematically coordinated by the RBI. Like commercial banks, these financial institutions are
not subject to reserve requirements. Nor do these institutions strictly depend on the RBI or
banks for financial accommodation. Different components of money market have been shown
in a treelike diagram (Fig. 8.1).
3. Characteristics of India’s Money Market:
The Indian money market is peculiar. It has several important features:
1. Dichotomised:
In the first place, the Indian money market has invariably a dichotomy—commercial banking
developed on Western or European lines, and an unorganised sector doing business on
traditional lines. However, these two sectors are loosely connected to each other.
Every sector conducts its business independently having different style of functioning. Over
the years, the importance of the unorganised sector of the Indian money market has been
shrinking. Even then its share in providing rural finance is still not unimportant.
2. Scattered:
Secondly, India’s money market is scattered. The two important money market centres in India
are in Kolkata and Mumbai. These two markets are dubbed National Money Market. However,
Delhi and Ahmedabad are coming to the ambit of the National Money Market. The National
Money Markets are related to the local money markets.
However, this canard against commercial banks in the present situation is not justified.
Particularly after nationalisation, banking system in India has gained enough strength. It is now
one of the disciplined sectors of the money market. One has enough reason to be sceptic regard-
ing the RBI’s control and monitoring over the organised commercial banking sector. Because
of the absence of an effective control of the
RBI, the country experienced the two infamous banking scams one was Harshad Mehta Scam
of 1992 and the other was the Ketan Parekh Scam in 2002.
These seasonal fluctuations in the rates of interest create uncertainty in the money market.
However, the RBI being the watchdog of the country’s monetary situation controls such
fluctuations in the market rate of interest successfully.
Obviously, these sectors of the money market are not within the ambit of the RBI’s direction
and control. On the other hand, the organised components of the money market can never
remain isolated from the RBI’s control and guidance. But the RBI has no control over the
quality and composition of credit allocated by the unorganised components of the money
market.
As a result, the RBI’s monetary policy or the weapons of credit control—tend to become less
effective. For instance, the RBI occasionally employs its credit control instruments to check
inflation (or deflation). Truly speaking, commercial banks are in the shackles of regulatory
processes of the RBI.
On the other hand, indigenous bankers are free from these control instruments. As a result, the
objective of controlling inflation or deflation gets frustrated. Above all, these institutions are
important providers of black money in the economy. But their behaviour virtually remains
unchecked.
However, with the passage of time, the organised sector of the money market has been
developed by the RBI. It has developed a bill market in India. Consequently, we notice the
contraction of businesses of unorganised sector of the money market. Still then, this sector
occupies an important place. Hence the necessity of integration.
The eventual integration of the organised and unorganised sectors will make the money market
sensitive and responsive to the monetary policy. Once integration is made, the RBI’s control,
regulation, directive and guidance will touch every facet of the money market. Let us hope for
the advent of a developed money market in India under the able guidance of
4. Constituents of the Indian Money Market:
It has been said that the Indian money market is dichotomised. There exists both organised and
unorganised components of money market. As far as the money market is concerned, the
Reserve Bank of India lies at the top. In addition, we have Indian joint stock banks— scheduled
and non-scheduled banks. Commercial banks not included in the Second Schedule of the RBI
Act, 1934, are called non- scheduled banks.
Some cooperative banks are scheduled commercial banks but not all cooperative banks enjoy
the ‘scheduled’ status. At present (January 2009) the number of non- scheduled banks is 30.
The two most important scheduled commercial banks are commercial banks (both public and
private) and cooperative banks.
Transferability
Discount
A certificate of deposit can be issued at a discount on its face value. Furthermore, banks and
financial institutions can issue certificates of deposits on a floating rate basis. However, the
method of calculating the floating rate should be market-based.
Reporting
Banks' fortnightly return should include certificates of deposits as per Section 42 of the RBI
Act, 1934. Furthermore, banks and financial institutions should also report about certificates
of deposits under the Online Returns Filing System (ORFS).
Commercial Paper
Commercial paper is an unsecured, short period debt tool issued by a company, usually for
the finance and inventories and temporary liabilities. The maturities in this paper do not last
longer than 270 days. These papers are like a promissory note allotted at a huge cost and
exchangeable between the All-India Financial Institutions (FIs) and Primary Dealers (PDs).
Most of the commercial paper investors are from the banking sector, individuals, corporate
and incorporated companies, Non-Resident Indians (NRIs) and Foreign Institutional Investors
(FIIs), etc. However, FII can only invest according to the limit outlined by the Securities and
Exchange Board of India (SEBI)
In India, commercial paper is a short-term unsecured promissory note issued by the Primary
Dealers (PDs) and the All-India Financial Institutions (FIs) for a short period of 90 days to
364 days.
The registration of commercial papers should only be granted to companies having Rs.
5 cores and above net worth with excellent dividend payment record.
The market should follow the CAS discipline. The RBI should manage the paper
amount, entry of the market, and total quantum which can be upgraded in a year.
No limitation on the commercial paper market apart from the least size of the note.
However, the size of one issue and each lot should not be less than Rs. 1 crore and Rs.
5 lakhs respectively.
It should be eliminated from the provision of insecure advances in the state of banks.
The company using commercial paper should have minimum 5 cores as net worth, a
debt ratio maximum of 105, a debt servicing ratio closer to 2, current ratio minimum
1033, and should be recorded on the stock exchange.
The paper can be made in terms of interest or at a discount rate to face value.
It should not be compelled to stamp duty while issuing and transferring.
It is a short-term money market tool, including a promissory note and a set maturity.
It acts as an evidence certificate of unsecured debt.
It is subscribed at a discount rate and can be issued in an interest-bearing application.
The issuer guarantees the buyer to pay a fixed amount in future in terms of liquid cash
and no assets.
A company can directly issue the paper to investors, or it can be done through
banks/dealer banks.
Unsecured Commercial Papers – These are traditional papers and allotted without
any security.
Secured Commercial Papers – It is also known as Asset-Backed Commercial Papers
(ABCP) and assured by other financial assets.
Particular Amount
Solution:
Brokerage = 3% of ₹500,000 = ₹15,000
Net Sale Price = ₹490,000 – ₹15,000 = ₹475,000
Particular Amount
Yield 18.95%
Financial institutions often need liquidity or ready cash to meet their transactions.
Usually, the repo facilit y of the RBI gives one day loans to scheduled commercial
banks. Another mechanism is the Call Money Market where financial institutions
can avail loans from one day to fourteen days.
In the same way, quick money or short -term money can be obtained by financial
inst itutions from the Collateralized Borrowing and Lending Obligations Market.
Institutions participating in CBLO are entities who have either no access or restricted
access to the inter -bank call money market. Still, institutions active in the call money
market can participate in the CBLO market. Nationalized Banks, Private Banks,
Foreign Banks, Co-operative Banks, Insurance Companies, Mutual Funds, Primary
Dealers, Bank cum Primary Dealers, NBFC, Corporate, Provident/ Pension Funds
etc., are eligible for CBLO membership. These institutions have to avail a CBLO
membership to do activit ies in the market.
The CCIL provides the Dealing System through Indian Financial Network
(INFINET) and Negotiated Dealing System for participating in the market.
In the CBLO market, members can borrow or lend funds against the collateral of
eligible securities. Eligible securities are Central Government securities including
Treasury Bills, and such other securities as specified by the CCIL. Borrowers in
CBLO have to deposit the required amount of eligible securit ies with the CCIL. For
trading, the CCIL matches the borrowing and lending orders (order matching)
submitted by the members. Borrowers have to pay interest to the lenders in
accordance with the bid.
The Clearing Corporation of India Ltd. (CCIL) (CIN: U65990MH2001PLC131804) was set up
in April, 2001 to provide guaranteed clearing and settlement functions for transactions in
Money, G-Secs, Foreign Exchange and Derivative markets. The introduction of guaranteed
clearing and settlement led to significant improvement in the market efficiency, transparency,
liquidity and risk management/measurement practices in these market along with added
benefits like reduced settlement and operational risk, savings on settlement costs, etc. CCIL
also provides non-guaranteed settlement for Rupee interest rate derivatives and cross currency
transactions through the CLS Bank.
The CBLO works like a bond—the lender buys the CBLO and a borrower sells the money
market instrument with interest. The CBLO facilitates borrowing and lending for various
maturities, from overnight to a maximum of one year, in a fully collateralized environment.
The details of the CBLO include an obligation for the borrower to repay the debt at a specified
future date and an authority to the lender to receive the money on that future date. The lender
also has the option to transfer his authority to another person for value received.
Since the repayment of loans is guaranteed by the CCIL, all borrowings are fully
collateralized. The collateral provides a safeguard against default risk by the borrower or
lender’s failure to make funds available to the borrower. The required value of the collateral
must be deposited and held in the custody of the CCIL. After the deposit has been received,
the CCIL facilitates trades by matching borrowing and lending orders submitted by its
members.
Special Considerations
Types of financial institutions eligible for CBLO membership include insurance firms, mutual
funds, nationalized banks, private banks, pension funds, and private dealers. To borrow,
members must open a Constituent SGL (CSGL) account with the CCIL, which is used to
deposit the collateral.
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