Banking Anf Financial Institution Word File

Notes for NTA- UGC NET Commerce
Banking and Financial Institutions

Indian Financial System-
Historical Background-
The banking sector development can be divided into three phases:

Phase I: The Early Phase which lasted from 1770 to 1969
Phase II: The Nationalization Phase which lasted from 1969 to 1991
Phase III: The Liberalization or the Banking Sector Reforms Phase which
began in 1991 and continues to flourish till date.
Pre Independence Period (1786-1947)

The first bank of India was the “Bank of Hindustan”, established in 1770
and located in the then, Indian capital, Calcutta. However, this bank
failed to work and ceased operations in 1832.
During the Pre Independence period over 600 banks had been
registered in the country, but only a few managed to survive.
Following the path of Bank of Hindustan, various other banks were
established in India. They were:
• The General Bank of India (1786-1791)

• Oudh Commercial Bank (1881-1958)
• Bank of Bengal (1809)
• Bank of Bombay (1840)
• Bank of Madras (1843)
During the British rule in India, The East India Company had established
three banks: Bank of Bengal, Bank of Bombay and Bank of Madras and
called them the Presidential Banks. These three banks were later
Bushra Shazli
+918948156741
[email protected]
merged into one single bank in 1921, which was called the “Imperial
Bank of India.”
The Imperial Bank of India was later nationalized in 1955 and was
named The State Bank of India, which is currently the largest Public
sector Bank.
Bank Name Year of Establishment
Allahabad Bank 1865
Punjab National Bank 1894
Bank of India 1906
Central Bank of India 1911
Canara Bank 1906
Bank of Baroda 1908
If we talk of the reasons as to why many major banks failed to survive

during the pre-independence period, the following conclusions can be
drawn:
• Indian account holders had become fraud-prone

• Lack of machines and technology
• Human errors & time-consuming
• Fewer facilities
• Lack of proper management skills
Following the Pre-Independence period was the post-independence

period, which observed some significant changes in the banking
industry scenario and has till date developed a lot.
Post Independence Period (1947-1991)

Bushra Shazli
+918948156741
[email protected]
At the time, when India got independence, all the major banks of the
country were led privately which was a cause of concern as the people
belonging to rural areas were still dependent on money lenders for
financial assistance.
With an aim to solve this problem, the then Government decided to
nationalise the Banks. These banks were nationalised under the
Banking Regulation Act, 1949. Whereas, the Reserve Bank of India was
nationalised in 1949.
Candidates can check the list of Banking sector reforms and Acts at the
linked article.
Following it was the formation of State Bank of India in 1955 and other
14 banks were nationalised between the time duration of 1969 to 1991.
These were the banks whose national deposits were more than 50
crores.
Given below is the list of these 14 Banks nationalised in 1969:
1. Allahabad Bank
2. Bank of India
3. Bank of Baroda
4. Bank of Maharashtra
5. Central Bank of India
6. Canara Bank
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank
11. Syndicate Bank
12. Union Bank of India
13. United Bank
14. UCO Bank
Bushra Shazli
+918948156741
[email protected]
In the year 1980, another 6 banks were nationalised, taking the number
to 20 banks. These banks included:
1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Comm.
5. Punjab & Sind Bank
6. Vijaya Bank
Apart from the above mentioned 20 banks, there were seven

subsidiaries of SBI which were nationalised in 1959:
1. State Bank of Patiala

2. State Bank of Hyderabad
3. State Bank of Bikaner & Jaipur
4. State Bank of Mysore
5. State Bank of Travancore
6. State Bank of Saurashtra
7. State Bank of Indore
All these banks were later merged with the State Bank of India in 2017,
except for the State Bank of Saurashtra, which was merged in 2008 and
State Bank of Indore, which was merged in 2010.
Note: The Regional Rural Banks in India were established in the year
1975 for the development of rural areas in India. Candidates can get
the list of RRBs in India at the linked article.
Impact of Nationalisation
There were various reasons why the Government chose to nationalise
the banks. Given below is the impact of Nationalising Banks in India:
Bushra Shazli
+918948156741
[email protected]
• This lead to an increase in funds and thereby increasing the

economic condition of the country
• Increased Efficiency
• Helped in boosting the rural and agricultural sector of the country
• It opened up a major employment opportunity for the people
• The Government used profit gained by Banks for the betterment

of the people
• The competition was decreased, and work efficiency had
increased
This post Independence phase was the one that led to major
developments in the banking sector of India and also in the evolution of
the banking sector.
Liberalisation Period (1991-Till Date)

Once the banks were established in the country, regular monitoring and
regulations need to be followed to continue the profits provided by the
banking sector. The last phase or the ongoing phase of the banking
sector development plays a significant role.
To provide stability and profitability to the Nationalised Public sector
Banks, the Government decided to set up a committee under the
leadership of Shri. M Narasimham to manage the various reforms in the
Indian banking industry.
The biggest development was the introduction of Private sector banks
in India. RBI gave license to 10 Private sector banks to establish
themselves in the country. These banks included:
1. Global Trust Bank

2. ICICI Bank
3. HDFC Bank
4. Axis Bank
Bushra Shazli
+918948156741
[email protected]
5. Bank of Punjab
6. IndusInd Bank
7. Centurion Bank
8. IDBI Bank
9. Times Bank
10. Development Credit Bank
The other measures taken include:
• Setting up of branches of the various Foreign Banks in India

• No more nationalisation of Banks could be done
• The committee announced that RBI and Government would treat

both public and private sector banks equally
• Any Foreign Bank could start joint ventures with Indian Banks
• Payments banks were introduced with the development in the

field of banking and technology
• Small Finance Banks were allowed to set their branches across
India
• A major part of Indian banking moved online with internet
banking and apps available for fund transfer
Thus, the history of banking in India shows that with time and the
needs of people, major developments have been done in the banking
sector with an aim to prosper it.
Some points to remember-
• The first bank of limited liability managed by Indians was Oudh
Commercial bank founded in 1881,
• Punjab National Bank was established in 1894
• Swadeshi Movement, which began in 1906, encouraged the

formation of number of commercial banks. Banking crisis during
Bushra Shazli
+918948156741
[email protected]
1913- 1917 and failure of 588 banks in various states during the
decade ended 1949 underlined the need for regulating and
controlling commercial banks.
• The Banking Companies Act was passed in February 1949, which

was subsequently amended to read as banking regulation Act,
1949. This Act provided the legal framework for regulation of the
banking system Act, 1949. This Act provided the legal framework
for regulation of the banking system by RBI.
• The largest bank- Imperial Bank of India was nationalized in 1955

and rechristened as State Bank of India, followed by formation of
its 7 Associate Banks in 1959.
• First bank in the world- The bank of Saint George Casa de san
1407 and established in 1770 and liquidated in 1829-32
• First Modern Bank in India- Bank of Calcutta in 1806.
• Three banks (The Bank of Bengal, The Bank of Bombay and the
Bank of Madras) were amalgamated into one by forming Imperial
Bank.
• Imperial Bank came in 1921, and it is the central bank till 1935 (
establishment of RBI.
• Imperial Bank of India Nationalized in 1955 as State Bank of India

after Independence.
In 1969 the nationalization of bank in India took place by PM Mrs

Indira Gandhi.
Bank-
Bushra Shazli
+918948156741
[email protected]
• A Bank is a licensed financial institution that acts as an

intermediary between the savers and the users of funds.
• It provides banking and other financial products and service to

their customer to source money via deposits and then channelizes
the same into lending activities such as providing loans and
advances.
• It denotes a financial institution dealing in money. A bank is an

institution that is prepared to accept deposit of money and repay
the same on demand.
Role Of Banking
Banks provide funds for business as well as personal needs of

individual. They play a significant role in the economy of a nation.
❖ It encourages saving habit amongst people and thereby makes

funds available for productive use.
❖ It acts as an intermediary between people having surplus money

an those requiring money for various business activities
❖ It facilitates business transaction through receipts and payment

by the cheques instead of currency.
❖ It helps in raising the standard of living of people in general by

providing loans for purchase of consumer durable goods, houses,
automobiles, etc.
❖ It provides loans and advances to businessmen for short term and

long term purposes.
Bushra Shazli
+918948156741
[email protected]
❖ It also facilitates import- export transaction.
Features of Bank
❖ Deals with money- Bank is a financial institution which deals with

other people’s money i.e./, money given by depositors.
❖ Individuals/ firm/ Company- A bank may be person, firm or a

company. A banking company means a company which is in the
business of banking.
❖ Acceptance of banking- A bank accepts money in the form of

deposit from the people which are usually repayable on demand
or after the expiry of a fixed maturity period. It gives safety to the
deposits of its customers and also acts as a custodian of funds for
them.
❖ Giving Advances- A bank lends out money in the form of loans

and advances to people who acquire it for different purposes.
❖ Payment and Withdrawal- A bank provides easy payment and

withdrawal facility to its customers in the form of cheques and
drafts and thus help to bring bank’s money in circulation.
❖ Profit and Service Orientation- A bank is a profit making

organization having service oriented approach. That is, it generate
profit by providing service.
❖ Ever Increasing Function- Banking is an evolutionary concept.

There is a continuous expansion and diversification as regards the
functions, services and activities of a bank.
Bushra Shazli
+918948156741
[email protected]
❖ Connecting Link- A bank acts as a connecting link between

borrowers and lenders of money. Banks collect money from those
who have surplus money and give the same to those who are in
need of it.
❖ Name identity- A banking company under Banking Regulation Act,

1949 is permitted to add the word “bank” to its name to enable
people to know that it is dealing in money and having all the
above features.
Functions of Banking
The main of Banking may be classified into two broad categories-
➢ Primary Function
➢ Secondary Function
Primary Function-
The primary function performed by an commercial bank includes:
a) Accepting deposit
b) Making advances
c) Credit Creation
a) Accepting deposit- One of the primary function of bank is to accept

the various kinds of deposits from it customers.
These include:
Bushra Shazli
+918948156741
[email protected]
• Saving Deposit, Recurring Account Deposits, Fixed Deposits, etc.,

all these Deposits earn interest on it for the customers and some
are payable after a certain period of time.
b) Making advances- The second primary functions of a bank is to

provide loans and advances of various forms to people who require
money.
It includes-
Overdraft facility, cash credit, bill discounting, etc., the usual practice is
to provide money against certain securities.
c) Credit Creation- The third but one of the most significant functions of
a commercial bank is create credit. While sanctioning a loan a bank
does not provide cash to the borrowers but instead it opens a deposit
account from where the borrower can withdraw the money.
Secondary Functions-
Besides the primary functions, banks also perform several secondary

functions.
a) Agency Function
b) Utility Function
Secondary Functions-
a) Agency Functions- These refers to functions of a bank wherein it acts

as the agent of the customer. These functions include:
❖ Collection and Clearing of cheques , dividends and interest

warrants.
Bushra Shazli
+918948156741
[email protected]
❖ Making payments of rent, insurance premium etc.
❖ Dealing in foreign exchange transaction
❖ Purchasing and selling securities.
❖ Acting as trusty, attorney, correspondence and executor
❖ Accepting tax proceeds and tax returns.
b) General Utility Functions- The general utility functions of a bank

include:
❖ Providing locker facility to customers
❖ Providing money transfer facility
❖ Issuing traveler's cheque
❖ Acting as referees
❖ Accepting various bills for payment eg- phone bills, gas bills, water
bills etc
❖ Providing merchant banking facility
❖ Providing various cards such as credit card, debit card, smart card,
etc.
Bushra Shazli
+918948156741
[email protected]
Types of Bank
• There are various type of Bank which operates in our country to

meet the financial requirements of different categories of people
engaged in agriculture, business, profession etc.,
• On the basis of functions, the banking institutions India may be

divided into the following types:
1- Central Bank (RBI, in India)( Discussed further in detail)
2- Commercial Bank
i) Public Sector Bank
ii) Private Sector Bank
iii) Foreign Bank
3- Development Bank
Bushra Shazli
+918948156741
[email protected]
4- Cooperative Bank
i) Primary Credit Societies
ii) Central Co-operative Banks
iii) State Co- operative Banks
5- Specialized bank ( EXIM Bank, SIDBI, NABARD) (Discussed further in

detail)
1- Central Bank-
• Central bank is a financial institution that is responsible for

overseeing the monetary system and policy of a nation or group
of nations, regulating its money supply, and setting interest rates.
Bushra Shazli
+918948156741
[email protected]
• Central banks enact monetary policy, by easing or tightening the

money supply and availability of credit, central banks seek to keep
a nation's economy on an even keel.
• A central bank sets requirements for the banking industry, such as

the amount of cash reserves banks must maintain vis-à-vis their
deposits.
• A central bank can be a lender of last resort to troubled financial

institutions and even governments.
• The Central Bank maintains record of Government revenue and

expenditure under various heads.
• It also advices the Government on monetary and credit policies

and decides on the interest rates for bank deposits and bank
loans.
• In addition, foreign exchange rates are also determined by the

Central Bank.
• Another important function of Central Bank is the issuance of

currency notes, regulating their circulation in the country by
different methods. No other bank than the Central Bank can issue
currency.
2- Commercial Bank- These banks are institutions that accept deposits

and grant short term loans and advances to their customers.
• In addition to giving short-term loans, commercial banks also give

medium- term and long – term loan to business enterprises.
Bushra Shazli
+918948156741
[email protected]
• They generally finance trade and commerce with short-term

loans. They charge high rate of interest from the borrowers but
pay much less rate of Interest to their depositors with the result
that the difference between the two rates of interest becomes
the main source of profit of the banks. Most of the Indian joint
stock Banks are Commercial Banks such as Punjab National Bank,
Allahabad Bank, Canara Bank, Andhra Bank, Bank of Baroda, etc.
Functions of Commercial Bank-
(A) Primary Functions:
1. It accepts deposits: A commercial bank accepts deposits in the

form of current, savings and fixed deposits. It collects the surplus
balances of the Individuals, firms and finances the temporary
needs of commercial transactions.
2. It gives loans and advances- The second major function of a

commercial bank is to give loans and advances particularly to
businessmen and entrepreneurs and thereby earn interest. This is, in
fact, the main source of income of the bank.
(B) Secondary Functions:
• Apart from the above-mentioned two primary (major) functions,

commercial banks perform the following secondary functions
also.
3. Discounting bills of exchange or bundles:
Bushra Shazli
+918948156741
[email protected]
• A bill of exchange represents a promise to pay a fixed amount of

money at a specific point of time in future. It can also be encashed
earlier through discounting process of a commercial bank.
4- Overdraft facility:
• An overdraft is an advance given by allowing a customer keeping

current account to overdraw his current account up to an agreed
limit. It is a facility to a depositor for overdrawing the amount
than the balance amount in his account.
5. Agency functions of the bank:
• The bank acts as an agent of its customers and gets commission

for performing agency functions as under:
(i) Transfer of funds:
• It provides facility for cheap and easy remittance of funds from

place-to-place through demand drafts, mail transfers, telegraphic
transfers, etc.
(ii) Collection of funds:
• It collects funds through cheques, bills, bundles and demand

drafts on behalf of its customers.
(iii) Payments of various items:
• It makes payment of taxes. Insurance premium, bills, etc. as per

the directions of its customers.
(iv) Purchase and sale of shares and securities:
Bushra Shazli
+918948156741
[email protected]
• It buys sells and keeps in safe custody securities and shares on

behalf of its customers.
Scheduled Banks and Non-scheduled Banks:
• Commercial banks are classified in two broad categories—

scheduled banks and non-scheduled banks.
• Scheduled banks are those banks which are included in Second

Schedule of Reserve Bank of India. A scheduled bank must have a
paid-up capital and reserves of at least Rs 5 lakh.
• RBI provides special facilities including credit to scheduled banks.

Some of important scheduled banks are State Bank of India and its
subsidiary banks, nationalized banks, foreign banks, etc.
a) A public bank is a bank, a financial institution, in which a state,

municipality, or public actors are the owners. It is an enterprise under
government control. Prominent among current public banking models
Bushra Shazli
+918948156741
[email protected]
are the Bank of North Dakota, the German public bank system, and
many nations’ postal bank systems.
• Public or 'state-owned' banks proliferated globally in the late 19th

and early 20th centuries as vital agents of industrialization in
capitalist and socialist countries alike; as late as 2012, state banks
still owned and controlled up to 25 per cent of total global
banking assets
b) Private banks are the banks owned by either the individual or a

general partner(s) with limited partner(s). Private banks are
not incorporated. In any such case, the creditors can look to both the
"entirety of the bank's assets" as well as the entirety of the sole-
proprietor's/general-partners' assets.
• These banks have a long tradition in Switzerland, dating back to at

least the Revocation of the Edict of Nantes (1685). Private banks
also have a long tradition in the UK where C. Hoare & Co. has
been in business since 1672.
Main Differences between Public and Private Sector Banks
1) Public sector banks exist for a long time now. They have a great
public image which creates trustworthiness. In return, these institutions
receive customer loyalty, which contributes to their broader customer
base.
• Contrary, the private sector banks now exist for a shorter period.
Thus, they have a lower customer base.
Bushra Shazli
+918948156741
[email protected]
2) With regards to interest rates policies, there is transparency in

public sector banks. However, the interest rates on savings for
customers are quite higher.
• For the private sector banks, there may be more hidden charges
on various operating systems. It explains why most people opt for
government banks.
• However, the banks in this category usually give lower customer

interests on savings.
3) Public sector banks usually have job security for its

employees. When individuals start working in such institutions, they do
not have to worry about being fired from a job due to specific issues.
• For private sector banks, there is usually constant performance

evaluation, which adds on to the constant worries regarding job
security.
• In the case where an individual fails to meet certain performance

levels, they may easily undergo retrenchment.
Non-scheduled Banks:
• The banks which are not included in Second Schedule of RBI are
known as non-scheduled banks. A non-scheduled bank has a paid-
up capital and reserves of less than Rs 5 lakh. Clearly, such banks
are small banks and their field of operation is also limited.
• A passing reference to some other types of commercial banks will

be informative.
c) Foreign Bank-
Bushra Shazli
+918948156741
[email protected]
• These banks are registered and have their headquarters in a

foreign country but operate their branches in our country.
• Some of the foreign country but operate their branches in our

country. Some of the foreign banks operating in our country are
Hong Kong and Shanghai Corporation (HSBC), CitiBank, American
Express Bank, Standard and Chartered Bank, etc., The number of
foreign banks operating in our country has increased since the
financial sector reforms of 1991.
3- Development Bank-
• Development banks are those which have been set up mainly to

provide infrastructure facilities for the industrial growth of the
country. They provide financial assistance for both public and
private sector industries.
Objectives of Development Banks
• The main objectives of the development banks are
1. To promote industrial growth,
2. To develop backward areas,
3. To create more employment opportunities,
4. To generate more exports and encourage import substitution,
5. To encourage modernization and improvement in technology,
Development Banks in India
Bushra Shazli
+918948156741
[email protected]
• Working capital requirements are provided by commercial banks,

indigenous bankers, co-operative banks, money lenders, etc. The
money market provides short-term funds which mean working
capital requirements.
• The long term requirements of business concerns are provided by

industrial banks, and the various long term lending institutions
which are created by government. In India these long term
lending institutions are collectively referred as development
banks. They are:
a) Industrial Finance Corporation of India (IFCI), 1948
b) Industrial Credit and Investment Corporation of India (ICICI), 1955
c) Industrial Development of Bank of India (IDBI), 1964
d) State Finance Corporation (SFC), 1951
e) Small Industries Development Bank of India (SIDBI), 1990
f) Export Import Bank (EXIM), (1982)
g) Small Industries Development Corporation (SIDCO)
h) National Bank for Agriculture and Rural Development (NABARD),

(1982)
In addition to these institutions, there are also

institutions such as Life Insurance Corporation of India, General
Insurance Corporation of India, National Housing Bank, Unit Trust of
India, etc., which are providing investment funds.
4- Co- operative Bank-

Bushra Shazli
+918948156741
[email protected]
• Co-operative banks are financial entities established on a co-

operative basis and belonging to their members. This means that
the customers of a co-operative bank are also its owners. These
banks provide a wide range of regular banking and financial
services. However, there are some points where they differ from
other banks.
• When a co-operative Society engages itself in banking business it

is called a Co- operative Bank.
• The society has to obtain a license from the RBI before starting
banking business.
• Any cooperative bank as a society is to function under the

overall supervision of the Registrar, Co-operative Societies of the
State.
• As regards banking business, the society must follow the

guidelines set and issued by the RBI
Types of Co- Operative Bank-
a) Primary Credit Societies-
• These are formed at the village or town level with borrower and
non- borrower members residing in one locality. The operations
of each society are restricted to a smart area so that the members
know each other and are able to watch over the activities of all
members to prevent frauds.
b) Central Co-operative banks-
Bushra Shazli
+918948156741
[email protected]
• These banks operative at the district level having some of the

primary credit societies belonging to the same district as their
members. These banks provide loans to their members ( primary
credit societies) and function as a link between the primary credit
societies and state Co-operative Banks.
c) State Co-operative Banks-
• These are the apex ( highest level) co-operative banks in all the
states of the country. They mobilize funds and help in its proper
channelization among various sectors. The money reaches the
individual borrowers from the state co-operative banks through
the central cooperative banks and primary credit societies.
5- Specialized Banks-
• There are some banks, which cater to the requirement and

provide overall support for setting up business in specific areas of
activity. EXIM bank, SIDBI and NABARD are the examples of such
bank. They engage themselves in some specific area or activity
and thus are called specialized banks. Let us know some about
them.
a) Export- Import Bank of India-
• Export-Import Bank of India (EXIM Bank) is a specialized financial

institution, wholly owned by Government of India, set up in 1982,
for financing, facilitating and promoting foreign trade of India.
Including the share capital of ` 1,300 crore received during the
year from Government of India, the paid up capital as on March
31, 2015, stood at ` 5,059 crore and the Net Worth stood at `
Bushra Shazli
+918948156741
[email protected]
9,902 crore. Profit after tax of the Bank for the year 2014-15
amounted to ` 726 crore.
• EXIM Bank extends Lines of Credit (LOCs) to overseas financial

institutions, regional development banks, sovereign governments
and other entities overseas, to enable buyers in those countries to
import developmental and infrastructure projects, equipments,
goods and services from India, on deferred credit terms.
• EXIM Bank has laid strong emphasis on enhancing project exports,

the funding options for which have been enhanced with
introduction of the Buyer's Credit-National Export Insurance
Account (BC-NEIA) program.
• The Bank facilitates two-way technology transfer by financing

import of technology into India, and investment abroad by Indian
companies for setting up joint ventures, subsidiaries or
undertaking overseas acquisitions. To promote hi-tech exports
from India, the Bank has a lending programme to finance research
and development (R&D) activities of export-oriented companies.
b) Small Industries Development Bank of India ( SIDBI)-
• If you to establish a small scale business unit or industry, loan on

easy terms can be available through SIDBI.
• It also finances modernization of small scale industrial unit, use of

new technology and market activities.
• The aim and focus SIDBI is to promote, finance and develop small-
scale industries.
Bushra Shazli
+918948156741
[email protected]
c) National Bank for Agricultural and Rural Development (NABARD)-
• It is a central or apex institution for financing agricultural and rural

sectors. If a person is engaged in agricultural or other activities
like handloom weaving, fishing, etc.
• NABARD can provide credit, both short-term and long-term,

through regional rural banks.
• It provides financial assistance, especially, to cooperative credit, in

the field of agriculture, small scale industries, cottage and village
industries handicrafts and allied economic activities in rural areas
through RRB’s.
Banking Products
1- Cheque-
• A cheque is a negotiable instrument instructing a financial

institution to pay specific currency from a specific account held in
the depositor’s held in the depositor’s name with that particular
financial institution.
• A Cheque is a document which orders a bank to pay a particular

amount of money from a person’s account to another individual’s
or company’s account in whose name the cheque has been made
or issued. The cheque is utilized to make safe, secure and
convenient payments. It serves as a secure option since hard
cash is not involved during the transfer process; hence the fear of
loss or theft is minimized.
• Essentials of a Cheque
Bushra Shazli
+918948156741
[email protected]
There are certain essentials related to a cheque which should be known

and understood before using this payment mode for money transfer.
Some of the important pointers related to a cheque are:
• A cheque is an unconditional order.
• A cheque is always drawn on a particular Bank.
• Signature on exchequer is a mandate and only by the maker.
• The amount is always a certain sum of moneyof one’s account.
• A cheque is always payable on demand.
• A cheque’s payment is always in cash.
• This cash amount is to be paid to the person mentioned there in,

or order, or the bearer.
Number of Parties involved with a Cheque
• Under the cheque mode of fund payment, there are three parties
which are involved for on-track movement of money through a
written paper source.
a) Drawer or Maker
• He/she is the customer or account holder who issues the cheque.
b) Drawee
• It is basically the bank on which the cheque is drawn and is called

the “Drawee”. Always remember that a cheque is always drawn
on a particular banker.
Bushra Shazli
+918948156741
[email protected]
c) Payee
• The individual who is named in the cheque for getting the

payment is known as the “Payee”. Interestingly, the drawer and
the payee can be the same individual in a particular case.
Types of Cheques
1. Bearer Cheque
• A bearer cheque is the one in which the payment is made to the

person bearing or carrying the cheque. These cheques are
transferable by delivery, that is, if you are carrying the cheque to
the bank, you can be issued the payment to. The banks need no
other authorisation from the issuer to be allowed to make the
payment.
• How can you identify a bearer cheque? You know it is a bearer

cheque when you see the words ‘or bearer’ printed on them.
2. Order Cheque
• In these cheques, the words ‘or bearer’ is cancelled. Such cheques

can only be issued to the person whose name is mentioned on the
cheque, and the bank will do its background check to authenticate
the cheque bearer’s identity before releasing the payment.
3. Crossed Cheque
• You may have observed cheques with two sloping parallel lines
with the words ‘a/c payee’ written on the top left. That is a
crossed cheque. The lines ensure that irrespective of who
presents the cheque, the payment will only be made to the
Bushra Shazli
+918948156741
[email protected]
individual whose name is written on the cheque, in other words,

the a/c payee along with his/her account number. These cheques
are relatively safe because they can be encashed only at the
drawee’s bank.
4. Open cheque
• An open cheque is basically an uncrossed cheque. This cheque can

be encashed at any bank, and the payment can be made to the
person bearing the cheque. This cheque is transferable from the
original payee (the original recipient of the payment) to another
payee too. The issuer needs to put his signature on both the front
and back of the cheque.
5. Post-Dated Cheque
• These types of cheques bear a later date of being encashed. Even

if the bearer presents this cheque to the bank immediately after
getting it, the bank will only process the payment on the date
mentioned in the cheque. This cheque stands valid past the
mentioned date, but not before.
6. Stale Cheque
• A cheque past its validity, three months after the date of being
issued, is called a stale cheque.
7. Traveller’s Cheque
• Foreigners on vacations carry traveller’s cheques instead of

carrying hard cash, which can be cumbersome. These cheques are
issued to them by one bank and can be encashed in the form of
Bushra Shazli
+918948156741
[email protected]
currency at a bank located in another location or country.

Traveller’s cheques do not expire and can be used for future trips.
8. Self Cheque
• You can identify self cheques by the word ‘self’ written in the
drawee column. Self cheques can only be drawn at the issuer’s
bank.
9. Banker’s Cheque
• A bank is the issuer of these types of cheques. The bank issues

these cheques on behalf of an account holder to make a
remittance to another person in the same city. Here the specified
amount is debited from the account of the customer, and then,
the cheque is issued by the bank. This is the reason banker’s
cheques are called non-negotiable instruments as there is no
room for banks to dishonour these cheques. They are valid for
three months. They can be revalidated provided specific
conditions are met.
Common Safety Measures for Writing a Cheque
• One needs to destroy all cancelled cheques until and unless they
are used for any particular purpose of submission for ECS.
• Make sure you do not hand over a cheque without the presence
of date, amount of cheque in numbers and words and Payee
name.
• Keep your signature clear and if needed sign twice to ensure that
the cheque is not bounced due to signature mismatch.
Bushra Shazli
+918948156741
[email protected]
• Further, mention the credit card number, mobile number,

connection number etc., on the reverse side of the cheque while
you make payments towards bills for utilities.
• It is strictly prohibited to staple, disfigure or fold cheque or any

sort of damage of MICR Band.
Speedier Collection of Cheques
• MICR Clearing-
1) It was introducing by RBI in the late 1980s to reduce delay in

clearly of cheques and thus support large volume cheque clearing.
2) MICR has brought in encoding of cheques as well as mechanical

sorting and listing of cheques.
3) MICR is a system of 9 digits divided into three groups each

containing 3 numbers. The 1st group of 3 digits specifies the place
of the cheque, the 2nd group specifies the name of the bank to
which the cheque belongs and the 3rd group specifies the branch
of the bank.
• Intercity Clearing between RBI Centers-
1) Initially it was introduced by RBI between the 4 metros.
2) Now the two ways intercity clearing its operational between many
centers and same is the picture for one way clearing.
• Magnetic Media Based Clearing Systems (MMBCS)-
1) It is actually the computerization of operation of other clearing

houses using magnetic media system.
Bushra Shazli
+918948156741
[email protected]
2) This is the initiative taken by RBI.
Electronic Products-
RBI introduced two major electronic payment/ fund transfer systems

namely-
a) National Electronic Funds Transfer (NEFT)
b) Electronic Clearing Services ( ECS)
c) Real Time Gross Settlement (RTGS) System [RTGS are generally

used for high value transactions) etc.,
1) These system replace the existing paper mandates (cheque) though

the customer has both the options to use.
2) These systems efficiently minimize delay as these systems are faster.
a) National Electronic Funs Transfer (NEFT)-
• Reserve Bank of India has introduced an electronic funds transfer

system called "National Electronic Funds Transfer” System
(hereinafter referred to as "NEFT System" or "NEFT" or “System”,
as appropriate). A set of procedures to be followed by various
stakeholders to the system are detailed in this document.
Advantages-
• Round the clock availability on all days of the year.
• Near-real-time funds transfer to the beneficiary account and

settlement in a secure manner.
Bushra Shazli
+918948156741
[email protected]
• Pan-India coverage through large network of branches of all types

of banks.
• Positive confirmation to the remitter by SMS / e-mail on credit to

beneficiary account.
• Penal interest provision for delay in credit or return of

transactions.
• No levy of charges by RBI from banks.
• No charges to savings bank account customers for online NEFT

transactions.
• Besides funds transfer, NEFT system can be used for a variety of

transactions including payment of credit card dues to the card
issuing banks, payment of loan EMI, inward foreign exchange
remittances, etc.
• Available for one-way funds transfers from India to Nepal.
NEFT system operate
Following is the step-wise flow of NEFT transaction.
Step-1: An individual / firm / corporate willing to transfer funds through

NEFT can use the internet/mobile banking facility offered by his/her
bank for initiating online funds transfer request.
• The remitter has to provide details of beneficiary such as, name of

the beneficiary, name of the bank branch where the beneficiary
has an account, IFSC of the beneficiary bank branch, account type
Bushra Shazli
+918948156741
[email protected]
and account number, etc. for addition of the beneficiary to

his/her internet/mobile banking module.
• Upon successful beneficiary addition, the remitter can initiate

online NEFT funds transfer by authorizing debit to his/her
account. Alternatively, the remitter can also visit his/her bank
branch for initiating NEFT funds transfer through branch/off-line
mode.
• The customer has to fill-in the beneficiary details in NEFT

application form available at the bank branch and authorize the
branch to debit to his/her account to the extent of the amount
requested in NEFT application form.
Step-2: The originating bank prepares a message and sends the

message to its pooling centre, also called the NEFT Service Centre.
Step-3: The pooling centre forwards the message to the NEFT Clearing
Centre, operated by the RBI, to be included for the next available batch.
Step-4: The Clearing Centre sorts the funds transfer transactions

beneficiary bank-wise and prepares accounting entries to receive funds
from the originating banks (debit) and give the funds to the beneficiary
banks (credit). Thereafter, bank-wise remittance messages are
forwarded to the beneficiary banks through their pooling centre (NEFT
Service Centre).
Step-5: The beneficiary banks receive the inward remittance messages

from the Clearing Centre and pass on the credit to the beneficiary
customers’ accounts.
Customer charges levied by bank for NEFT transactions

Bushra Shazli
+918948156741
[email protected]
The RBI does not levy any charges from member banks for NEFT
transactions. Also, there are no charges to be levied for Inward
transactions at destination bank branches for giving credit to
beneficiary accounts.
• For outward transactions, the maximum charges that bank can

levy from their customer for NEFT transaction are as follows:
a) With effect from January 01, 2020, banks have been advised to not
levy any charges from their savings bank account holders for NEFT
funds transfers initiated online.
b) Maximum charges which can be levied for outward transactions at

originating bank for other transactions –
• - For transactions up to Rs 10,000 : not exceeding 2.50 (+

Applicable GST)
• - For transactions above Rs 10,000 up to Rs 1 lakh: not exceeding

5 (+ Applicable GST)
• - For transactions above Rs 1 lakh and up to Rs 2 lakhs: not

exceeding15 (+ Applicable GST)
• - For transactions above Rs 2 lakhs: not exceeding 25 (+

Applicable GST)
• c) The details about Charges applicable for transferring funds from

India to Nepal using the NEFT system under the Indo-Nepal
Remittance Facility Scheme
b) Electronic Clearing Service-
Bushra Shazli
+918948156741
[email protected]
• It is an electronic mode of funds transfer from one bank account

to another. It can be used by institutions for making payments
such as distribution of dividend interest, salary, pension, among
other. It can also be used to pay bills and other chares such as
telephone, electricity, water or for making equated monthly
installments payments on loans as well as SIP investments. ECS
can be used for both credit and debit purposes.
• The RBI has regulated the charges to levied by sponsor banks from
institutions. Destination banks branches have been directed to
afford ECS credit free of charge to the beneficiary account
holders. So, it costs you nothing.
c) Real Time Gross Settlement (RTGS)-
• Real-time gross settlement (RTGS) systems are specialist funds

transfer systems where the transfer of money or securities takes
place from one bank to any other bank on a "real-time" and on a
"gross" basis. Settlement in "real time" means a
payment transaction is not subjected to any waiting period, with
transactions being settled as soon as they are processed. "Gross
settlement" means the transaction is settled on a one-to-one
basis, without bundling or netting with any other transaction.
"Settlement" means that once processed, payments are final and
irrevocable.
Advantage of RTGS-
• RTGS offers many advantages over the other modes of funds

transfer:
Bushra Shazli
+918948156741
[email protected]
• It is a safe and secure system for funds transfer.
• RTGS transactions / transfers have no amount cap.
• The system is available on all days when most bank branches are
functioning, including Saturdays.
• There is real time transfer of funds to the beneficiary account.
• The remitter need not use a physical cheque or a demand draft.
• The beneficiary need not visit a bank branch for depositing the
paper instruments.
• The beneficiary need not be apprehensive about loss / theft of

physical instruments or the likelihood of fraudulent encashment
thereof.
• Remitter can initiate the remittances from his / her home / place
of work using internet banking, if his / her bank offers such
service.
• The transaction charges have been capped by RBI.
• The transaction has legal backing.
Charges / service charges for RTGS transactions
• With effect from July 01, 2019, the Reserve Bank has waived the
processing charges levied by it for RTGS transactions. Banks may
pass on the benefit to its customers.
Bushra Shazli
+918948156741
[email protected]
• With a view to rationalize the service charges levied by banks for

offering funds transfer through RTGS system, a broad framework
of charges has been mandated as under:
• a) Inward transactions – Free, no charge to be levied.
• b) Outward transactions – 2,00,000/- to 5,00,000/- : not

exceeding 24.50/-;(exclusive of tax, if any)
Above 5,00,000/- : not exceeding 49.50/-. (exclusive of tax, if
any)
• Banks may decide to charge a lower rate but cannot charge more
than the rates prescribed by RBI.
Essential information that the remitting customer needs to furnish to

the bank for making a remittance
• The remitting customer has to furnish the following information

to a bank for initiating a RTGS remittance:
• Amount to be remitted
• The account number to be debited
• Name of the beneficiary bank and branch
• The IFSC number of the receiving branch
• Name of the beneficiary customer
• Account number of the beneficiary customer
• Sender to receiver information, if any
Care should be taken while originating a RTGS transaction

Bushra Shazli
+918948156741
[email protected]
• The following should be ensured while putting through a funds

transfer transaction using RTGS –
• Originating and destination bank branches are part of the RTGS

network.
• Beneficiary details such as beneficiary name, account number and

account type, name and IFSC of the beneficiary bank branch
should be available with the remitter.
• Extreme care should be exercised in providing the account

number of the beneficiary, as, in the course of processing RTGS
transactions, the credit will be given to the customer’s account
solely based on the account number provided in the RTGS
remittance instruction / message.
Types of Banking-
Branch Banking
• Branch banking involves business of banking via branches. The

branches are set up under Section 23 of Banking Regulations Act,
1949. A branch should cater to all banking services and include a
specialized branch, a satellite office, an extension counter, an
ATM, administrative office, service branch and a credit card
centre for the purpose of branch authorization policy. The
advantage of branch banking is that it helps in better
management, more inclusion and risk diversification. The
disadvantage of branch banking is that it might encourage outside
local influences.
Unit Banking
Bushra Shazli
+918948156741
[email protected]
• Unit banking is a system of banking which originated in US. It is a

limited way of banking where banks operate only from a single
branch (or a few branches in the same area) taking care of local
community. In comparison to branch banking, the size of unit
banks is very small. Due to small size and due to unit structure;
the decision making in unit banks is very fast. The management in
unit banks enjoy more autonomy and more discretionary powers.
However, due to single units, the risk is not distributed or
diversified.
Mixed Banking
• Mixed Banking is the system in which banks undertake activities

of commercial and investment banking together. These banks
give short-term and long-term loans to industrial concerns. The
banks appoint experts which give valuable advice on various
financial issues and also help gauge the financial health of
companies. Industries don’t have to run to different places for
differential financial needs. They thus promote rapid
industrialization. They may however pose a grave threat to
liquidity of a bank and lead to bad debts.
Chain Banking
• Chain banking system refers to the type of banking when a group

of persons come together to own and control three or more
independently chartered banks. Each of these banks could
maintain their independent existence despite common control
and ownership. The banks in the chains were assigned specific
Bushra Shazli
+918948156741
[email protected]
functions so there was no loss of profits and overlapping of

interests.
Universal Banking
• Universal banking is a system of banking under which big banks

undertake a variety of banking services like commercial banking,
investment banking, mutual funds, merchant banking, insurance
etc. It involves providing all these services under one roof by
financial experts who can handle multiple financial products
easily.
• This helps to boost investor confidence and also makes the

operations more cost-effective. However, different policy
regulations for different financial products makes the operations
cumbersome and are a big drawback for banks. Also, if such banks
fail, it will lead to a big dip in customer confidence.
Relationship Banking
• Relationship banking is a banking system in which banks make

deliberate efforts to understand customer needs and offer him
products accordingly.
• It helps banks to gather critical soft information about the

borrowers, which helps them to determine creditworthiness of
such clients.
• Clients too often become responsible and avoid moral hazard

behavior.
Bushra Shazli
+918948156741
[email protected]
• However, the banks may discourage borrowers to invest in high

risk projects.
• Clients can often renegotiate their loan terms and hence result in
inefficient investments for banks.
Virtual Banking
• Virtual banking is performing all banking operations online. This

has served as a great revolution in banking market as banks have
to continuously struggle for perfection to live up to competition
and stay ahead of it.
• As banks don’t have physical offices, they find the options very
cost-effective. The banks thus pass these benefits to customers in
form of waiving of account fee or higher rates of interest. The
trend is catching in Indian markets but some typical fears still grip
an average Indian who still places more trust in bank staff with
whom they can personally go and talk, rather than relying on
machines.
Islamic Banking
• Islamic banking is banking or banking activity that is consistent

with the principles of Sharia and its practical application through
the development of Islamic economics.
• In particular, Islamic law prohibits usury, the collection and

payment of interest, also commonly called riba in Islamic
discourse.
Bushra Shazli
+918948156741
[email protected]
• In addition, Islamic law prohibits investing in businesses that are

considered unlawful, or haraam (such as business that sell alcohol
or pork, or businesses that produce media such as gossip columns
or pornography which are contrary to Islamic values).
• In the late 20th century, a number of Islamic Banks were created,

to cater to this particular banking market.
Shadow Banking
• Shadow banking refers to all the non-bank financial

intermediaries that provide services similar to those of traditional
commercial banks. They generally carry out traditional banking
functions, but do so outside the traditional system of regulated
depository institutions. Some of these activities include:
• Credit intermediation – Any kind of lending activity including at

least one intermediary between the saver and the borrower
• Liquidity transformation – Usage of short-term debts like deposits

or cash-like liabilities to finance long-term investments like loans.
• Maturity transformation – Using short-term liabilities to fund

investment in long-term assets
In the Indian financial arena, shadow banks term

can be used for Non-Banking Finance Companies (NBFCs). However,
NBFCs in India have been regulated by the RBI (Reserve Bank of India)
since 1963. Other examples are investment bankers, Money market
mutual funds, mortgage companies etc.
Global Banking-
Bushra Shazli
+918948156741
[email protected]
• International banking activities frequently result in financial

instability and serious economic downturns as financial markets
become more open and deregulated.
• Competition from multinational banks has reduced the availability

of credit to small and medium sized enterprises, to low and
middle income consumers and to farmers.
• While economies experiences financial instabilities and declining

credit, governments are losing the means to protect their
domestic markets.
Reserve Bank of India

History-
• The Reserve Bank of India is the central bank of the country.

Central Banks are a relatively recent innovation and most central
banks, as we know them today, were established around the early
twentieth century.
• The Reserve bank of India was set up on the basis of the

recommendations of the Hilton Young Commission.
• The Reserve Bank of India Act, 1934 (II of 1934) provides the
statutory basis of the functioning of the bank, which commenced
operations on April 1, 1935.
• The Bank was constituted to

* Regulate the issue of banknotes
* Maintain reserves with a view to securing monetary stability
and
Bushra Shazli
+918948156741
[email protected]
* To operate the credit and currency system of the country to its

advantage.
• The Bank began its operations by taking over from the

Government the functions so far being performed by the
Controller of Currency and from the Imperial Bank of India, the
management of Government accounts and public debt. The
existing currency offices at Calcutta, Bombay, Madras, Rangoon,
Karachi, Lahore and Cawnpore (Kanpur) became branches of the
Issue Department. Offices of the Banking Department were
established in Calcutta, Bombay, Madras, Delhi and Rangoon.
• Burma (Myanmar) seceded from the Indian Union in 1937 but the
Reserve Bank continued to act as the Central Bank for Burma till
Japanese Occupation of Burma and later upto April, 1947. After
the partition of India, the Reserve Bank served as the central bank
of Pakistan upto June 1948 when the State Bank of Pakistan
commenced operations. The Bank, which was originally set up as
a shareholder's bank, was nationalised in 1949.
Preamble
The preamble of Reserve Bank of India describes the basic
functions of Reserve Bank as-
“To regulate the issue of Bank notes and keeping of reserves

with a view to securing monetary stability in India and generally to
operate the currency and credit system of the country to its
advantage.”
Central Board
Bushra Shazli
+918948156741
[email protected]
• The central board of directors is the main committee of the

central bank. The Government of India appoints the directors for
a four-year term. The board consists of a governor, and not more
than four deputy governors; four directors to represent the
regional boards; two – usually the Economic Affairs Secretary and
the Financial Services Secretary – from the Ministry of
Finance and ten other directors from various fields.
• The Reserve Bank – under Raghuram Rajan's governorship –

wanted to create a post of a chief operating officer (COO), in the
rank of deputy governor and wanted to re-allocate work between
the five of them (four deputy governor and COO).
• The bank is headed by the governor, currently Shaktikanta

Das. There are four deputy governors B. P. Kanungo, Mahesh
Kumar Jain, M. Rajeshwar Rao, and Michael Patra.
Bushra Shazli
+918948156741
[email protected]
Functions of RBI
• Issue of Currency Notes-Under Section 22 of RBI Act, the bank has

the sole right to issue currency notes of all denominations except
one rupee coins and notes. The one rupee notes and coins and
small coins are issued by Central Government and their
distribution is undertaken by RBI as the agent of government.
➢ For the printing of notes, RBI uses four facilities:
➢ The Security Printing and Minting Corporation of India

Limited (SPMCIL), a wholly owned company of the Government of
Bushra Shazli
+918948156741
[email protected]
India, has printing presses at Nashik, Maharashtra and Dewas,

Madhya Pradesh.
➢ The Bharatiya Reserve Bank Note Mudran Private

Limited (BRBNMPL), owned by the RBI, has printing facilities
in Mysore, Karnataka and Salboni, West Bengal.
➢ For the minting of coins, SPMCIL has four mints

at Mumbai, Noida, Kolkata and Hyderabad for coin production.
• Controller of Credit- RBI has power to control the volume of

credit created by banks. The RBI through its various quantitative
and qualitative techniques regulates total supply of money and
bank credit in the interest of economy.RBI pumps in money during
busy season and withdraws money during slack season.
• Banker to the Government- The RBI acts as a banker agent and

adviser to the government. It has obligation to transact the
banking business of Central Government as well as State
Government.
Eg- RBI receives and makes all payments on behalf of

government, remits its funds, buys and sells foreign currencies for it
and gives it advice on all banking matters. RBI helps the Government-
both Central and state- to float new loans and manage public debt. The
bank makes ways and meets advances of the government. On behalf of
Central government it sells treasury bills and thereby provides short-
term finance.
• Banker’s Bank and Lender off last Resort- RBI Acts as a banker to
other banks. It provides financial assistance to scheduled banks
Bushra Shazli
+918948156741
[email protected]
and state co-operative banks in form of rediscounting of eligible

bills and loans and advances against approved securities.
• RBI acts as lender of last resort. It provides funds to bank when

they fail to get it from other sources. It also acts as a clearing
house. Through RBI, banks make inter-banks payments.
• Exchange Control and Custodian of Foreign Reserve- RBI has the

responsibility of maintaining fixed exchange rates with all
member countries of IMF. For this RBI has centralized all foreign
exchange reserves (FOREX) RBI functions as custodian of nations
foreign exchange reserves. It has to maintain external value of
Rupees. RBI achieves this aim through appropriate monetary fiscal
and trade policies and exchange control.
• Clearing House Functions- The RBI acts as a clearing house for all
member banks. This avoids unnecessary transfer of funds
between the various banks.
• Collection and Publication of Data- The RBI collects and complies

statistical information on banking and financial operations of the
economy. The RBI Bulletin is a monthly publication. It not only
provides information, but also results of important studies and
investigations conducted by reserve bank are given. The Report
on currency and finance’ is an annual publications. It provides
review of various developments of economic and financial
importance.
• Developmental and Promotional Functions- The RBI has helped

in setting up Industrial finance Corporation of India (IFCI), State
Bushra Shazli
+918948156741
[email protected]
Financial Corporations (SFCs), Deposit Insurance Corporation,

Agricultural Refinance and Development Corporation (ARDC), etc.
2016 demonetisation
• People gathered at ATM of Axis Bank in Mehsana, Gujarat to

withdraw cash following deposit of demonetised currency notes
in bank on 15 November 2016.
• On 8 November 2016, the Government of India announced

the demonetisation of all 500 and 1,000 banknotes of
the Mahatma Gandhi Series on the recommendation of the
Reserve Bank of India (RBI). The government claimed that the
action would curtail the shadow economy and crack down on the
use of illicit and counterfeit cash to fund illegal activity and
terrorism.
The Reserve Bank of India laid down a detailed procedure for the
exchange of the demonetized banknotes with new 500
and 2,000 banknotes of the Mahatma Gandhi New
Series and 100 banknotes of the preceding Mahatma Gandhi Series.
The key points were:
• Long queue in front of SBI ATM at Paravur near the city

of Kollam in Kerala, 19 November 2016.
• Citizens had until 30 December 2016 to tender their old

banknotes at any office of the RBI or any bank branch and credit
the value into their respective bank accounts.
• Cash withdrawals from bank accounts were restricted to Rs

10,000 (US$140) per day and Rs20,000 (US$280) per week per
Bushra Shazli
+918948156741
[email protected]
account from 10 to 13 November 2016. This limit was increased to

Rs 24,000 (US$340) per week from 14 November.
• However, exceptions were given to petrol, CNG and gas stations,

government hospitals, railway and airline booking counters, state-
government recognised dairies and ration stores, and
crematoriums to accept the old 500 and 1,000 banknotes until 11
November 2016, which was later extended to 14 November
2016 International airports were also instructed to facilitate an
exchange of notes amounting to a total value of Rs 5,000 for
foreign tourists and outbound passengers.
• Under the revised guidelines issued on 17 November 2016,

families were allowed to withdraw 250,000 for wedding expenses
from one account provided it was KYC compliant. The rules were
also changed for farmers who are permitted to withdraw Rs
25,000 per week from their accounts against crop loan.
Merits of demonetization-
• It gave the country a 5 lakh crore advantage as there was a huge

spike in country's tax base and addition of 1 lakh more pan card
holders.
• Hawala cash transfers to maoist and terrorism groups and

separatist group came to a halt because of denomination of
Rs.500 & Rs.1000 currency bills.
• There was a very big spike in digital transaction even small town
and cities people adopted paying digitally for goods and services
leading to sustained growth of non-cash payments.
Bushra Shazli
+918948156741
[email protected]
Monetary Policy
• Monetary Policy refers to the use of instruments under the
control of the central bank to regulate the availability, cost and
sue of money and credit.
• In India, monetary policy of the Reserve Bank of India is aimed at

managing the quantity of money in order to meet the
requirements of different sectors of the economy and to increase
the pace of economic growth.
• The goal: achieving specific economic objectives such as low and

stable inflation and promoting growth.
Objectives of Monetary Policy-
• Inflation- Monetary policies can target inflation levels. A low level

of inflation is considered to be healthy for the economy. If
inflation is high, a contractionary policy can address this issue.
• Unemployment- Monetary policies can influence the level of

unemployment in the economy. For example, an expansionary
monetary policy generally decreases unemployment because the
higher money supply stimulates business activities that lead to the
expansion of the job market.
• Currency exchange rates- Using its fiscal authority, a central bank

can regulate the exchange rates between domestic and foreign
currencies. For example, the central bank may increase the
money supply by issuing more currency. In such a case, the
Bushra Shazli
+918948156741
[email protected]
domestic currency becomes cheaper relative to its foreign

counterparts.
• Ensuring adequate flow of credit to the productive sectors of the

economy to support economic growth.
Promotion of Exports and Food Procurement Operations: Monetary

policy pays special attention in order to boost exports and facilitate the
trade. It is an independent objective of monetary policy.
• Price Stability: Price Stability implies promoting economic

development with considerable emphasis on price stability. The
centre of focus is to facilitate the environment which is favourable
to the architecture that enables the developmental projects to
run swiftly while also maintaining reasonable price stability.
• Controlled Expansion Of Bank Credit: One of the important

functions of RBI is the controlled expansion of bank credit and
money supply with special attention to seasonal requirement for
credit without affecting the output.
• Promotion of Fixed Investment: The aim here is to increase the

productivity of investment by restraining non essential fixed
investment.
• Restriction of Inventories: Overfilling of stocks and products

becoming outdated due to excess of stock often results is sickness
of the unit. To avoid this problem the central monetary authority
carries out this essential function of restricting the inventories.
The main objective of this policy is to avoid over-stocking and idle
money in the organization
Bushra Shazli
+918948156741
[email protected]
Quantitative / General Techniques
• Direct Instruments-
1- Cash Reserve Ratio- The share of net demand and time liabilities that
bank must maintain as cash balance with the Reserve Bank.
This is the amount of money that the banks have to

necessarily park with the RBI. The base of this is the total of the
deposits that a bank has. The RBI plays the bank interest on the amount
parked with it.
2- Statutory Liquidity Ratio (SLR)- The term used in the regulation of

banking in India. It is the amount which a bank has to maintain in the
form of cash, gold or approved securities.
The quantum is specified as some percentage of the

total demand and time liabilities of a bank. This percentage is fixed by
the Reserve bank of India.
• Indirect Instruments-
1- Repo rate- Repo (repurchase) rate also known as the benchmark

interest rate is the rate at which the RBI lends money to the
commercial banks for a short-term (a maximum of 90 days). When the
repo rate increases, borrowing from RBI becomes more expensive.
If RBI wants to make it more expensive for the banks to

borrow money, it increases the repo rate similarly, if it wants to make it
cheaper for banks to borrow money it reduces the repo rate. If the repo
rate is increased, banks can't carry out their business at a profit
whereas the very opposite happens when the repo rate is cut down.
Bushra Shazli
+918948156741
[email protected]
Generally, repo rates are cut down whenever the country needs to
progress in banking and economy.
2- Reverse Repo rate- As the name suggest, reverse repo rate is just the
opposite of repo rate. Reverse repo rate is the short term borrowing
rate at which RBI borrows money from banks.
• The reserve bank uses this tool when it feels there is too much
money floating in the banking system. An increase in the reverse
repo rate means that the banks will get a higher rate of interest
from RBI. As a result, banks prefer to lend their money to RBI
which is always safe instead of lending it to others (people,
companies, etc.) which is always risky.
3- Bank Rate- Bank rate is defined in Section 49 of the RBI Act of 1934
as the 'standard rate at which RBI is prepared to buy or rediscount bills
of exchange or other commercial papers eligible for purchase'.
• When banks want to borrow long term funds from the RBI, it is
the interest rate which the RBI charges to them. The bank rate is
not used to control money supply, but penal rates continue to be
linked to the bank rate. If a bank fails to
meet SLR or CRR requirements then the RBI will impose a penalty
of 300 basis points above bank rate.
4- Open Market Operations- Open market operation is the activity of

buying and selling of government securities in open market to control
the supply of money in banking system. When there is excess supply of
money, central bank sells government securities thereby sucking out
excess liquidity. Similarly, when liquidity is tight, RBI will buy
Bushra Shazli
+918948156741
[email protected]
government securities and thereby inject money supply into the

economy.
• On 23 March 2020, Reserve Bank of India infuse Rs 1 trillion

through term repo auction, a massive OMOs (open market
operations) purchase of government securities.
• The Reserve Bank is monitoring the financial market conditions

and liquidity situation in the economy as COVID-19 pandemic in
India fears of a recession.
Liquidity adjustment facility (LAF)
• Liquidity adjustment facility was introduced in 2000. LAF is a

facility provided by the Reserve Bank of India to scheduled
commercial banks to avail of liquidity in case of need or to park
excess funds with the RBI on an overnight basis against the
collateral of government securities.
• RBI accepts applications for a minimum amount of Rs

5 crore (US$700,000) and in multiples of Rs 50 million thereafter.
Marginal standing facility (MSF)
• This scheme was introduced in May 2011 and all the scheduled
commercial bank can participate in this scheme. Banks can
borrow up to 2.5% per cent of their respective net demand and
time liabilities. The RBI receives application under this facility for a
minimum amount of Rs. 10 million and in multiples of
Rs. 10 million thereafter.
Bushra Shazli
+918948156741
[email protected]
• The important difference from repo rate is that bank can pledge
government securities from its SLR quota (up to one per cent). So
even if SLR goes below 20.5% by pledging SLR quota securities
under MSF, the bank will not have to pay any penalty.
Selective/ Qualitative Credit Control Methods
Under Selective Credit Control, credit is provided to selected

borrowers for selected purpose, depending upon the use to which the
control try to regulate the quality of credit- the direction towards the
credit flows. The Selective Controls are-
1) Ceiling of Credit- The ceiling on level of credit restricts the lending

capacity of a bank to grant advances against certain controlled
securities.
2- Margin Requirement- A loan is sanctioned against Collateral Security.

Margin means that proportion of the value of security against which
loan is not given. Margin against a particular security is reduced or
increased in order to encourage or to discourage the flow of credit to a
particular sector.
3- Direct action- It is too severe and is therefore rarely followed. It may

involve refusal by RBI to rediscount bills or cancellation of license, if the
bank has failed to comply with the directives of RBI.
4- Discriminatory Interest Rate (DIR) – Through DIR, RBI makes credit

flow to certain priority or weaker sectors by charging concessional rates
of interest. RBI issues supplementary instructions regarding granting of
additional credit against sensitive commodities, issue of guarantee,
making advances, etc.
Bushra Shazli
+918948156741
[email protected]
5- Directives- The RBI issues directives to banks regarding advances.

Directives are regarding the purpose for which loans may or may not be
given.
6- Moral Suasion- under Moral Suasion, RBI issues periodical letters to

banks to exercise control over credit in general or advances against
particular commodities. Periodic discussions are held with authorities
of commercial banks in this respect.
Under this measure, the RBI try to persuade

banks through meetings, conferences, media statements to do specific
things under certain economic trends. For example, when the RBI
reduces repo rate, it asks banks to reduce their base rate as well.
Another example of this measure is to ask banks to reduce their non-
performing assets.
Rates as of 22 May 2020
Policy rates
Policy repo rate 4.00%
Reverse repo rate 3.35%
Marginal standing facility rate 4.25%
Bank rate 4.25%
Reserve ratios
Cash reserve ratio (CRR) 3.0%
Bushra Shazli
+918948156741
[email protected]
Statutory liquidity ratio (SLR) 18.00%
Lending and deposit rates
Base rate 8.95%–9.40%
Marginal Cost of funds-based

overnight Lending Rate 7.80%–8.30%
(MCLR)
Savings deposit rate 3.25%–3.50%
Term deposit rate for > 1 year 6.25%–7.00%
National Bank for Agricultural and Rural Development

(NABARD)
• NABARD is set up as an apex Development Bank with a mandate
for facilitating credit flow for promotion and development of
agriculture, small- scale industries, cottage and village industries,
handicrafts and other rural crafts. It also has the mandate to
support all other allied economic activities in rural areas, promote
integrated and sustainable rural development and secure
prosperity of rural areas.
• NABARD was established on the recommendations of B.

Sivaramman Committee on 12 July 1982. It is specialized bank for
agriculture and rural development in India.
Bushra Shazli
+918948156741
[email protected]
In discharging its role as a facilitator for rural prosperity NABARD is

entrusted with
a) Providing refinance to lending institutions in rural areas
b) Bringing about or promoting institutional development and
c) Evaluating, monitoring and inspecting the client banks
d) Besides this pivotal role, NABARD also: Acts as a coordinator in

the operations of rural credit institutions.
e) Offers training and research facilitates for banks, cooperatives

and organizations working in the field of rural development.
Role of NABARD
NABARD discharge its duty by undertaking the following roles :
• Serves as an apex financing agency for the institutions providing

investment and production credit for promoting the various
developmental activities in rural areas
• Takes measures towards institution building for improving

absorptive capacity of the credit delivery system, including
monitoring, formulation of rehabilitation schemes, restructuring
of credit institutions, training of personnel, etc.
• It regulates and supervise the cooperative banks and the RRB's,

through out entire India.
• Co-ordinates the rural financing activities of all institutions

engaged in developmental work at the field level and maintains
liaison with Government of India, state governments, Reserve
Bushra Shazli
+918948156741
[email protected]
Bank of India (RBI) and other national level institutions concerned

with policy formulation
• Undertakes monitoring and evaluation of projects refinanced by

it.
• NABARD refinances the financial institutions which finances the

rural sector.
• NABARD partakes in development of institutions which help the

rural economy.
• NABARD also keeps a check on its client institutes.
• It regulates the institutions which provide financial help to the

rural economy.
• It provides training facilities to the institutions working in the field

of rural upliftment.
NAB cons-
NABARD Consultancy Services (Nabcons) is a wholly owned subsidiary

promoted by National bank of agricultural and Rural Development and
is engaged in providing consultancy in all spheres of agriculture, rural
development and allied areas. Nab cons leverages on the core
competence of the NABARD in the areas of agricultural and rural
development, especially multidisciplinary projects, banking,
institutional development, infrastructure, training etc, internalized for
more than two decades.
International Association of NABARD
Bushra Shazli
+918948156741
[email protected]
• NABARD’s international associates range from World Bank-

affiliated organizations to global developmental agencies working
in the field of agricultural and rural development. These agencies
offer material and advisory help in implementing schemes that
are aimed at uplifting the rural poor in making agricultural
processes effective and yielding.
a) World Bank Group (WBG)
b) Kreditanstalt fur Wiederaufbau (KfW)
c) Swiss Agencyy for Development & Co-opertion (SDC)
d) d) Commission on European Community (CEC)
e) e)Asian – Pacific Rural & Agricultural Credit association (APRACA)
f) f) International Fund for Agricultural Development (IFAD)
g) g) Deutsche Gesellschaft fur Technique Zusmmenardeit (GTZ)
h) h) Organization of Petroleum Exporting Countries (OPEC)
Regional Rural Banks

• The institution of Regional Rural Banks was created to meet the
excess demand for institutional credit in the rural areas,
particularly among the economically and socially marginalized
sections.
• Although the cooperative banks and the commercial banks had

reasonable records in terms of geographical coverage and
disbursement of credit, in term of population groups the
Bushra Shazli
+918948156741
[email protected]
cooperative banks were dominated by the rural rich, while the

commercial banks had a clear urban bias.
The area of operation of RRBs is limited to the area as notified by

Government of India covering one or more districts in the State. RRBs
also perform a variety of different functions. RRBs perform various
functions in following heads:
• Providing banking facilities to rural and semi-urban areas.
• Carrying out government operations like disbursement of wages

of MGNREGA workers, distribution of pensions etc.
• Providing Para-Banking facilities like locker facilities, debit and

credit cards, mobile banking, internet banking, UPI etc.
• Small financial banks.
Recapitalization
• Subsequent to review of the financial status of RRBs by the Union

Finance Minister in August, 2009, it was felt that a large number
of RRBs had a low Capital to Risk weighted Assets Ratio (CRAR). A
committee was therefore constituted in September, 2009 under
the Chairmanship of K C Chakrabarty, Deputy Governor, RBI to
analyze the financials of the RRBs and to suggest measures
including re-capitalisation to bring the CRAR of RRBs to at least 9%
in a sustainable manner by 2012. The Committee submitted its
report in May, 2010. The following points were recommended by
the committee:
Bushra Shazli
+918948156741
[email protected]
• The remaining 42 RRBs will not require any capital and will be
able to maintain CRAR of at least 9% as of 31 March 2012 and
thereafter on their own.
• A fund of 100 crore to be set up for training and capacity building

of the RRB staff.
Amalgamation
• Currently, RRB's are going through a process of amalgamation and

consolidation. 25 RRBs have been amalgamated in January 2013
into 10 RRBs.
• This counts 67 RRBs till the first week of June 2013. This counts 56
as of March RRBs (post-merger) covering 525 districts with a
network of 14,494 branches.
• All RRBs were originally conceived as low cost institutions having a

rural ethos, local feel and pro poor focus. However, within a very
short time, most banks were making losses.
• The original assumptions as to the low cost nature of these

institutions were belied. This may be again amalgamated in near
future. With the third phase of amalgamation of RRB bringing
down the number of such entities to 38 from 56. As of 1st April
2020, there are 43 RRBs in India.
Reforms in Banking Sector

• Since nationalization of banks in 1969, the banking sector had
been dominated by the public sector. There was a financial
Bushra Shazli
+918948156741
[email protected]
repression, role of technology was limited, no risk management

etc.,
• This resulted in low profitability and poor asset quality. The

country was caught in deep economic crises.
• The Government decided to introduce comprehensive economic

reforms.
• Banking Sector reforms were part of this package. In august 1991,

the Government appointed a committee on financial system
under chairmanship of M. Narsimham.
First phase of Banking Sector Reforms/ Narasimham Committee

Report- 1991
TO promote healthy development of financial sector, the Narasimham

committee made recommendations.
1. Establishment of 4 tier hierarchy for banking structure with 3 to 4

large banks (including SBI) at the top and at bottom rural banks
engaged in agricultural activities.
2. The supervisory functions over banks and financial institutions can

be assigned to a quasi-autonomous body sponsored by RBI.
3. A phased reduction in statutory liquidity ratio.
4. Phased achievement of 8% capital adequacy ratio.
5. Abolition of branch licensing policy.
6. Proper classification of assets and full disclosure of accounts of

banks and financial institutions.
Bushra Shazli
+918948156741
[email protected]
7. Deregulation of Interest rates.
8. Delegation of direct lending activity of IDBI to a separate corporate

body.
9. Competition among financial institutions on participating approach.
10. Setting up Asset Reconstruction fund to take over a portion of the

loan portfolio of banks whose recovery has become difficult.
Banking Reform Measures of Government: –
On the recommendations of Narasimhan Committee, following

measures were undertaken by government since 1991: –
1. Lowering SLR and CRR-
The high SLR and CRR reduced the profits of the banks. The SLR
had been reduced from 38.5% in 1991 to 25% in 1997. This has left
more funds with banks for allocation to agriculture, industry, trade etc.
The Cash Reserve Ratio (CRR) is the cash ratio of banks total
deposits to be maintained with RBI. The CRR had been brought down
from 15% in 1991 to 4.1% in June 2003. The purpose is to release the
funds locked up with RBI.
2- Prudential Norms: –
Prudential norms have been started by RBI in order to impart

professionalism in commercial banks. The purpose of prudential norms
includes proper disclosure of income, classification of assets and
provision for Bad debts so as to ensure that the books of commercial
banks reflect the accurate and correct picture of financial position.
Bushra Shazli
+918948156741
[email protected]
Prudential norms required banks to make 100%

provision for all Non-performing Assets (NPAs). Funding for this
purpose was placed at Rs. 10,000 crores phased over 2 years.
3. Capital Adequacy Norms (CAN): –
Capital Adequacy ratio is the ratio of minimum capital to risk asset

ratio. In April 1992 RBI fixed CAN at 8%. By March 1996, all public
sector banks had attained the ratio of 8%. It was also attained by
foreign banks.
4- Recovery of Debts
The Government of India passed the “Recovery of debts due to

Banks and Financial Institutions Act 1993” in order to facilitate and
speed up the recovery of debts due to banks and financial institutions.
Six Special Recovery Tribunals have been set up. An Appellate Tribunal
has also been set up in Mumbai.
5- Access To Capital Market
The Banking Companies (Acquisition and Transfer of

Undertakings) Act was amended to enable the banks to raise capital
through public issues. This is subject to the provision that the holding of
Central Government would not fall below 51% of paid-up-capital. SBI
has already raised a substantial amount of funds through equity and
bonds.
6- Freedom of Operation
Scheduled Commercial Banks are given freedom to open new

branches and upgrade extension counters, after attaining capital
Bushra Shazli
+918948156741
[email protected]
adequacy ratio and prudential accounting norms. The banks are also
permitted to close non-viable branches other than in rural areas.
B. Second Phase Reforms of Banking Sector(1998)/ Narasimham

Committee
To make banking sector stronger the government appointed

Committee on banking sector Reforms under the Chairmanship of M.
Narasimham. It submitted its report in April 1988. The Committee
placed greater importance on structural measures and improvement in
standards of disclosure and levels of transparency.
Following are the recommendations of Narasimham Committee-
• Those days many public sector banks were facing a problem of the
Non-performing assets (NPAs). Some of them had NPAs were as
high as 20 percent of their assets. Thus for successful
rehabilitation of these banks, it recommended ‘Narrow Banking
Concept’ where weak banks will be allowed to place their funds
only in the short term and risk-free assets.
• The committee considered the stronger banking system in the

context of the Current Account Convertibility ‘CAC’. It thought
that Indian banks must be capable of handling problems regarding
domestic liquidity and exchange rate management in the light of
CAC. Thus, it recommended the merger of strong banks which will
have ‘multiplier effect’ on the industry.
• The committee considered that there was an urgent need for

reviewing and amending main laws governing Indian Banking
Industry like RBI Act, Banking Regulation Act, State Bank of India
Bushra Shazli
+918948156741
[email protected]
Act, Bank Nationalisation Act, etc. This up gradation will bring

them in line with the present needs of the banking sector in India.
• In order to improve the inherent strength of the Indian banking

system the committee recommended that the Government
should raise the prescribed Capital adequacy norms. This will
further improve their absorption capacity also. Currently, the
capital adequacy ratio for Indian banks is at 9 percent.
• As it had earlier mentioned the freedom for banks in its working

and bank autonomy, it felt that the government control over the
banks in the form of management and ownership and bank
autonomy does not go hand in hand and thus it recommended a
review of functions of boards and enabled them to adopt
professional corporate strategy.
On the recommendations of committee following reforms have been

taken:
1) New Areas- New Areas for bank financing have been opened up
such as:- Insurance, credit cards, asset management, leasing, gold
banking, investment banking etc
2) New Instrument- For greater flexibility and better risk

management new instrument have been introduced such as:
Interest rate swaps, cross currency forward contracts, Forward
rate agreement, liquidity adjustment facility for meeting day to
day liquidity mismatch.
Bushra Shazli
+918948156741
[email protected]
3) Risk Management- Banks have started specialized committees to

measure and monitor various risks. They regularly upgrading their
skills and systems.
4) Increase Inflow of Credit- Measures are taken to increase the

flow of credit to priority sector through focus on Micro Credit and
Self Help group.
5) Universal Banking- It refers to combination of commercial

banking and investment banking. For evolution of universal
banking guidelines have been given
6) Management of NPAs- RBI and Central government have taken

measures for management of non-performing assets (NPAs) such
as corporate Debt Restructuring (CDR), Debt Recovery Tribunals
(DRTs) and Lok Adults.
7) Customer Service- In recent years, to improve customer service,

RBI has taken many steps such as- credit card facilities, banking
ombudsman, settlement of claims of deceased depositors etc.
BASEL
• Basel is a city in Switzerland which is also the headquarters of
Bureau of International Settlement (BIS).
• BIS fosters co-operation among central banks with a common goal

of financial stability and common standards of banking
regulations.
• The Bank for International Settlements (BIS) established on 17

May 1930, is the world's oldest international financial
Bushra Shazli
+918948156741
[email protected]
organization. There are two representative offices in the Hong

Kong and in Mexico City. In total BIS has 60 member countries
from all over the world and covers approx 95% of the world GDP.
BASEL COMMITTEE
• The Basel Committee - initially named the Committee on Banking

Regulations and Supervisory Practices - was established by the
central bank Governors of the Group of Ten countries at the end
of 1974 in the aftermath of serious disturbances in international
currency and banking markets
• The Committee, headquartered at the Bank for International

Settlements in Basel, was established to enhance financial
stability by improving the quality of banking supervision
worldwide, and to serve as a forum for regular cooperation
between its member countries on banking supervisory matters.
• The Committee's first meeting took place in February 1975, and

meetings have been held regularly three or four times a year
since.
• The Committee has established a series of international standards

for bank regulation, most notably its landmark publications of the
accords on capital adequacy which are commonly known as Basel
I, Basel II and, most recently, Basel III.
• The Basel committee prescribed Capital Adequacy Norms in order

to protect the interests of the customers.
Bushra Shazli
+918948156741
[email protected]
• The set of the agreement by the BCBS (BASEL COMMITTEE ON

BANKING SUPERVISION), which mainly focuses on risks to banks
and the financial system are called Basel accord.
• The purpose of the accord is to ensure that financial institutions

have enough capital on account to meet the obligations and
absorb unexpected losses.
• India has accepted Basel accords for the banking system.
• BASEL ACCORD has given us three BASEL NORMS which are BASEL
1,2 and 3.
The Basel Committee on Banking Supervision (BCBS) is a

committee of banking supervisory authorities that was
established by the central bank governors of the Group of
Ten countries in 1974. The committee expanded its membership
in 2009 and then again in 2014. In 2019, the BCBS has 45
members from 28 Jurisdictions, consisting of Central Banks and
authorities with responsibility of banking regulation. It provides a
forum for regular cooperation on banking supervisory matters.
• Its objective is to enhance understanding of key supervisory

issues and improve the quality of banking supervision worldwide.
The Committee frames guidelines and standards in different areas
– some of the better known among them are the international
standards on capital adequacy, the Core Principles for Effective
Banking Supervision and the Concordat on cross-border banking
supervision.
BASEL 1
Bushra Shazli
+918948156741
[email protected]
• BASEL 1 that is, the 1988 Basel Accord, is primarily focused

on credit risk and appropriate risk-weighting of assets. Assets of
banks were classified and grouped in five categories according to
credit risk, carrying risk weights of 0% (for example cash, bullion,
home country debt like Treasuries), 20% (securitisations such
as mortgage-backed securities (MBS) with the highest AAA rating),
50% (municipal revenue bonds, residential mortgages), 100% (for
example, most corporate debt), and some assets given No rating.
Banks with an international presence are required to hold capital
equal to 8% of their risk-weighted assets (RWA).
• The tier 1 capital ratio = tier 1 capital / all RWA
• The total capital ratio = (tier 1 + tier 2 capital) / all RWA
• Leverage ratio = total capital/average total assets
• Banks are also required to report off-balance-sheet items such as

letters of credit, unused commitments, and derivatives. These all
factor into the risk weighted assets. The report is typically
submitted to the Federal Reserve Bank as HC-R for the bank-
holding company and submitted to the Office of the Comptroller
of the Currency (OCC) as RC-R for just the bank.
• From 1988 this framework was progressively introduced in

member countries of G-10, comprising 13 countries as of
2013: Belgium, Canada, France, Germany, Italy, Japan, Luxembour
g, Netherlands, Spain, Sweden, Switzerland, United Kingdom and
the United States of America.
Bushra Shazli
+918948156741
[email protected]
• Over 100 other countries also adopted, at least in name, the

principles prescribed under Basel I. The efficacy with which the
principles are enforced varies, even within nations of the Group.
Risk weighted asset (RWA) means assets with different risk profiles.
For example:- An asset backed by collateral would carry lesser risk as

compared to personal loans which have no collateral.
India adopted Basel 1 guidelines in 1999.
The twins objectives of Basel 1 was:-
1. To ensure an adequate level of capital in the international banking

system.
2. To create a more level playing field in the competitive

environment.
Basel 2
• In 2004, Basel II guidelines were published by BCBS, which were
considered to be the refined and reformed versions of Basel I
accord.
The guidelines were based on three parameters which are as follows
• Banks should maintain a minimum capital adequacy requirement

of 8% of risk assets.
• Banks were needed to develop and use better risk management

techniques in monitoring and managing all the three types of risks
that is credit and increased disclosure requirements.
Bushra Shazli
+918948156741
[email protected]
• Banks need to mandatory disclose their risk exposure, etc to the

central bank.
Objective
• The final version aims at:
• Ensuring that capital allocation is more risk-sensitive;
• Enhancing disclosure requirements which would allow market

participants to assess the capital adequacy of an institution;
• Ensuring that credit risk, operational risk and market risk are
quantified based on data and formal techniques;
• Attempting to align economic and regulatory capital more closely

to reduce the scope for regulatory arbitrage.
This Basel capital accord focuses on three pillars:-
PILLAR 1
Minimum Regulatory capital requirement based on risk weighted asset:
• Banks should continue to maintain a minimum capital adequacy

requirement of 8% of risk-weighted assets. However, the
definition of capital adequacy ratio was refined. Also, Basel-II
divides the capital into 3 tiers.
• Tier-3 capital includes short-term subordinated loans.

(subordinated loans means lower in the ranking. It is repaid after
other debts in case of bank liquidation.)
Bushra Shazli
+918948156741
[email protected]
• The credit risk component can be calculated in three different

ways of varying degree of sophistication, namely standardized
approach, Foundation IRB, Advanced IRB. IRB stands for "Internal
Rating-Based Approach".
• For operational risk, there are three different approaches – basic

indicator approach or BIA, standardized approach or TSA, and the
internal measurement approach (an advanced form of which is
the advanced measurement approach or AMA).
• For market risk the preferred approach is VaR (value at risk).
PIILAR 2
Supervisory review process- According to this, banks were required to

develop and use better risk management techniques in monitoring and
managing all the three types of risks that a bank faces, viz. credit,
market, and operational risks.
• The process has four key principles-
a) Bank should have process for assessing their overall vapital

adequacy in relation to their risk profile and a strategy for
monitoring their capital levels.
b) Supervisors should review and evaluate bank’s internal capital

adequacy assessment and strategies, as well as their ability to
monitor and ensure their compliance with regulatory capital
ratios.
Bushra Shazli
+918948156741
[email protected]
c) Supervisors should expect banks to operate above the minimum

regulatory capital ratios and should have the ability to require
banks to hold capita in excess of the minimum.
d) Supervisors should seek to intervene at an early stage to prevent

capital from falling below minimum level and should require rapid
remedial action if capital is not mentioned or restored.
PILLAR 3
Market discipline: Increasing the disclosure that banks must provide to

increase the transparency of banks. It increased disclosure
requirements. Banks need to mandatorily disclose their CAR, risk
exposure, etc to the central bank.
July 8–9, 2009 update
• A final package of measures to enhance the three pillars of the

Basel II framework and to strengthen the 1996 rules governing
trading book capital was issued by the newly expanded Basel
Committee. These measures include the enhancements to the
Basel II framework, the revisions to the Basel II market-risk
framework and the guidelines for computing capital for
incremental risk in the trading book.
Regulatory Initiatives
• The regulatory initiatives taken by the Reserve Bank of India

include:
a) Ensuring that the banks have suitable risk management

framework oriented towards their requirements dictated by the
Bushra Shazli
+918948156741
[email protected]
size and complexity of business, risk philosophy, market

perceptions and the expected level of capital. The framework
adopted by banks would need to be adaptable to changes in
business size, market dynamics and introduction of innovative
products by banks in future.
b) Introduction of Risk Based Supervision (RBS) in 23 banks on a pilot

basis.
c) Encouraging banks to formalize their Capital Adequacy

Assessment Programme (CAAP) in alignment with business plan
and performance budgeting system. This, together with adoption
of Risk Based Supervision would aid in factoring the Pillar II
requirements under Basel II.
d) Enhancing the area of disclosures (Pillar III), so as to have greater

transparency of the financial position and risk profile of banks.
e) Improving the level of corporate governance standards in banks.
f) Building capacity for ensuring the regulator’s ability for identifying

and permitting eligible banks to adopt IRB / Advanced
Measurement approaches.
Basel 3
• In 2010, Basel III guidelines were released. These guidelines were
introduced in response to the financial crisis of 2008.
• In 2008, Lehman Brothers collapsed in September 2008, the need

for a fundamental strengthening of the Basel II framework had
become apparent.
Bushra Shazli
+918948156741
[email protected]
• Basel III norms aim at making most banking activities such as their
trading book activities more capital-intensive.
• The guidelines aim to promote a more resilient banking system by

focusing on four vital banking parameters viz. capital, leverage,
funding and liquidity.
• Presently Indian banking system follows Basel II norms.
• The Reserve Bank of India has extended the timeline for full
implementation of the Basel III capital regulations by a year to
March 31, 2019.
The guidelines aim to promote a more resilient banking system.
• Capital: The capital adequacy ratio is to be maintained at 12.9 %.

The minimum Tier 1 capital ratio and the minimum Tier 2 capital
ratio have to be maintained at 10.5 % and 2 % of risk-weighted
assets respectively.
• In addition, banks have to maintain a capital conservation

buffer of 2.5%.
• Counter-cyclical buffer is also to be maintained at 0-2.5%.
• The leverage rate has to be at least 3 %. The leverage rate is the

ratio of a bank’s tier-1 capital to average total consolidated assets.
• Liquidity: Basel-III created two liquidity ratios: LCR and NSFR. The
liquidity coverage ratio(LCR) will require banks to hold a buffer of
high-quality liquid assets sufficient to deal with the cash outflows
encountered in an acute short term stress scenario as specified by
Bushra Shazli
+918948156741
[email protected]
supervisors. The minimum LCR requirement will be to reach 100%

on 1 January 2019. This is to prevent situations like “Bank Run”.
• The goal is to ensure that banks have enough liquidity for a 30-
days stress scenario if it were to happen. On the other hand, the
Net Stable Funds Rate (NSFR) requires banks to maintain a stable
funding profile in relation to their off-balance-sheet assets and
activities. NSFR requires banks to fund their activities with stable
sources of finance (reliable over the one-year horizon). The
minimum NSFR requirement is 100 %. Therefore, LCR measures
short-term (30 days) resilience, and NSFR measures medium-term
(1 year) resilience.
Important Points Regarding Implementation of Basel III
• The government of India is scaling disinvesting their holdings in

PSBs to 52 per cent.
• The government will soon infuse Rs.6,990 crore in nine public

sector banks including SBI, Bank of Baroda (BoB), Punjab National
Bank (PNB) for enhancing their capital and meeting global risk
norms.
• This is the first tranche of capital infusion for which the

government had allocated Rs.11,200 crore in the Budget for 2014-
15.
• The government has infused Rs.58,600 crore between 2011 to

2014 in the state-owned banks.
Finance Minister Arun Jaitley in the Budget speech had said that "to be
in line with Basel-III norms there is a requirement to infuse Rs.2,40,000
Bushra Shazli
+918948156741
[email protected]
crore as equity by 2018 in our banks. To meet this huge capital

requirement we need to raise additional resources to fulfill this
obligation.
• The deadline for the implementation of Basel-III was March 2019

in India. It was postponed to March 2020. In light of the
coronavirus pandemic, the RBI decided to defer
the implementation of Basel norms by further 6 months.
Extending more time under Basel III means lower capital burden
on the banks in terms of provisioning requirements, including the
NPAs.
• This extension would impact the perception of Indian Banks and

central banks in the eyes of the global players.
Capital Adequacy Norms

Capital Adequacy Norms included different Concepts, explained as
follows:
Tier-I Capital
Capital which is first readily available to protect the unexpected losses

is called as Tier-I Capital. It is also termed as Core Capital.
Tier 1 capital is the core capital of a bank that is permanent

and reliable. It includes equity capital and disclosed reserves.
Tier-I Capital consists of :-
• Paid-Up Capital.
• Statutory Reserves.
Bushra Shazli
+918948156741
[email protected]
• Other Disclosed Free Reserves : Reserves which are not kept side
for meeting any specific liability.
• Capital Reserves : Surplus generated from sale of Capital Assets.
Tier-II Capital
Capital which is second readily available to protect the unexpected

losses is called as Tier-II Capital.
Tier 2 capital is the supplementary capital. It includes

undisclosed reserves, general provisions, provisions against Non-
performing Assets, cumulative non-redeemable preference shares, etc.
Tier-II Capital consists of :-
• Undisclosed Reserves and Paid-Up Capital Perpetual Preference

Shares.
• Revaluation Reserves (at discount of 55%).
• Hybrid (Debt / Equity) Capital.
• Subordinated Debt.
• General Provisions and Loss Reserves.
There is an important condition that Tier II Capital cannot exceed 50%

of Tier-I Capital for arriving at the prescribed Capital Adequacy Ratio.
Risk Management
• Risk management encompasses the identification, analysis, and
response to risk factors that form part of the life of a business.
Effective risk management means attempting to control, as much
Bushra Shazli
+918948156741
[email protected]
as possible, future outcomes by acting proactively rather than

reactively. Therefore, effective risk management offers the
potential to reduce both the possibility of a risk occurring and its
potential impact.
• Risk management is an important business practice that helps

businesses identify, evaluate, track, and mitigate the risks present
in the business environment. Risk management is practiced by the
business of all sizes; small businesses do it informally, while
enterprises codify it.
Response to Risks
• Response to risks usually takes one of the following forms:
• Avoidance: A business strives to eliminate a particular risk by

getting rid of its cause.
• Mitigation: Decreasing the projected financial value associated

with a risk by lowering the possibility of the occurrence of the risk.
• Acceptance: In some cases, a business may be forced to accept a

risk. This option is possible if a business entity develops
contingencies to mitigate the impact of the risk, should it occur.
Risk Analysis Process
• Risks analysis is a qualitative problem-solving approach that uses

various tools of assessment to work out and rank risks for the
purpose of assessing and resolving them. Here is the risk analysis
process:
1. Identify existing risks

Bushra Shazli
+918948156741
[email protected]
• Risk identification mainly involves brainstorming. A business

gathers its employees together so that they can review all the
various sources of risk. The next step is to arrange all the
identified risks in order of priority. Because it is not possible to
mitigate all existing risks, prioritization ensures that those risks
that can affect a business significantly are dealt with more
urgently.
2. Assess the risks
• In many cases, problem resolution involves identifying the

problem and then finding an appropriate solution. However, prior
to figuring out how best to handle risks, a business should locate
the cause of the risks by asking the question, “What caused such a
risk and how could it influence the business?”
3. Develop an appropriate response
• Once a business entity is set on assessing likely remedies to

mitigate identified risks and prevent their recurrence, it needs to
ask the following questions: What measures can be taken to
prevent the identified risk from recurring? In addition, what is the
best thing to do if it does recur?
4. Develop preventive mechanisms for identified risks
• Here, the ideas that were found to be useful in mitigating risks are
developed into a number of tasks and then into contingency plans
that can be deployed in the future. If risks occur, the plans can be
put to action.
Bushra Shazli
+918948156741
[email protected]
Risk Weighted Assets

Capital Adequacy Ratio is calculated based on the assets of the bank.
The values of bank's assets are not taken according to the book value
but according to the risk factor involved. The value of each asset is
assigned with a risk factor in percentage terms.
• Tier 1: Capital is a bank’s core capital that is used at times of

financial emergency to absorb losses without impact on daily
operations. It includes audited revenue reserves, ordinary share
capital, intangible assets, and future tax benefits.
• Tier 2: Capital is a bank’s supplemental capital that is used to

absorb losses at the time of winding up an asset. It includes
revaluation reserves, perpetual cumulative preference
shares, retained earnings, subordinated debt, and
general provisions for bad debt.
Subordinated Debt
These are bonds issued by banks for raising Tier II Capital.
They are as follows :-
• They should be fully paid up instruments.
• They should be unsecured debt.
• They should be subordinated to the claims of other creditors. This

means that the bank's holder's claims for their money will be paid
at last in order of preference as compared with the claims of
other creditors of the bank.
Bushra Shazli
+918948156741
[email protected]
• The bonds should not be redeemable at the option of the holders.

This means the repayment of bond value will be decided only by
the issuing bank.
Anti Money Laundering-
• Money Laundering- Money laundering is the practice of engaging

in a specific financial transaction to conceal the identity, source
and/ or destination of money and is the main operation of
underground economy.
• The offence of money laundering has been defined in section 3 of

the prevention of –
Money Laundering Act 2002 (PMLA)-
• Prevention of Money Laundering Act, 2002 is an Act of the

Parliament of India enacted by the NDA government to prevent
money-laundering and to provide for confiscation of property
derived from money-laundering. PMLA and the Rules notified
there under came into force with effect from July 1, 2005.
• Money Laundering occurs in three stages-
a) Placement- it refers to the initial point of entry for funds derived

from any criminal activities.
b) Layering- It refers to the creation of complex network of

transaction which attempts to obscure the linkk between the
initial entry point and the end of laundry cycle.
c) Integration- it refers to the return of funds to the legitimate

economy for late extraction.
Bushra Shazli
+918948156741
[email protected]
Non- performing Asset

These are assets of banks, which stop generating income for the bank.
These are not physical assets of banks but are loans and advances
extended by banks to its customers.
Loans and Advances becomes NPA when-
a) Interest payment is due for more than 90 days for a term loan by
the borrowers.
b) An overdraft or cash credit account is out of order for period of 90

days.
c) In case of bill purchased or discounted it is overdue for more than

90 days
d) Amount of liquidity facility outstanding for more than 90 days in

case of securitization transaction
e) If interest is not paid in full within 90 days form the end of a

quarter when the interest has been charged on a loan amount by
the bank.
• Types of Stressed Assets-
a) Standard Asset- It is one, which services the interest or

installment on time and there is no overdue. The account is also
operating regularly.
b) Substandard Assets- It is one which is an NPA for a period less

than or equal to 12 months. It will have well defined credi
weakness that risk the liquidation of the debt. It is characterized
Bushra Shazli
+918948156741
[email protected]
by the possibility that the banks will face some loss, if deficiencies
are not corrected.
c) Doubtful Assets- If Sub-standard assets remains so for 12 months

or more, then it would be turned as doubtful assets.
d) Loss Assets- If the loan is not repaid even after it remains

substandard for more than three years it would be called as loss
Asset.
NPA Management
Banks can manage their NPA’s effectively as follows-
1. Banks should install a strong mechanism which will help the bank
officials identify the early sign of an asset becoming non-
performing. This system should enable the banks to discover the
problem and take necessary measures to avoid the loss of asset.
Bushra Shazli
+918948156741
[email protected]
2. They should analyze each and every loan accounts keeping in view
the repayment periods and the period of overdue for correct
classification of assets.
3. The IT system should be sound enough so that it generates

reliable and quality information about the quality of the assets of
the banks.
SARFASI Act
➢ Securitization and Reconstructions of Financial Assets and

enforcement of Security Interest Act 2002
➢ To regulate secured creditors’ interest came into force in 2002.
➢ It is primarily aimed at the enforcement of the security interests

besides securitization and reconstruction of the financial assets.
➢ The Act lays down the steps to be taken for possession of assets
and prescribes methods of sale viz.
a) Private treaty
b) Conducting a public auction
c) Inviting tenders form the public
d) Obtaining quotations form parties who could be interested in

buying such assets.
Asset Reconstruction Companies (ARC)
Bushra Shazli
+918948156741
[email protected]
The RBI gave license to 14 new ARC’s recently after the amendment of
the SARFAESI Act of 2002. These companies are created to unlock value
from stressed loans.
• An Asset Reconstruction Company is a specialized financial

institution that buys the NPAs or bad assets from banks and
financial institutions so that the latter can clean up their balance
sheets. Or in other words, ARCs are in the business of buying bad
loans from banks.
Corporate Debt Restructring-2005
It reduces the burden of the debts on the company by decreasing rates

paid and increasing the time, the company has to pay the obligation
back.
Bushra Shazli
+918948156741
[email protected]
• It is the acquisition of any right or interest of any bank or financial

institution in loans, advances granted, debentures, bonds,
guarantees or any other credit facility extended by banks for the
purpose of its realisation. Such loans, advances, bonds,
guarantees and other credit facilities are together known by a
term – ‘financial assistance’.
Mission Indradhanush- 2015
• It is for transforming the PSBs represents the most comprehensive

reform effort undertaken since banking nationalization in the year
1970 to revamp the Public Sector Banks and improve their overall
performance by ABCDEFG (Appointments, Bank Boards Bureau,
Capitalization, De-stressing, Empowerment, Framework of
Accountability)
Financial Markets
• A Financial Market is a market for creation and exchange of
financial assets. If you buy or sell financial assets, you will
participate in financial markets in some way or the other.
• A financial market is a word that describes a marketplace where

bonds, equity, securities, currencies are traded. Few financial
markets do a security business of trillions of dollars daily, and
some are small-scale with less activity. These are markets where
businesses grow their cash, companies decrease risks, and
investors make more cash.
Types of financial Market-
Bushra Shazli
+918948156741
[email protected]
• There are so many financial markets, and every country is home

to at least one, although they vary in size. Some are small while
some others are internationally known, such as the New York
Stock Exchange (NYSE) that trades trillions of dollars on a daily
basis. Here are some types of financial markets.
1. Stock market
• The stock market trades shares of ownership of public companies.

Each share comes with a price, and investors make money with
the stocks when they perform well in the market. It is easy to buy
stocks. The real challenge is in choosing the right stocks that will
earn money for the investor.
2- Bond market
• The bond market offers opportunities for companies and the

government to secure money to finance a project or investment.
In a bond market, investors buy bonds from a company, and the
company returns the amount of the bonds within an agreed
period, plus interest.
3- Commodities market
• The commodities market is where traders and investors buy and

sell natural resources or commodities such as corn, oil, meat, and
gold. A specific market is created for such resources because their
price is unpredictable. There is a commodities futures
market wherein the price of items that are to be delivered at a
given future time is already identified and sealed today.
4. Derivatives market
Bushra Shazli
+918948156741
[email protected]
• Such a market involves derivatives or contracts whose value is

based on the market value of the asset being traded. The futures
mentioned above in the commodities market is an example of a
derivative.
Importance of Financial Markets
• There are many things that financial markets make possible,

including the following:
• Financial markets provide a place where participants like investors

and debtors, regardless of their size, will receive fair and proper
treatment.
• They provide individuals, companies, and government

organizations with access to capital.
• Financial markets help lower the unemployment rate because of

the many job opportunities it offers
Functions of Financial Market
• Mentioned below are the important functions of the financial

market.
• It mobilizes savings by trading it in the most productive methods.
• It assists in deciding the securities price by interaction with the

investors and depending on the demand and supply in the
market.
• It gives liquidity to bartered assets.
Bushra Shazli
+918948156741
[email protected]
• Less time-consuming and cost-effective as parties don’t have to

spend extra time and money to find potential clients to deal with
securities. It also decreases cost by giving valuable information
about the securities traded in the financial market.
➢ Nature of Claim-
a. The Debt Market- It is the financial market for fixed claims (debt
instrument).
• The bond market broadly describes a marketplace where

investors buy debt securities that are brought to the market by
either governmental entities or publicly-traded corporations.
National governments generally use the proceeds from bonds to
finance infrastructural improvements and pay down debts.
• Debt investments include government, corporate, and municipal

bonds, as well as real estate investments, peer-to-peer lending,
and personal loans.
Bushra Shazli
+918948156741
[email protected]
• The bonds are issued for a fixed tenure at a pre-specified interest

rate. In the secondary market, the investors who had purchased
the bond previously, sell their bonds to other investors. Various
brokers operate in the secondary market who facilitate these
transactions.
b. The equity Market is the financial market for residual claims (equity
instruments).
• Equity market is a place where stocks and shares of companies

are traded. The equities that are traded in an equity market are
either over the counter or at stock exchanges. Often called as
stock market or share market, an equity market allows sellers and
buyers to deal in equity or shares in the same platform.
Types of Equity Markets
• Primary Market: Every company that proposes to go public must

come out with an initial public offering (IPO). During the IPO, the
company offers a certain portion of its equity to the public.
• Secondary Market: After the listing of the IPO shares, these are
traded on the secondary market.
Maturity of Claim-
a. Money Market- The market for short term financial claims is

referred to as the money market. At the wholesale level, it
involves large-volume trades between institutions and traders. At
the retail level, it includes money market mutual funds bought by
individual investors and money market accounts opened by bank
customers.
Bushra Shazli
+918948156741
[email protected]
Money market accounts work much the same as other

bank deposit accounts, like savings or checking accounts. The idea is
pretty straightforward: you put money in the account and the bank
pays interest on your balance periodically according to the terms of the
account. Opening a money market account is simple, too.
Example of money market- There are several money

market instruments in most Western countries, including treasury bills,
commercial paper, banker's acceptances, deposits, certificates of
deposit, bills of exchange, repurchase agreements, federal funds, and
short-lived mortgage- and asset-backed securities.
Types of Money Market Instruments?
• There are multiple types of money market instruments available,

each of them aiming to boost the total productive capacity and
hence, the GDP of the country. It also provides secure returns to
the investors looking for low-risk investment opportunities for a
short tenure.
The list of money market instruments traded in the money market are:
Certificate of Deposit
• Lending substantial financial resources to an organization can be

done against a certificate of deposit. The operating procedure is
similar to that of a fixed deposit, except the higher negotiating
capacity, as well as lower liquidity of the former.
Commercial Paper
Bushra Shazli
+918948156741
[email protected]
• This type of money market instrument serves as a promissory

note generated by a company to raise short term funds. It is
unsecured, and thereby can only be used by large-cap companies
with renowned market reputation.
• The maturity period of these debt instruments lies anywhere

between 7 days to one year, and thus, attracts a lower interest
rate than equivalent securities sold in the capital market.
Treasury Bills
• These are only issued by the central government of a country

when it requires funds to meet its short term obligations.
• These securities do not generate interest but allow an investor to

make capital gains as it is sold at a discounted rate while the
entire face value is paid at the time of maturity.
Repurchase Agreements
• Commonly known as Repo, is a short term borrowing tool where

the issuer availing the funds guarantees to repay (repurchase) it in
the future.
• Repurchase agreements generally involve the trading of

government securities. They are subject to market interest rates
and are backed by the government.
Banker’s Acceptance
• One of the most common money market instruments traded in

the financial sector, a banker’s acceptance signifies a loan
Bushra Shazli
+918948156741
[email protected]
extended to the stipulated bank, with a signed guarantee of

repayment in the future.
• Since money market instruments are traded wholesale over the

counter, it cannot be purchased in standard units by an individual
investor.
b. Capital Market- The market for long term financial claims is called
capital market. The capital market is the market for long term debt
instruments and equity instruments.
• It consist of the primary market, where new securities are issued

and sold, and the secondary market, where already-
issued securities are traded between investors. The most
common capital markets are the stock market and the
bond market.
• These are financial markets that bring buyers and sellers together
to trade stocks, bonds, currencies, and other financial
assets. Capital markets include the stock market and the
bond market. They help people with ideas become entrepreneurs
and help small businesses grow into big companies.
Capital Markets Expanded
• Capital markets can refer to markets in a broad sense for any

financial asset.
Corporate Finance
• In this realm, the capital market is where investable capital for

non-financial companies is available. Investable capital includes
Bushra Shazli
+918948156741
[email protected]
the external funds included in a weighted average cost of capital

calculation—common and preferred equity, public bonds, and
private debt—that are also used in a return on invested capital
calculation. Capital markets in corporate finance may also refer to
equity funding, excluding debt.
Financial Services
• Financial companies involved in private rather than public

markets are part of the capital market. They include investment
banks, private equity, and venture capital firms in contrast to
broker-dealers and public exchanges.
Public Markets
• Operated by a regulated exchange, capital markets can refer to

equity markets in contrast to debt, bond, fixed income, money,
derivatives, and commodities markets. Mirroring the corporate
finance context, capital markets can also mean equity as well as
debt, bond, or fixed income markets.
Functions of Capital Markets
1. Capital Formation
• In capital markets, there are people who have no immediate need

for cash – investors – and those who need cash – debtors. The
capital markets allow unused capital to be invested and employed
instead of sitting by idle.
2- Ease of Access and Exit
Bushra Shazli
+918948156741
[email protected]
• In today’s day and age, capital markets have become increasingly

accessible, with investors able to trade off their mobiles. The
advancement of technology has made capital markets almost
universally available.
3- Economic Growth
• By facilitating a market place for borrowers and lenders, the

capital market creates a more efficient flow of capital. Businesses
that need a corporate loan can come to the capital market, apply,
and get it issued by an underwriter. Alternatively, it can sell some
of its company onto the stock exchange in return for capital.
4- Liquidity of Capital
• Capital markets allow those who have capital, to invest it. In

return, they have ownership of a bond or equity. However, they
are unable to buy a car, food, or other assets with a bond
certificate which is why it may be necessary to liquidate these.
5- Return on Investment
• In capital markets there are enough financial instruments to suit

any type of investors, whether they want a high level of risk or a
low level of risk – there is something for everyone.
• At the same time, capital markets provide investors with an

opportunity to enhance their yield on their capital. Savings
accounts offer little interest – particularly in comparison to yields
on the majority of stocks
Capital Market Instruments

Bushra Shazli
+918948156741
[email protected]
➢ Bond Markets
• The bond market is very diverse in its offerings, which is why most
of the trades in this market are done ‘Over the Counter’ (OTC).
There are many different types, but let us look at the main ones
below:
1. Corporate Bonds – Investment-Grade
• Corporate bonds are simply businesses borrowing money in

exchange for a ‘bond’ at a set rate of interest. These usually come
in short-term bonds with a maturity of five years or less;
intermediate bonds, with a maturity between 5 to 12 years; and
long-term bonds with a maturity of over 12 years.
• More specifically, investment-grade bonds are those categorised

for big businesses that are highly unlikely to default. They are
riskier than government bonds, yet safer than ‘junk bonds’ – so
are a half-way house between risk levels.
2. Corporate Bonds – Junk bonds
• Junk bonds offer a high yield – much higher than other types. Yet
they also offer the highest level of risk. This is because the
companies that issue these bonds are either small or unreliable. In
other words, the likelihood of receiving the initial investment back
is not high.
• This is a good way for small to medium business to obtain capital

and grow as it allows them to access credit they may not have
access to otherwise.
Bushra Shazli
+918948156741
[email protected]
3. Foreign Bonds
• Foreign bonds are issued in the domestic country by a foreign

entity in local currency. For instance, an Indian firm may want to
raise some capital in the US as it is unable to raise it in the Indian
capital markets. In turn, it may issue $1 million in foreign bonds –
all in US dollars. The debt is therefore repayable in US dollars.
• Although this can pose a greater risk to the foreign entity due to
currency fluctuations, it provides an avenue to capital that may be
unavailable in its own market. At the same time, it allows
investors to diversify their portfolio to reduce their exposure to
economic fluctuations.
4. Municipal Bonds
• A municipal bond differs from a government bond in the fact that

they are issued by local government or one of its agencies –
rather than the central/federal government. These are generally
safe bonds but present a greater risk than treasury bonds.
• They can be popular as they come in a tax-exempt version, with

the investment funding local infrastructural projects such as new
parks, libraries, or bridges.
5. Treasury Bonds
• Government bonds, or ‘treasury bonds’, as they are commonly

referred to in the US, are issued by central government over a set
period of time – usually greater than 10 years. They earn a small
amount of interest – below the market average, due to the low
risk associated with such.
Bushra Shazli
+918948156741
[email protected]
6. Zero-coupon Bonds
• Zero-coupon bonds are bonds that are sold on the market at a

steep discount. This is because there is no interest due until it
expires – so essentially its value gains over time.
• Often, these bonds are indexed to inflation to ensure the owner

of the bond maintains its purchasing power throughout time.
➢ Seasoning of Claim
a. Primary Market is classified as financial markets is based on

whether the claims represent new issues or outstanding issues.
The market where issuers sell new claims is referred to as the
primary market.
When a company publicly sells new stocks and

bonds for the first time, it does so in the primary capital market. This
market is also called the new issues market. In many cases, the new
issue takes the form of an initial public offering (IPO). When investors
Bushra Shazli
+918948156741
[email protected]
purchase securities on the primary capital market, the company that

offers the securities hires an underwriting firm to review it and create a
prospectus outlining the price and other details of the securities to be
issued.
Functions of Primary Market
• The functions of such a market are manifold –
New issue offer
• The primary market organises offer of a new issue which had not
been traded on any other exchange earlier. Due to this reason, it
is also called a New Issue Market.
Underwriting services
• Underwriting is an essential aspect while offering a new issue. An

underwriter’s role in a primary marketplace includes purchasing
unsold shares if it cannot manage to sell the required number of
shares to the public. A financial institution may act as an
underwriter, earning a commission on underwriting.
Distribution of new issue
• A new issue is also distributed in a primary marketing sphere.

Such distribution is initiated with a new prospectus issue. It invites
the public at large to buy a new issue and provides detailed
information on the company, issue, and involved underwriters.
There are 5 types of primary market issues.
1) Public issue
Bushra Shazli
+918948156741
[email protected]
• Public issue is the most common method of issuing securities of a

company to the public at large. It is mainly done via Initial Public
Offering (IPO) resulting in companies raising funds from the
capital market. These securities are listed in the stock exchanges
for trading.
2) Private placement
• When a company offers its securities to a small group of investors,

it is called private placement. Such securities may be bonds,
stocks or other securities, and the investors can be both individual
and institutional.
3) Preferential issue
• A preferential issue is one of the quickest methods available to

companies for raising capital. Both listed and unlisted companies
can issue shares or convertible securities to a select group of
investors.
4) Qualified institutional placement
• Qualified institutional placement is another kind of private

placement where a listed company issues securities in the form of
equity shares or partly or wholly convertible debentures apart
from such warrants convertible to equity shares and purchased by
a Qualified Institutional Buyer (QIB).
Some QIBs are –
• Foreign Institutional Investors registered with the Securities and

Exchange Board of India.
Bushra Shazli
+918948156741
[email protected]
• Foreign Venture Capital Investors.
• Alternate Investment Funds.
• Mutual Funds.
• Public Financial Institutions.
• Insurers.
• Scheduled Commercial Banks.
• Pension Funds.
5) Rights and bonus issues
• Another issuance in the primary market is rights and bonus issue,

in which the company issues securities to existing investors by
offering them to purchase more securities at a predetermined
price (in case of rights issue) or avail allotment of additional free
shares (in case of bonus issue).
Advantages of Primary Market
• Companies can raise capital at relatively low cost, and the

securities so issued in the primary market provide high liquidity as
the same can be sold in the secondary market almost
immediately.
• The primary market is an important source for mobilisation of

savings in an economy. Funds are mobilised from commoners for
investing in other channels. It leads to monetary resources being
put into investment options.
Bushra Shazli
+918948156741
[email protected]
• Chances of price manipulation in the primary market are

considerably less when compared to the secondary market. Such
manipulation usually occurs by deflating or inflating a security
price, thereby deliberately interfering with fair and free
operations of the market.
b. Secondary Market-
The market where investors trade outstanding securities is called

the secondary market.
• A secondary market is a platform wherein the shares of

companies are traded among investors. It means that investors
can freely buy and sell shares without the intervention of the
issuing company. In these transactions among investors, the
issuing company does not participate in income generation, and
share valuation is rather based on its performance in the market.
Income in this market is thus generated via the sale of the shares
from one investor to another.
Some of the entities that are functional in a secondary market include –
• Retail investors.
• Advisory service providers and brokers comprising commission

brokers and security dealers, among others.
• Financial intermediaries including non-banking financial

companies, insurance companies, banks and mutual funds.
Different Instruments in the Secondary Market
Bushra Shazli
+918948156741
[email protected]
• The instruments traded in a secondary market consist of fixed

income instruments, variable income instruments, and hybrid
instruments.
Fixed income instruments
• Fixed income instruments are primarily debt instruments ensuring

a regular form of payment such as interests, and the principal is
repaid on maturity. Examples of fixed income securities are –
debentures, bonds, and preference shares.
Variable income instruments
• Investment in variable income instruments generates an effective

rate of return to the investor, and various market factors
determine the quantum of such return. These securities expose
investors to higher risks as well as higher rewards. Examples of
variable income instruments are – equity and derivatives.
Hybrid instruments
• Two or more different financial instruments are combined to form

hybrid instruments. Convertible debentures serve as an example
of hybrid instruments.
Functions of Secondary Market
• A stock exchange provides a platform to investors to enter into a

trading transaction of bonds, shares, debentures and such other
financial instruments.
• Transactions can be entered into at any time, and the market

allows for active trading so that there can be immediate purchase
Bushra Shazli
+918948156741
[email protected]
or selling with little variation in price among different

transactions. Also, there is continuity in trading, which increases
the liquidity of assets that are traded in this market.
• Investors find a proper platform, such as an organised exchange

to liquidate the holdings. The securities that they hold can be sold
in various stock exchanges.
• A secondary market acts as a medium of determining the pricing

of assets in a transaction consistent with the demand and supply.
The information about transactions price is within the public
domain that enables investors to decide accordingly.
• It is indicative of a nation’s economy as well, and also serves as a

link between savings and investment. As in, savings are mobilised
via investments by way of securities.
Advantages of Secondary Market
• Investors can ease their liquidity problems in a secondary market

conveniently. Like, an investor in need of liquid cash can sell the
shares held quite easily as a large number of buyers are present in
the secondary market.
• The secondary market indicates a benchmark for fair valuation of

a particular company.
• Price adjustments of securities in a secondary market takes place

within a short span in tune with the availability of new
information about the company.
Bushra Shazli
+918948156741
[email protected]
➢ Timing of delivery
a. Cash or spot market- The spot market or cash market is a public

financial market in which financial instruments or commodities
are traded for immediate delivery. It contrasts with a futures
market, in which delivery is due at a later date.
• A cash market is a market for securities or commodities in which

the goods are sold for cash and delivered immediately. In some
cases, "immediate" means one month or less.
• For example, foreign exchange markets are considered a cash

market since investors can immediately receive currencies in
exchange for cash.
Exchange vs. Over-the-Counter
• Cash markets can occur both on regulated exchanges or over the

counter (OTC) transactions, which are fairly unregulated. This can
Bushra Shazli
+918948156741
[email protected]
include cash markets in the NYSE, also known as the New York
Stock Exchange.
• Regulated exchanges tend to offer institutional protections

against some risks. OTC markets offer traders the opportunity to
create customized contracts. Factors such as the trader’s risk
tolerance and goals will indicate which option is best.
Cash Market Trading
• Cash market trading occurs when an investor purchases

commodities or securities on the settlement date or point of sale.
It’s done through a regulated exchange or through over-the-
counter (OTC) transactions. Both are settled on the spot at a
specified date.
Spot Market
• A spot market is where financial instruments are exchanged for

immediate delivery, such as commodities, currencies, and
securities. Delivery, here, means cash exchange for a financial
tool. In comparison, a futures contract is based on the delivery of
the underlying asset at a future date. Over-the-counter
(OTC) markets and exchanges may provide spot trading and/or
futures trading.
• Spot markets are also referred to as "liquid markets" or "cash

markets" because transactions are instantly and essentially
exchanged for the commodity. While it may take time to legally
transfer funds between the buyer and the seller, such as T+2 on
Bushra Shazli
+918948156741
[email protected]
the stock market and in most currency transactions, all parties

agree to trade "right now.“
• Unsystematic risk is unique to a given business or industry.
• A swap is a contract which is based on a derivative by which two

parties are allowed to exchange their cash flows and liabilities
from more than one fiscal instruments.
• Capital risk reflects the ability to lose part or all of an investment.
• Relative strength is a calculation of the price trend of a stock or

a financial instrument in comparison to another instrument, stock,
or industry.
• The Ulcer Index (UI) is an indicator that calculates downside risk in

terms of price declines both in magnitude and length.
• A prop-shop is a trading company that deploys its own resources

to generate profits from trading.
Bushra Shazli
+918948156741
[email protected]
b. Forward or future Market- A forward contract is a private and

customizable agreement that settles at the end of the agreement and is
traded over-the-counter. A futures contract has standardized terms and
is traded on an exchange, where prices are settled on a daily basis until
the end of the contract.
• Both forward and futures contracts involve the agreement

between two parties to buy and sell an asset at a specified price
by a certain date.
Bushra Shazli
+918948156741
[email protected]
• A forward contract is a private and customizable agreement that

settles at the end of the agreement and is traded over-the-
counter.
• A futures contract has standardized terms and is traded on an

exchange, where prices are settled on a daily basis until the end of
the contract.
Forward Contracts
• The forward contract is an agreement between a buyer and seller

to trade an asset at a future date. The price of the asset is set
when the contract is drawn up. Forward contracts have one
settlement date—they all settle at the end of the contract.
• These contracts are private agreements between two parties, so

they do not trade on an exchange. Because of the nature of the
contract, they are not as rigid in their terms and conditions.
Futures Contracts
• Like forward contracts, futures contracts involve the agreement to

buy and sell an asset at a specific price at a future date. The
futures contract, however, has some differences from the forward
contract.
• First, futures contracts—also known as futures—are marked-to-

market daily, which means that daily changes are settled day by
day until the end of the contract. Furthermore, a settlement for
futures contracts can occur over a range of dates.
Bushra Shazli
+918948156741
[email protected]
• Because they are traded on an exchange, they have clearing

houses that guarantee the transactions. This drastically lowers the
probability of default to almost never.
➢ Organizational Structure-
a. Exchange traded market- It is characterized by a centralized
organization with standardized procedures.
• Exchange-traded markets are the one in which all transactions

are routed through a central source. In other words, one party is
responsible for being the intermediary that connects buyers and
Bushra Shazli
+918948156741
[email protected]
sellers. The downside of this is that it gives the intermediary

immense power in shaping the market.
• Stock exchanges like the National Stock Exchange of India (NSE),

Bombay Stock Exchange of India (BSE), New York Stock Exchange
(NYSE) are all examples of exchange-traded market.
• Exchanges bring together brokers and dealers who buy and sell
these objects. These various financial instruments can typically be
sold either through the exchange, typically with the benefit of
a clearing house to reduce settlement risk.
• Exchanges can be subdivided:
• By objects sold:
• Stock exchange or securities exchange
• Commodities exchange
• Foreign exchange market – is rare today in the form of a

specialized institution
• By type of trade:
• Classical exchange – for spot trades
• Futures exchange or futures and options exchange – for

derivatives
b. Counter Market- It is a decentralized market with customized

procedures.
Bushra Shazli
+918948156741
[email protected]
• Over-the-counter (OTC) refers to the process of how securities are

traded for companies not listed on a formal exchange.
• Securities that are traded over-the-counter are traded via a dealer

network as opposed to on a centralized exchange.
• OTC trading helps promote equity and financial instruments that

would otherwise be unavailable to investors.
• Companies with OTC shares may raise capital through the sale of
stock.
Advantages-
• OTC provides access to securities not available on standard

exchanges such as bonds, ADRs, and derivatives.
• Fewer regulations on the OTC allows the entry of many

companies who can not, or choose not to, list on other exchanges.
• Through the trade of low-cost, penny stock, speculative investors

can earn significant returns.
Disadvantages-
• OTC stocks have less trade liquidity due to low volume which
leads to delays in finalizing the trade and wide bid-ask spreads.
• Less regulation leads to less available public information, the

chance of outdated information, and the possibility of fraud.
• OTC stocks are prone to make volatile moves on the release of

market and economic data.
Bushra Shazli
+918948156741
[email protected]
Government Security market
• In the investing world, government security applies to a range of

investment products offered by a governmental body. For most
readers, the most common type of government security are
those items issued by the U.S. Treasury in the form of Treasury
bond, bills, and notes. However, the governments of many
nations will issue these debt instruments to fund ongoing,
necessary, operations.
• Government securities are government debt issuances used to

fund daily operations, and special infrastructure and military
projects.
Bushra Shazli
+918948156741
[email protected]
• They guarantee the full repayment of invested principal at the

maturity of the security and often pay periodic coupon or interest
payments.
• Government securities are considered to be risk-free as they have

the backing of the government that issued them.
• The tradeoff of buying risk-free securities is that they tend to pay

a lower rate of interest than corporate bonds.
• Investors in government securities will either hold them to

maturity or sell them to other investors on the secondary bond
market.
Examples of Government Securities
Savings Bonds
• Savings bonds offer fixed interest rates over the term of the
product. Should an investor hold a savings bond until its maturity
they receive the face value of the bond plus any accrued
interest based on the fixed interest rate. Once purchased, a
savings bond cannot be redeemed for the first 12 months it is
held. Also, redeeming a bond within the first five years means the
owner will forfeit the months of accrued interest.
T-Bills-
• Treasury bills (T-Bills) have typical maturities of 4, 8, 13, 26, and

52 weeks. These short-term government securities pay a higher
interest rate return as the maturity terms lengthen. For example,
Bushra Shazli
+918948156741
[email protected]
as of September 4, 2020, the yield on the four-week T-bill was

0.09% while the one-year T-bill yielded 0.13%.
• Treasury bills or T-bills are issued only by the central government

of India. They are short-term money market instruments, which
means that their maturity period is less than 1 year. Treasury bills
are currently issued with three different maturity periods: 91
days, 182 days, and 364 days. T-bills are quite unlike other kinds
of investment products available in the financial markets.
• Most financial instruments pay you an interest on your

investment. The Treasury bill, on the other hand, is what is
commonly known as zero coupon securities. These securities do
not pay you any interest on your investment. However, they’re
issued at a discount and are redeemed at face value on the date
of maturity. For instance, a 182-day T-bill with a face value of Rs.
100 may be issued at Rs. 96, with a discount of Rs. 4, and
redeemed at the face value of Rs. 100.
Treasury Bonds
• Treasury bonds (T-Bonds) have maturities of between 10 and 30

years. These investments have $1,000 face values and pay
semiannual interest returns. The government uses these bonds to
fund deficits in the federal budget.
Dated G-Secs
• Dated G-Secs are also among the different types of government

securities in India. Unlike T-bills and CMBs, G-Secs are long-term
money market instruments that offer a wide range of tenures,
Bushra Shazli
+918948156741
[email protected]
starting from 5 years and going all the way up to 40 years. These
instruments come with either a fixed or a floating interest rate,
also known as the coupon rate. The coupon rate is applied on the
face value of your investment and is paid to you on a half-yearly
basis as interest.
• There are around 9 different types of dated G-Secs currently

issued by the government of India. These are listed below.
• – Fixed Rate Bonds
• – Floating Rate Bonds
• – Capital Indexed Bonds
• – Inflation Indexed Bonds
• – Bonds with Call/Put Options
Advantages-
• Government securities can offer a steady stream of interest

income
• Due to their low default risk, government securities tend to be

safe-haven plays
• Some government securities are exempt from state and local

taxes
• Government securities can be bought and sold easily
• Government securities are available through mutual funds and

exchange-traded funds
Bushra Shazli
+918948156741
[email protected]
Disadvantages-
• Government securities offer low rates of return relative to other

securities
• The interest rates of government securities don't usually keep up

with inflation
• Government securities issued by foreign governments can be risky
• Government securities often pay a lower rate in a rising-rate

market
Development Financial Institutions

• A development finance institution (DFI) also known as
a development bank or development finance company (DFC) is
a financial institution that provides risk capital for economic
development projects on non commercial basis. They are often
established and owned by governments or charitable institutions
to provide funds for projects that would otherwise not be able to
get funds from commercial lenders.
• Some development banks include socially responsible

investing and impact investing criteria into their mandates.
Governments often use development banks to form part of
their development aid or economic development initiatives.
Industry
IFCI – 1st DFI in India. Industrial Corporation of India was established in

1948.
Bushra Shazli
+918948156741
[email protected]
ICICI – Industrial Credit and Investment Corporation of India Limited

established in 1955 by an initiative of the World Bank.
• It established its subsidiary company ICICI Bank limited in 1994.
• In 2002, ICICI limited was merged into ICICI Bank Limited making it
the first universal bank of the country.
Universal Bank – Any Financial institution performing the function of

Commercial Bank + DFI
• It was established in the private sector and is still the Only DFI in
the private sector.
IDBI – Industrial Development Bank of India was set up in 1964 under

RBI and was granted autonomy in 1976
• It is responsible for ensuring adequate flow of credit to various

sectors
• It was converted into a Universal Bank in 2003
IRCI – Industrial Reconstruction Corporation of India was set up in

1971.
• It was set up to revive weak units and provide financial &

technical assistance.
SIDBI – Small Industries development bank of India was established in

1989.
• Was established as a subsidiary of IDBI
• It was granted autonomy in 1998
Bushra Shazli
+918948156741
[email protected]
Foreign Trade
EXIM Bank – Export-Import Bank was established in January 1982 and

is the apex institution in the area of foreign trade investment.
• Provides technical assistance and loan to exporters
Agriculture Sector
NABARD – National Bank for agriculture and rural development was

established in July 1982
• It was established on the recommendation of the Shivraman

Committee
• It is the apex institution in the area of agriculture and rural sectors
• It functions as a refinancing institution
Housing
• NHB- National Housing Bank was established in 1988.
• It is the apex institution in Housing Finance
• Aspirants can also read about micro-finance at the linked article.
Development banking
Industrial Development Bank of India (IDBI)

• During the 1964 the Central Government felt the need for a
Centralized development Bank for growth of ‘industries. Until
then the commercial banks and private banks were doing
financing work for the industries.
Bushra Shazli
+918948156741
[email protected]
• Government therefore established IDBI in order to do a

concentrated activity for industrialization the country.
• Initially IDBI was a subsidiary of RBI and in 1976 IDBI was

converted as a autonomous body.
• The important feature of IDBI is what it has to play a role of

principal financial institution for coordinating the activities of
institutions engaged in financial promoting and developing the
industry.
Organisation and Management:
• IDBI consist of a Board of Directors, consisting of a chairman and

Managing Director appointed by the Government of India, a
Deputy Governor of the RBI nominated by that bank and 20 other
Directors are nominated by the Central Government.
• The board had constituted an Executive Committee consisting of

10 Directors, including the Chairman and Managing Director. The
executive committee is empowered to sanction financial
assistance.
• The Head office of IDBI is located in Mumbai. The bank has five
regional offices, one each in Kolkata, Guwahati, New Delhi,
Chennai and Mumbai. Besides the bank have 21 branch offices.
Objectives of IDBI-
a) To undertake research work pertaining to service of economic

studies and techno commercial studies in connection with
development industries.
Bushra Shazli
+918948156741
[email protected]
b) Play a supportive role to entrepreneurs who are planning and

developing the industries. To assist those industries who are
required on priority in development of industrial structure of the
nation.
c) Provide finance for the export of engineering goods and service

on deferred payment basis.
d) It works as an apex institution for term finance to industries and

coordinates the functioning of the agencies financing promoting and
developing the industries.
• Since its inception IDBI is playing an important role in promotion

of small- scale industries. It helps through the refinance scheme of
industrial loans and by way of bills discounting.
• Its assistance to these industries is channelized through 18 State

Financial Corporations, 28 State Industrial development
Corporations, Commercial Banks and Regional Rural Banks.
• It has financed for modernization scheme, technology up

gradation, energy conservation schemes, equipment replacement.
Foreign currency assistance and for rehabilitation of small and
medium industries.
Sources of funds for IDBI
• By public issue of IDBI bonds.
• By way of deposits from the public
• Capital contribution from the Central Government
Bushra Shazli
+918948156741
[email protected]
• Loans taken from RBI and the Government.
• Borrowings in foreign currency from the international Capital

Market.
• From the repayments of earlier loans and recycling of profits.
Soft Loans for Renovations-
• Many of the process industries and engineering industries need to

be modernized renovated to upgrade the technology to be
competitive in terms of price and quality and productivity for
global competition.
• Some of the industrial areas needing modernization are cement,

engineering, sugar, cotton textiles and jute industries. The expert
committees in each area have recommended various schemes like
equipment, replacement, process changes, environment
protection, by-product, usage, etc.
Functions of IDBI:
The main functions of IDBI are discussed below:
(i) To provide financial assistance to industrial enterprises.
(ii) To promote institutions engaged in industrial development.
(iii) To provide technical and administrative assistance for

promotion management or expansion of industry.
(iv) To undertake market and investment research and surveys in

connection with development of industry.
Bushra Shazli
+918948156741
[email protected]
Developmental Activities of IDBI:
(1) Promotional Activities:
• In fulfillment of its developmental role, the bank continues to

perform a wide range of promotional activities relating to
developmental programmes for new entrepreneurs, consultancy
services for small and medium enterprises and programmes
designed for accredited voluntary agencies for the economic
upliftment of the underprivileged.
(2) Technical Consultancy Organisations:
• With a view to making available at a reasonable cost, consultancy

and advisory services to entrepreneurs, particularly to new and
small entrepreneurs, IDBI, in collaboration with other All-India
Financial Institutions, has set up a network of Technical
Consultancy Organisations (TCOs) covering the entire country.
Industrial Finance Corporation of India

• Industrial Finance Corporation of India (IFCI) is actually the first
financial institute the government established after
independence. The main aim of the incorporation of IFCI was to
provide long-term finance to the manufacturing and industrial
sector of the country.
• Initially established in 1948, the Industrial Finance Corporation

of India was converted into a public company on 1 July 1993 and
is now known as Industrial Finance Corporation of India Ltd. The
main aim of setting up this development bank was to provide
Bushra Shazli
+918948156741
[email protected]
assistance to the industrial sector to meet their medium and long-

term financial needs.
• The IDBI, scheduled banks, insurance sector, co-op banks are

some of the major stakeholders of the IFCI. The
authorized capital of the IFCI is 250 crores and the Central
Government can increase this as and when they wish to do so.
Functions of the IFCI
• First, the main function of the IFCI is to provide medium and long-
term loans and advances to industrial and manufacturing
concerns. It looks into a few factors before granting any loans.
They study the importance of the industry in our national
economy, the overall cost of the project, and finally the quality of
the product and the management of the company. If the above
factors have satisfactory results the IFCI will grant the loan.
• The Industrial Finance Corporation of India can also subscribe to

the debentures that these companies issue in the market.
• The IFCI also provides guarantees to the loans taken by such

industrial companies.
• When a company is issuing shares or debentures the Industrial

Finance Corporation of India can choose to underwrite such
securities.
• It also guarantees deferred payments in case of loans taken from

foreign banks in foreign currency.
Promotional schemes of IFCI-

Bushra Shazli
+918948156741
[email protected]
• Since 1989 IFCI has given a new look to its activities by

encouraging growth of indigenous technology, ancillory
industries, consultancy services, etc.
• The scheme are briefed as under-
a) Subsidy for consultancy to industries relating to Dairy

Development, Poultry and Fishing and Animal Husbandry.
b) Subsidy for consultancy to industries related to industries based

on Agriculture Sericulture and Horticulture.
c) Subsidy for promotion of SSI and Ancillary industries.
Financial Resources of Industrial Finance Corporation of India (IFCI):
The main three components of financial resources of IFCI include:
(i) Share capital
(ii) Bonds and debentures and
(iii) Other borrowings.
Initially, the paid up capital of the IFCI was Rs 5

crore. Later on, the amount was increased several times and as on 31st
March, 2013, the amount of paid up capital stood at Rs 1,926 crore. The
share capital of IFCI is mostly subscribed by IDBI, the LICI, commercial
banks and the cooperative banks. IFCI has also accumulated sizeable
reserves.
Sources of Funds of IFCI-
a) By way of shares and debentures.
Bushra Shazli
+918948156741
[email protected]
b) Borrowing by issue of bonds
c) From repayment of loans
d) Recycling of profit earnings.
State Financial Corporation

• It was in 1951 that State Financial Corporations Act was passed. In
accordance with the provisions of the Act, first Corporation by
Punjab Government was set up in 1953. At present there are 18
such corporations.
Objectives-
• To provide term loans for purchase of land, buildings, machinery

and other facilities.
• To promote self- employment for professionally qualified men

and women entrepreneurs interested in starting their own
projects.
• Financial assistance for expansion, modernization and

mechanization in the existing setup.
• Financial assistance for rehabilitation of sick units.
• To give financial assistance for promotion of rural industries,

cottage industries and urban service centers.
• To provide financial assistance for quality improvement and

environmental control needs.
Bushra Shazli
+918948156741
[email protected]
• To provide financial assistance for transport vehicles and tourism

related activities.
Functions of the State Corporations:
• State Finance Corporations provide financial assistance either by

way of granting loans or advances or subscribing to debentures of
industrial concerns, or by guaranteeing loans raised by industrial
concerns or by underwriting the stocks, shares, bonds and
debentures.
• The corporation can assist private limited concerns and

partnership firms as well. The loans are granted against
mortgaged assets and technical soundness of the project is given
foremost consideration while granting loans.
• The SFCs grant loans mainly for acquisition of fixed assets like
land, building, plant and machinery.
• The SFCs provide financial assistance to industrial units whose

paid-up capital and reserves do not exceed Rs. 3 crore (or such
higher limit up to Rs. 30 crore as may be specified by the central
government).
Unit Trust of India

• Unit Trust of India was first set up in 1st February 1964 under the
Unit Trust of India Act, 1963. It is a statutory public sector
investment institution having the main objective to encourage
and mobilize the savings of the community and canalize them into
productive corporate investment.
Bushra Shazli
+918948156741
[email protected]
• A unit trust is an investment plan in which the funds are pooled

together and then invested. The fund which is pooled is then
unitized and the investor who is one party to the unit trust is
called a unit holder, holding a certain number of units.
• A second party i.e. the manager is responsible for the day-to-day

running of the trust and for investing the funds.
Objectives of Unit Trust of India (UTI)
• Unit Trust of India provides to the investor a safe return of the

investment whenever they require funds. UTI provides daily price
record and advertises it in the newspapers.
• Thus, two prices are quoted on a daily basis, the

purchase price and the sale price of the units. This price may
fluctuate daily, but the fluctuations are nominal on a monthly
basis.
• The price varies between the month of July and the month of
June. The purchase price of the various units is the lowest in the
month of July.
• The basic objective of the UTI is to offer both small and large
investors the means of acquiring shares in the properties resulting
from the steady, industrial growth of the country.
Functions of UTI
• Mobilize the saving of the relatively small investors.
• Channelize these small savings into productive investments.
Bushra Shazli
+918948156741
[email protected]
• Distribute the large scale economies among small income groups.
• Encourage savings of lower and middle-class people.
• Sell nits to investors in different parts of the country.
• Convert the small savings into industrial finance.
Advantages of Unit Trust are:
• The investment is safe and divides the risk over a wide range of
securities.
• The investors will be getting a regular and good income, as it

distributes 90 percent of its income.
• Dividends up to Rs. 1,000 received by the individual investors are

exempt from income-tax.
• There is a high degree of liquidity of investment as one can sell

the units back to the trust at any time at a specific price.
• You have experts who are doing the hard work for you.
SIDBI (Small Industries Development Bank of India)

• Small Industries and Development Bank of India (which is the
SIDBI full form) mainly focuses on the financing, promotion and
development of the Micro, Small and Medium Enterprises
(MSMEs).
• Established in 1990, SIDBI’s primary objective is to strengthen the

MSME sector by facilitating cash flow.
Bushra Shazli
+918948156741
[email protected]
• The bank assists MSMEs to get funds for the development,

commercialization and marketing of their innovative technologies
and products.
• SIDBI offers customized financial products under several loan

schemes and provides services to meet the demands of various
business projects.
Objectives
• SIDBI majorly follows 4 major objectives which are Development,

Promotion, Coordination and Financing. Some of its key functions
include:
• SIDBI offers financial support to MSMEs, Small Scale Industries

(SSIs), and other service sectors
• It provides funding via banks, NBFCs, SFCs and other financial

institutions
• SIDBI aims to create equilibrium in the financial sector by

strengthening credit flows and promoting skill development
Loan products offered by SIDBI
• SIDBI covers mainly 6 products under Direct Loans that are

discussed below:
• SIDBI Make in India Soft Loan Fund for Micro Small and Medium
Enterprises (SMILE)
• Smile Equipment Finance (SEF)
• Loans under Partnership with OEM

Bushra Shazli
+918948156741
[email protected]
• Working Capital (Cash Credit)
• SIDBI Trader Finance Scheme (STFS)
• Loan for Purchase of Equipment for Enterprise’s Development

(SPEED)
• SMILE (SIDBI Make in India Soft Loan Fund for MSME): SMILE
focuses on covering the financial requirements for new
enterprises which are in the manufacturing or in the services
sector. The loan amount offered under this scheme is minimum
Rs. 10 lakh for equipment finance and Rs. 25 lakh for other
purposes. Repayment tenure is maximum of 10 years, including
moratorium period of up to 36 months
• SMILE Equipment Finance (SEF): SEF has a simplified application

format with competitive interest rate. MSME entities that want to
purchase any new equipment or need financing for the same are
covered under this loan scheme. Repayment period is of 72
months and the loan amount starts from Rs. 10 lakh.
• Loans under Partnership with OEM (Original Equipment

Manufacturer): This loan scheme is helpful for MSMEs that can
purchase machines from OEMs. Minimum 3 years of business
existence is required and the repayment period is of 60 months.
Loan amount offered is maximum up to Rs. 1 crore
• Working Capital (Cash Credit): Working Capital is available for

MSME units. Working Capital offers seamless approvals, as per
the loan applicant’s requirement
Bushra Shazli
+918948156741
[email protected]
• SIDBI Trader Finance Scheme (STFS): STFS loan scheme is for

MSME Retails/Wholesalers who are in existence for at least 3
years with a satisfactory financial position. The minimum loan
amount offered is Rs. 10 lakh and maximum up to Rs. 1 crore.
However, the repayment period shall depend on the cash flow
and size of business. However, the repayment tenure is maximum
up to 60 months
• Loan for Purchase of Equipment for Enterprise’s Development

(SPEED): Under this loan scheme, SIDBI offers 100% financing with
loan amount up to Rs. 1 crore for New to Bank and Rs. 2 crore for
existing customers. Minimum 3 years of operations are required
to get this loan wherein the repayment period is 2 to 5 years,
including Moratorium period of 3-6 months. Borrowers can avail
this loan at an interest rate of 9.25% to 10% per annum
SIDBI’s Venture Capital
• This loan scheme covers some major initiatives which take care of
start-up funding. This includes Start-ups Life cycle along with
SIDBI’s interventions, Funds of Funds for Start-ups, Aspire Fund
and India Aspiration Fund.
• Start-ups Lifecycle along with SIDBI’s interventions: There are

new start-ups and ventures in the field of business that require
the right funding from time to time. This initiative helps in
providing the funds with the help of banks, NBFCs and SFBs
• Funds of Funds for Start-ups: The Government of India started

with this initiative to support various Alternate Investment Funds
Bushra Shazli
+918948156741
[email protected]
(AIFs) with the idea that it will bring some contribution to the
start-up businesses. It aims to support the growth and
development of the enterprises which are innovation driven
• Aspire Fund: Aspire fund focuses on providing financial backing to

start-ups who are in the initial stages of setting up manufacturing
and services
• India Aspiration Fund: With the support of RBI, India Aspiration

Fund was set up in order to promote equity and equity based
investments in start-ups and the MSME sector
Non- Banking Financial Institutions

• A non-banking financial institution or non-bank financial company
is a financial institution that does not have a full banking license
or is not supervised by a national or international banking
regulatory agency.
• From mid 1980s, many on- banking financial companies have

come into being in the public sector as well as the private sector.
Some of the well known names are HDFC, Sundram Finance,
Kotak Mahindra Finance, ICICI Venture etc These companies
engage in a variety of activities like leasing finance, hire-purchase
finance, housing finance, venture capital financing etc.
• Nonbank financial companies (NBFCs), also known as nonbank

financial institutions (NBFIs) are entities that provide certain bank-
like and financial services but do not hold a banking license.
Bushra Shazli
+918948156741
[email protected]
• NBFCs are not subject to the banking regulations and oversight by

federal and state authorities adhered to by traditional banks.
• Investment banks, mortgage lenders, money market funds,

insurance companies, hedge funds, private equity funds, and P2P
lenders are all examples of NBFCs.
• Since the Great Recession, NBFCs have proliferated in number and

type, playing a key role in meeting the credit demand unmet by
traditional banks.
Types of NBFCs
• Dodd-Frank defines three types of nonbank financial companies:

foreign nonbank financial companies, U.S. nonbank financial
companies, and U.S. nonbank financial companies supervised by
the Federal Reserve Board of Governors. NBFCs can offer services
such as loans and credit facilities, currency exchange, retirement
planning, money markets, underwriting, and merger activities.
1) Foreign Nonbank Financial Companies
• Foreign nonbank financial companies are incorporated or

organized outside the U.S. and predominantly engaged in financial
activities such as those listed above. Foreign nonbanks may or
may not have branches in the United States.
2) U.S. Nonbank Financial Companies
• U.S. nonbank financial companies, like their foreign nonbank

counterparts, are predominantly engaged in nonbank financial
activities but have been incorporated or organized in the United
Bushra Shazli
+918948156741
[email protected]
States. U.S. nonbanks are restricted from serving as Farm Credit

System institutions, national securities exchanges, or any one of
several other types of financial institutions.2
3) U.S. Nonbank Financial Companies Supervised by the Board of

Governors
• The main difference between these nonbank financial companies

and others is that they fall under the supervision of the Federal
Reserve Board of Governors. This is based on a determination by
the Board that financial distress or the “nature, scope, size, scale,
concentration, interconnectedness, or mix of activities” at these
institutions could threaten the financial stability of the United
States.
The different types of NBFCs:
• The NBFCs can be categorised under two broad heads:
1) On the nature of their activity
2) On the basis of deposits
• The different types of Non-Banking Financial Corporations or

NBFCs are as follows:
On the nature of their activity:
– Asset Finance Company
– Loan Company
– Mortgage Guarantee Company
Bushra Shazli
+918948156741
[email protected]
– Investment Company
– Core Investment Company
– Infrastructure Finance Company
– Micro Finance Company
– Housing Finance Company
On the basis of deposits:
– Deposit accepting Non-Banking Financial Corporations
– Non-deposit accepting Non-Banking Financial Corporations
Guidelines prescribed by the Reserve Bank of India (RBI) that are to be

followed by the Non-Banking Financial Corporations (NBFC):
• The functions of the NBFCs in India are supervised by the Reserve

Bank of India (RBI). Hence, the NBFCs have to abide by the
guidelines put forward by the RBI in Chapter III B of the RBI Act of
1934. The regulations prescribed by the RBI are as follows:
• NBFCs cannot accept demand deposits from public depositors or

investors as it is not authorized by law.
• The minimum time period for which the public deposits can be
taken by the company is 12 months, while the maximum tenure
can be 60 months.
• The Reserve Bank of India will not guarantee the repayment of

any amount which is taken by the NBFCs.
Bushra Shazli
+918948156741
[email protected]
• The Company cannot charge an interest rate which is more than

the rate prescribed by the Reserve Bank of India.
• NBFCs can issue cheques to their customers in order to make

payments or settlements.
• The company has to furnish a record of the statutory return on

the deposits taken by the company in the form NBS- 1 every year.
• The company has to furnish a quarterly return on the liquid assets

of the company.
• The audited balance sheet of the company has to be submitted

every year.
• The company has to ascertain its credit ratings every 6 months

and submit the same to the RBI.
• The companies which have a Public Deposit of Rs.20 Crore or

more or have assets worth Rs.100 Crore or more will have to
submit a half-yearly ALM return.
• The depositors of the NBFCs cannot avail the securing facility of

the Deposit Insurance and Credit Guarantee Corporation (DICGC).
• Only the NBFCs that have been duly rated and matches the
recommended Minimum Investment Grade Credit (MIGC) rating,
are eligible to accept conditional deposits from public depositors.
• The RBI has restricted the NBFCs from providing additional

benefits, extra incentives, or gifts to the customers or depositors,
than those which are offered by the banks.
Bushra Shazli
+918948156741
[email protected]
• The company has to maintain a minimum of 15% of the Public

Deposits in its Liquid Assets.
Mutual Funds
• Mutual funds are open-ended investment companies that pool
investors' money into a fund operated by a portfolio manager.
This manager then turns around and invests this large pool of
shareholder money in a portfolio of various assets, or
combinations of assets.
• Mutual funds are one of the most popular investment options

these days. A mutual fund is an investment vehicle formed when
an asset management company (AMC) or fund house pools
investments from several individuals and institutional investors
with common investment objectives. A fund manager, who is a
finance professional, manages the pooled investment.
• The fund manager purchases securities such as stocks and bonds

that are in line with the investment mandate.
• A mutual fund is a collection of stocks, bonds, or other securities.
• When you buy a mutual fund, you own the share of the mutual
fund.
• The price of each mutual fund share is called its NAV or net asset
value. That's the total value of all the securities it owns divided by
the number of the mutual fund's shares.
• Mutual fund shares are traded continuously, but their prices

adjust at the end of each business day
Bushra Shazli
+918948156741
[email protected]
• Mutual funds may include investments in stocks, bonds, options,

futures, currencies, treasuries and money market securities.
Depending on the stated objective of the fund, each will vary in
regard to content and risk.
• Funds issue and redeem shares on demand at the fund's NAV, or

net asset value. Mutual fund management fees typically range
between 0.5% and 2% of assets per year, but 12b-1 fees,
exchange fees and other administrative charges also apply.
Types of Mutual Funds-
1) Equity funds, as the name suggests, invest mostly in equity shares

of companies across all market capitalizations. A mutual fund is
categorized under equity fund if it invests at least 65% of its
portfolio in equity instruments. Equity funds have the potential to
offer the highest returns among all classes of mutual funds.
The equity funds are further classified as below:
a) Small-Cap Funds
• Small-cap funds are those equity funds that predominantly invest

in equity and equity-linked instruments of companies with small
market capitalisation. SEBI defines small-cap companies as those
that are ranked after 251 in market capitalisation.
b) Mid-Cap Funds
• Mid-cap funds are those equity funds that invest primarily in

equity and equity-linked instruments of companies with medium
Bushra Shazli
+918948156741
[email protected]
market capitalization. SEBI defines mid-cap companies as those

that are ranked between 101 and 250 in market capitalization.
c) Large-Cap Funds
• Large-cap funds are those equity funds that invest mostly in

equity and equity-linked instruments of companies with large
market capitalization. SEBI defines large-cap companies as those
that are ranked between 1 and 100 in market capitalization.
d) Multi-Cap Funds
• Multi-Cap Funds invest substantially in equity and equity-linked

instruments of companies across all market capitalizations.
e) ELSS
• Equity-linked savings scheme (ELSS) is the only kind of mutual

funds covered under Section 80C of the Income Tax Act, 1961.
Investors can claim tax deductions of up to Rs 1,50,000 a year by
investing in ELSS.
2) Debt Mutual Funds
• Debt mutual funds invest mostly in debt, money market and other
fixed-income instruments such as treasury bills, government
bonds, certificates of deposit, and other high-rated securities. A
mutual fund is considered a debt fund if it invests a minimum of
65% of its portfolio in debt securities. Debt funds are ideal for risk-
averse investors as the performance of debt funds is not
influenced much by the market fluctuations. Therefore, the
Bushra Shazli
+918948156741
[email protected]
returns provided by debt funds are very much predictable. The

debt funds are further classified as:
a) Dynamic Bond Funds
• Dynamic Bond Funds are those debt funds whose portfolio is

modified depending on the fluctuations in the interest rates.
b) Income Funds
• Income Funds invest in securities that come with a long maturity

period and therefore, provide stable returns over time. The
average maturity period of these funds is five years.
c) Short-Term and Ultra Short-Term Debt Funds
• Short-term and ultra short-term debt funds are those mutual

funds that invest in securities that mature in one to three years.
These funds are ideal for risk-averse investors.
d) Liquid Funds
• Liquid funds are debt funds that invest in assets and securities
that mature within ninety-one days. These mutual funds generally
invest in high-rated instruments. Liquid funds are a great option
to park your surplus funds, and they offer higher returns than a
regular savings bank account.
e) Gilt Funds
• Gilt Funds are debt funds that invest in high-rated government

securities. It is for this reason that these funds possess lower
levels of risk and are apt for risk-averse investors.
Bushra Shazli
+918948156741
[email protected]
f) Credit Opportunities Funds
• Credit Opportunities Funds mostly invest in low rated securities

that have the potential to provide higher returns. Naturally, these
funds are the riskiest class of debt funds.
3) Balanced or Hybrid Mutual Funds
• Balanced or hybrid mutual funds invest across both equity and

debt instruments. The main objective of hybrid funds is to balance
the risk-reward ratio by diversifying the portfolio. The fund
manager would modify the asset allocation of the fund depending
on the market condition, to benefit the investors and reduce the
risk levels. Investing in hybrid funds is an excellent way of
diversifying your portfolio as you would gain exposure to both
equity and debt instruments. The debt funds are further classified
as :
a) Equity-Oriented Hybrid Funds
• Equity-oriented hybrid funds are those that invest at least 65% of

its portfolio in equities while the rest is invested in fixed-income
instruments.
b) Debt-Oriented Hybrid Funds
• Debt-oriented hybrid funds allocate at least 65% of its portfolio in

fixed-income instruments such as treasury bills and government
securities, and the rest is invested in equities.
c) Monthly Income Plans
Bushra Shazli
+918948156741
[email protected]
• Monthly income plans (MIPs) majorly invest in debt instruments

and aim at providing a steady return over time. The equity
exposure is usually limited to under 20%. You can decide if you
would receive dividends on a monthly, quarterly, or annual basis.\
d) Arbitrage Funds
• Arbitrage funds aim at maximising the returns by purchasing

securities in one market at lower prices and selling them in
another market at a premium. However, if the arbitrage
opportunities are not available, then the fund manager may
choose to invest in debt securities or cash equivalents.
Mutual Funds in India
The first introduction of a mutual fund in India occurred in 1963,

when the Government of India launched Unit Trust of India (UTI).
UTI enjoyed a monopoly in the Indian mutual

fund market until 1987, when a host of other government-
controlled Indian financial companies established their own funds,
including State Bank of India, Canara Bank and by Punjab National
Bank.
How does one earn returns in a mutual funds?
After investing your money in a mutual fund, you can earn returns in
two forms:
1. In the form of dividends declared by the scheme
2. Through capital appreciation - meaning an increase in the value

of your investments.
Bushra Shazli
+918948156741
[email protected]
Why Should You Invest in Mutual Funds?
• Investing in mutual funds provides several advantages for

investors. To name a few, flexibility, diversification, and expert
management of money, make mutual funds an ideal investment
option.
a) Investment Handled by Experts ( Fund Managers )
• Fund managers manage the investments pooled by the asset

management companies (AMCs) or fund houses. These are
finance professionals who have an excellent track record of
managing investment portfolios.
b) Low Cost
• Investing in mutual funds comes at a low cost, and thereby

making it suitable for small investors. Mutual fund houses or asset
management companies (AMCs) levy a small amount referred to
as the expense ratio on investors to manage their investments. It
generally ranges between 0.5% to 1.5% of the total amount
invested. The Securities and Exchange Board of India (SEB) has
mandated the expense ratio to be under 2.5%.
c) SIP ( Systematic Investment Plan )
• The most significant advantage of investing in mutual funds is that

you can invest a small amount regularly via a SIP (systematic
investment plan). The frequency of your SIP can be monthly,
quarterly, or bi-annually, as per your comfort.
d) Switch Fund Option

Bushra Shazli
+918948156741
[email protected]
• If you would like to move your investments to a different fund of

the same fund house, then you have an option to switch your
investments to that fund from your existing fund. A good investor
knows when to enter and exit a particular fund.
e) Liquidity
• Since most mutual funds come with no lock-in period, it provides

investors with a high degree of liquidity. This makes it easier for
the investor to fall back on their mutual fund investment at times
of financial crisis. The redemption request can be placed in just a
few clicks, and the requests are processed quickly, unlike other
investment options. On placing the redemption request, the fund
house or the asset management company would credit your
money to your bank account in just business 3-7 days.
Disadvantages:
• Many funds charge hefty fees, leading to lower overall returns.
• Over time, statistics have shown that most actively managed

funds tend to underperform their benchmark averages.
• Mutual funds cannot be bought or sold during regular trading

hours, but instead are priced just once per day
Pension Fund
• A pension fund, also known as a superannuation fund in some
countries, is any plan, fund, or scheme which provides retirement
income. Pension funds typically have large amounts of money to
Bushra Shazli
+918948156741
[email protected]
invest and are the major investors in listed and private

companies.
• Pension plans are a good way to secure your financial stability

post-retirement. Pension plans that are maintained by the
employers to protect you from uncertainties that may come
unannounced post your retirement.
Classifications of pension funds-
a) Open vs. closed pension funds
• Open pension funds support at least one pension plan with no

restriction on membership while closed pension funds support
only pension plans that are limited to certain employees.
• Closed pension funds are further sub classified into:
• Single employer pension funds
• Multi-employer pension funds
• Related member pension funds
• Individual pension funds
b) Public vs. private pension funds
• A public pension fund is one that is regulated under public sector

law while a private pension fund is regulated under private sector
law.
• In certain countries the distinction between public or government

pension funds and private pension funds may be difficult to
Bushra Shazli
+918948156741
[email protected]
assess. In others, the distinction is made sharply in law, with very

specific requirements for administration and investment.
• For example, local governmental bodies in the United States are

subject to laws passed by the states in which those localities exist,
and these laws include provisions such as defining classes of
permitted investments and a minimum municipal obligation.
Pension plans available in India
• There are different kinds of pension plans which you can check
below:
• Plans that are sponsored by an insurer where the investment is

solely in debt and are best suited for conservative investors.
• Plans that are unit-linked and invest in both equity and debt.
• The National Pension Scheme, which invests either 100% in

government securities, 100% in debt securities (other than
government securities), or a maximum of 75% in equity.
Employees' Provident Fund Organisation –
• a statutory body of the Government of India that administers a

compulsory Provident Fund Scheme, Pension Scheme and an
Insurance Scheme.
• Provident Fund is applicable for employees across establishments

(private as well as government, subject to criteria). EPFO is the
largest social security organisation in India with assets well over 5
lakh crore (US$104 billion) as of 2014.
Bushra Shazli
+918948156741
[email protected]
National Pension Scheme –
• a defined-contribution–based pension scheme launched by

the Government of India open to all citizens of India on a
voluntary basis and mandatory for the employees of central
government (except Indian Armed Forces) who are appointed on
or after 1 January 2004. Indian citizens between the age of 18 and
65 are eligible to join.
• The Government of India introduced a new Pension Scheme for

people who wanted to build up their pension amount. With the
scheme, your savings will be invested in debt and equity market,
based on your preference. It allows you to withdraw 60% of the
funds at the time of retirement and the remaining 40% is used for
the purchase of the annuity. The maturity amount is tax-free.
Deferred Annuity
• With the deferred annuity plan, you can accumulate a corpus

through a single premium or regular premiums over the term of
the policy. The pension begins once the policy term gets over.
• This deferred annuity plan has tax benefits wherein no tax is

charged on the money invested until you plan to withdraw it. This
scheme can be bought by either making regular contributions, or
by a one-time payment.
• This way, it works for you whether you want to invest the entire
amount at one time or want to invest systematically.
Life Annuity
Bushra Shazli
+918948156741
[email protected]
• The life annuity scheme pays the annuity amount to the annuitant
until the time of death. If the annuitant dies and they had chosen
the option ‘with spouse’, then the spouse receives the pension
amount.
Pension Plans with and without cover
• Pension plans with cover include life cover, which means that at
the death of the policyholder, the family members are paid a
lump sum amount. This amount may not be considerable. The
without-cover plan as the name suggests does not have life cover.
If the policyholder passes away, then the nominee gets the
corpus. At present, the immediate annuity plans are without
protection, while the deferred plans are with cover.
Advantages of pension plans
Some of the advantages of investing in Pension Plans are listed below:
a. Option in Investment
• Pension funds give investors the option to invest in either the safe
government securities or take some risk and invest in debt and
equity investments depending on their risk profile. The risk is
balanced by the prospect of higher returns that are generated by
the investment.
b. Long-term savings
• These plans serve as a long-term savings scheme regardless of

whether you opt for a lump sum payments or multiple payments
of small amounts, the savings is assured. Pension plans create an
Bushra Shazli
+918948156741
[email protected]
annuity which can be invested further and give rise to a steady

flow of cash post your retirement.
c. Negates the effect of Inflation
• It is an excellent way of negating the effect of inflation by

investing in pension plans. These plans pay a lump sum during
your retirement, which amounts to a maximum of one-third of
the accumulated corpus and the remaining two-thirds of the
corpus is used in generating a steady cash flow.
d. Access a lump sum amount during an emergency
• You are allowed to make adjustments to your pension policy to

access a lump sum payout in case of an emergency. This can be
done to cover one’s long-term health care.
Disadvantages of pension plans
a. limited amount of deduction allowed
• Though pension plans qualify you to a tax deduction, the

maximum allowed deduction on life insurance premiums is Rs 1.5
lakh under the Income Tax Act, 1961.
b. Taxation on the annuity
• When you receive the annuity after your retirement, it is taxable

as on that date.
c. High returns require high-risk taking
• To make sure that the payout at the time of your retirement is

adequate, you may have to seek high-risk options to obtain higher
Bushra Shazli
+918948156741
[email protected]
returns. The traditional non-risky investment options may not be

enough to override the effects of inflation.
d. Best suited for early investors
• If you are not an early investor, then this investment option may
be a little late for you. As the returns earned by someone who
invests at age 21 as opposed to someone aged 30 or 35 years, will
get a substantially more significant return.
Financial Regulators in India

• Financial regulation is a form of regulation or supervision, which
subjects financial institutions to certain requirements, restrictions
and guidelines, aiming to maintain the stability and integrity of
the financial system. This may be handled by either a government
or non-government organization.
• The main responsibilities of financial regulators are to enforce

applicable laws, try to prevent cases of market manipulation,
ensure the competence of financial service providers, execute
regular inspections, protect traders and clients, and investigate
and prosecute misconduct, such as insider trading.
• Successful financial regulation prevents market failure, promotes

macroeconomic stability, protects investors, and mitigates the
effects of financial failures on the real economy. Financial
regulation can also be used to improve market transparency and
to protect investors.
Aims of regulation
Bushra Shazli
+918948156741
[email protected]
• The objectives of financial regulators are usually:
• market confidence – to maintain confidence in the financial

system
• financial stability – contributing to the protection and

enhancement of stability of the financial system
• consumer protection – securing the appropriate degree of

protection for consumers.
Regulators in India-
• Securities and Exchange Board of India
• Reserve Bank of India
• Ministry of Finance
• Ministry of Corporate Affairs
• Insurance Regulatory Authority of India
• PFRDA
Securities And Exchange Board Of India

• The Securities and Exchange Board of India (SEBI) is
the regulator of the securities and commodity
market in India owned by the Government of India. It was
established on 12 April 1988 and given Statutory Powers on 30
January 1992 through the SEBI Act, 1992.
• The main purpose of SEBI is to safeguard the rights and interest of

the investor reduce malpractices related to the stock exchange,
Bushra Shazli
+918948156741
[email protected]
establishing a code of conduct and promoting the healthy

functioning of the stock exchange.
History of SEBI-
• Securities and Exchange Board of India (SEBI) was first established

in 1988 as a non-statutory body for regulating the securities
market.
• It became an autonomous body on 12 April 1992 and was

accorded statutory powers with the passing of the SEBI Act 1992
by the Indian Parliament.
• SEBI has its headquarters at the business district of Bandra Kurla

Complex in Mumbai and has Northern, Eastern, Southern and
Western Regional Offices in New Delhi, Kolkata, Chennai,
and Ahmedabad respectively.
• It has opened local offices at Jaipur and Bangalore and has also
opened offices
at Guwahati, Bhubaneshwar, Patna, Kochi and Chandigarh in
Financial Year 2013–2014.
Controller of Capital Issues was the regulatory authority before SEBI

came into existence; it derived authority from the Capital Issues
(Control) Act, 1947.
• The SEBI is managed by its members, which consists of the

following:
• The chairman is nominated by the Union Government of India.
• Two members, i.e., Officers from the Union Finance Ministry.

Bushra Shazli
+918948156741
[email protected]
• One member from the Reserve Bank of India.
• The remaining five members are nominated by the Union

Government of India, out of them at least three shall be whole-
time members.
• After the amendment of 1999, collective investment schemes

were brought under SEBI except nidhis, chit funds and
cooperatives.
Role of SEBI
• Protect the interests of investors through proper education and

guidance
• Regulate and control the business on stock exchanges and other

security markets
• Stop fraud in capital market
• Audit the performance of stock market
It was setup to meet the needs of the following groups-
a) Issuers- It provides a market place in which they can raise funds in an

easy and efficient manner.
b) Investors- It provides protection and supplies accurate and correct

information on a regular basis.
c) Intermediaries- It provides a competitive professional market. It also

helps intermediaries provide better service to the investors and issuers
by giving them efficient infrastructure.
Bushra Shazli
+918948156741
[email protected]
Functions of SEBI-
1- Protective Functions-
a) Prohibits insider trading- Insider trading is the buying or selling of

securities by the insider like directors, promoters or employees
working in the company, having access to confidential price or
information that affects the prices of securities. To prevent insider
trading, SEBI has barred Trusts of listed companies and employee
welfare schemes from purchasing their own share from the
secondary market.
b) Checks price rigging- It refers to malpractices relating to

securities, with th objective of causing unnatural fluctuation
c) in the price of securities by increasing or decreasing the market

price of stocks leading to huge losses of investors or traders. SEBI
keeps strict s surveillance to prevent such price riggings.
d) Promotes fair trade practices- SEBI prohibits fraudulent and unfair

trade practices and promotes fair trading of securities by
establishing regulation and code of conduct in the securities
market.
e) Provides financial education to investors- SEBI educates investors

by conducting online and offline seminars that help investors get
insights on the financial market and money management
2- Development functions-
Bushra Shazli
+918948156741
[email protected]
The development functions, mean the imitative taken by SEBI to

upgrade the security market with the help of technological innovations.
They are as follows-
a) By training the intermediaries of the securities market.
b) Introducing electronic/ internet trading through registered stock

brokers.
c) Introducing the DEMAT format
d) By the introduction of discount brokerage.
3- Regulatory Functions-
This refers to the establishment of regulations for financial

intermediaries and corporate to make sure the market runs efficiently.
a) SEBI has framed guidelines and code of conduct that are enforced
to financial intermediaries and corporate.
b) These intermediaries have been brought under the regulatory

purview and private placement has been made more restrictive.
c) SEBI regulates the working of the mutual funds.
Objectives of SEBI-
• The fundamental objective of SEBI is to safeguard the interest of

all the parties involved in trading. It also regulates the functioning
of the stock market. SEBI’s objectives are:
• To monitor the activities of the stock exchange.
• To safeguard the rights of the investors

Bushra Shazli
+918948156741
[email protected]
• To curb fraudulent practices by maintaining a balance between

statutory regulations and self-regulation.
• To define the code of conduct for the brokers, underwriters, and

other intermediaries.
SEBI Act and SEBI Guidelines
• SEBI was established as a non-statutory body in 1988, entrusted

with observing the stock market activities. The SEBI Act of 1922
converted SEBI into a statutory authority with autonomous
powers. The Act provided SEBI with the authority to regulate
capital markets, not just observe but enforce guidelines.
The SEBI Act 1992 covers the following areas:
• Composition and actions of the SEBI Board members
• Powers and Functions of the Board
• Fund sources of SEBI, as in grants made available by the Union

Government
• Rules on Penalties and legal pathways
• Defines the judicial authority of SEBI
• The extent of powers of the Union Government to supersede

SEBI.
SEBI also has to adhere to a list of SEBI guidelines, pertaining to areas

such as:
• Employee Stock Option schemes
Bushra Shazli
+918948156741
[email protected]
• Disclosure and Investor Protection norms
• Legal Proceedings
• Anti-money laundering norms
• Listing and delisting of securities
• Opening of trading terminals overseas
SEBI New Margin Rules
In September 2020, SEBI implemented new rules on margin

pledge. The rule is expected to bring transparency and prevent misuse
of clients’ securities by brokerage firms. The new margin rules were
directed to come into effect from June 1, but were delayed due to
pandemic pushing the implementation date to September 1.
The new margin rules by SEBI mandate the following:
• The stock, being pledged, is to remain in the investor’s de-mat

account. As the stock is not changing accounts, the benefits from
corporate events accrue directly to the investors
• Upfront collection of margins by brokers for any purchase or sale

of securities, penalizing any sort of failure to do so. Clients could
meet the margin requirements by the end of the day, which is
now changed to the beginning of the day
• Power of Attorney (POA) cannot be assigned in the favor of the

brokers for pledging. As under the old system, brokers could
demand POA from the investors to execute decisions on their
behalf
Bushra Shazli
+918948156741
[email protected]
• Margin pledge created separately for investors requiring margin
• Buy Today Sell Tomorrow (BTST) not allowed anymore for shares
bought on margin. Investors are required to honor the delivery of
share (T+2 days is the usual settlement period). Typically,
investors would use intraday realized profits to meet the margin
requirements, which is now amended by the new regulations. For
a BTST trade, it can be initiated only if the net available margin is
equal to or greater than 20 percent of the transaction value.
Ministry of Finance
• The Ministry of Finance is an important ministry within
the Government of India concerned with the economy of India,
serving as the Indian Treasury Department. In particular, it
concerns itself with taxation, financial legislation, financial
institutions, capital markets, centre and state finances, and
the Union Budget.
• The Ministry of Finance is the apex controlling authority of

the Indian Revenue Service, Indian Economic Service, Indian Cost
Accounts Service and Indian Civil Accounts Service.
Aims of Ministry of Finance
1. Enhancing financial management to improve fiscal effectiveness
(1) Enhancing operating efficiency of the national treasury agent

institutions, providing sound internal financial control
mechanisms of government agencies.
Bushra Shazli
+918948156741
[email protected]
(2) Establishing multiple channels for the cultivation of financial

resources to support government administration.
(3) Improving disbursement efficiency, strengthening internal

financial control, and ensuring disbursement security.
(4) Improving debt management in adherence to fiscal discipline.
2. Improving national asset management to create asset activation

benefits
(1) Actively implementing national real estate take-over to

promote the benefits of activating non-public use properties.
Speeding up the survey of national property to improve
operational performance.
(2) Utilizing the national property database modification platform

to complete property registration data, integrate information
resources, and enhance and promote the management and
utilization performance of national property.
(3) Collaborating with government agencies at all levels to

appropriate national real estate for operational needs (including
long-term care services).
Role of Ministry of finance-
1- Providing quality service to the Division’s diverse clientele.
2- Developing and establishing adequate human resource

management.
3- Improving the administrative support services functions.

Bushra Shazli
+918948156741
[email protected]
4- Developing and implementing a decentralized and fully

integrated Financial Accounting system for the Public Service
5- Improving Internal Audit function in the Public Service
6- Provide an effective budgetary system within a decentralized.

accounting framework.
7- Developing, implementing and monitoring management

information systems for use in the Treasury Division and the wider
Public Service, and
8.- Developing the structure and format for Consolidated National

Accounts.
Ministry of Corporate Affairs

• The Ministry is primarily concerned with administration of the
Companies Act 2013, the Companies Act 1956, the Limited
Liability Partnership Act, 2008 & other allied Acts and rules &
regulations framed there-under mainly for regulating the
functioning of the corporate sector in accordance with law.
• The Ministry is also responsible for administering the Competition

Act, 2002 to prevent practices having adverse effect on
competition, to promote and sustain competition in markets, to
protect the interests of consumers through the commission set up
under the Act.
• The Ministry of Corporate Affairs is an Indian

government ministry. It is primarily concerned with
administration of the Companies Act 2013, the Companies Act
Bushra Shazli
+918948156741
[email protected]
1956, the Limited Liability Partnership Act, 2008, Insolvency and

Bankruptcy Code, 2016 & other allied Acts and rules & regulations
framed there-under mainly for regulating the functioning of the
corporate sector in accordance with law.
• It is responsible mainly for regulation of Indian enterprises in

Industrial and Services sector. Ministry is mostly served by the
Indian Corporate Law Service officers cadre (ICLS).
Objectives of Ministry of Corporate Affairs-
• To simplify and implement and effective Companies Act, 2 2013,

and other allied laws in order to help corporate and enterprises
carry out business easily without diluting corporate governance
standards.
• To Promote LLP and one- person company among small and mid-
sized enterprises and start- ups.
• To promote fair trade and health competition
• Effective implementation of Insolvency and Bankruptcy Code,

2016 by making IBBI fully functional.
• To strengthen regulatory institutions of good governance.
• To encourage business firms adopt governance and responsible

business practices.
Functions of ministry of corporate affairs
Bushra Shazli
+918948156741
[email protected]
• 1 - Administration of the notified provisions of the companies act

2013 and those provisions of the companies act 1956 that are still
in force.
• 2 - Formulations of various rules and regulations under various

acts administered by the ministry.
• 3 - Convergence of Indian accounting standards with international

financial reporting standards.
• 4 - Management of the cadre of the Indian corporate law service.
Ministry of Corporate affairs in India
• The main objectives of the ministry of corporate affaires is to

transform the regulatory environment of the corporate, to
protect the interest of the stakeholders in a competitive
environment and to strengthen the corporate and help achieve
excellence.
• For providing effective services to the investors, the MCA has

devised a well defined citizen’s charter. The ministry has also
prescribed a strong decision making procedure in accordance with
the rules and regulations prescribed by the Central government.
The Department of Company affairs was first corporated in the
1950s. It became a separate Ministry bestowed with the power to
regulate corporate in 20014 and its present name in May, 2007.
PFRDA
Bushra Shazli
+918948156741
[email protected]
• Pension Fund Regulatory and Development Authority is a

regulatory body which was established in 2003 with an aim of
promoting, regulating and developing the pension sector in India.
• Initially, PFRDA was formulated for Government sector employees

only but gradually, its services extended to all citizens of India and
NRIs including self-employed individuals.
Application of Pension Fund Regulatory & Development Authority
• While examining the reports under the OASIS (Old Age Social and
Income Security), the need of a single authority was felt to
establish a fool-proof system which is accepted by all political
parties. Then came PFRDA as a pension regulator which works to
promote and develop pension funds.
• It is also known as a central autonomous body having legislative,

executive and judicial powers as that of other regulators of
financial services in India – RBI, SEBI, IRDA and Insolvency &
Bankruptcy Board of India (IBBA).
Functions of PFRDA
• Given below are some key functions performed by the Pension

Fund Regulatory and Development Authority in India:
• Focuses on promoting pension schemes in order to secure and

serve the old age financial needs of retired persons on a
sustainable basis
• Regulates the pension schemes to which PFRDA Act is applicable-

NPS and Atal Pension Yojana
Bushra Shazli
+918948156741
[email protected]
• Fosters NPS- Tier-1 & Tier 2 for the benefit of the subscribers
• Designates varied intermediate agencies such as Pension Fund

Managers, Central Record Keeping Agency etc.
• The preamble formulates public notices to spread awareness

about importance of pension schemes
• Initiates grievances portals and redressal mechanism for the

pension subscribers
• Trains intermediaries about educating, popularizing, resolving

queries of individuals for retirement related instruments & plans
• Works on settlement of disputes among the intermediaries and

also between intermediaries & subscribers
Pension Fund & Managers
• Pension Fund is an intermediary which has been permitted with

Certificate of Registration by the PFRDA. It is authorised to collect
& receive contributions, invest them and pay the subscribers in a
specified manner.
Overall functions of Pension Fund:
• Pension Fund collects the funds from subscribers (the ones who
have specified their investment choice and the ones who have
selected automatic allocation of funds) from the administrator
bank for further investment purposes
Bushra Shazli
+918948156741
[email protected]
• It regularly manages and maintains the accounts of the

subscribers of National Pension Scheme using bookkeeping
methods
• Establishing the investment and risk management committee for

the subscribers
• Declaring and Communicating the Scheme NAV (Net Asset Value)

everyday to the Central Record Keeping Agency (CRA) for the
purpose of unitization- consolidation of several units into single
unit, in PRAN of the subscriber
• Keeping the NPS trust updated with regular reports of operational

activities
Recent Reforms in Financial Sector
• Financial sector is the mainstay of any economy and it contributes

immensely in the mobilization and distribution of resources.
Financial sector reforms have long been viewed as significant part
of the program for policy reform in developing nations.
• Earlier, it was thought that they were expected to increase the

efficiency of resource mobilization and allocation in the real
economy to generate higher rates of growth.
• Recently, they are also seen to be critical for macroeconomic

stability. It was due to the repercussion of the East Asian crisis,
since weaknesses in the financial sector are broadly regarded as
one of the major causes of collapse in that region.
Bushra Shazli
+918948156741
[email protected]
• The elements of the financial sector are Banks, Financial

Institutions, Instruments and markets which mobilise the
resources from the surplus sector and channelize the same to the
different needy sectors in the economy.
• The process of accumulative capital growth through

institutionalization of savings and investment fosters economic
growth. Reform of the financial sector was recognized, from the
very beginning, as an integral part of the economic reforms
initiated in 1991.
• The economic reform process occurred amidst two serious crisis

involving the financial sector the balance of payments crisis that
endangered the international credibility of the country and
pushed it to the edge of default; and the grave threat of
insolvency confronting the banking system which had for years
concealed its problems with the help of faulty accounting
strategies.
• Major aims of the financial sector reforms are to allocate the

resources proficiently, increasing the return on investment and
hastened growth of the real sectors in the economy. The
processes introduced by the Government of India under the
reform process are intended to upturn the operational efficiency
of each of the constituent of the financial sector.
The major delineations of the financial sector reforms in India were

found as under:
• Removal of the erstwhile existing financial repression.
Bushra Shazli
+918948156741
[email protected]
• Creation of an efficient, productive and profitable financial sector.
• Enabling the process of price discovery by the market

determination of interest rates that improves allocate efficiency
of resources.
• Providing operational and functional autonomy to institutions.
• Preparing the financial system for increasing international

competition.
• Opening the external sector in a calibrated manner.
• At global level, financial sector reforms have been driven by two

apparently contrary forces.
• The first is a thrust towards liberalization, which seeks to

decrease, if not eliminate a number of direct controls over banks
and other financial market participants.
• The second is a thrust in favour of strict regulation of the financial

sector. This dual approach is also apparent in the reforms tried in
India.
Financial and banking sector reforms are in following areas:
Financial markets
• Regulators
• The banking system
• Non-banking finance companies
• The capital market

Bushra Shazli
+918948156741
[email protected]
• Mutual funds
• Overall approach to reforms
• Deregulation of banking system
• Capital market developments
• Consolidation imperative
Indian Banking Sector and Financial Reforms
• The main intent of banking sector reforms was to uphold a

diversified, efficient and competitive financial system with the aim
of improving the allocative efficiency of resources through
operational flexibility, improved financial viability and institutional
solidification.
• As early as August 1991, the government selected a high level

Committee on the Financial System (the Narasimham Committee)
to look into all facets of the financial system and make
comprehensive recommendations for improvements. The
Committee submitted its report in November 1991, making
several recommendations for reforms in the banking sector and
also in the capital market.
The major reforms relating to the banking system were:
• Capital base of the banks were strengthened by recapitalization,

public equity issues and subordinated debt.
Bushra Shazli
+918948156741
[email protected]
• Prudential norms were introduced and progressively tightened for

income recognition, classification of assets, provisioning of bad
debts, marking to market of investments.
• Pre-emption of bank resources by the government was reduced

sharply.
• New private sector banks were licensed and branch licensing

restrictions were relaxed.
Similarly, several operational reforms were introduced in the area of

credit policy:
• Detailed regulations relating to Maximum Permissible Bank

Finance were abolished.
• Consortium regulations were relaxed substantially.
• Credit delivery was shifted away from cash credit to loan method
Forex market reform:

Forex market reform took place in 1993 and the successive adoption of
current account convertibility were the acmes of the forex reforms
introduced in the Indian market.
• Under these reforms, authorised dealers of foreign exchange as

well as banks have been given greater sovereignty to perform in
activities and numerous operations.
• Additionally, the entry of new companies have been allowed in

the market. The capital account has become effectively adaptable
for non-residents but still has some reservations for residents.
Bushra Shazli
+918948156741
[email protected]
Financial Inclusion
• Financial inclusion means that individuals and businesses have
access to useful and affordable financial products and services
that meet their needs – transactions, payments, savings, credit
and insurance – delivered in a responsible and sustainable way.
Being able to have access to a transaction

account is a first step toward broader financial inclusion since a
transaction account allows people to store money, and send and
receive payments.
A transaction account serves as a gateway to other financial services,

which is why ensuring that people worldwide can have access to a
transaction account is the focus of the World Bank Group’s Universal
Financial Access 2020 initiative.
• Financial access facilitates day-to-day living, and helps families and

businesses plan for everything from long-term goals to unexpected
emergencies.
• Since 2010, more than 55 countries have made commitments to

financial inclusion, and more than 60 have either launched or are
developing a national strategy.
• When countries take a strategic approach and develop national

financial inclusion strategies which bring together financial
regulators, telecommunications, competition and education
ministries, our research indicates that when countries institute a
national financial inclusion strategy, they increase the pace and
impact of reforms.
Bushra Shazli
+918948156741
[email protected]
Financial Inclusion as per RBI-
• Financial Inclusion is the process of ensuring access to

appropriate financial products and services needed by all sections
of the society in general and vulnerable groups such as weaker
sections and low income groups in particular at an affordable cost
in a fair and transparent manner by mainstream institutional .
Extent of Financial Exclusion
• In this section, the extent of financial exclusion from different

perspectives / angularities is presented based on five different
data sources viz.:
• • NSSO 59th Round Survey Results
• • Government of India Population Census 2011
• • CRISIL – Inclusix
• • RBI Working Paper Series Study on ‘Financial Inclusion in India: A

Case-study of West Bengal’ and
• • IMF ‘Financial Access Survey’ Results
Financial inclusion and bank stability
• The theoretical and empirical evidences on the link between

financial inclusion and bank stability are limited. Banking
literature indicates several potential channels through which
financial inclusion may influence bank stability.
Bushra Shazli
+918948156741
[email protected]
• A recent study appeared in Journal Economic Behavior &

Organization a robust positive association between financial
inclusion and bank stability.
• The authors show that the positive association is more

pronounced with those banks that have higher retail deposit
funding share and lower marginal costs of providing banking
services; and also with those that operate in countries with
stronger institutional quality.
Financial Inclusion Schemes in India
• The Government of India has been introducing several exclusive

schemes for the purpose of financial inclusion. These schemes
intend to provide social security to the less fortunate sections of
the society. After a lot of planning and research by several
financial experts and policymakers, the government launched
schemes keeping financial inclusion in mind. These schemes have
been launched over different years.
Let us take a list of the financial inclusion schemes in the country:
• Pradhan Mantri Jan Dhan Yojana (PMJDY)
• Atal Pension Yojana (APY)
• Pradhan Mantri Vaya Vandana Yojana (PMVVY)
• Stand Up India Scheme
• Pradhan Mantri Mudra Yojana (PMMY)
• Pradhan Mantri Suraksha Bima Yojana (PMSBY)

Bushra Shazli
+918948156741
[email protected]
• Sukanya Samriddhi Yojana
• Jeevan Suraksha Bandhan Yojana
• Credit Enhancement Guarantee Scheme (CEGS) for Scheduled

Castes (SCs)
• Venture Capital Fund for Scheduled Castes under the Social Sector
Initiatives
• Varishtha Pension Bima Yojana (VPBY)
Objectives of Financial Inclusion
• Financial inclusion intends to help people secure financial services

and products at economical prices such as deposits, fund transfer
services, loans, insurance, payment services, etc.
• It aims to establish proper financial institutions to cater to the

needs of the poor people. These institutions should have clear-cut
regulations and should maintain high standards that are existent
in the financial industry.
• Financial inclusion aims to build and maintain financial

sustainability so that the less fortunate people have a certainty of
funds which they struggle to have.
• Financial inclusion also intends to have numerous institutions that

offer affordable financial assistance so that there is sufficient
competition so that clients have a lot of options to choose from.
There are traditional banking options in the market. However, the
number of institutions that offer inexpensive financial products
and services is very minimal.
Bushra Shazli
+918948156741
[email protected]
• Financial inclusion intends to increase awareness about the

benefits of financial services among the economically
underprivileged sections of the society.
• The process of financial inclusion works towards creating financial

products that are suitable for the less fortunate people of the
society.
• Financial inclusion intends to improve financial literacy and

financial awareness in the nation.
Goals of Financial Inclusion for Women Empowerment
• Financial inclusion is very particular about including women in

financial management activities of a household. Financial
inclusion believes that women are more capable of handling
finances efficiently when compared to men of a house. Hence,
financial inclusion activities target women by helping them get
started engaging in financial management. There are many
houses where women are not permitted to be involved in
managing money. They are controlled by the men of the house
and are asked to take care of only the domestic chores.
Need for Financial Inclusion
• Financial inclusion enhances the financial system of the country

comprehensively. It strengthens the availability of economic
resources. Most importantly, it toughens the concept of savings
among poor people living in both urban and rural areas. This way,
it contributes towards the progress of the economy in a
consistent manner.
Bushra Shazli
+918948156741
[email protected]
• Many poor people tend to get cheated and sometimes even

exploited by rich landlords as well as unlicensed moneylenders
due to the vulnerable condition of the poor people. With the help
of financial inclusion, this serious and hazardous situation can be
changed.
• Financial inclusion engages in including poor people in the formal

banking industry with the intention of securing their minimal
finances for future purposes. There are many households with
people who are farmers or artisans who do not have proper
facilities to save the money that they earn after putting in so
much effort.
DIGITISATION OF BANKING
• Banking industry has witnessed a huge change over the years and
has adopted the automation methods to make the process easy
and faster.
• Digitization is something that has been widely accepted by

banking industry and has been successfully implemented.
• Digitization is the process of converting data into digital format. In

the age of digitization and automation, banks need to adopt these
changes.
• Digital banking is part of the broader context for the move

to online banking, where banking services are delivered over the
internet. The shift from traditional to digital banking has been
gradual and remains ongoing, and is constituted by differing
degrees of banking service digitization.
Bushra Shazli
+918948156741
[email protected]
• Digital banking involves high levels of process automation and

web-based services and may include APIs enabling cross-
institutional service composition to deliver banking products and
provide transactions. It provides the ability for users to access
financial data through desktop, mobile and ATM services.
History of Digital Banking
• The earliest forms of digital banking trace back to the advent of

ATMs and cards launched in the 1960s. As the internet emerged
in the 1980s with early broadband, digital networks began to
connect retailers with suppliers and consumers to develop needs
for early online catalogues and inventory software systems.
• By the 1990s the Internet became widely available and online

banking started becoming the norm. The improvement
of broadband and ecommerce systems in the early 2000s led to
what resembled the modern digital banking world today. The
proliferation of smart phones through the next decade opened
the door for transactions on the go beyond ATM machines. Over
60% of consumers now use their smart phones as the preferred
method for digital banking.
• The challenge for banks is now to facilitate demands that connect

vendors with money through channels determined by the
consumer. This dynamic shapes the basis of customer satisfaction,
which can be nurtured with Customer Relationship
Management (CRM) software. Therefore, CRM must be integrated
into a digital banking system, since it provides means for banks to
directly communicate with their customers.
Bushra Shazli
+918948156741
[email protected]
• There is a demand for end-to-end consistency and for services,

optimized on convenience and user experience. The market
provides cross platform front ends, enabling purchase decisions
based on available technology such as mobile devices, with a
desktop or Smart TV at home. In order for banks to meet
consumer demands, they need to keep focusing on improving
digital technology that provides agility, scalability and efficiency.
Turns Traditional Method to Digital:
• • Traditional banking methods involve end-to-end banking

system. With the adaptation of digital banking solutions, it is
overcoming the time consuming traditional method. All the
systems are under control and data is secured.
Role of Digitization in Banking & Its Advantages:-
• Business efficiency - Not only do digital platforms improve

interaction with customers and deliver their needs more quickly,
they also provide methods for making internal functions more
efficient. While banks have been at the forefront of digital
technology at the consumer end for decades, they have not
completely embraced all the benefits of middleware to accelerate
productivity.
• Enhanced security - All businesses big or small face a growing

number of cyber threats that can damage reputations. In February
2016 the Internal Revenue Service announced it had been hacked
the previous year, as did several big tech companies. Banks can
benefit from extra layers of security to protect data.
Bushra Shazli
+918948156741
[email protected]
• Business efficiency - Not only do digital platforms improve

interaction with customers and deliver their needs more quickly,
they also provide methods for making internal functions more
efficient. While banks have been at the forefront of digital
technology at the consumer end for decades, they have not
completely embraced all the benefits of middleware to accelerate
productivity.
• Cost savings - One of the keys for banks to cut costs is automated
applications that replace redundant manual labor. Traditional
bank processing is costly, slow and prone to human error,
according to McKinsey & Company. Relying on people and paper
also takes up office space, which runs up energy and storage
costs. Digital platforms can future reduce costs through the
synergies of more qualitative data and faster response to market
changes.
• Increased accuracy - Traditional banks that rely mainly on paper

processing can have an error rate of up to 40%, which requires
reworking. Coupled with lack of IT integration between branch
and back office personnel, this problem reduces business
efficiency. By simplifying the verification process, it's easier to
implement IT solutions with business software, leading to more
accurate accounting. Financial accuracy is crucial for banks to
comply with government regulations.
• Improved competitiveness - Digital solutions help manage

marketing lists, allowing banks to reach broader markets and
build closer relationships with tech savvy consumers. CRM
Bushra Shazli
+918948156741
[email protected]
platforms can track customer history and provide quick access to

email and other forms of online communication. It's effective for
executing customer rewards programs that can improve loyalty
and satisfaction.
• Greater agility - The use of automation can speed up both

external and internal processes, both of which can improve
customer satisfaction. Following the collapse of financial markets
in 2008, an increased emphasis was placed on risk management.
Instead of banks hiring and training risk management
professionals, it's possible for risk management software to
detect and respond to market changes more quickly than even
seasoned professionals.
DIGITISATION has two major Drawbacks:-
• Reduction in Jobs as Digitization makes possible to do more work

with less effort.
• Vulnerability of computerized Data as Banks are always prone to

hacks & cyber attacks.
The Top 5 trends that show how successful banks and financial services
firms are redefining themselves.
1. Swallowing the whole digital pill. Consumers increasingly use

mobile touch points for online purchases and transactions, and
they expect to interact the same way with their banking
institutions. To retain and attract customers, many banks are
beginning to move beyond their remote banking apps and more
widely adopt digitization via e-forms and workflow systems, which
Bushra Shazli
+918948156741
[email protected]
they can rapidly implement without deep integration into

complex legacy architectures.
• Other organizations, like Spanish bank BBVA, are gaining digital

capabilities by acquiring startups that already provide digital
banking solutions. This push for broader digitization requires
service provider and software firms to prepare for increased
demand for mobility testing services, quality analysis and mobile
data management.
2. Capitalizing on the “zero-friction” model. More and more banks are

embracing a client service model that requires minimal contact with
their customers. A couple of years ago, early remote check deposit
technology began to change the way people conducted their personal
finances. Now, as banks increasingly engage technology providers and
make significant investments in near field communication (NFC), mobile
payments at the point of sale are becoming more widely available. The
release of Apple Pay’s mobile payments service for iPhones and the
introduction of Host Card Emulation (HCE) for Androids have made a lot
of slow-moving banks act quickly.
3. Drilling into data for deeper insight. Like other consumer-facing

enterprises, banks need specific and current information about
customer behavior and preferences. To enhance customer loyalty and
lifetime value, banks and financial services firms are seeking niche
service providers that can offer customer analytics solutions that
collect, store and interpret both their structured and unstructured data.
4. Integrating and recycling services to create a leaner, more

productive outcome. Mergers are common in the BFSI sector, but
Bushra Shazli
+918948156741
[email protected]
current digital disruption in the industry means that banks must place
special emphasis on delivery models that ensure seamless integration
and interoperability.
• For example, a newly merged entity that is suffering from many

duplicative processes, differing standards and multiple, redundant
process management tools needs a service provider that has both
expertise in BFSI operations and strong business process
management and post-merger integration capabilities.
5. Leveraging cross-industry experiences, economics and engineering.

Different industries have traditionally used different ways of acquiring
and retaining customers. Digitization is creating best practices in
process, technology, tools and platforms that can be shared across
industries. For example, the BFSI sector can glean insights from data in
the life sciences, healthcare and retail industries to increase adoption
velocity, reduce engineering time and improve financial accounting.
Internet Banking
• Internet Banking is a convenient way to do banking from the

comfort of your home or office.
• Internet banking, also known as online banking or e-banking or

Net Banking is a facility offered by banks and financial institutions
that allow customers to use banking services over the internet.
Customers need not visit their bank’s branch office to avail each
and every small service. Not all account holders get access to
internet banking.
Bushra Shazli
+918948156741
[email protected]
• If you would like to use internet banking services, you must

register for the facility while opening the account or later. You
have to use the registered customer ID and password to log into
your internet banking account.
Features of Internet Banking
• Check Account Statement
• Payments using Net Banking
• Transfer Funds
• Open a Fixed Deposit
• Pay Utility Bills
• Open Deposits Recharge prepaid mobile/DTH and a lot more.
• Buy General Insurance
• Pay Taxes
• Order Cheque Book
• Track your Deliverables
• And many more financial and non-financial services
Advantages of Internet Banking-
• Availability: You can avail the banking services round the clock
throughout the year. Most of the services offered are not time-
restricted; you can check your account balance at any time and
transfer funds without having to wait for the bank to open.
Bushra Shazli
+918948156741
[email protected]
• Easy to Operate: Using the services offered by online banking is

simple and easy. Many find transacting online a lot easier than
visiting the branch for the same.
• Convenience: You need not leave your chores behind and go

stand in a queue at the bank branch. You can complete your
transactions from wherever you are. Pay utility bills, recurring
deposit account installments, and others using online banking.
• Time Efficient: You can complete any transaction in a matter of a

few minutes via internet banking. Funds can be transferred to any
account within the country or open a fixed deposit account within
no time on netbanking.
• Activity Tracking: When you make a transaction at the bank

branch, you will receive an acknowledgement receipt. There are
possibilities of you losing it. In contrast, all the transactions you
perform on a bank’s internet banking portal will be recorded. You
can show this as proof of the transaction if need be. Details such
as the payee’s name, bank account number, the amount paid, the
date and time of payment, and remarks if any will be recorded as
well.
Disadvantages of Internet/Online Banking
The disadvantages of internet banking are as follows:
• Internet Requirement: An uninterrupted internet connection is a

foremost requirement to use internet banking services. If you do
not have access to the internet, you cannot make use of any
facilities offered online. Similarly, if the bank servers are down
Bushra Shazli
+918948156741
[email protected]
due to any technical issues on their part, you cannot access net
banking services.
• Transaction Security: No matter how much precautions banks

take to provide a secure network, online banking transactions are
still susceptible to hackers. Irrespective of the advanced
encryption methods used to keep user data safe, there have been
cases where the transaction data is compromised. This may cause
a major threat such as using the data illegally for the hacker’s
benefit.
• Difficult for Beginners: There are people in India who have been
living lives far away from the web of the internet. It might seem a
whole new deal for them to understand how internet banking
works. Worse still, if there is nobody who can explain them on
how internet banking works and the process flow of how to go
about it. It will be very difficult for inexperienced beginners to
figure it out for themselves.
• Securing Password: Every internet banking account requires the

password to be entered in order to access the services. Therefore,
the password plays a key role in maintaining integrity. If the
password is revealed to others, they may utilise the information
to devise some fraud. Also, the chosen password must comply
with the rules stated by the banks. Individuals must change the
password frequently to avoid password theft which can be a
hassle to remember by the account holder himself.
Mobile Banking
Bushra Shazli
+918948156741
[email protected]
• Mobile banking is the act of making financial transactions on a

mobile device (cell phone, tablet, etc.). This activity can be as
simple as a bank sending usage activity to a client’s cell phone or
as complex as a client paying bills or sending money abroad.
• Mobile banking is a service provided by a bank or other financial

institution that allows its customers to conduct financial
transactions remotely using a mobile device such as
a smartphone or tablet. Unlike the related internet banking it uses
software, usually called an app, provided by the financial
institution for the purpose. Mobile banking is usually available on
a 24-hour basis. Some financial institutions have restrictions on
which accounts may be accessed through mobile banking, as well
as a limit on the amount that can be transacted. Mobile banking is
dependent on the availability of an internet or data connection to
the mobile device.
Advantages of using mobile banking
• The most obvious advantage is, of course, easy access. With only a
smart phone in your hand, you have a possibility to check your balance,
transfer your funds or pay bills.
• It’s safer to use a special app than online Internet banking. The
greatest advantage is that most banks allow their customers to do
online shopping without paying bills, which is very useful for
online stores’ fans.
Disadvantages of Mobile banking
Bushra Shazli
+918948156741
[email protected]
• The main disadvantage is that it is not suitable for every phone. If

you want to use mobile banking, you can download the app,
which is available only for smart phones. There is a risk of hacking
too, but it is easy to be safe from that – don’t share your
password with anyone.
Mobile banking services
• Typical mobile banking services may include:
Account information
• Mini-statements and checking of account history
• Alerts on account activity or passing of set thresholds
• Monitoring of term deposits
• Access to loan statements
• Access to card statements
• Mutual funds / equity statements
• Insurance policy management
Transaction
• Funds transfers between the customer's linked accounts
• Paying third parties, including bill payments and third party fund
transfers(see, e.g., FAST)
• Check Remote Deposit
Investments
Bushra Shazli
+918948156741
[email protected]
• Portfolio management services
• Real-time stock
Support
• Status of requests for credit, including mortgage approval, and

insurance coverage
• Check (cheque) book and card requests
• Exchange of data messages and email, including complaint

submission and tracking
• ATM Location
Content services
• General information such as finance related news
• Loyalty-related offers
Tips for Safe Mobile Banking
• Mobile banking, either by mobile banking apps, internet banking,

USSD or SMS, is protected. If you use the bank’s website or
mobile app to transfer funds, etc. there are protections like
firewalls and SSL encryption that make sure your data is safe and
cannot be used by anyone else.
• That being said, there are some measures that you must take
when doing mobile banking or online banking. These are:
• Use a safe network connection – It is important that you do not

use any public Wi-Fi and/or someone else’s device for online
Bushra Shazli
+918948156741
[email protected]
banking. If you have to use a public network, set up a VPN

software and only then go ahead.
• Licensed anti-virus – Make sure you have anti-virus software

installed in your device for an added layer of protection. Also, this
should be a licensed software for which you will receive a key
when you buy it. Without this key, nobody can make any changes
in the software. This provides full-proof protection.
• Subscribe for push message notification – Doing this ensures that

you are always informed about any transaction that takes place
to/from your account. Also, if there are any unsuccessful login
attempts to your internet banking account, your bank will send
you a notification. In such cases, you can contact your bank and
get your account secured.
Digital Payment System
• Digital payment is a way of payment which is made through digital

modes. In digital payments, payer and payee both use digital
modes to send and receive money.
• It is also called electronic payment. No hard cash is involved in

digital payments. All the transactions in digital payments are
completed online. It is an instant and convenient way to make
payments.
• The Government of India has been taking several measures to

promote and encourage digital payments in the country. As part
of the ‘Digital India’ campaign, the government aims to create a
Bushra Shazli
+918948156741
[email protected]
‘digitally empowered’ economy that is ‘Faceless, Paperless,

Cashless’.
• There are various types and modes of digital payments. Some of

these include the use of debit/credit cards, internet banking,
mobile wallets, digital payment apps, Unified Payments Interface
(UPI) service, Unstructured Supplementary Service Data (USSD),
Bank prepaid cards, mobile banking, etc.
10 Types of Digital Payment Methods in India
• Banking cards
• USSD
• Aadhaar Enabled Payment System (AEPS)
• UPI
• Mobile Wallets
• Bank pre-paid cards
• Point of Sale (PoS)
• Internet Banking
• Mobile Banking
• Bharat Interface for Money (BHIM) app
1- Banking cards: Cards are among the most widely used payment
methods and come with various features and benefits such as security
of payments, convenience, etc.
Bushra Shazli
+918948156741
[email protected]
• The main advantage of debit/credit or prepaid banking cards is

that they can be used to make other types of digital payments.
• For example, customers can store card information in digital

payment apps or mobile wallets to make a cashless payment.
Some of the most reputed and well-known card payment systems
are Visa, Rupay and MasterCard, among others. Banking cards can
be used for online purchases, in digital payment apps, PoS
machines, online transactions, etc.
How to get Banking cards?
• Apply with your respective bank and provide Know Your Customer
(KYC) details
• The card will get activated within a week and you will be allotted a
4-digit pin, which can be used for all transactions.
2. USSD: Another type of digital payment method, *99#, can be used to

carry out mobile transactions without downloading any app. These
types of payments can also be made with no mobile data facility. This
facility is backed by the USSD along with the National Payments
Corporation of India (NPCI).
• The main aim of this type of digital payment service is to create an

environment of inclusion among the underserved sections of
society and integrate them into mainstream banking. This service
can be used to initiate fund transfers, get a look at bank
statements and make balance queries. Another advantage of this
type of payment system is that it is also available in Hindi.
How to Use *99#?

Bushra Shazli
+918948156741
[email protected]
• This service can be used by dialling *99#, after which the

customer can interact with an interactive voice menu through
their mobile screen.
• To use the service the mobile number of the customer should be

the same as the one linked to the bank account
• The next step is to register for USSD, MMID (Mobile Number

Identifier) and MPIN
3. AEPS: Expanded as Aadhaar Enabled Payment System, AEPS, can be

used for all banking transactions such as balance enquiry, cash
withdrawal, cash deposit, payment transactions, Aadhaar to Aadhaar
fund transfers, etc.
• All transactions are carried out through a banking correspondent

based on Aadhaar verification. There is no need to physically visit
a branch, provide debit or credit cards, or even make a signature
on a document. This service can only be availed if your Aadhaar
number is registered with the bank where you hold an account.
This is another initiative taken by the NPCI to promote digital
payments in the country.
How to use AEPS?
• It is very simple to use AEPs, all you need to do is to provide the

accurate Aadhaar number and the payment will be successfully
made to the concerned merchant
4. UPI: UPI is a type of interoperable payment system through which

any customer holding any bank account can send and receive money
through a UPI-based app. The service allows a user to link more than
Bushra Shazli
+918948156741
[email protected]
one bank account on a UPI app on their smartphone to seamlessly

initiate fund transfers and make collect requests on a 24/7 basis and on
all 365 days a year.
• The main advantage of UPI is that it enables users to transfer

money without a bank account or IFSC code. All you need is a
Virtual Payment Address (VPA). There are many UPI apps in the
market and it is available on both Android and iOS platforms.
• To use the service one should have a valid bank account and a
registered mobile number, which is linked to the same bank
account. There are no transaction charges for using UPI. Through
this, a customer can send and receive money and make balance
enquiries.
How to use UPI?
• Download the app on Android or iOS platform
• Register for the service by providing bank account details
• Create a VPA, get an MPIN
5. Mobile Wallets: A mobile wallet is a type of virtual wallet service

that can be used by downloading an app. The digital or mobile wallet
stores bank account or debit/credit card information or bank account
information in an encoded format to allow secure payments.
• One can also add money to a mobile wallet and use the same to
make payments and purchase goods and services. This eliminated
the need to use credit/debit cards or remember the CVV or 4-digit
pin. Many banks in the country have launched e-wallet services
Bushra Shazli
+918948156741
[email protected]
and apart from banks, there are also many private players. Some
of the mobile wallet apps in the market are Paytm, Mobikwik,
Freecharge, etc.
• The various services offered by mobile wallets include sending

and receiving money, making payments to merchants, online
purchases, etc. Some mobile wallets may charge a certain
transaction fee for the services offered.
How to use a mobile wallet?
• Download the app
• Register for the service by following instructions and providing all

details
• Load money
6. Bank pre-paid cards: A prepaid card is a type of payment instrument

on to which you load money to make purchases. The type of card may
not be linked to the bank account of the customer. However, a debit
card issued by the bank is linked with the bank account of the
customer.
How to Use a Prepaid Card?
• Apply for the card
• Get pin
• Load money from your bank account/debit card
7. PoS terminals: Traditionally, PoS terminals referred to those that

were installed at all stores where purchases were made by customers
Bushra Shazli
+918948156741
[email protected]
using credit/debit cards. It is usually a hand held device that reads

banking cards. However, with digitization the scope of PoS is expanding
and this service is also available on mobile platforms and through
internet browsers.
• There are different types of PoS terminals such as Physical PoS,

Mobile PoS and Virtual PoS. Physical PoS terminals are the ones
that are kept at shops and stores. On the other hand, mobile PoS
terminals work through a tablet or smartphone.
• This is advantageous for small time business owners as they do

not have to invest in expensive electronic registers. Virtual PoS
systems use web-based applications to process payments.
8. Internet Banking: Internet banking refers to the process of carrying

out banking transactions online. These may include many services such
as transferring funds, opening a new fixed or recurring deposit, closing
an account, etc.
• Internet banking is also referred to as e-banking or virtual

banking. Internet banking is usually used to make online fund
transfers via NEFT, RTGS or IMPS. Banks offer customers all types
of banking services through their website and a customer can log
into his/her account by using a username and password.
• Unlike visiting a physical bank, there are to time restrictions for

internet banking services and they can be availed at any time and
on all 365 days in a year. There is a wide scope for internet
banking services.
Bushra Shazli
+918948156741
[email protected]
9. Mobile Banking: Mobile banking is referred to the process of

carrying out financial transactions/banking transactions through a
smart phone.
• The scope of mobile banking is only expanding with the

introduction of many mobile wallets, digital payment apps and
other services like the UPI.
• Many banks have their own apps and customers can download
the same to carry out banking transactions at the click of a
button. Mobile banking is a wide term used for the extensive
range or umbrella of services that can be availed under this.
10. Bharat Interface for Money (BHIM) app: The BHIM app allows
users to make payments using the UPI application. This also works in
collaboration with UPI and transactions can be carried out using a VPA.
One can link his/her bank account with the BHIM interface easily. It is
also possible to link multiple bank accounts.
• The BHIM app can be used by anyone who has a mobile number,
debit card and a valid bank account. Money can be sent to
different bank accounts, virtual addresses or to an Aadhaar
number. There are also many banks that have collaborated with
the NPCI and BHIM to allow customers to use this interface.
How to Use BHIM App?
• Download and install the BHIM app
• Choose a language
Bushra Shazli
+918948156741
[email protected]
• Register for the service by providing mobile number linked to

bank account
• Add bank-related information and set up a UPI PIN by following

the given instructions
Benefits of Digital Payments
• Faster, easier, more convenient: Perhaps, one of the biggest

advantages of cashless payments is that it speeds up the payment
process and there is no need to fill in lengthy information. There is
no need to stand in a line to withdraw money from an ATM or
carry cards in the wallet. Also, with the move to digital, banking
services will be available to customers on a 24/7 basis and on all
days of a year, including bank holidays. Many services like digital
wallets, UPI, etc, work on this basis.
• Economical and less transaction fee: There are many payment

apps and mobile wallets that do not charge any kind of service fee
or processing fee for the service provided. The UPI interface is one
such example, where services can be utilized by the customer free
of cost. Various digital payments systems are bringing down costs.
• Waivers, discounts and cashbacks: There are many rewards and

discounts offered to customers using digital payment apps and
mobile wallets. There are attractive cash back offers given by
many digital payment banks. This comes as boon to customers
and also acts a motivational factor to go cashless.
• Digital record of transactions: One of the other benefits of going

digital is that all transaction records can be maintained.
Bushra Shazli
+918948156741
[email protected]
Customers can track each and every transaction that is made, no

matter how small the transaction amount this.
• One stop solution for paying bills: Many digital wallets and
payment apps have become a convenient platform for paying
utility bills. Be it mobile phone bills, internet or electricity bills, all
such utility bills can be paid through a single app without any
hassle.
Insurance
Insurance is a contract, represented by a policy, in which an
individual or entity receives financial protection or
reimbursement against losses from an insurance company. The
company pools clients' risks to make payments more affordable
for the insured.
• Risk-transfer mechanism that ensures full or partial financial

compensation for the loss or damage caused by event(s) beyond
the control of the insured party.
Insurance is an agreement in which
you pay money to a company, and they pay you if something
unpleasant happens to you, for example, if your property is stolen
or damaged, or if you get a serious illness.
• Under an insurance contract, a party (the insurer) indemnifies the

other party (the insured) against a specified amount of loss,
occurring from specified eventualities within a specified period,
provided a fee called premium is paid.
Bushra Shazli
+918948156741
[email protected]
The Insurer:- A person or company offering insurance policies in

return for premiums. The insurer pays the insured the cash value
which the policy has built up if it is surrendered.
• An “insurer” refers to the company providing you with financial

coverage in the case of unexpected, bad events covered on your
renters or homeowners policy.
• It is mandatory for insurers to provide the customers with a

prospectus that carries all the major features of the policy.
The Insured:-
The person who obtains or is otherwise covered by insurance on his or

her health, life or property. The insured in a policy is not limited to the
insured named in the policy but applies to anyone who is insured under
the policy.
• It is the duty of the insured to pay the premium, and to represent

fully and fairly all the circumstances relating to the subject
matter of the insurance, which may influence the
determination of the underwriters in undertaking the risk, of
estimating the premium.
• A concealment of such facts amounts to a fraud, which

avoids the contract.
• In general insurance, compensation is normally proportionate to

the loss incurred, whereas in life insurance usually a fixed sum is
paid.
Bushra Shazli
+918948156741
[email protected]
• Some types of insurance (such as product liability insurance) are

an essential component of risk management, and are mandatory
in several countries.
Insurance, however, provides protection only against tangible

losses. It cannot ensure continuity of business, market share, or
customer confidence, and cannot provide knowledge, skills, or
resources to resume the operations after a disaster.
5 reasons why insurance matters
1. Protection for you and your family- Your family depend on

your financial support to enjoy a decent standard of living, which
is why insurance is especially important once you start a family. It
means the people who matter most in your life may be protected
from financial hardship if the unexpected happens.
2. Reduce stress during difficult times- None of us know what

lies around the corner. Unforeseen tragedies such as illness, injury
or permanent disability, even death – can leave you and your
family facing tremendous emotional stress, and even grief. With
insurance in place, you or your family’s financial stress will be
reduced, and you can focus on recovery and rebuilding your lives.
3. To enjoy financial security- No matter what your financial

position is today, an unexpected event can see it all unravel very
quickly. Insurance offers a payout so that if there is an unforeseen
event you and your family can hopefully continue to move
forward.
Bushra Shazli
+918948156741
[email protected]
4. Peace of mind- No amount of money can replace your health

and wellbeing – or the role you play in your family. But you can at
least have peace of mind knowing that if anything happened to
you, your family’s financial security is assisted by insurance.
5. A legacy to leave behind - A lump sum death benefit can

secure the financial future for your children and protect their
standard of living.
Types of Insurance
The cornerstone of financial planning, insurance hedges you, your

dependents and your assets against financial losses incurred in case of
an unfortunate event. The concept of insurance is pretty simple. You
pay a certain amount called the premium to the insurer who in turn
offers a coverage and pays a pre-determined amount for the damages
suffered.
However, depending on what your insurance covers, they are classified

as life and general or non life insurance.
1. LIFE INSURANCE
• As the name suggests, life insurance covers your life. In case of

policyholder’s premature demise within the policy term, the
insurance company pays the sum assured to the nominee.
• One of the most essential financial instruments, life insurance

helps your family to stay financially independent, square off
liabilities taken in the form of loans, maintain the lifestyle
provided, and keep essential goals on track.
Bushra Shazli
+918948156741
[email protected]
• Life Insurance is defined as a contract between the policy holder

and the insurance company, where the life insurance company
pays a specific sum to the insured individual's family upon his
death. The life insurance sum is paid in exchange for a specific
amount of premium. Life is beautiful, but also uncertain.
Whatever you do, however smart and hard you work, you are
never sure what life has in store for you.
• It is therefore important that you do not leave anything to chance,

especially ‘life insurance’. As death is the only certain thing in life,
apart from taxes, it pays to insure it well in advance.
Life Insurance Premium
• Simply put, “life insurance premium”is the amount of money you

pay your life insurance company in exchange for your coverage.
Life insurance premium can either be a regular monthly/annual
payment or a one-time payment as the case may be.
• The payout (called a death benefit) is the amount of money the

life insurance company would pay your beneficiaries if you died
unexpectedly during the term period. Calculate your premium by
clicking below for a better understanding:
Benefits of Life Insurance
• Life insurance is designed to minimize the impact of the financial

loss your family may incur upon your demise. The benefits of such
plans are fourfold, aptly contained within the acronym “LIFE”:
1. Liability Free- Life insurance gives your family the power to be

independent and self-reliant. A good term plan can help them repay
Bushra Shazli
+918948156741
[email protected]
financial liabilities like home loan, auto loan, personal loan, or a loan
on credit card. The term plan may also cover hospitalization charges
and critical illness treatment, giving you a comprehensive protection
package
2. Income Replacement- If you are the sole breadwinner in your

family, a life insurance plan becomes can provide a guaranteed
income to your family every month, making sure that their everyday
life is not disrupted and they remain financially stable.
3. Education and other expenses for dependents- The payouts from

life insurance can help to pay the bills for the education of your
children, as well as expenses for their wedding or medical costs if
any.
4. Immediate Expenses after Demise- It will also help your family

cover a part of essential expenses immediately after your demise,
such as funeral costs and/or medical bills.
Type of life insurance
(1)Term life insurance:-
• Term insurance is the simplest form of life insurance available in

the market. A pure protection plan, a term insurance offers a
large coverage at an affordable premium.
• It pays your nominee the sum assured in case of your demise

within the policy term. The insurance proceeds received help your
family to meet daily expenses and pay off debts. Note that pure
term plans have no maturity benefits. It means, in case you
survive the policy term, you don’t get these benefits.
Bushra Shazli
+918948156741
[email protected]
• However, of late insurers have come up with the return of

premium term insurance plans which return all the premiums
paid in case you survive the policy term. But these plans are
slightly more expensive than pure term plans.
(2) Endowment plans:-
• Endowment Plans provide financial protection through life cover

along with guaranteed returns. The policyholder will receive a
lump sum amount if he or she survives until the date of maturity
of the policy. With these plans the life cover amount is much
lower and people generally buy these plans for the maturity
benefit. These plans are great if you are saving for a big purchase.
• In case of your demise during the policy term, your nominee gets
the sum assured.
• In case you survive the policy term, you get the sum assured as
maturity amount along with the accumulated bonuses. Thus,
endowment plans fulfill the dual needs of insurance and
investment.
(3) Money back policies:-

Money back policies are similar to endowment plans, except that they
pay a certain amount at pre-defined intervals during the policy term.
• For instance, a money-back policy for a term of 15 years, may pay

a certain amount at the end of 5th and 10th year of the policy
term. On policy maturity, it pays the maturity benefits along with
the accumulated bonuses.
Bushra Shazli
+918948156741
[email protected]
(4) Unit linked insurance plans (ULIPs):-

Combining insurance and investment in a single product, ULIPs offer life
protection as well as the opportunity for capital appreciation by
investing in various funds of varying degrees of risk.
• Just like endowment policies, in ULIPs a certain portion of the

premium goes in providing life cover, while the other portion is
invested in markets to earn returns.
• Every ULIP has underlying funds belonging to different asset

classes such as equities, debt and hybrid where it invests to
generate returns.
Why you MUST buy life insurance?
• Life, as we know it, can throw a surprise at any moment. Surprises

are welcome as long as they are pleasant. Rude surprises
completely take us by the hook!
• A heath emergency, an accident, or sudden death – these are

some eventualities that you and your family must always be
prepared for. That is where the importance of life insurance lies.
• In other words, look at life insurance as your replacement as far as

income is concerned. Thus, helping your family and you get over
any kind of financial problems, if you are not able to take care of
them. As simple as that!
(5) Whole life insurance:-

As the name suggests, a whole life insurance offers you coverage for
your entire life.
Bushra Shazli
+918948156741
[email protected]
• The policy term for whole life insurance plans extend up to 100
years and as long as the premiums are paid, the benefits of the
policy are kept intact.
• If you, the policyholder, survive the policy term, you get maturity
benefits. If you want to remain insured throughout your life,
whole life insurance plans are a good choice to make.
2. GENERAL INSURANCE
• General insurance covers non-life assets - such as your home,

vehicle, health, travel – from floods, fire, thefts, accidents and
man-made disasters.
Top advantages of general insurance plans
• General insurance plans are beneficial because of the following

reasons –
• The plans cover financial losses and compensate you for the
losses that you suffer. As such, general insurance plans provide
you financial security even in the case of contingencies
• In some cases, general insurance plans are mandatory by law. For

instance, motor insurance plans are mandatory as per the Motor
Vehicles Act, 1988. Similarly, if you are travelling to Schengen
countries, you mandatorily need a valid overseas health insurance
plan. When you buy such mandated plans, you fulfill the legal
obligation and save yourself from violation offence
Bushra Shazli
+918948156741
[email protected]
• General insurance plans help in protecting your savings in

emergency situations. You can, therefore, use your savings to
fulfill your financial goals
• Health insurance plans, which are a type of general insurance

plan, allow you tax benefits. The premiums paid for such plans are
allowed as a deduction under Section 80D. This deduction helps in
lowering your taxable income which, in turn, lowers your tax
liability and helps you save tax.
Types of general insurance
(1)Health insurance:-
An essential risk mitigating tool, health insurance prevents out-of-

pocket expenses while dealing with a medical emergency.
• A general health insurance plan is an indemnity plan that pays for

hospitalization expenses up to the sum insured. While you can
avail a standalone health policy, family floater plans provide
coverage to all the members of your family
• On the other hand, critical illness plans are fixed-benefit plans

which provide a lump sum upon diagnosis of a critical ailment,
taking care of pre- and post-hospitalization costs. These plans
help take care of astronomical costs associated with the
treatment of critical ailments.
Features of health insurance plans
• Here are some of the common features of health insurance plans

–
Bushra Shazli
+918948156741
[email protected]
• Health plans can be taken to cover yourself as well as your family

members
• Expenses incurred on room rent, surgery, nurse’s fees, doctor’s

fees, ambulance, day care treatments, etc. are all covered under
health insurance plans
• The premiums paid are allowed as a deduction. You can claim a

deduction of up to INR 1 lakh by paying health insurance
premiums for yourself, your family and dependent parents.
• There are different types of health insurance plans available in the

market. These include the following –
• Individual health plans which cover a single individual
• Family floater plans which cover the whole family
• Senior citizen plans which cover senior citizens
(2) Motor insurance:-
• Motor insurance covers your vehicles against accidents, damage,

theft, vandalism, and so on. This form of insurance comes in two
forms – comprehensive and third-party. A comprehensive motor
insurance policy provides a 360-degree cushion to your vehicle
against damages caused due to flood, fire, riot, etc. Along with
this, it also offers you the rider, a personal accident coverage
along with third-party liability.
• On the other hand, a third-party motor insurance takes care of

the damages suffered by a third-party in case of an accident
caused by your vehicle. It won’t cover any damages to your
Bushra Shazli
+918948156741
[email protected]
vehicle. As per the Motor Vehicles Act, 1988, it’s mandatory for
every vehicle plying on the road to have a third-party insurance.
Features of motor insurance plans
• There are two types of policies available in the market – third

party liability and comprehensive
• Third-party plans are legally mandatory while comprehensive

plans are voluntary
• Third-party plans cover only the financial liability suffered if you

harm any individual or third party property
• Comprehensive plans also cover the damages suffered by your

vehicle itself
• There are different motor insurance policies covering cars, two-

wheelers and commercial vehicles
(3) Home insurance:-

As the name suggests, a home insurance policy protects your home and
its belongings from the damages suffered due to man-made or natural
disasters. Some home insurance policies also provide coverage for
temporary living expenses in case you are living on rent, due to your
home undergoing renovation.
Features of home insurance
• There are three types of home insurance policies. They are as

follows –
• Structure insurance which covers the structure of your home

Bushra Shazli
+918948156741
[email protected]
• Contents insurance which covers the contents of your home
• A comprehensive policy which covers both structure as well as the

contents of your home
• The policy covers natural calamities like earthquakes, floods,

storms, cyclones, etc.
• Man-made calamities are also covered like fire, theft, riots, etc.
• The policy can be taken on a replacement value clause or market

value clause
(5) Travel insurance:-

In case you are travelling abroad, a travel insurance policy protects you
against losses suffered due to loss of baggage, delays in flight and trip
cancellation. In some cases, if you are hospitalized while travelling, a
travel insurance may also offer cashless hospitalization.
Features of travel insurance plans
• Travel insurance plans can be of the following types –
• International travel insurance plans
• Domestic travel insurance plans
• Student travel insurance plans
• Senior citizen travel insurance plans
• Single trip policies
• Annual multi-trip policies
Bushra Shazli
+918948156741
[email protected]
• Coverage under travel insurance plans include the following

common benefits –
• Medical emergencies
Documents needed to buy general insurance plans
• You would need the following documents to buy a general

insurance policy –
• Proposal form for the policy
• Identity proof
• Age proof
• Address proof
• Details of the asset which is being covered
• Photographs
• Other documents depending on the type of policy that you buy
Risk Management Classification
Insurance is often concerned with risk, or the potential for damages

and harm that can occur in the future.
While future risk is unpredictable, insurance professionals can evaluate

potential risks by considering what types of medical malpractice cases
have occurred previously in your specialty and your geographic area.
For example, a doctor who owns their own OB-GYN practice may be at
risk of more medical malpractice claims than a family physician
Bushra Shazli
+918948156741
[email protected]
How Risks Are Classified
Risk can be referred to like the chances of having an unexpected or

negative outcome. Any action or activity that leads to loss of any type
can be termed as risk. There are different types of risks that a firm
might face and needs to overcome. Widely, risks can be classified into
three types: Business Risk, Non-Business Risk, and Financial Risk.
To discuss risk more specifically, insurance professionals use risk

classification to help divide risks into categories.
• Business Risk: These types of risks are taken by business

enterprises themselves in order to maximize shareholder value
and profits. As for example, Companies undertake high-cost risks
in marketing to launch a new product in order to gain higher
sales.
• Non- Business Risk: These types of risks are not under the control
of firms. Risks that arise out of political and economic imbalances
can be termed as non-business risk.
• Financial Risk: Financial Risk as the term suggests is the risk that
involves financial loss to firms. Financial risk generally arises due
to instability and losses in the financial market caused by
movements in stock prices, currencies, interest rates and more.
1. Financial and Non-Financial Risks
Financial risks are the risks where the outcome of an event (i.e. event
giving birth to a loss) can be measured in monetary terms.
Bushra Shazli
+918948156741
[email protected]
• The losses can be assessed and a proper money value can be

given to those losses. The common examples are:
• Material damage to property arising out of an event. We may

consider damage to a ship due to a cyclone or even sinking of a
ship due to the cyclone. Damage to the motor car due to a road
accident which may be of partial or total nature. Damage to stock
or machinery etc.
• Theft of a property which may be a motorcycle, motor car,

machinery, items of household use or even cash.
• Loss of profit of a business due to fire damaging the material

property.
All such losses, i.e. the outcome of unforeseen untoward events can be
measured in monetary terms.
Non-Financial risks are the risks the outcome of which cannot be

measured in monetary terms.
• There may be a wrong choice or a wrong decision giving rise to

possible discomfort or disliking or embarrassment but not being
capable of valuation in money terms.
Examples can be:
• Choice of a car, its brand, color etc.
• Selection of a restaurant menu,
• Choice of publicity etc.
Bushra Shazli
+918948156741
[email protected]
Since the outcome cannot be valued in terms of money, we shall call

these non-financial risks as uninsurable.
2. Pure Risk and Speculative Risks
Pure risks are those risks where the outcome shall result into loss only
or at best a break-even situation. We cannot think about a gain-gain
situation.
• The result is always unfavorable, or maybe the same situation (as

existed before the event) has remained without giving a birth to a
profit (or loss).
As opposed to this, speculative risks are those risks where there is the
possibility of gain or profit. At least the intent is to make a profit and no
loss (although loss might ensue).
3. Fundamental Risk and Particular Risks
Now coming to the last stage of classification of risk we may consider

the subject from the viewpoint of the cause of a risk and its effect. We
call such classifications as fundamental risks and particular risks.
Fundamental risks are the risks mostly emanating from nature. These
are the risks which arise from causes that are beyond the control of an
individual or group of individuals.
• The losses arising out of such causes may be sudden disaster in

dimension and felt by a huge number of populations, the society
or by the state although an individual may be a part to that
sudden disaster.
Bushra Shazli
+918948156741
[email protected]
Particular risks are; as opposed to what has been narrated

hereinbefore, there are risks which usually arise from actions of
individuals or even group of individuals.
• These may be identified as causes arising from personal (or group)

behavior and effects (losses) not being of that magnitude.
• These are mostly man created because of their negligence, error

in judgment, carelessness, and disregard for law or respect.
• Insurability can mean either whether a particular type of loss

(risk) can be insured in theory, or whether a particular client is
insurable for by a particular company because of particular
circumstance and the quality assigned by an insurance
provider pertaining to the risk that a given client would have.
• An individual with very low insurability may be said to

be uninsurable, and an insurance company will refuse to issue a
policy to such an applicant. For example, an individual with
a terminal illness and a life expectancy of 6 months would be
uninsurable for term life insurance.
• This is because the probability is so high for the individual to die

within the term of the insurance, that he/she would present far
too high a liability for the insurance company. A similar, and
stereotypical, example would be earthquake
insurance in California.
• Insurability is sometimes an issue in case

law of torts and contracts. It also comes up in issues
involving tontines and insurance fraud schemes. In real property
Bushra Shazli
+918948156741
[email protected]
law and real estate, insurability of title means

the realty is marketable.
Characteristics of insurable risks
Risks that can be insured by private companies typically share seven

common characteristics.
• Large number of similar exposure units. Since insurance operates

through pooling resources, the majority of insurance policies are
provided for individual members of large classes, allowing
insurers to benefit from the law of large numbers in which
predicted losses are similar to the actual losses. Exceptions
include Lloyd's of London, which is famous for insuring the life or
health of actors, actresses and sports figures. However, all
exposures will have particular differences, which may lead to
different rates.
• Definite Loss. The loss takes place at a known time, in a known

place, and from a known cause. The classic example is death of an
insured person on a life insurance policy. Fire, automobile
accidents, and worker injuries may all easily meet this criterion.
Other types of losses may only be definite in theory. Occupational
disease, for instance, may involve prolonged exposure to injurious
conditions where no specific time, place or cause is identifiable.
Ideally, the time, place and cause of a loss should be clear enough
that a reasonable person, with sufficient information, could
objectively verify all three elements.
Bushra Shazli
+918948156741
[email protected]
• Accidental Loss. The event that constitutes the trigger of a claim

should be fortuitous, or at least outside the control of the
beneficiary of the insurance. The loss should be ‘pure,’ in the
sense that it results from an event for which there is only the
opportunity for cost. Events that contain speculative elements,
such as ordinary business risks, are generally not considered
insurable.
• Large Loss. The size of the loss must be meaningful from the
perspective of the insured. Insurance premiums need to cover
both the expected cost of losses, plus the cost of issuing and
administering the policy, adjusting losses, and supplying the
capital needed to reasonably assure that the insurer will be able
to pay claims.
Factors affecting insurability of risk are:
• Premium loadings : Administrative and capital costs.
• Moral Hazard : A person's incentive to take precaution reduces

leading to increased risk.
• Adverse selection: Policyholders are more informed about

expected claims in comparison to insurers.
Reinsurance
It is a process whereby one entity (the reinsurer) takes on all or part of

the risk covered under a policy issued by an insurance company in
consideration of a premium payment. In other words, it is a form of an
insurance cover for insurance companies.
Bushra Shazli
+918948156741
[email protected]
• Unlike co-insurance where several insurance companies come

together to issue one single risk, reinsurers are typically the
insurers of the last resort. The insurance business is based on laws
of probability which presupposes that only a fraction of the
policies issued would result in claims.
• As a result, the total sum insured by an insurance company would

be several times its net worth. It is based on this same probability
of loss that insurance companies fix the insurance premium.
• The premiums are fixed in such a manner that the total premium
collected would be enough to pay for the total claims incurred
after providing for expenses.
• However, there is a possibility that in a bad year, the total value of

claims may be much more than the premium collected.
• If the losses are of a very large magnitude, there is a chance that

the net worth of the company would be wiped out.
• It is to avoid such risks that insurance companies take out policies.
• Secondly, insurance companies take the support of reinsurers

when they do not have the capacity to provide a cover on their
own.
Broadly, reinsurance can be classified under two heads - treaty

reinsurance and facultative reinsurance.
Treaty reinsurance
Bushra Shazli
+918948156741
[email protected]
Treaty reinsurance occurs whenever the ceding company agrees to

cede all risks within a specific class of insurance policies to the
reinsurance company.
In turn, the reinsurance company agrees to indemnify the ceding

company of all risks therein, even though the reinsurance company has
not performed individual underwriting for each policy.
Often, the reinsurance applies even to those policies that have not yet
been written. so long as they pertain to the pre-agreed class.
Facultative Reinsurance
Facultative reinsurance occurs whenever the reinsurance company

insists on performing its own underwriting for some or all the policies
to be reinsured.
Under these agreements, each facultatively underwritten policy is

considered a single transaction, not lumped together by class.
Such reinsurance contracts are usually less attractive to the ceding

company, which may be forced to retain only the most risky policies.
Functions
• Almost all insurance companies have a reinsurance program. The

ultimate goal of that program is to reduce their exposure to loss
by passing part of the risk of loss to a reinsurer or a group of
reinsurers.
Risk transfer
Bushra Shazli
+918948156741
[email protected]
• With reinsurance, the insurer can issue policies with higher limits
than would otherwise be allowed, thus being able to take on
more risk because some of that risk is now transferred to the re-
insurer.
Income smoothing
• Reinsurance can make an insurance company's results more

predictable by absorbing large losses. This is likely to reduce the
amount of capital needed to provide coverage.
The risks are spread, with the reinsurer or reinsurers bearing some of
the loss incurred by the insurance company. The income smoothing
arises because the losses of the cadent are limited. This fosters stability
in claim payouts and caps indemnification costs.
Surplus relief
• Proportional Treaties (or "pro-rata" treaties) provide the cedent

with "surplus relief"; surplus relief being the capacity to write
more business and/or at larger limits.
• Arbitrage
• The insurance company may be motivated by arbitrage in

purchasing reinsurance coverage at a lower rate than they charge
the insured for the underlying risk, whatever the class of
insurance.
• In general, the reinsurer may be able to cover the risk at a lower

premium than the insurer because:
Bushra Shazli
+918948156741
[email protected]
• The reinsurer may have some intrinsic cost advantage due

to economies of scale or some other efficiency.
• Reinsurers may operate under weaker regulation than their

clients. This enables them to use less capital to cover any risk, and
to make less conservative assumptions when valuing the risk.
• Reinsurers may operate under a more favourable tax regime than

their clients.
• Reinsurers will often have better access to underwriting expertise

and to claims experience data, enabling them to assess the risk
more accurately and reduce the need for contingency margins in
pricing the risk
• Even if the regulatory standards are the same, the reinsurer may
be able to hold smaller actuarial reserves than the cadent if it
thinks the premiums charged by the cadent are excessively
conservative.
• The reinsurer may have a more diverse portfolio of assets and

especially liabilities than the cadent. This may create
opportunities for hedging that the cadent could not exploit alone.
Depending on the regulations imposed on the reinsurer, this may
mean they can hold fewer assets to cover the risk.
• The reinsurer may have a greater risk appetite than the insurer.
REGULATORY FRAMEWORK OF INSURANCE

Historical Perspective
Bushra Shazli
+918948156741
[email protected]
The history of life insurance in India dates back to 1818 when it was
conceived as a means to provide for English Widows.
•Interestingly in those days a higher premium was charged for Indian

lives than the non-Indian lives as Indian lives were considered more
riskier for coverage.
•The Bombay Mutual Life Insurance Society started its business in1870.
It was the first company to charge same premium for both Indian and
non-Indian lives.
•The Oriental Assurance Company was established in 1880.
• The General insurance business in India, on the other hand, can

trace its roots to the Triton Insurance Company Limited, the first
general insurance company established in the year 1850 in
Calcutta by the British.
Important milestones in the life insurance business in India
•1912: The Indian Life Assurance Companies Act enacted as the first
statute to regulate the life insurance business.
•1928: The Indian Insurance Companies Act enacted to enable the

government to collect statistical information about both life and non-
life insurance businesses
•1938: Earlier legislation consolidated and amended to by the

Insurance Act with the objective of protecting the interests of
the insuring public.
Bushra Shazli
+918948156741
[email protected]
•1956: 245 Indian and foreign insurers and provident societies taken
over by the central government and nationalized. LIC formed by an Act
of Parliament- LIC Act 1956- with a capital contribution of Rs.5 crore
from the Government of India.
Important milestones in the general insurance business in India
•1907: The Indian Mercantile Insurance Ltd. set up- the first company
to transact all classes of general insurance business.
•1957: General Insurance Council, a wing of the Insurance Association

of India, frames a code of conduct for ensuring fair conduct and sound
business practices.
•1968: The Insurance Act amended to regulate investments and set

minimum solvency margins and the Tariff Advisory Committee setup.
• 1972: The general insurance business in India nationalized

through The General Insurance Business (Nationalization) Act,
1972 with effect from 1st January 1973. 107
insurers amalgamated and grouped into four companies- the
National Insurance Company Limited, the New India Assurance
Company Limited, the Oriental Insurance Company Ltd. and the
United India Insurance Company Ltd. GIC incorporated as a
company.
Regulation in India
•Introduced with Indian Life Assurance CompaniesAct,1912
•The Insurance Act,1938 created a strong and powerful regulatory

authority- Controller of Insurance.
Bushra Shazli
+918948156741
[email protected]
• Nationalization of the life insurance business and creation of LIC in

1956 and nationalization of the general insurance business and
creation of GIC and its subsidiaries in 1973.
• The powers of Controller of Insurance were diluted onthe belief

that the nationalized industry does not require any supervision
and that its accountability to the government through the
Insurance Division of the Finance Ministry would be adequate.
Insurance Regulatory Development and Authority

• IRDA - Insurance Regulatory Development and Authority is the
statutory, independent and apex body that governs and supervise
the Insurance Industry in India.
• It was constituted by Parliament of India Act called Insurance

Regulatory and Development Authority of India (IRDA of
India) after the formal declaration of Insurance Laws
(Amendment) Ordinance 2014, by the President of India Pranab
Mukherjee on December 26,2014.
• IRDA Act was passed upon the recommendations of Malhotra

Committee report (7 Jan,1994), headed by Mr R.N. Malhotra
(Retired Governor, RBI)
• Main Recommendations - Entrance of Private Sector Companies

and Foreign promoters & An independent regulatory authority for
Insurance Sector in India
• In April,2000, it was set up as statutory body, with its

headquarters at New Delhi.
Bushra Shazli
+918948156741
[email protected]
• The headquarters of the agency were shifted to Hyderabad,

Telangana in 2001.
Organizational Setup of IRDA:
• IRDA is a ten member body consists of :

One Chairman (For 5 Years & Maximum Age - 60 years )
• Five whole-time Members (For 5 Years and Maximum Age- 62

years)
• Four part-time Members (Not more than 5 years)
• The chairman and members of IRDAI are appointed

by Government of India.
The present Chairman of IRDAI is Subhash Chandra Khuntia.
To keep up the growth, here is how IRDA works:
• To protect the interest of policyholders at the time of claims,

issuance of the policy, and cancellation of the policy is the
ultimate motive. Hence, it monitors that no insurance
company can deny the claim on their free will unless it falls
beyond the scope of the cover.
• There is a need to tame the market to a single tune which brings

the players together and then compete with each other simply
based on the discounts. And so, IRDA clearly states the code of
conduct for all insurance companies, surveyors, and loss
assessors.
Bushra Shazli
+918948156741
[email protected]
• To prevent any misdeed, it calls for both annual or need-based

audit, conduct investigation, call for information from either the
insurance companies or intermediaries.
• Regulate the rates and terms offered by the insurance companies

to bring equality for the customers.
• If there arises any dispute between the insurer and the

policyholder, then IRDA will step in to provide a resolution.
• To prevent different insurers quote rates as per their

convenience, they bound the major risks to the Tariff Advisory
Committee. After this, the insurers keep in mind the percentage
of premium income they would need to fund the professional
organizations.
• Keeping in mind the development of both the urban and the rural
sector, IRDA bounds the insurers with a minimum percentage to
carry both life and non -life business.
• The scope of work is wide and IRDA as a body works abiding its
limit without favoring any single insurance companies.
Role of IRDA:
• To promote the interest and rights of policy holders.
• To promote and ensure the growth of Insurance Industry.
• To ensure speedy settlement of genuine claims and to prevent

frauds and malpractices
Bushra Shazli
+918948156741
[email protected]
• To bring transparency and orderly conduct of in financial markets

dealing with insurance.
• Ensures and encourages the systematic growth of the insurance

industry just to benefit the common people who invest in policies
to look for safety.
• Protects the interest of the policyholders so that they trust the

system.
• Promote high standards of integrity and fair dealings in the

market.
• Resolve disputes of all kinds and speed up claim settlement.
• Set standards and conduct vigilance to check for scams or frauds.
Functions And Duties of IRDA:
• It issues the registration certificates to insurance companies and

regulates them.
• It protects the interest of policy holders.
• It provides license to insurance intermediaries such as agents and

brokers after specifying the required qualifications and set
norms/code of conduct for them.
• It promotes and regulates the professional organizations related

with insurance business to promote efficiency in insurance sector.
• It regulates and supervise the premium rates and terms of

insurance covers.
Bushra Shazli
+918948156741
[email protected]
• It specifies the conditions and manners, according to which the

insurance companies and other intermediaries have to make their
financial reports.
• It regulates the investment of policyholder's funds by insurance

companies.
• It also ensures the maintenance of solvency margin (company's

ability to pay out claims) by insurance companies.
Recent Trends in Banking Sector in India

• Indian economic environment is witnessing path breaking reform
measures. The financial sector, of which the banking industry is
the largest player, has also been undergoing a metamorphic
change. Today the banking industry is stronger and capable of
withstanding the pressures of competition.
• While internationally accepted prudential norms have been

adopted, with higher disclosures and transparency, Indian banking
industry is gradually moving towards adopting the best practices
in accounting, corporate governance and risk management.
Interest rates have been deregulated, while the rigor of directed
lending is being progressively reduced.
• Today, we are having a fairly well developed banking system with

different classes of banks – public sector banks, foreign banks,
private sector banks – both old and new generation, regional rural
banks and co-operative banks with the Reserve Bank of India as
the fountain Head of the system.
Bushra Shazli
+918948156741
[email protected]
• In the banking field, there has been an unprecedented growth

and diversification of banking industry has been so stupendous
that it has no parallel in the annals of banking anywhere in the
world.
• During the last 41 years since 1969, tremendous changes have

taken place in the banking industry. The banks have shed their
traditional functions and have been innovating, improving and
coming out with new types of the services to cater to the
emerging needs of their customers.
• Massive branch expansion in the rural and underdeveloped areas,

mobilization of savings and diversification of credit facilities to the
either to neglected areas like small scale industrial sector,
agricultural and other preferred areas like export sector etc. have
resulted in the widening and deepening of the financial
infrastructure and transferred the fundamental character of class
banking into mass banking.
• There has been considerable innovation and diversification in the

business of major commercial banks. Some of them have engaged
in the areas of consumer credit, credit cards, merchant banking,
leasing, mutual funds etc.
• A few banks have already set up subsidiaries for merchant

banking, leasing and mutual funds and many more are in the
process of doing so. Some banks have commenced factoring
business.
THE INDIAN BANKING SECTOR
Bushra Shazli
+918948156741
[email protected]
• The history of Indian banking can be divided into three main

phases.
Phase I (1786- 1969) - Initial phase of banking in India when many small
banks were set up
Phase II (1969- 1991) - Nationalization, regularization and growth
Phase III (1991 onwards) - Liberalization and its aftermath
• With the reforms in Phase III the Indian banking sector, as it

stands today, is mature in supply, product range and reach, with
banks having clean, strong and transparent balance sheets.
• The major growth drivers are increase in retail credit demand,

proliferation of ATMs and debit-cards, decreasing NPAs due to
Securitization, improved macroeconomic conditions,
diversification, interest rate spreads, and regulatory and policy
changes (e.g. amendments to the Banking Regulation Act).
• Certain trends like growing competition, product innovation and

branding, focus on strengthening risk management systems,
emphasis on technology have emerged in the recent past.
• In addition, the impact of the Basel II norms is going to be

expensive for Indian banks, with the need for additional capital
requirement and costly database creation and maintenance
processes. Larger banks would have a relative advantage with the
incorporation of the norms.
PERSPECTIVES ON INDIAN BANKING
Bushra Shazli
+918948156741
[email protected]
• In 2009-10 there was a slowdown in the balance sheet growth of

scheduled commercial banks (SCBs) with some slippages in their
asset quality and profitability.
• Bank credit posted a lower growth of 16.6 per cent in 2009-10 on

a year-on-year basis but showed signs of recovery from October
2009 with the beginning of economic turnaround. Gross
nonperforming assets (NPAs) as a ratio to gross advances for
SCBs, as a whole, increased from 2.25 per cent in 2008 -
09 to 2.39 percent in 2009 – 10.
• Notwithstanding some knock-on effects of the global financial

crisis, Indian banks withstood the shock and remained stable and
sound in the post-crisis period. Indian banks now compare
favorably with banks in the region on metrics such as growth,
profitability and loan delinquency ratios.
• In general, banks have had a track record of innovation, growth

and value creation. However this process of banking
development needs to be taken forward to serve the larger need
of financial inclusion through expansion of banking services, given
their low penetration as compared to other markets.
• During 2010-11, banks were able to improve their profitability and

asset quality. Stress test showed that banking sector remained
reasonably resilient to liquidity and interest rate shocks.
• Yet, there were emerging concerns about banking sector stability

related to disproportionate growth in credit to sectors such as
real estate, infrastructure, NBFCs and retail segment, persistent
Bushra Shazli
+918948156741
[email protected]
asset-liability mismatches, higher provisioning requirement and

reliance on short-term borrowings to fund asset growth
RECENT TRENDS IN BANKING
1) Electronic Payment Services – E Cheques :-
Now-a-days we are hearing about e-governance, e-mail, e-commerce,

e-tail etc. In the same manner, a new technology is being developed in
US for introduction of e-cheque, which will eventually replace the
conventional paper cheque. India, as harbinger to the introduction of e-
cheque, the Negotiable Instruments Act has already been amended to
include; Truncated cheque and E-cheque instruments.
2) Real Time Gross Settlement (RTGS)
Real Time Gross Settlement system, introduced in India since March

2004, is a system through which electronics instructions can be given by
banks to transfer funds from their account to the account of another
bank.
The RTGS system is maintained and operated by the RBI and provides a
means of efficient and faster funds transfer among banks facilitating
their financial operations. As the name suggests, funds transfer
between banks takes place on a ‘Real Time' basis. Therefore, money
can reach the beneficiary instantaneously and the beneficiary's bank
has the responsibility to credit the beneficiary's account within two
hours.
3) Electronic Funds Transfer (EFT) :-
Bushra Shazli
+918948156741
[email protected]
Electronic Funds Transfer (EFT) is a system whereby anyone who wants

to make payment to another person/company etc. can approach his
bank and make cash payment or give instructions/authorization to
transfer funds directly from his own account to the bank account of the
receiver/beneficiary. Complete details such as the receiver's
name, bank account number, account type (savings or current account),
bank name, city, branch name etc. should be furnished to the bank at
the time of requesting for such transfers so that the amount reaches
the beneficiaries' account correctly and faster. RBI is the service
provider of EFT.
4) Electronic Clearing Service (ECS)
Electronic Clearing Service is a retail payment system that can be used

to make bulk payments/receipts of a similar nature especially where
each individual payment is of a repetitive nature and of relatively
smaller amount. This facility is meant for companies and government
departments to make/receive large volumes of payments rather than
for funds transfers by individuals.
5) Automatic Teller Machine (ATM)
Automatic Teller Machine is the most popular devise in India, which

enables the customers to withdraw their money 24 hours a day 7 days
a week. It is a devise that allows customer who has an ATM card to
perform routine banking transactions without interacting with a human
teller. In addition to cash withdrawal, ATMs can be used for payment of
utility bills, funds transfer between accounts, deposit of cheques and
cash into accounts, balance enquiry etc.
Bushra Shazli
+918948156741
[email protected]
6) Point of Sale Terminal
Point of Sale Terminal is a computer terminal that is linked online to the

computerized customer information files in a bank and magnetically
encoded plastic transaction card that identifies the customer to the
computer. During a transaction, the customer's account is debited and
the retailer's account is credited by the computer for the amount of
purchase.
7) Tele Banking
Tele Banking facilitates the customer to do entire non-cash related

banking on telephone. Under this devise Automatic Voice Recorder is
used for simpler queries and transactions. For complicated queries and
transactions, manned phone terminals are used.
8) Electronic Data Interchange (EDI)
Electronic Data Interchange is the electronic exchange of business

documents like purchase order, invoices, shipping notices, receiving
advices etc. in a standard, computer processed, universally accepted
format between trading partners. EDI can also be used to transmit
financial information and payments in electronic form.
IMPLICATIONS -
• The banks were quickly responded to the changes in the industry;

especially the new generation banks. The continuance of the
trend has re-defined and re-engineered the banking operations as
whole with more customization through leveraging technology. As
technology makes banking convenient, customers can access
Bushra Shazli
+918948156741
[email protected]
banking services and do banking transactions any time and from

any ware. The importance of physical branches is going down.
IT IN BANKING
• Indian banking industry, today is in the midst of an IT revolution. A

combination of regulatory and competitive reasons has led to
increasing importance of total banking automation in the Indian
Banking Industry. Information Technology has basically been used
under two different avenues in Banking.
• One is Communication and Connectivity and other is Business

Process Reengineering. Information technology enables
sophisticated product development, better market infrastructure,
implementation of reliable techniques for control of risks and
helps the financial intermediaries to reach geographically distant
and diversified markets.
• It is becoming increasingly imperative for banks to assess and

ascertain the benefits of technology implementation. The fruits of
technology will certainly taste a lot sweeter when the returns can
be measured in absolute terms but it needs precautions and the
safety nets.
• It has not been a smooth sailing for banks keen to jump onto the
IT bandwagon. There have been impediments in the path like the
obduracy once shown by trade unions who felt that IT could turn
out to be a threat to secure employment.
• Further, the expansion of banks into remote nooks and corners of

the country, where logistics continues to be a handicap, proved to
Bushra Shazli
+918948156741
[email protected]
be another stumbling stock. Another challenge the banks have

had to face concerns the inability of banks to retain the trained
and talented personnel, especially those with a good knowledge
of IT.
• The increasing use of technology in banks has also brought up

‘security' concerns. To avoid any pitfalls or mishaps on this
account, banks ought to have in place a well-documented security
policy including network security and internal security.
• The passing of the Information Technology Act has come as a

boon to the banking sector, and banks should now ensure to
abide strictly by its covenants. An effort should also be made to
cover e-business in the country's consumer laws.
Top Trends of Banking in 2020
Artificial Intelligence
The opportunities for AI in banking are boundless and to date we have
only touched the surface of what this technology can achieve in
banking. 2020 is set to be a big year for AI in banking with leading
financial institutions committing more money to its research and
development than ever before. According to Business Insider
research, 75% of large financial institutions are in the process of
implementing AI strategies, with their benefits set to be seen this year.
Digital transformation
• Digital transformation in banking will no longer be only on the

agenda for early adopters, but those banks that have previously
fallen behind will be required to move away from legacy systems
Bushra Shazli
+918948156741
[email protected]
and implement strategies and services that support the needs and
expectations of customers in 2020.
• While previously companies would have been applauded for their

transformation exercises, in 2020 it will be the norm with those
who do not change their systems and processes falling quickly
behind.
• An early sign of this is Mitsubishi UFJ Financial Group (MUFG)’s

announcement last week, naming Hironori Kamezawa as the
bank’s new Chief Executive Officer.
• Kamezawa, who moves to the top spot from his previous role as
Chief Digital Transformation Officer, is an experienced digital
banker and mathematics graduate who will be charged with
accelerating the banks digital efforts.
Platform-based Banking
The effects of Open Banking, lenient regulation for fintechs and
customer demands for end-to-end customer journeys have paved the
way for Banking-As-A-Service to emerge as a legitimate revenue model
for traditional players. By giving third-party providers access to core
systems and functionality, banks can attract new customer bases and
create new revenue streams.
Cloud Computing
The cloud has been the go-to server system for challenger banks and
has positively contributed to their speed to market, improved customer
experiences and ability to reduce costs.
Bushra Shazli
+918948156741
[email protected]
• While most banks still rely on on-premises server systems, there

has been a shift in the last number of years, with traditional
players moving to the cloud in order to take advantage of the
benefits that their modern counterparts already leverage. In
2020, we expect to see more banks move to the cloud in general
and specifically, more will move to the public cloud platforms.
RBI panel’s 4 four massive proposed changes to Banking
• The Reserve Bank of India’s Internal Working Group has made

recommendations that have the potential to change the
landscape of India’s banking industry. The report suggests
changes on ownership and corporate structure of private sector
banks.
• The RBI has currently not finalized the acceptance of the report;
the final recommendations will only be known later. However, the
magnitude of the changes proposed has sparked a conversation
around how these changes might affect the financial institutions if
the RBI accepts the recommendations.
• The key changes proposed by the report deal with ownership of

banks. It suggests four changes, of which some have the potential
to reorient the banking space.
• 1) It proposes allowing large corporate houses as promoters of

banks, subject to amendments to the Banking Regulations Act.
• 2) The report recommends conversion of well-run decade-old

large NBFCs with asset size of over Rs 50,000 crore to banks.
Bushra Shazli
+918948156741
[email protected]
• 3) It recommends raising the cap on promoter’s stake in the long

run to 26% from the current 15% while placing a uniform cap on
non-promoter holding by any entity at 15%.
• 4) NOFHC should continue to be the preferred structure for all

new licenses to be issued for universal banks.
10 Public Sector Banks into Four
• The Union Cabinet has approved the merger of 10 public sector

banks into four, paving the way for the largest consolidation
among the state-owned lenders.
• The banks’ boards will now have to finalise the share swap ratio,
Finance Minister Nirmala Sitharaman said after the cabinet
meeting on Wednesday. The government or banks will not seek
any exemption from regulators to fast-track the merger process,
and due process will be followed, she said-
The government had in August last year announced its plan to merge
10 public Sector banks into four, bringing down the number of state-
owned lenders to 12 from 21. The merger, Sitharaman had then said,
would help in better management of capital. The merger would be
effective from April 1, 2020
According to the plan:
• Punjab National Bank- will take over Oriental Bank of Commerce

and United Bank.
• Canara Bank will take over syndicate Bank.
Bushra Shazli
+918948156741
[email protected]
• Union Bank of India will take over Andhra bank and Corporation
Bank.
• Indian Bank will be merged with Allahabad Bank.
• Consolidation among public sector banks has been on the agenda

for the National Democratic Alliance since 2014, when it first
came into power. In 2017, State Bank of India was merged with
five of its associate banks and Bhartiya Mahila bank, In 2018, it
decided to merge Bank of Baroda with Vijaya Bank and Dena
Bank. The government also allowed Life Insurance Corporation of
India to take over 51 percent equity in IDBI Bank Ltd, effectively
privatizing it.
Bushra Shazli
+918948156741
[email protected]

Banking Anf Financial Institution Word File

Uploaded by

Copyright:

Available Formats

Banking Anf Financial Institution Word File

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Banking Anf Financial Institution Word File

Uploaded by

Copyright:

Available Formats

Notes for NTA- UGC NET Commerce

Banking and Financial Institutions

The banking sector development can be divided into three phases:

Pre Independence Period (1786-1947)

• The General Bank of India (1786-1791)

• Bank of Bengal (1809)

• Bank of Bombay (1840)

• Bank of Madras (1843)

Allahabad Bank 1865

Punjab National Bank 1894

Bank of India 1906

Central Bank of India 1911

Canara Bank 1906

Bank of Baroda 1908

If we talk of the reasons as to why many major banks failed to survive

• Indian account holders had become fraud-prone

• Human errors & time-consuming

• Lack of proper management skills

Following the Pre-Independence period was the post-independence

Post Independence Period (1947-1991)

Apart from the above mentioned 20 banks, there were seven

1. State Bank of Patiala

• This lead to an increase in funds and thereby increasing the

• Helped in boosting the rural and agricultural sector of the country

• It opened up a major employment opportunity for the people

• The Government used profit gained by Banks for the betterment

Liberalisation Period (1991-Till Date)

1. Global Trust Bank

The other measures taken include:

• Setting up of branches of the various Foreign Banks in India

• The committee announced that RBI and Government would treat

• Payments banks were introduced with the development in the

• Punjab National Bank was established in 1894

• Swadeshi Movement, which began in 1906, encouraged the

• The Banking Companies Act was passed in February 1949, which

• The largest bank- Imperial Bank of India was nationalized in 1955

• First Modern Bank in India- Bank of Calcutta in 1806.

• Imperial Bank of India Nationalized in 1955 as State Bank of India

In 1969 the nationalization of bank in India took place by PM Mrs

• A Bank is a licensed financial institution that acts as an

• It provides banking and other financial products and service to

• It denotes a financial institution dealing in money. A bank is an

Banks provide funds for business as well as personal needs of

❖ It encourages saving habit amongst people and thereby makes

❖ It acts as an intermediary between people having surplus money

❖ It facilitates business transaction through receipts and payment

❖ It helps in raising the standard of living of people in general by

❖ It provides loans and advances to businessmen for short term and

❖ It also facilitates import- export transaction.

❖ Deals with money- Bank is a financial institution which deals with

❖ Individuals/ firm/ Company- A bank may be person, firm or a

❖ Acceptance of banking- A bank accepts money in the form of

❖ Giving Advances- A bank lends out money in the form of loans

❖ Payment and Withdrawal- A bank provides easy payment and

❖ Profit and Service Orientation- A bank is a profit making

❖ Ever Increasing Function- Banking is an evolutionary concept.

❖ Connecting Link- A bank acts as a connecting link between

❖ Name identity- A banking company under Banking Regulation Act,

The main of Banking may be classified into two broad categories-