Indian Financial System - TSM
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Transcript of Indian Financial System - TSM
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Indian Financial System
(Role of Banks in the Financial System)
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Accepting, for the purpose of lending or investment of
deposits of money from the public, repayable on
demand or otherwise and Withdrawable by cheques,
draft, order or otherwise.
Banking Regulation Act : u/s 5 (b)
Banking
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Banking in India has evolved through four distinct
phases:
Foundation phase
Expansion phase
Consolidation phase
Reforms phase
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Foundation phase can be considered to cover 1950s
and 1960s till the nationalization of banks in 1969.
The focus during this period was to lay the foundation
for a sound banking system in the country. A major
development was transformation of Imperial Bank of
India into State Bank of India in 1955 and
nationalization of 14 major private banks during
1969. :
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Expansion phase had begun in mid-60s but gained
momentum after nationalization of banks and continued till
1984.
A determined effort was made to make banking facilities
available to the masses.
Branch network of the banks was widened at a very fast pace
covering the rural and semi-urban population, which had no
access to banking hitherto.
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Consolidation phase: The phase started in 1985 when a
series of policy initiatives were taken by RBI which saw
marked slowdown in the branch expansion. Attention was
paid to improve house-keeping, customer service, credit
management, staff productivity and profitability of banks.
Measures were also taken to reduce the structural
constraints that obstructed the growth of money market.
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Reforms phase :
The macro-economic crisis faced by the country in 1991 paved theway for extensive financial sector reforms which brought
deregulation of interest rates, more competition, technological
changes, prudential guidelines on asset classification and income
recognition, capital adequacy, autonomy packages. The
Narasimham Committee report suggested wide ranging reforms
for the banking sector in 1992 to introduce internationally
accepted banking practices. The amendment of Banking
Regulation Act in 1993 saw the entry of new private sector banks.
:
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Areas of Impact of reform measures
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Dismantling the barriers and opening the system to competition
by adopting measures promoting healthy competition
Deregulation of Interest rates
Restrictions on directed lending
Prudential Regulation Policies
Transparency in disclosures
Merger of Banks
CRR/SLR reduction
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Capital adequacy ratio
Asset quality
Return on assets
Business per employee
Recapitalization of banks by government.
Visible results of Reform process
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Financial System
A structure available in the economy to mobilize
resources from the surplus sectors of the
economy and deploy the same to the deficit
sectors.
Transformation of savings in to Investment andconsumption is the function of a financial system
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Financial System An institutional framework existing in a country
to enable financial transactions
Three main parts Financial assets (loans, deposits, bonds, equities, etc.)
Financial institutions (banks, mutual funds, insurancecompanies, etc.)
Financial markets (money market, capital market, forexmarket, etc.)
Regulation is another aspect of the financialsystem (RBI, SEBI, IRDA )
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Financial assets/instruments Enable channelising funds from surplus units to
deficit units
There are instruments for savers such asdeposits, equities, mutual fund units, etc.
There are instruments for borrowers such asloans, overdrafts, etc.
Like businesses, governments too raise fundsthrough issuing of bonds, Treasury bills, etc.
Instruments like PPF, KVP, etc. are available tosavers who wish to lend money to the
government
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Financial Markets
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A financial market is a mechanism that allows
people to easily buy & sell (trade) financial
securities ( such as stocks & bonds ),
commodities ( such as precious metals or
agricultural goods
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Types of Financial Market
Financial Market
Capitalmarket
MoneyMarket
SecurityMarket
ForeignExchange
Market
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Participants in the Financial Market
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Individuals
Corporate
Government
Regulators
Financial
Institutions*
Commercial Banks
Mutual Funds
Primary dealers
Non banking financial
companies
FI
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In the financial markets, there is a flow of funds
from (funds-surplus units) known as investors to
another group (funds-deficit units) which require
funds.
However, often these groups do not have direct link.
The link is provided by market intermediaries such
as brokers, mutual funds, financial institutions likebanks
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IntermediationThe process of mobilizing the savings of the
community and deploying the same to deficit sectors
is called intermediation.
Organizations which does the job are called as
Financial intermediaries
Banks are financial intermediaries
Now the concept of financial disintermediation also is
prevalent
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Financial Markets
a)Money Market
b)Securities Market
c)Forex Market
d)Capital Market
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Money Market
As per RBI definitions A market for short terms financial assets
that are close substitute for money, facilitates the exchange of
money in primary and secondary market..
The money market is a mechanism that deals with the lending and
borrowing of short term funds (less than one year).
A segment of the financial market in which financial instruments
with high liquidity and very short maturities are traded.
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Banks borrow in the money market to:
Fill the gaps or temporary mismatch of funds
To meet the CRR and SLR mandatory requirements
as stipulated by the central bank.
To meet sudden demand for funds arising out of
large outflows (like advance tax payments)
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Money Market Instruments
Call Money
Treasury Bill
Certificate of Deposits
Commercial Paper
Repo & Reverse Repo
Marginal standing facility 23
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Call money market
It is an integral part of the Indian money market whereday-to-day surplus funds (mostly of banks) are traded.
The loans are of short-term duration (1 to 14 days).
Money lent for one day is called call money; if itexceeds 1 day but is less than 15 days it is callednoticemoney.
Money lent for more than 15 days is termmoney
The borrowing is exclusively limited to banks, who aretemporarily short of funds.
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Call loans are generally made on a clean basis- i.e.
no collateral is required.
The main function of the call money market is to
redistribute the pool of day-to-day surplus funds of
banks among other banks in temporary deficit offunds.
The call market helps banks economize their cash
and yet improve their liquidity.
It is a highly competitive and sensitive market
It acts as a good indicator of the liquidity position
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Call Money Market Participants
Those who can both borrow and lend in the market RBI (through LAF), banks and primary dealers.
Once upon a time, select financial institutions viz.,IDBI, UTI, Mutual funds were allowed in the callmoney market only on the lenders side
These were phased out and call money market is
now a pure inter-bank market (since August 2005)
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Commercial Papers
Short-term borrowings by corporate, financial institutions,from the money market
Can be issued in the physical form (Usance PromissoryNote) or Demat form.
Introduced in 1990
When issued in physical form are negotiable byendorsement and delivery and hence, highly flexible
Issued subject to minimum of Rs. 5 lacs and in the multipleof Rs. 5 lacs after that
Maturity is 7 days to 1 year Unsecured and backed by credit rating of the issuing
company
Issued at discount to the face value
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Corporate, PDs and all-India financial institutions
(FIs) that have been permitted to raise short-term
resources under the umbrella limit fixed by the
Reserve Bank of India (RBI) are eligible to issue CP.
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Primary Dealers & Satellite Dealers
Primary Dealers can be referred to as Merchant
Bankers to Government of India, comprising the
first tier of the government securities market.
Primary Dealers can also be referred to as
Merchant Bankers to Government of India, as
they are only allowed to underwrite primaryissues of government securities other than RBI
who have since shed this role.
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The role of Primary Dealers is to;
1) Provide underwriting services
2) offer firm buy sell quotes for T-Bills & dated
securities
3) Development of Secondary Debt Market
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All India Financial Institutions
All India Development Banks- IDBI,IFCI,ICICI Limited,
SIDBI,IIBI
Specialized Financial Institutions-
Risk Capital &Technology Finance Corporation Ltd
(RCTC), ICICI Venture Limited, Tourism FinanceCorporation of India Ltd. (TFCI
Investment Institutions- LIC,GIC,UTI
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Commercial Banking is primarily concerned with short
term lending for financing working capital requirements
of a concern.
Development banking, on the other hand is concerned
with lending funds for medium to long-term for financing
of investments in fixed assets of the company.
Commercial Banking is security-oriented, while
development banking is project-oriented.
.
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An FI may issue CPs within the overall umbrella
limit fixed by RBI i.e., issue of CPs together with
other instruments viz., term money, term deposits,
CDs and inter corporate deposits should not
exceed 100% of its net owned funds, as per the
latest audited balance sheet.
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Eligibility Norms:
( a) the tangible net worth of the company, as per the
latest audited balance sheet, is not less than Rs.4 crore;
(b) the company has been sanctioned working capital
limit by bank/s or FIs; and
(c) the borrowal account of the company is classified as
a Standard Asset by the financing bank/institution.
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The minimum credit rating shall be P-2
of CRISIL or such equivalent rating byother CRAs.
The issuers shall ensure at the time of
issuance of the CP that the rating soobtained is current and has not fallen
due for review.
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CP can be issued for maturities between a minimum of
7 days and a maximum of up to one year from the date
of issue. The maturity date of the CP should not go
beyond the date up to which the credit rating of the
issuer is valid.
CP can be issued in denominations of Rs.5 lakh or
multiples thereof. Amount invested by a singleinvestor should not be less than Rs.5 lakh (face value).
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CP can be issued as a "stand alone"
product. The aggregate amount of CP froman issuer shall be within the limit as
approved by its Board of Directors or the
quantum indicated by the CRA for the
specified rating,
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Only a scheduled bank can act as an IPA for
issuance of CP.
CP may be issued to and held by individuals,
banking companies, other corporate bodies
(registered or incorporated in India) and
unincorporated bodies, Non-Resident Indians
and Foreign Institutional Investors (FIIs).
However, investment by FIIs would be within
the limits set for them by Securities and
Exchange Board of India (SEBI).
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Certificates of Deposit
CDs are short-term borrowings in the form of UPN issued by all
scheduled banks and are freely transferable by endorsement and
delivery. It is a negotiable instrument.
Maturity of not less than 7 days and maximum up to a year. FIs are
allowed to issue CDs for a period between 1 year and up to 3 years
Subject to payment of stamp duty under the Indian Stamp Act,
1899
Issued to individuals, corporations, trusts, funds and associations
They are issued at a discount rate freely determined by the
market/investors39
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Repo & Reverse Repo
Repo is a collateralized lending i.e. the banks which
borrow money from Reserve Bank to meet short
term needs have to sell securities, usually bonds, to
Reserve Bank with an agreement to repurchase the
same at a predetermined rate and date.
Interest Rate Charged by RBI to commercial Banks
for such transactions is called as Repo Rate40
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Reserve Bank of
India
Cash
Security
Reverse Repo transaction
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In a reverse repo, Reserve Bank absorbs money
from banks by giving securities. The interest paid
by Reserve Bank in this case is called reverse repo
rate.
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Borrower of funds is called as seller of repo and
lender of funds is called as buyer of repo.
When the term of the loan is for one day, it is
known as an overnight repo and if it is for more
than one day it is called a term repo.
When the transaction is between a commercial
Bank and RBI, such repo transactions are called
Liquidity Adjustment Facility44
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Reserve bank controls repo rates and reverse repo rates as
a measure of controlling liquidity and inflation.
For commercial banks, the major source of short term
funding is Reserve Bank. Banks go short of money, when
there is a high demand for loans and the cash in hand at
the banks is low.
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Policy rates as on date
Present Repo rate : 8.00
Present Reverse Repo Rate:7.00%
Bank rate:9.00%
Marginal Standing Facility Rate :9.00
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Reserve Ratios
Cash Reserve Ratio : 4.75%
Statutory Reserve Ratio : 24.00%
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Under this scheme, Banks will be able to borrow
up to 2% (earlier it was 1%, increased to 2% wef
17/04/2012) of their respective Net Demand andTime Liabilities".
The rate of interest on the amount accessed from
this facility will be 100 basis points (i.e.
1%) above the repo rate
Marginal Standing Facility
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Marginal Standing Facility
All Scheduled Commercial Banks having Current Account and
SGL Account with Reserve Bank, Mumbai will be eligible to
participate in the MSF Scheme.
Under the facility, the eligible entities can avail overnight, up to
Two per cent of their respective Net Demand and Time Liabilities
(NDTL) outstanding at the end of the second preceding fortnight.
But for the intervening holidays, the MSF facility will be for one
day except on Fridays when the facility will be for three days or
more, maturing on the following working day.
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MSF will be undertaken in all SLR-eligible transferable
Government of India (GoI) dated Securities/Treasury Bills andState Development Loans (SDL).
A margin of five per cent will be applied in respect of GoI dated
securities and Treasury Bills. In respect of SDLs, a margin of 10per cent will be applied. Thus, the amount of securities offered on
acceptance of a request for Rs.100 will be Rs.105 (face value) of
GoI dated securities and Treasury Bills or Rs.110 (face value) of
SDLs.
Such facility can be availed against the securities already lodged
with RBI for the SLR requirement.
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Thank you very much