Session 1 HDFC-IBS MUMBAI JOINT CERTIFICATION PROGRAM ON INDIAN FINANCIAL SYSTEM

8/4/2019 Session 1 HDFC-IBS MUMBAI JOINT CERTIFICATION PROGRAM ON INDIAN FINANCIAL SYSTEM

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1.1F INANCIAL SYSTEM Session 1

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FINANCIAL S YSTEM

The Financial System represents a channel through

which savings are mobilized through the surplus unitsand routed to the deficit units.

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F INANCIAL S YSTEM

Seekers of Funds ( mainly

business firms andgovernment )

Flow of Funds(Savings)

Suppliers of Funds ( Mainly

Households )

Flow of FinancialServices

Incomes, and FinancialClaims

Functions of Financial System

Savings FunctionLiquidity FunctionPayment FunctionRisk FunctionInformation Function

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IMPORTANCE OF FINANCIAL S YSTEM

Only the act of savings will not guaranteeeconomic progress. This is due to the fact thatsavings and investments are usually be carried outby different groups, savings comes from the

household sector and the investments are beingmade by the corporate sector. Hence, there shouldbe a mechanism to ensure that savings flow fromthose who save to those who wish to invest. Theprocess will enable the utilization of excess idle

funds, there by enhancing their value. Enablingsuch a transfer of funds from the savers to theborrowers is the Financial System

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FUNCTIONS OF FINANCIAL SYSTEM

The saving Function:

Savings find their way into the hands of those

in the production through the financial system.

Financial claims are issued in the money andcapital markets which promise the futureincome flow.

The funds with producers result in productionof better goods and services.

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LIQUIDITY FUNCTION

Money in the from of deposits may give lessreturn

One therefore always prefers to store funds infinancial instruments like stocks, bonds,debentures.

In these instruments risk high and less degree of

liquidity.

The financial market provide the investor with theopportunity to liquidate the investment.

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PAYMENT FUNCTION

The financial system offer a very convenient modeof payment for goods and services.Cheque and credit card system are easiest way ofpayment.Various payment system are in operation in themodern financial system.Risk Function: The financial market provideprotection against life, health and income risk.Life insurance and non life insurance are providedby the financial market.The income risk is covered the hedge instruments.

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CONSTITUENTS OF FINANCIAL S YSTEM 4

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Financial System

Financial Assets Financial Markets Financial Intermediaries

Forex Market Capital Market Money Market Credit Market

Primary Market

Secondary Market8

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CHARACTERISTICS OF FINANCIAL MARKETS Purpose Players Regulator

Money Market

Short-term Rupee

finance

Banks, Government,

FIs, Corporate, FIIs,MFs, Individuals

RBI

Capital MarketLong-term Rupeefinance

Corporate, Banks, FIs,Individuals, MFs, FIIs SEBI

Forex MarketShort/Long termforeign currencyfinance

Banks, Corporate,Forex Dealers RBI

Credit MarketShort/Long termRupee finance

Banks, FIs, NBFCsRBI

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FINANCIAL MARKET AS SEGMENT OF FS

Financial System tries to fulfill its role through theFinancial Markets.Financial Markets aid in increasing production and

income for the various units.It channelize the savings of households and surplusbudget to those institutions that need fund.The quantum of funds are made available to theborrowers.

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Money Markets

Call Money Market

Treasury Bills

Commercial Paper

Certificate of deposit

MMMFs

Capital Markets

Primary Markets Secondary Markets

Public Issue

Rights Issue

Bonus Issue

Private Placement

Bought-out Deals

Trading Systems

Depositories

Clearing mechanism

Carry Forward System

Settlement Procedure

Financial Markets

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FINANCIAL MARKET

Financial market can be defined as the market inwhich financial assets are create or transferred.Financial markets are some time classified asprimary and secondary market.The distinction between two market is bases on thedifferences in the period of maturity of the financialassets issued in these markets

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TYPES OF MARKETS

Depending on the differing requirements, varioussub-markets have developed. The main segmentsof the organized Financial Markets are as follows:

1) Money Market The Money Market is a a whole

sale debt market for low-risk, high liquid, short-terminstruments. Funds are available in this market forperiods ranging from a single day up to a year. Themarket is dominated mostly by Government, Banksand Financial Institutions.

2) Capital Market The Capital Market is aimed atfinancing the long-term investments. Thetransaction taking place in this market will be forperiods over a year

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MONEY MARKET

The market that deals with short-term fundsrequirements is called the money market. Thefunds are available for the period of single day toone year. The Government, Banks and the financialinstitutions are main players in the money market.The instruments in the money market are of short-term nature and highly liquid.

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MONEY MARKET INSTRUMENTS

With short- term liquidity being the main purposeof money market, various instruments have beendeveloped to suit these short-term requirements.For instance the amount required of funds by

banks to meet their statutory reserves will varyfrom one day to a fortnight. Similarly corporatemay require funds for their working capital purposefor any period up to a year.

Call money market, treasury bills market andmarkets for commercial papers and certificate ofdeposits are some of the examples.

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II CERTIFICATE OF DEPOSIT Based on the recommendation of Vaghual CommitteeReport ,RBI formulated a scheme in June 1989 for issueof CD.Certificate of Deposits are issued by the banks in thefrom of negotiable promissory note and short term

nature.They are negotiable and are marketable form bearingspecific value and maturity.They are transferable from one party to other.

CDs are available for subscription for individuals,corporate, companies, trusts NRI ,MFsCD should be issued in denomination of Rs 1 lakh. Themarket lot (physical or demat) will one lakh or multiple.

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CD may issued at discounted on the face value withthe issuing bank FIs having the freedom todetermine the discount rate. The are also issued onfloating rate.The maturity period of CD should not be less than 7days and more than one year.FIs can not issue CD for the period less than oneyear and more than three year.CDs are issued only in dematerialize form.

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COMMERCIAL PAPER

Commercial paper (CP) is also money marketinstrument. RBI introduced CP in 1990 enablinghighly rated corporate borrowers to diversify theirsources of borrowings.CD is an unsecured usance money marketinstrument issued in the from of promissory note ata discount and is transferable.CP are issued in denomination of Rs 5Lakh andmultiple thereof. A single investor should not investless than Rs 5 lakh of value.

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All eligible participants have to obtain the creditrating from the credit rating organization.The minimum rating should be P-2 of CRSIL orsuch equivalent rating by other agencies.CP can be issued in dematerialized or physicalfrom.All India financial Institutions and primary dealersare also allowed to issue CP.CPs are subscribed by individuals, banks,corporate bodies, NRIs, and FIIs.CP has minimum maturity period of 15 days andmaximum of one year.

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CAPITAL MARKET

The capital market provides the resources neededby medium and large scale industries forinvestment purposes. The capital market functionsas an institutional mechanism to channel long termfunds from those who save, to those who needthem for productive purposes.

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S TRUCTURE OF CAPITAL MARKET

The capital markets consists of the primary marketsand the secondary markets and there is a close linkbetween them. The primary market creates longterm instruments through which corporate entities

borrow from the capital market. But the secondarymarket is the one which provides liquidity andmarketability to these instruments.

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P RIMARY MARKET

To meet the financial requirements of theirprojects companies raises capital through issue ofsecurities (shares and debentures)in the primarymarket.

The primary market created long terminstruments through which corporate entities borrowfrom the market.

The secondary market is the one which providesliquidity and marketability to these instruments.

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TYPES OF ISSUES

A company can raises the capital through issue ofshares and debentures by means of :

1. Public Issue2.

Right Issue3. Bonus Issue4. Private placement5. Bought out deals

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MODES OF RAISING CAPITAL IN P RIMARY MARKET

Public issue: when the securities are issued tomembers of the public it takes the form of publicissue. Most popular method of raising long termfunds. Securities are allotted to the general public.Rights issue: Where the equity shares of a bodycorporate is made to the existing shareholders as apre-emptive right, it takes the form of rights issue.Private placement: Where the shares of a bodycorporate are sold to a group of small number ofinvestors it takes the form of a private placement.These investors are selected clients such as FIs,corporates, banks and high net worth individuals.

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S ECONDARY MARKET

The secondary market is that segment of the capital marketwhere the securities issued in the primary market are traded.It provide the liquidity to various financial instruments.The secondary market operate through the stock exchanges.

Stock exchanges are regulated under Securities contractRegulation Act1956 and SEBI Act 1990.The stock exchanges are auction market and it ischaracterized by Bull and Bear.Bull is the buyer in the market. He may take optimistic viewwhile bear is the seller (pessimist attitude)

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ABOUT P UBLIC ISSUES

Corporate may raise capital in the primary market byway of an initial public offer, rights issue or privateplacement. An Initial Public Offer (IPO) is the selling ofsecurities to the public in the primary market.

This Initial Public Offering can be made through thefixed price method, book building method or acombination of both.

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ELIGIBILITY FOR IPOThe firm should satisfies the following conditions

Track Record: should have track record for paying dividendfor last three years.

It has net tangible assets of at least Rs 3 crore in each of theproceeding 3 years.

It has a net worth of at least Rs 1 crore in each of theproceeding 3 financial years.

The securities are compulsorily listed on a recognized stock exchange.(more than one stock exchange if the paid up capitalis more than 5 crore)

Promoters minimum contribution: The promoter group isrequired to make certain minimum contribution.

Lock in Period: Promoters contribution is IPO is subject tolock in period is 3 years from date of allotment

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BOOK BUILDING Book building involves inviting subscriptions to a public offer

of securities through a process of tendering.Prior to book building Merchant banker fixes the floor price inconsultation with the issuer.The floor price is the minimum price at which bid can bemade.

Eligible investors can fill up a bid-cum- application form andsubmit to lead manager running the book.The lead manager assesses the response to the issue, ascertainsthe highest price at which demand is sufficient to match thesize of the issue.

The company which are eligible to make the public issue canfreely price its share. However, the issuing company has todisclose the basis for price in term of adjusted EPS, return onnet worth, net asset value etc.

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PRINCIPAL STEPS IN IPO

Approval of the BoardAppointment of lead managerAppointment of other intermediariesPreparation of prospectus

Filing of prospectus with the registrar of companyPrinting and dispatch prospectus and application form.Filing of initial listing applicationPromotion of the issueStatutory announcementCollection of applicationsAllotment of sharesListing of shares

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PRINCIPAL STEPS IN IPO Approved of Board in required to go for IPO

Appoint of the lead Manager- merchant banker- must be selected carefully.

Under -writer: An under- writer agree to subscribe the shares in the event topublic do not subscribe them.

Banker: The banker to issue collect the money on behalf of the company.

Brokers to issue facilities its subscription. Registrar : collection and scrutiny of application form. issue and dispatch of allotment letters refund

All companies seeking to make the public issue have to file their offer documentwith SEBI. Company may go for public issue if there is no communication fromSEBI within 21 days.

Once the prospectus is approved by stock exchange and consent fromintermediaries, company should file prospectus with Register of companies.

Prospectus should be printed and dispatched to prospective investors.

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S ECONDARY MARKET

The secondary market is that segment of the capitalmarket where the securities issued in the primarymarket are traded.It provide the liquidity to various financial instruments.

The secondary market operate through the stockexchanges.Stock exchanges are regulated under Securitiescontract Regulation Act1956 and SEBI Act 1990.The stock exchanges are auction market and it is

characterized by Bull and Bear.Bull is the buyer in the market. He may take optimisticview while bear is the seller (pessimist attitude)

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TRADING S YSTEM

Trading system in the stock exchanges was carriedout by public outcry- in the trading ring.OTCEI is the first exchange to introduce screenbased trading.Screen based trading received big boost aftersetting up NSEAll big stock exchanges have introduced the screenbased trading.The fully automated trading system enabled marketparticipants to login order, execute deal and receiveonline market information.

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S ETTLEMENT S YSTEM

Trading in equities is internationally done on rollingsettlement basis.In India, trading settlement s done on T+2SEBI is encouraging the stock exchanges toshorten their settlement period cycle further to T+1

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DEBT MARKET

Government securities are the mostimportant and unique financial instrumentsin the financial markets of any economy.GOI sec. include debt obligations of the

central government, state government andother financial institutions owned by centraland state governments. As the repayment ofprinciple as well as interest is secured bygovernment, these instruments are usuallyreferred to as Gilt -edged Securities .Literally gilt means gold, therefore, a gilt-edged security implies Security of the BestQuality .

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GOVERNMENT SECURITY MARKET

The govt securities are issued by Central, State , localand semi-government authorities SEB, SFCs NABARDetc.The government securities are issued with the maturityranging from 2 to 31 years, Long term above 10 years,Medium term 5-10 years and short term below 5 years.Individuals ,firms, companies, corporate, Stategovernments, Banks and all India Financial Institutions,Trust, MFs PF are allowed to invest.

The minimum amount of investment in Governmentsecurities for single investor is of Rs 10,000 and multipletherof.

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The RBI issue government stock to investor by creditingin their subsidiary General Ledger account.The fixed interest rate in there on time dated securities Itis called as a coupon rate. These securities areessentially fixed income securities.

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GDR AND ADR

During liberalization many corporate from thedeveloping countries are issuing dollar foreigncurrency denominated equity shares.The shares issued by the corporate are held by thedepository large international banks.These shares deposited with local custodianappointed by the depository which issue the receiptagainst these shares.This instrument is called as depository receipts.The depository receipts are denominated inconvertible currency usually US Dollar

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Depository receipt is negotiable certificate issued bydepository banks. It may be listed or traded on majorexchanges for liquidity purpose.A GDR is a negotiable instrument which present

publically traded local currency equity share.Each depository receipts a specific number of shares indomestic market. They are entitle for dividend.ADR is dollar dominated negotiable certificate, itpresent a non US company s publicly traded equity.It was devised to help American invest in overseassecurities and to assist non-US companies wishing tohave their stock traded in the American Market.

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ADR/GDR - FEATURES

These are special instruments which are created fromordinary shares to generate funds abroadThe shares of a company are deposited with a bank whichwill issue GDRs and ADRs of equivalent value in a foreigncurrency (normally dollars)The holder of a GDR does not have voting rightsThe proceeds are collected in foreign currency thusenabling the issuer to utilize the same for meeting theforeign exchange component of project cost, repayment of

foreign currency loans, meeting overseas commitmentsand for similar other purposes.Dividends are paid in Indian rupees due to which theforeign exchange risk or currency risk is placed totally onthe investor

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ADR/GDR - FEATURES

The GDRs are usually listed at the Luxembourg StockExchange as also traded at two other places besides theplace of listing e.g. on the OTC market in London and onthe private placement market in USA.An investor who wants to cancel his GDR may do so by

advising the depositary to request the custodian torelease his underlying shares and relinquishing his GDRsin lieu of shares held by the Custodian. The GDR can becanceled only after a cooling-period of 45 days. Thedepositary will instruct the custodian about cancellation of

the GDR and to release the corresponding shares, collectthe sales proceeds and remit the same abroad.

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ADR/GDR FEATURES

Marketing of the GDR issue is done by the investmentbanks that manage the road shows, which are presentationsmade to potential investors. During the road shows, anindication of the investor response is obtained. The issuerfixes the range of the issue price and finally decides on theissue price after assessing the investor response at the roadshows.Cost of floating an ADR or GDR issue is quite high and is

only justifiable if the amount of finance to be raised is quitelarge

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GDR and ADR issue should obtain the approvalfrom Government of India, Ministry of Finance.Bonds: the Indian companies can also raise foreigncurrency funds by issuing bonds in domesticmarket.Typically a Euro-bonds are issued outside thecountry of the currency in which it is dominated.They are listed one or more stock exchanges.

The bonds may be fixed rate bonds or Floating ratenotes.

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Demutualization of stock exchanges:Demutualization refers to the transition process of the exchangefrom the mutually owned association to a shareholders-owned

company.In other words, transforming the legal structure of an exchangefrom mutual form to a business form.After demutualization the ownership, the management and thetrading right at the exchange are segregated.At the movement, the broker members of the exchange are boththe owners and the traders on the exchange and they furthermanage the exchange as well.Stock Brokers : A broker is member of the recognized stockexchange, who is permitted to do trading on the screen basedtrading- registered with SEBI

A sub-broker is also registered with SEBI and affiliated withmember of stock exchange

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SEBI

The Capital Issue controls on issue of the Capitalby the companies have been substituted by thetransparent and simplified guidelines issued by theSEBI under the SEBI Act,1992. Functions of SEBIare following:Promote fair dealings by the issuers of securitiesand ensure a market place where funds can beraised at a relatively low cost.Provide a degree of protection to the investors andsafeguard their rights and interests.Regulate and develop a code of conduct and fairpractices by intermediaries in the capital market.

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FUNCTIONS OF THE BOARD SEBI has to protect the interest of investors and topromote and development of and to regulate the securitymarket.Regulate and the stock brokers and sub-brokersRegistering and regulating the working of thedepositories.Promoting and regulating self regulatory organization.Promoting investors education.Regulating mutual fundsProhibiting inside tradingCalling information from stock exchanges-audit,undertaking inspectionConducting research issues relating to capital market

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QUALIFIED INSTITUTIONAL BUYERS (QIB)

Qualified institutional Buyers are those institutional investorswho are generally perceived to posses an expertise andfinancial muscle to evaluate and invest in capital market.The QIB are :Public financial intuitionsScheduled commercial banksMutual fundsFII registered with SEBIVC fundsSIDCsProvident funds andPension funds

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ROLE AND FUNCTIONS OF MUTUAL FUNDS

What is a Mutual Funds :Mutual fund is a mechanism forpooling resources from public by issuing units to them andinvesting the funds, so collected in the securities.Mutual fund issues units to investors in accordance with thequantum money invested by them.Investors of mutual funds are known as unit holders.The profit and loss of funds are shared by the investors inproportion to their investment.A mutual fund is required to be registered with SEBI

SEBI formulates the policies and regulates the mutual funds toprotect the interest of investors

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MANAGEMENT OF MUTUAL FUNDS

A mutual fund is set up in the form of a trust.Which has sponsors, trustees, Asset Managementcompanies and custodians.The trust is established by a sponsor or more thanone sponsors. Sponsors is like promoter of thecompany.Trustee of the mutual fund hold its property for thebenefit of the units holders.An AMC approved by SEBI manages the fund bymaking investment in the various type of securities.

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A custodian who is also registered with SEBI holdsthe securities of various schemes of funds in itscustody.SEBI regulations require that at least two-third ofthe directors of the trustee company or board mustbe independentTypes of Schemes: A mutual fund scheme can beclassified into open-ended fund or a close ended

fund depending on the maturity period.

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Open-ended scheme : These scheme do not havematurity.It is available for subscription and purchase on acontinuous basis.Investors can conveniently buy and sell unit at NAVrelated price.Close ended scheme : a close ended scheme hasa stipulated maturity -3 to 10 years.The fund is open for subscription only duringspecified period. Buy and sell the unit of thescheme on the stock exchange

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INDIAN FINANCIAL SYSTEM Session 2

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IRDA

In the year 2000 , IRDA was constituted as anautonomous body under IRDA Act 1999.The IRDA shall have the duty to regulate, promote, andensure an orderly growth of the insurance business andreinsurance business.The power and function of IRDA shall include (1) issuingto the applicant a certificate of registration, renew ,modify, suspend, or cancel.Protect the interest of the policy holders.

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INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY

Regulator for insurance business both general and life assurance.Regulate all aspects of insurance business, including licensing ofinsurance companies, framing regulations about the conduct ofbusiness and supervising all insurance activities in the country.Specifying the code of conduct for surveyors and loss assessors.Promoting efficiency in the conduct of insurance business.Specifying the form and manner in which book of account shall bemaintainedRegulating investment of funds by insurance company.Regulating the percentage of insurance and general business to beundertaken by the company in rural area.Regulating maintenance of margin of safety.

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ROLE AND FUNCTION OF INSURANCE COMPANIES

The Indian Insurance Industry is as old as any part of theworld.The first insurance company was started in 1818 I kolkata.The reasons for the nationalization are conserved mostly withunethical practices adopted by some players.There was tremendous growth of this sector afternationalization. However, there was feeling that the industry isnot fully responsive to customers needs.The insurance industry till 1999-2000 comprises mainly of two

players. LIfE segment LIC and general insurance segmentGIC with its four subsidiaries orient insurance, New india,National insurance, United India insurance.

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Opening of the Sector : The insurance sector wasopened up in the year 1999 , facilitating entry of privateplayers in to industry.The entry level capital requirement were kept at Rs 100crore.The regulatory framework is applicable to both private aswell as public sector units.The new environment has facilitated competitiveconditions and industry has exhibited a healthy growth.Now there are 8 public sector companies and 21 privatesector.

Insurance business is divided into four classes : Lifeinsurance , Marine insurance, fire insurance andMiscellaneos insurance

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Non-Scheduled Banks Scheduled Banks

Commercial Banks State Cooperative Banks

Reserve Bank of India Functions : Currency Issue; Bankers Bank; Banker to Government;

Credit Control ; Creation of Money

Indian Banks Foreign Banks

Public Sector Private Sector

Other Nationalized BanksSBI & Subsidiaries Regional Rural Banks

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Role and function of RBI: RBI has two distinct roles, Monetary controlincluding controlling inflection and bank supervision.

This ensured through off-site and on site surveillance.The monetary control is exercised through CRR and SLR

mechanism.Central Bank do act as lender of last resort to banking system andare responsible for ensuring an efficient payment system.RBI main Functions are:Note Issuance Tools of monetary control

Government s Bank CRR

Banker s Bank Bank Rate

Bank Supervision Open market operationDevelopment financialsystem

Selective credit control

Exchange control

Monetary control

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COMMERCIAL BANK

Banking in India today:1. Banking operations have witnessed tremendous changes

over a period of time due to the advancement in thetechnology or globalization or both. They have become farmore advanced when compared to past.

2. One of the key challenges that banks face today is theirability to offer fee based services that can reach out directlyto where their customers are and be profitable at the sametime.

3. Traditional banks have long been exposed to strongexternal pressures. These pressures include technologicalrevolution, securitization, rising competitions, deregulation,etc.

4. There are tow models emerging in the banking sectortoday. One of them is universal banking in which banks areattempting to provide products and services developed bythem to customers. The second one is CRM.

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Definition of Commercial Banks: The Banking Regulation Act 1949, defines

Banking as accepting for the purpose of lending orinvestment of deposits of money from the public,repayable on demand or otherwise andwithdrawable by cheque , draft, order or otherwise.

Definition of Scheduled Bank :Scheduled Banks in India constitute those bankswhich have been included in the Second Schedule

of Reserve Bank of India (RBI) Act, 1934. RBI inturn includes only those banks in this schedulewhich satisfy the criteria laid down vide section 42(6) (a) of the Act.

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REGULATORY PROVISIONS

Banking in India is manly govern by the Banking RegulationAct 1949 and RBI Act 1934.RBI and GOI exercise control over bank from opening ofbanks to their winding up.Banking is defined in section 5B of the banking regulation actas the acceptance of deposits of money from the public for thepurpose of lending or investment. Such deposits may berepayable on demand or otherwise withdraw able bycheque/draft/order/ or otherwise.Thus Bank must perform two main functions :

1. One acceptance of public deposits.2. Lending or investment of such deposits.

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License for Banking : In Indian it is necessary tohave the license from RBI under section 22 of theB.R.Act for commencing or carrying on thebusiness of banking.

Permitted Business : Although traditionally themain business of the bank is acceptance ofdeposits and lending, the bank have their wings farand wide in to many allied and even unrelated

activities.The forms of business permissible under section6(1) of the BR Act, apart from banking business,are summarized below:

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(a) Borrowing , raising or taking up of money(b) Acting as the agent of the government.(c )contracting for public and private loans

(d) insure, guarantee, underwrite, participate inmanaging and carrying any issue of state/ MC otherloans or of shares stock, debentures stock ofcompanies and lend money for the purpose of anysuch issue.(e) Carry on and transact every kind of guarantee.(f) under take the administration of the estiates(g) Do any other business specified by the centralgovernment.

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Prohibited Business : Section 8 of B R Act prohibitbanking company from engaging directly orindirectly in trading activates. and under takingtrading risk

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Indian banking SystemThe present banking system of India can beclassified as follows :Public Sector Banks State Bank of India and its 7 associate bankscalled the State Bank Group19 Nationalized Banks

Regional Rural Banks sponsored by Public SectorBanks.

Private Sector Banks Old Generation Private Banks

New Generation Private BanksForeign Banks in IndiaScheduled Co-operative BanksNon-Scheduled Banks.

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Banking operations


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Banking operationsMajor Banking Activities undertaken by modernized banks: Section 6 of the Banking Regulation Act lists the followingactivities as those inwhich a Banking company may engage in:

1. Main Functions:Borrowing / Raising / Taking of DepositsLending or Advancing of Money

2. Subsidiary Services:Issue of LC/ Guarantee

Acting as agents to Government / Local Authority / Any otherpersons/ corporateTo act as executors / trustees

3. Agency ServicesCollectionRemittancesForeign Exchange Business

4. General utility Services:Safe Deposit LockersDemat ServiceCash Management Service

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5. Electronic Banking ServicesAnywhere / Online BankingATMPhone / Mobile Banking

Credit Cards / Debit CardsE-BankingConsumer CreditCapital Market related activities

Retail credit - vehicle loan, consumer loan, education loan,etc

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Banking Sector Reforms :Till 1991, no particular importance was attachedto Profits, Returns on Invested Funds or even to

quality of assets by Banks in India.The thrust of the entire operation was onmeeting certain predetermined and ordainedtargets.The result was Banks largely succeeded in

mobilizing savings but failed in ResourceAllocation due to Govt. Directives.In the process, the health of the Banking Systemwas neglected and asset quality haddeteriorated .

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Narasimham Committee Report :In August 1991, Govt. of India appointed acommittee to review the Financial System under

the chairmanship of M. Narasimham, FormerGovernor of RBI.The Committee made various recommendationsfor Financial Sector reforms.The important recommendations relate to the

following areas:Deregulation of Interests RatesStipulation of minimum Capital Adequacy Ratioat 8%by March 1996Uniform Accounting practices in regard toincome recognition, asset classification &provisioning for bad / doubtful debtsImparting transparency to Bank s BalanceSheets & making full disclosures

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FUND BASED

Cash credit & OverdraftsDiscounting trade billsMoney at callTerm loansConsumer creditMiscellaneous advances

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DISCOUNTING TRADE BILLS AND MONEY AT


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DISCOUNTING TRADE BILLS AND MONEY AT CALL

A bill arising out of transaction is presented by thesellers after acceptance by the purchasers to banksfor discount and payment is made.Money at call : Bank also grant loan for very short

period not exceeding 7 days to dealers or brokers.Such advances are repayable in short notice.

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2.2.2BANK CREDIT FOR VARIOUS SECTORS

PRIORITY SECTOR-Agriculture-small scale industries-other activities

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Weaker section :


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Weaker section :Small and marginal framersArtisansSwarnjayanti YojanaSC and STSLGSME Financing :SME sector play very important role in economicdevelopment.It contribute 40% of the industrial production and 35 % ofthe export and generate employment opportunities.

Low investment requirement, operating flexibility andlabour intensive are main characteristic of this sector

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Micro small and Medium Enterprises


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Micro, small and Medium EnterprisesDevelopment (MSMED) Act 2006:MSMED Act was passed in 2006 for the sound growth ofSME sector.The enterprises in this Act has been classified as micro,small and medium.Based on their activity these enterprises have further

classified as manufacturing enterprises and service.The MSMED Act has provision to safeguard the interestof SME by putting penalty clause on delayed payment.If the buyer failed to pay within 45 days buyer shall beliable to interest to suppliers.SIDBI and NSIC have set up credit rating schemes forSME sector to facilitate the flow of credit

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Different Types of Banking Services And Products :Section 6 of the Banking Regulation Act lists the followingactivities as those in which a Banking company may engagein:

1. Main Functions:Borrowing / Raising / Taking of Deposits

Lending or Advancing of Money2. Subsidiary Services:

Issue of LC/ GuaranteeActing as agents to Government / Local Authority / Any otherpersons / corporatesTo act as executors / trustees

3. Agency ServicesCollectionRemittancesForeign Exchange Business

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Diff T f B ki S i A d


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Different Types of Banking Services AndProducts :

4. General utility Services:

Safe Deposit LockersDemat ServiceCash Management Service

5. Electronic Banking ServicesAnywhere / Online BankingATMPhone / Mobile BankingCredit Cards / Debit CardsE-BankingConsumer CreditCapital Market related activitiesRetail credit - vehicle loan, consumer loan, educationloan, etc

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TRADITIONAL PROFILE OF LENDING ASSETS


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TRADITIONAL PROFILE OF LENDING ASSETS

Predominantly corporate assetsSignificant concentration levels with largeindividual and group exposures

Mainly to commodity and manufacturing sectors

Directed lending to agricultural and SMEsectors

Lending to individual borrowers to meet regulatorytargets

Absence of structured lending and scientificportfolio construction strategies

Retail credit was largely an untapped market

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RETAIL BANKING IN INDIA


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RETAIL BANKING IN INDIA.

Retail Banking includes a comprehensive rang of financialproducts.They are: deposits products, housing loans, credit cards, autofinance, personal loans, consumer durable loans, loansagainst the equity shares, loans for subscribing IPO, debitcard, Mutual funds and investment advisory services.

These products provide the opportunities to banks todiversify assets portfolio. Retail Banking: Retail banking is typical mass-market banking whereindividual customers use local branches of larger

commercial banks. Services offered include: savings andchecking accounts, mortgages, personal loans, debitcards, credit cards, and so forth.

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RETAIL P RODUCTS Indian Retail Banking offers following products :Retail Deposits ProductsSaving and recurring account ,Recurring deposit accountCurrent deposit account,Term Deposit accountZero balance account,Senior citizen account

Retail loan accountHome loan, auto loan, consumer loan, personnel loaneducation loan, credit cardRetail Services :Safe deposit lockerDepository servicesBanc assurance products

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Today s retail banking sector is characterized by three


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Today s retail banking sector is characterized by threebasic features :

1. Multiple products ( deposits, credit cards , insurance,and securities )

2. Multiple Channels of distribution (call centure, branch ,internet and kiosk)

3. Multiple customer groups ( consumer, SME, andcorporate )

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(A) R EASONS FOR GROWTH OF RETAIL BANKING


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(A) R EASONS FOR GROWTH OF RETAIL BANKING

Limited lending opportunity to banks

Capital market is getting well developed and linked withinternational capital market.Interest rate is deregulated and corporate are in positionsto raise the resources from capital market at cheaper

rate.Development of various financial product also resulted inless borrowing from the Banking sector.Increasing risk profile and low yield indicate that the

corporate banking has entered maturity phase.Banks are therefore concentrating on Retail banking andfee based income for maintaining the assets growth andprofitability.

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For banks, retail segment is the principal growth

driver. The private sector banks like HDFC bank,ICICI bank are very aggressive in this segment.The critical success factor of the Banks, whichare aggressively moving in the retail banking

segment are wider distribution network, low costfunding, low operating cost, marketing capability,large product portfolio, proper credit appraisal,faster loan processing, flexible technology, andgood recovery mechanism.

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ECONOMIC BACKDROP


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Demographic

forces

Continuedexpansion of

services sector

Resurgentindustrial sector

GDP growthof above 8%

Upwardmigration of

incomes

growing international linkages giving impetus to all sectors of the economy

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REASONS FOR BOOM FOR RETAIL BANKING


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REASONS FOR BOOM FOR RETAIL BANKING IN INDIA

Improvement in GDP.Improvement in per capita income.Globalization.Improvement of standard of living.Aspiration for quality life.Access to consumption financing.Statistics can be seen from the following charts.

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WHOLE S ALE BANKING


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Whole sale banking refers to doing business banking businesswith industrial and business entity

They are corporate, MNC, traders domestic business houses,public sector.Products :The products offered can be classified in four groupsFund based services : Term loan, working capital, short termfinance bills discounting, export finance.Non fund based services :Bank guarantee, L/C,Value added services :cash management, vendor financing ,forex, RTGS, Derivative desk, corporate salary account

Internet banking: payment gateway services, supply chainmanagement,

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INTERNATIONAL BANKING


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I B Banking services catering to cross border transactions is

called international banking.Banks are the active members of foreign exchangemarket and they provide certain type of services.Banks have been traditionally offering various services to

the international business people. They are pre-shipment and post shipment credit-export and importfinancing,

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Operational ControlsSources of Operational Controls:External Sources Vested with Reserve Bank of

IndiaInternal Control Respective Banks

Internal Control Areas:i. Maintenance of Documents and Recordsii. Adequate Information Storage and Retrieval

Mechanismiii. Maintenance of CRARiv. Asset-Liability Management Systemv. Organizational Structure

A di d Vi il

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Session 1 HDFC-IBS MUMBAI JOINT CERTIFICATION PROGRAM ON INDIAN FINANCIAL SYSTEM

Documents

Transcript of Session 1 HDFC-IBS MUMBAI JOINT CERTIFICATION PROGRAM ON INDIAN FINANCIAL SYSTEM