IDBI :Industrial Dev Bank Of India IFCI : Industrial finance Corp Of India SIDBI IDFC : Infrastructure Dev Finance Comp . IIBI : Industrial Invt Bank of India NABARD EXIM Bank SFC SIDC : State Ind Dev. Corp. ECGC :Export Credit Guarantee Corporation Of

India DICGS : Deposit Insurance and credit Guarantee

corp

Indian Banking system

RBI

Schedule Banks Non Scheduled Bank

State Coop. Commercial Bank

BanksIndian Foreign

PSU Pvt. Sector Bank

Banks

SBI & itssubsidaries

Other nationalizedbank

Regional ruralbank

Central Coop. bankBank and Primary CreditSocieties

CommercialBank

BANKING IN INDIA

BANKING IN INDIA

Banking in India is governed by BR Act,1949 and RBI Act,1934Banking in India is controlled/monitoredby RBI and Govt. of India The controls for different banks are differentbased on whether the bank/s is/are

a) statutory corporation

b) a banking company c) a cooperative society

BANKING REGULATION ACT,1949 (BR ACT)-1

BR Act covers banking companies and cooperative banks, with certain modifications.

BR Act is not applicable to

a) primary agricultural credit societies b) land development banks

BR Act allows RBI (Sec 22) to issue license for banks

BANKING REGULATION ACT,1949 (BR ACT)-2

RESERVE BANK OF INDIA ACT,1934(RBI ACT)-1

RBI Act was enacted to constitute theReserve Bank of India

RBI Act has been amended from time to time RBI Act deals with the constitution,

powers and functions of RBI

RESERVE BANK OF INDIA ACT,1934(RBI ACT)-2

RBI Act deals with:incorporation, capital management and

business of bankscentral banking functionsfinancial supervision of banks and

financial institutionsmanagement of forex/reservescontrol functions : bank rate,audit,accountspenalities for violation

RESERVE BANK OF INDIA - 1

Reserve Bank of India was established in 1935, after the enactment of the

ReserveBank of India Act 1934 (RBI Act). Banking Regulation Act,1949 (BR Act)

gave wide powers to RBI as regards to establishment of new banks/mergers and amalgamation of banks, opening of new branches, etc

BR Act,1949 gave RBI powers to regulate, supervise and develop the banking system in India

RESERVE BANK OF INDIA – 2

Central Bank

It is an apex institution of the monetary and banking structure of a country. A central bank has the authority to regulate and control the banking business and monetary system of a country. Its main function are

Traditional Function

Supervisory Function of banks

Development Function of RBI

MONETARY POLICY Monetary policy refers to the credit control measures

adopted by the central bank of a country to influence the level of aggregate demand for goods and services or to influence the trends in certain sectors of the economy.

Monetary policy operates through varying the cost availability of credit. There variations affect the demand for . And the supply of credit in the economy, and the nature of economic activities.

CONTD……

Price stability :- Another objective of monetary policy is to stabilize the price level. Both , rising and falling prices are bad as the bring unnecessary loss to some and undue advantage to others. They are associated with business cycles. So a policy of price stability keeps the value of money stable, eliminates cyclical fluctuations. Brings economic stability, helps in reducing inequalities of income and wealth, secures social justice and promotes economic welfare

CONTD…

Economic growth :-monetary policy can be imposed to influence the rapid economic growth. Economic growth is defined as “the process whereby the real per capita income of a country increases over a long period of time “it is measured by the increase in the amount of goods and services produced in a country. A growing economy produces more goods and services in each successive time period. Thus, growth occurs when an economy’s thus, economic growth implies raising the standard of living of the people, and reducing inequalities of inequalities of income distribution.

Exchange Rate Stability : Until 1991 India followed fixed Exchange Rate system and only occasionally devalued the rupee. The policies of floating exchange rate and increasing globalisation of Indian Economy openness and adopted since 1991.

This had made exch . rate more volatile

Quantitative Credit Control

Bank Rate : •It is a standard rate at which the RBI buys/rediscounts the bills of exchange /other eligible CPs .

•The B/R was not changed frequently due to the RBIs reluctance to adversely affects the yield and mkt for G-Sec .

•In post 1997 the B/R was reactivated by linking the rate to accomodation and refinance from RBI.

•It reflects the prime lending rates of the Banks

There are two types of refinance schemes available to Banks

•Export Credit Refinance

•General Refinance( to tide over temporary liquidity shortages face by Banks. It has been now replaced by collateral lending facility within overall frame work of LAF

LAF : One of the most important instruments of monetary policy in recent years.The RBI as lender of last resort was providing various general and sector –specific refinance facilities to the banks.

ILAF April 1999, the general finance facility replaced by CLF upto 0.25 % of fortnightly average outstanding deposit in 1997-98 which would be available for 2 weeks at Bank Rate.

An ACLF available for an equivalent amount of CLF at B/R plus 2% .

After ILAF a full fledged LAF came into being in June 2000.

The apparent success of LAF resulted in phases out of the CLF October 2002.

The LAF operates through the Repo auction.

i.e sale of G-Sec from RBI portfolio for absorption of liquidity.

Reverse Repo : Buying of G-Sec for injection of liquidity on a daily basis ther by creating a corridor for the call money market and other mismatches in liquidity.

Maturity : 1-14 days.

Min. Bid Size : 5 crore and multiples of Rs 5 crore thereafter .Securities Traded :All transferable GOI dated securities/ T-Bills can be traded in Repo and Reverse repo markets.

Call rates and Discretionary liquidity impact each other. The RBI balance sheet can be partitioned into autonomous liquidity and discretionary liquidity.

Discretionary Liquidity : It is the sum of the Balance sheet flows that arises out of its money market operation.

It represent changes in total liquidity in the system which occurs due to monetary policy action.

It comprises of policy induced flows from RBI to banks and PD’s.

Autonomous Liquidity : It essentially comprises of liquidity that flow to banks without any monetary policy action.

CRR : As per the RBI stipulation relating to the maintenance of CRR by banks, to choose an optimum strategy of holding CRR depending upon their intra-period cash flows.

Banks are allowed to maintain the CRR on the last Friday of the second preceding fortnight.

The daily min. requirement is 50% of the fortnightly required for the 7 days of the reporting fortnight and 65% for the remaining 7 days including the reporting Friday.The daily Min. was reduced to enable the smooth adjustment of liquidity for roper cash management in over night call rates

SLR :It refers to that portion of total deposits of a commercial banks which it has to keep in form of liquid reserves •Cash in Hand •Reserves with RBI,Government Securities and the approved securities like IDBI,NABARD , IFCI and State electricity and road transport undertakings •Co-operative debentures

OMO’s : As defined by RBI refer to “the purchase and sale by central bank of a variety of the assets such as foreign exchange , gold , govt securities and even company shares”

In practice it is confined to purcase and sale of govt securities

MSS :It was RBI from April 2004 to mop up additional liquidity Under this

•The govt will issue T-Bills and /or dated securities in addition to its normal borrowings requirements for absorbing liquidity from the system.

•It will be issued by way of auction conducted by RBI.

• Amount raised under MSS will be held in separate account titled MSS account to be maintained and operated by the RBI.

Impact

•It will curb short-term volatility in the Forex market.

•It is expected to fine tune the structural balance in money market and maintain a grip over short-term interest rate.

•The cost of sterilization will be borne by the govt.

•The size of govt bond will increase.

Qualitative Credit Control

Other Measures

Money Market

It refers to that segment of the system / market that enables the raising of short term funds for meeting the temporary shortages of cash and obligations and the temporary deployment of excess funds for earning returns

CALL MONEY MARKET

• It deals with the (borrowed and lent) overnight / one day (call) money and notice money for periods of up to 14 days.

• It primarily serves as the balancing the short term liquidity positions of banks.

• It is the market for short term funds repayable on demand and with maturity period varying between one day to a fortnight.

CALL MONEY MARKET

No collateral security is required to cover this transaction

It is basically an the over the counter market without the intermediation of brokers.

Call money is required by banks to meet their CRR requirement.

The rate of interest on call loans is known as the call rate .

It varies from day to day and often hour to hour.

COMMERCIAL BILLS MARKET

When trade bills are accepted by commercial banks they are called commercial bills.

The cost of funds raised was lower than the cost of inter-bank deposits or loans of over 60 days and also this inter-bank deposits was subjected to reserve requirements

TREASURY BILLS MARKET

It is an instrument of a short term borrowing by the GOI

It is a kind of finance Bill (i.e a bill does not arise from any genuine transaction in goods) or a promissory note issued by the RBI on behalf of the Government.

The T-Bills are issued to raise short term funds to bridge seasonal/temporary gaps between receipts and expenditure of GOI.

FEATURES OF T-BILLS

They are negotiable securities They are issued at discount and are repaid at

par on maturity High liquidity on account of short tenure (i.e

91 days and 364 days) and inter bank repos Absence of default risk due to government

guarantee and RBI’s willingness to always purchase them negligible capital depreciation.

Assured yield Low transaction cost Eligibility for inclusion in SLR Purchases/sales affected through the SGL.

AD-HOC TREASURY BILLS

It was introduced to replenish Government cash balances with RBI.

It was decided between the RBI and the GOI that the govt could maintain with the reserve bank a cash of not less than Rs 50 crore on Friday and Rs 4 crore on other days

Free of obligation to pay interest there on Whenever the balance fell below the minimum. The govt. account would be replenished by the

creation of ad-hoc bills in favour of Reserve Bank.

Ad-hoc 91 days T-Bills were created to replenish the govt’s cash balances with the Reserve bank.

CONTD

It is net increase in in the net RBI credit to the Govt .

In 1970’s and 1980’s a large proportion of ad-hoc T-bills were converted in to long term dated/undated G-sec.

This coversion referred to as funding. This put an constraints on the conduct of

monetary policy. This lead to ad-hoc T-bill replaced by WMA’s in

1997. It is an arrangement to cover temporary

mismatch of the govt. revenue and expenditure.

CONTD

It is not a source of financing the Govt deficit It is an overdraft facility of the govt. with the

RBI. They are issued on Yield basis and not on

price basis. The yield on T-bill is calculated as per the

following formula Y= (100-P) * 365 *100/P*D. P= Price Y= Discounted Yield D= Days of maturity

T-Bills have a primary as well as secondary market

The dealers bids through (negotiated Dealing System) NDS

In secondary market the already ssued T-bills are traded in by banks, FI’s and MF’s

The quotes for T-bills in the secondary market are on a yield basis.

Two way yield are quoted (Bid and Ask) Bid yield is higher than the ask yield

COMMERCIAL PAPER

Following the recommendations of the vaghul committee in March 1989

RBI permitted the issue of CP’s within the framework of its guidelines

It can be issued to individuals ,banks ,companies and other registered Indian corporate bodies and Unincorporated bodies

NRI’s can be issued a CP only on anon-tranferable and non-repatriable basis.

FII’s are eligible to invest in CP’s but within the limits set for their investment by the SEBI

It is an unsecured short term promissory note, negotiable and tranferable by endorsement and with a fixed maturity period.

It is issued at discount by a leading credit worthy ness and highly rated corporates to meet their working capital requirements. It is also known as finance paper ,industrial paper or corporate paper. The PD’s and All India financial institution can also issue CP’s

It can also be issued in interest –bearing form.

CONDITIONS OF ISSUING CP’S

The tangible net worth of the company ,as per audited balance sheet is not less than Rs 4 Crore

A company has been sanctioned working lmit by banks or all-India FI’s.

The borrowal account of the company is classified as a standard asset by the financing banks/institution.

Working capital limit means the aggregate limits including those by way purchase/discount of bills sanctioned by way of purchase/discount of bills sanctioned by banks/FI’s for meeting working capital requirements.

Maturity CP can be issued for maturities between a minimum of 7 days and a maximum upto one year from the date of issue.Denomination CP can be issued in denomination of Rs 5 Lakh (face value)Mode of issuance It is either in the form of a promissory note or in a demat form through any depository approved by and registered with the SEBI

Effective Cost/Interest Yield As CP’s are issued at a discount and

redeemed at their face value ,their effective pre-tax interest yield

[ Face value –Net amt realised /Net amt realised ]*[360/maturity periods]

Net amt realised = face value- discount-issuing company and paying agent IPA Charges

i.e stamp duty ,rating charges, dealing bank fee and fee for stand by facility.

PARTICIPANTS

Corporate Bodies Banks Mutual Funds The UTI LIC GIC And so on looking out for investment

CERTIFICATE DEPOSITS MARKET

This are unsecured ,negotiable , short term instruments in bearer form issued by commercial Banks and DFI’s

It was introduced in 1989 and are marketable receipts of funds deposited in abank for period at a specified rate of interest.

They are attractive both to the bankers and the investors in the sense that the banker is not required to encash the deposit prematurely

While can sell the CD’s in the secondary narket before its maturity

It has liquidity /ready marketability Issued demat form or a usance promissory

note for funds deposited at a bank Issued by commercial banks (excluding the

RRB’s/LAB’s) Select all-India FI’s permitted by thr RBI to

raise short-term resources within the limit fixed by it

Min. isssue Rs 1 lakh or issued in the mutiples of Rs 1 lakh.

Individual /corporations /companies/trusts/funds/associations and so on

Bank can issue 7days (min) with maturity and one year

FI’s can issue CD’s with maturity 1-3 yrs I t can issued at a Discount on face value and can

also issue on floating rate basis The interest rate should be set periodically

according to pre-determined formula Issuer is free to issue or determine

discount/coupon rate. Bank have to maintain SLR and CRR on the issue

of the CD’s No lock in period and can be freely transferred by

endorsement and delivery

MMMF’S

The money market instrument outlined earlier in the wholesale transactions involving large amount and are suitable for large corporates and institutional investors to enable small investors to come or participate MMMF’s started or introduced through that can earn market related yield.

It bridges the gap between small individuals and money market.

RBI made certain modification in 1995-96 to make it more flexible and attractive to a large investors base such as banks FI’s and corporates besides individuals.

Modification donei. Removal of ceiling for raising resourcesii. Allowing Private sector to set up MMMF’s.iii.Permission to MMMF’s to invest in rated bands

and debenturesiv.Min lock-in period 15daysv. MMMMF’s allowed to offer a cheque writing

facility in tie up with banks to provide more liquidity to unit holders.

vi.MMMF’s have to be setup as a separate entity only in form of a trust

vii.It is Under SEBI since March 2007.

Market for long-term capital. Demand comes from the industrial, service sector and government

Supply comes from individuals, corporates, banks, financial institutions, etc.

Can be classified into: Gilt-edged market Industrial securities market (new issues and

stock market)

THE INDIAN CAPITAL MARKET

THE INDIAN CAPITAL MARKET

Development Financial Institutions Industrial Finance Corporation of India (IFCI) State Finance Corporations (SFCs) Industrial Development Finance Corporation

(IDFC) Financial Intermediaries

Merchant Banks Mutual Funds Leasing Companies Venture Capital Companies

PRIMARY MARKET

It is the market for new issues. It is the market for fresh capital. Funds are mobilized through prospectus , right issue, and the private placement.

IPO & FPO

1. IPOIt is a offering either of securities or an offer for sale of existing securities or both by an unlisted company for the first time to the public.

2. FPOIt is an offering of either a fresh issue of securities or an offer for sale to the public by an already listed company through an offer documents Investors participating in these offerings take informed decisions based on its track record and performance.

RIGHT ISSUE

It is the issue of new shares in which existing shareholders are given preemptive rights to subscribe to the new issue on a pro-rata basis.

The right is given in the form of an offer to existing shareholders to subscribe to a proportionate number of fresh ,extra at a pre-determined price.

PRIVATE PLACEMENT

It refers to the direct sale of newly issued securities by the issuer to a small number of investors through merchant bankers.

i. Investorsii. Financial Institutions iii.Corporatesiv.Banks and High net worth individuals

PREFERENTIAL ISSUE

A public / rights is cumbersome and requires compliance with statutory provisions . Hence, many companies opt for preferential allotment of shares for raising funds.

Such allotments are made to various strategic groups including promoters ,Foreign Partners, Technical collaborators and .Private funds.

QIP’S

It has emerged as a new fund raising investment for listed companies in India.

Through QIP’s issue funds can be raised from foreign as well as domestic institutional investors without getting listed on a foreign exchange ,which is lengthy and cumbersome.

INTERNATIONAL CAPITAL MARKET

GDR

GDRs are essentially equity instruments issued abroad by authorized overseas corporate bodies against shares/bonds of Indian companies held with nominated custodian banks.

The issue of GDR creates equity shares of the issuing company which kept with a designated bank .

GDR are freely transferable outside India and dividend in respect of the shares represented by GDR is paid in Indian rupees.

ADR

ADRs are negotiable instruments denominated I dollars and issued by the US depository bank.

A non-Us company that seeks to list in the US ,deposits it shares with a bank and receive a receipt which enables the company to issue the American depository shares.

These ADS serve as a stock certificates and are used interchangeably with the ADR which represents ownership of deposited shares There is no legal or technical difference between an GDR and ADR.

ECBS

Indian corporates are allowed to raise foreign loans for financing infrastructure projects.

The Indian companies are free to raise ECBs from any internationally recognized source, such as bank, export credit agencies, suppliers of equipments,foreign collaborators, foreign equity holders, and international capital markets .

ECBs are linked to federal reserve board rate which is 3% since April 2005.

FCCBS

FCCBs are bonds issued by Indian companies and subscribed to by anon-resident in foreign currency.

They carry a fixed interest or coupon rate and are convertible into a certain number of ordinary shares at a preferred price.

They are convertible into ordinary shares of the issuing company either in whole or a part on the basis of any equity-related warrants attached to the debt instruments .

This bonds are listed and traded abroad.

Till conversion the interest is paid in dollars

And if conversion option is not exercised than the redemption is also made in dollars.

Thus Foreigners prefer FCCBs and Indian companies prefer to issue GDRs.

The rate of interest is less but the exchange risk is more in FCCBs as interest is payable in foreign currency.

SECONDARY MARKET

The secondary market is a market in which existing securities are resold or traded. This market is also Known as the Stock market

In India secondary market consist of recognized Stock exchanges operating under rules, by-laws and regulation duly approved by the government.

These stock exchanges Constitute an organize Stock market where securities are issued by the central and State govt, public bodies and joint stock companies are traded.

STOCK EXCHANGE DEFN

A Stock exchange is defined under section 2 (3) of the securities contract (Regulation) Act, I956, as any body of individuals whether incorporated or not, constituted toe the purpose or assisting, Regulating or controlling the business of buying selling, or dealing in securities.

FUNCTION OF THE SECONDARY MARKET

To Facilitate liquidity and marketability at the outstanding equity and debt instruments

To contribute to economic growth through allocation of funds to the most efficient Channel through the process of disinvestment to reinvestment.

To provide instant valuation at securities caused by Changes in the internal environment (company-wide and industy wide factors). such valuation facilitates the measurement of the cost of capital and the rate of return of the economic entities at the micro level.

To ensure a measure of safety to improve and fair dealing to protect investors interest.

To induce companies to improve performance Since the market price at the Stocks exchanges reflects the performance and this market price is readily available to investors.

PREFERENCE SHARES TYPES

1.CUMULATIVE preference Shares

Share where the arrears of dividends in times of and for lean profits can be accumulated and paid in the year in which the company earns good profits. This is the type of preference share on which dividend accumulates if it is remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity Shares.

Non-Cumulative preference shares', Shares where the carry forward of the arrears of dividends is not possible.

Participating preference shares: shares that enjoy the right to participate in surplus profits or Surplus assets on the liquidation of a company or in both, if the Articles of Association provides for it.

Redeemable preference sharesShares that are to be repaid at the end of the term of issue, the max. period of redemption being 20 years redeemed with effect from 1/03/1997 under the companies amendment act ,1996. Since they are similar to debentures . Only fully paid shares are redeemed Where redemption is made out of profits a capital redemption Reserve Account is opened to which a sum equal to the nominal value off the shares is transferred, It is treated as paid-up Share capital of the company.

Fully convertible cumulative preference shares

Shares comprises of two parts

Part A is convertible into equity shares