1

Notes

On

PAPER 2.5 INDIAN FINANCIAL SYSTEM

Submitted to

DIRECTORATE OF DISTANCE & CORRESPONDENCE EDUCATION

BANGALORE UNIVERSITY

By

Dr. M. Muninarayanappa

Professor – Department Of Commerce

Bangalore University, Bangalore.

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PAPER 2.5

INDIAN FINANCIAL SYSTEM

SYLLABUS

Objective: The objective of this subject is to familiariz e the students with

regard to structure, organization and working of financial system in India.

Unit 1: FINANCIAL SYSTEM

Introduction – Meaning – Classification of Financial System.Financial Markets – Functions

and Significance of Primary Market, Secondary Market, Capital Market, & Money Market.

Unit 2: FINANCIAL INSTITUTIONS

Types of Banking and Non-Banking Financial Institutions.Constitution, objectives &

functions of IDBI, sfcs, sidcs, LIC, EXIM Bank.Meaning and scope of Mutual Funds.

Unit 3: COMMERCIAL BANKS Introduction – Role of Commercial Banks – Functions of Commercial Banks – Primary

Functions and Secondary Functions – Investment Policy of Commercial Banks.

UNIT 4: CO-OPERATIVE BANKS

Meaning – definition – features - functions – types – merits and demerits - Lending policies –

priority areas of lending – role of co-operative banks for agricultural development.

UNIT 5: RURAL FINANCE

RRBS: Meaning – definition – features - functions – types – merits and demerits- Lending

policies – priority areas of lending – Role of RRBS in rural development. Micro finance:

micro finance products and services – role of Self Help Groups – post office –role of

companies in micro finance as a part of social responsibilities.

UNIT 6: CAPITAL MARKET

Stock market: Meaning – functions – primary – secondary – functionaries in stock market -

D-mat Accounts – listing requirements – role of stock exchange in capital mobilization

.

Unit 7: REGULATORY INSTITUTIONS

Introduction.RBI – Organization – Objectives – Role and Functions.The Securities and

Exchange Board of India – Organization and Objectives – IRDA and its functions.

Unit 8: FINANCIAL SERVICES

Introduction – Meaning – Features – Importance. Types of Financial Services – factoring,

leasing, venture capital, Consumer finance; housing & vehicle.

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Content

1.1 Introduction to Financial System 1.2 Meaning 1.3 Financial Institutions

1.4 Capital Markets 1.5 Primary Market

1.6 Secondary Market 1.7 Long Term Loan Market 1.8 Money Market

1.9 Stock Exchange 2.1 Monetary Establishments

2.2 Banking Institutions 2.3 The Organised Non-Banking Financial Institutions 2.4 Mutual Funds

3.1 Introduction 3.2 Functions Of Commercial Banking

3.3 Types Of Deposits 3.4 Lending Of Funds 3.5 Discounting Of Bills Of Exchange

3.6 Investment Of Funds On Securities 3.7 Creation Of Credit Or Creation Of Money

3.8 Secondary Functions Of Commercial Banks 3.9 Miscellaneous Or General Utility Services 3.10 Investment Norms:

4.1 Introduction 4.2Meaning 4.3 Definition

4.4 Types & Perform Of Co-Operative Banks, India 4.5 Primary Co-Operative Credit Society

4.6 Central Co-Operative Banks 4.7 State Co-Operative Bank 4.8 Land Development Banks

4.9 Urban Co-Operative Banks 4.10 Functions Of Co-Operative Banks

4.11 Problems Of Co-Operative Banks 4.12 Advantages Of Cooperative Banks 4.13 Disadvantages Of Cooperative Banks:

4.14 Role Of Co-Operative Banks For Agricultural Development. 5.1 Regional Rural Banks:

5.2 Objectives Of RRB’s 5.3 Areas Of Operations Of RRB 5.4Micro Finance: Meaning

5.5Micro Finance Products 5.6Role of Self help group

5.7Micro Finance-the role of Post Offices 5.8Role of Companies in Micro Finance 6.0 Meaning

6.1 Choices Of Capital Market 6.2 Importance Of Capital Market

6.3 Classification Of Capital Market 6.4 Primary Market

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6.5 Functions Or Services Of Primary Market Or New Issue Market 6.6 Secondary Market

6.7 Functioning Of Secondary Market 6.8 Primary And Secondary Markets – Similarities

6.9 Characteristics/ Functions Of Capital Market 6.10 Demat Account 6.11 Procedure

7.1 Meaning And Significance: 7.2 Need / Importance:

7.3 Types 7.4 Organization Of Rbi: 7.5 Objectives:

7.6 Functions: 7.7 Main Functions:

7.7 Supervisory Functions: 7.8 Promotional Functions: 7.9 Methods Of Credit Control

7.10 Quantitative Methods: 7.11 Securities And Exchange Board Of India (SEBI)

8.1 Introduction

8.2 Meaning

8.3 Choices Of Economic Services

8.4 Importance Of Economic Services

8.5 Styles Of Economic Services

8.6 Factoring:

8.7Partitioning Mechanism

8.8 Steps In Partitioning

8.9 Services Rendered By The Difficulty

8.10 Features Of Leasing

8.11 Venture Capital:

8.12 Features Of Venture Capital

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Unit 1

FINANCIAL SYSTEM

Structure

1.10 Introduction

1.11 Meaning

1.12 Financial Institutions

1.13 Capital Markets

1.14 Primary Market

1.15 Secondary Market

1.16 Long Term Loan Market

1.17 Money Market

1.18 Stock Exchange

Introduction – Meaning – Classification of Financial System. Financial Markets – Functions

and Significance of Primary Market, Secondary Market, Capital Market, & Money Market.

OBJECTIVES: You understand the financial systems how it works in the Indian market. The

importance of primary, secondary market and shorter money market are explained. The roles

of stock exchanges in the primary and secondary market can also be understood. The role of

intermediaries and the importance of financial instruments in the financial market are also

explained in brief.

1.1 INTRODUCTION

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Organization of the financial system

Financial Intermediaries Financial Markets Financial

Assets/Instruments

Banks NBFCMutual

Funds

Insurance

Organization

Leasing Companies

Hire-Purchase/Consumer Finance

Companies

Housing Finance Companies

Venture Capital Funds

Merchant Banking Organization

Credit Rating Agencies

Factoring and Forfeiting Org.,

Stock broking firms

Depositories

Money

MarketCapital/Securities Market

Primary Market Secondary

Market

Primary/Direct Indirect Derivatives

Equity

Preference

Debentures

Innovative debt

instruments

Forward

Futures

OptionsConvertible Debentures

Non- Convertible

Debentures

Secured Premium Notes

Warrants

Mutual Fund-units

Security Receipts

Pass Through

Certificates

Source: Prof. Augustin Amaladas & Prof. Amala Shanthi - slide share, St. Joseph’s College

of Commerce, Bangalore.

The financial system links between the savers and users to promote faster economic development.

A lender (saver) believes that he/she could enjoy the future money than present money. A

borrower (user) believes that he gets maximum enjoyment of the present than future money. A

well organised financial system is a backbone of the Economic development of any country. Its

Financial inputs from financial system for the production of goods and servic es which in turn

promote the well being and standard of living of the people of a country. Financial markets and

financial institutions are supportive mechanism of a financial system which requires money and

money assets. Mobilisation of savings and investing in productive ventures are the responsibility

of a financial system.

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Post-1991 Phase Organization of the Indian financial System

Privatization of

financial

institution

Banks

Mutual-Fund

Insurance

Companies

Reorganization of Structure

DFIs/PFIs Banks NBFCs Mutual-funds Capital

Market

Money-

Market

PrimaryStock-

exchange

Investor Protection:

SEBI

Prudential Norms:

Credit/advance

portfolio

Investment

Portfolio

Capital adequacy

Exposure

Norms:

Securitisation,

Asset

Reconstruction

And Enforcement

Of Security

Interest

Asset-Liability

Management Credit Risk

Management

Country Risk

Management

Source: Prof. AugustinAmaladas& Prof. AmalaShanthi - Slide Share, St. Joseph’s College of

Commerce, Bangalore.

1.2 MEANING

The term national economy may be a set of inter-related activities or services

operating along to realize some pre-determined purpose or goal. It includes totally different

markets the establishments, instruments, services and mechanisms that influence the

generation of savings, investments, capital formation and growth.

1.2.1 DEFINITION

Van Horne has outlined the national economy as “the purpose of economic markets to assign

savings expeditiously in an economy to final users either for investment in real assets or for

consumption”.

2. Consistent with Robinson, the first operate of the system is “to give a link between savings

and investment for the creation of latest wealth and allow portfolio adjustment within the

composition of the prevailing wealth”.

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1.2.2 ROLE OF FUNCTIONS OF ECONOMIC SYSTEM

A national economy performs the subsequent functions:

1. It is a link between savers and investors. It helps in utilizing the mobilized savings of the

scattered savers in additional economical and effective manner. It channelizes flow of savings

in to productive investment.

2. It provides a payment mechanism for the exchange of products and services.

3. It provides a mechanism for the transfer of resources across geographic boundaries.

4. It provides a mechanism for managing and dominant the chance concerned in mobilizing

savings and allocating credit.

5. It promotes the method of capital formation by transferrable along the availability of

savings and also the demand for investible funds.

6. It helps in lowering the value of transactions and increase returns. Reduced value

motivates folks (groups) to save lots of additional.

7. It provides elaborated info to the operators/players within the market like people, business

homes, government etc.

1.2.3 CLASSIFICATION OF ECONOMIC SYSTEM

The following are the four major classification of Indian monetary System:

1. Monetary establishments

2. Monetary Markets

.

3. Monetary Instruments/ assets/ securities

1. Financial Services

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1.3 FINANCIAL INSTITUTIONS

Financial establishments are the intermediaries who facilitate sleek functioning of the

national economy by creating investors and borrowers meet. They mobilize savings of the

excess units and apportion them in productive activities promising a stronger rate of returns.

Financial establishments are termed as money intermediaries as a result of they act as

middleman between the savers and borrowers.

Financial market

1.3.1 MEANING

A market could be a place or mechanism that

facilitates the transfer of resources from one

entity to a different. A money market is an

establishment or arrangement that facilitates the

exchange of monetary instruments like shares,

debentures, loans etc. In different words, a

market wherever in money instruments like

money claims, assets and securities are unit listed is understood as “a money market”.

Money market transactions might occur either at a selected place or location.

Eg: banks, stock exchanges or through different mechanisms like telephone, telex or fax or

different electronic media.

1.3.2 DEFINITION In line with Brigham Eugene. F. “The place wherever individuals and organizations needing

to borrow money are unit brought alongside those having surplus funds is named a money

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market”. One in every of the necessary requisites for the accelerated development of

associate economy is that the existence of a dynamic money market. A money market is of

nice use for a rustic because it helps the economy in many ways that.

1.3.3 ROLE OR IMPORTANCE OF MONEY MARKET

The role or importance of money market is as follows:

1. Transfer of resources:

Money market facilitates the transfer of resources from one person to another.

2. Growth in income:

Money market permits the lender to earn interest and dividend on their surplus investible

funds, so conducive to extend in their financial gain.

3. Productive usage:

Money market yield the productive use of funds employed in finance system, so enhancing

the financial gain and therefore the gross national production.

4. Capital formation:

Money market provides a channel through that the new savings flow to help capital

formation.

5. Worth discovery or worth determination:

Money markets yield the determination of the worth of listed money assets through the

interaction of various set of participants.

6. Sale mechanism:

Money market provides a mechanism for commerce of monetary assets by associate capitalist

and provides the advantages of marketability and liquidity of such assets.

7. Data availability:

The data generated in money market is helpful to numerous parties participating in economic

system. Thus, a money market could be a primary constituent of monetary system. The

money market not solely helps within the transfer of savings from new trade or production,

however conjointly provides opportunities for money investment to earn financial gain.

In different words, money markets perform each money and non-financial functions. The

money market permits finance of not solely physical capital formation i.e. Tangible mounted

assets and inventories, however conjointly consumption expenditure.

That is why money markets manage the flow of funds not solely between individual savers

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and investors however conjointly between institutional savers and investors.

1.3.4 CLASSIFICATION OF MONETARY MARKETS

The Classification of monetary markets in India is as follows:

1. Unorganized markets:

In these markets there are unit variety of money lenders, bankers, and traders etc. United

Nations agency lends money to the general public. Bankers conjointly collect deposits from

the general public. There are non-public finance firms, invoice funds etc, whose activities

aren't controlled.

2. Organized markets:

In the organized markets, there are unit standardized rules and rules governing their money

dealings. There's conjointly a high degree of institutionalization and instrumentalisation.

These markets are unit subject to strict oversight and management by the run batted in or

different restrictive bodies.

These organized markets may be additional classified into 2 viz.

I. Capital market.

II. Securities Market.

1.4 CAPITAL MARKET

The capital market could be a marketplace

for monetary assets that have a protracted

or indefinite maturity. Typically it deals

with long run securities that have a

maturity amount of higher than one year.

It includes establishments and mechanism

for the effective pooling of long term funds from people and institutional investors and

creating them accessible industrial undertakings. Capital market in brief, deals in shares,

debentures, bonds and securities.

1.4.1 OPTIONS OF CAPITAL MARKET

1. It deals in long and medium term funds.

2. It consists of primary market and secondary market and special monetary establishments.

3. It covers each individual and institutional investor.

4. It makes funds accessible to industrial and industrial undertakings.

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1.4.2 IMPORTANCE OF CAPITAL MARKET

Absence of capital market acts as a deterrent issue to capital formation and economic process.

Resources would stay idle if finances don't seem to be funneled through capital market.

The importance of capital market may be in brief summarized as follows:

1. The capital market is a vital supply for the productive use of economy’s savings. It

mobilizes the savings of the folks for more investment, and therefore avoids their wastage in

unproductive uses.

2. It provides incentives to saving and facilitates capital formation by giving appropriate rates

of interest because the value of capital.

3. It provides anas avenue for investors, significantly the social unit sector to speculate in

monetary assets that are a lot of productive than physical assets.

4. It facilitates increase in production and productivity within the economy and therefore

enhances the economic welfare of the society.

5. The operations of various establishments within the capital market induce economic

process. They furnish qualitative directions to the flow of funds and convey concerning

rational allocation of scarce resources.

6. A healthy capital market consisting of knowledgeable intermediaries promotes stability in

values of securities representing capital funds.

7. Moreover, it is a vital supply for technological upgradation within the industrial sector by

utilizing the funds endowed by the general public.

Thus, a capital market is a vital link between |people who} save and people who draw a bead

on to speculate these savings.

1.4.3 CLASSIFICATION OF CAPITAL MARKET

Capital market may be classified into three, viz,

i. Industrial exchange.

ii. Government exchange.

iii. Long run loan market.

iv. Industrial securities market:

It implies, It is a marketplace for industrial securities, viz,

i. Equity shares or stock

ii. Preferred shares.

iii. Debentures or bonds.

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It is a market wherever industrial considerations raise their capital or debt by

supplying applicable instruments. It may be more divided into two:-

• Primary market or new issue market

• Secondary market or exchange.

1.5 PRIMARY MARKET

Primary market may be a marketplace for

new issue or new monetary claims. Thus It is

additionally known as New Issue Market.

The first market deals with those securities

that are unit issued to the general public for

the primary time. Within the primary market,

borrowers exchange new monetary securities

for future funds. Thus, the first market facilitates capital formation.

There are three ways by that an organization might raise capital in a very primary market.

They are:

Public issue.

Rights issue.

Private placement.

The foremost common methodology of raising capital by new corporations is through sale of

securities to the general public. It is known as public issue. Once associate existing company

needs to boost extra capital, securities are unit initial offered to the present shareholders on

preventive basis. It is known as offer. Non-public placement may be a manner of

commercialism securities in private to little cluster of investors.

1.5.1 FUNCTIONS OR SERVICES OF PRIMARY MARKET OR NEW ISSUE

MARKET

1. The transfer: A vital perform rendered by primary market is to permit the transfer of

resources from capitalist to entrepreneurs who establish new corporations. It is additionally

known as the perform of origination. The transfer perform is expedited by specialist agencies

that assist in numerous activities related to such transfer.

2. Investigatory services: The investment bankers and different agencies concerned in

primary market offer the investigatory services. These embrace, economic analysis, technical

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analysis, monetary associate analysis of the businesses wherever a capitalistants to take a

position. This data helps the investors in creating a transparent selection on the kind, quality

and amount of investment to form.

3. Consultative and data services: Numerous consultative services are unit out there in

primary market with a read to up the standard of capital problems in primary market. The

relevant services embrace crucial the kind, the mix, the price, the timing, the size, the

commercialism ways and therefore the terms and conditions of issue of securities etc.

4. The guarantee: If the corporate, getting into capital market isn't positive of raising full

quantity of funds from the market, there are unit bound mechanism there by success of such

issue are secured. It is known as underwriting. Underwriting aims at guaranteeing the

subscription of public issue. Underwriters guarantee roaring subscription of the problem by

endeavor to require up the securities within the event of the general public failing to

subscribe a similar. It advantages all those concerned in pr imary market just like the

provision company, the investment public and capital market generally. The perform of

underwriting is undertaken for a commission.

5. The distribution: The perform that facilitates the sale of securities from company to

investors is termed ‘Distribution’. The perform of distribution is rendered by the specialised

agencies like brokers and dealers in securities. They maintain a relentless and an in depth link

with the issuers on the one hand and therefore the final investors on the opposite.

1.6 SECONDARY MARKET

Secondary market may be a marketplace for secondary sale of securities. In different words,

securities that have already competent the new issue market are unit listed during this market.

Generally, such securities are unit quoted within the exchange and it provides a nonstop and

regular marketplace for shopping for and commercialism of securities. This market consists

of all stock exchanges recognized by the government of India. The stock exchanges in India

are regulated under the Securities Contracts (Regulation) Act 1956. The Bombay exchange is

that the principal exchange in India that sets the tone of the opposite stock markets.

The secondary market provides liquidity to monetary instruments that are unit already issued

in primary market. In a very exchange, purchases and sales of securities whether or not of

state or semi-government bodies or different public bodies and additionally shares and

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debentures issued by non-public joint stock corporations are unit done.

Functioning of secondary market:

For the effective functioning of secondary market, correct management should be exercised.

At present, management is exercised through the subsequent 3 necessary processes.

1. Recognition of stock exchanges:

As an area of secondary market operation the stock exchanges got to be recognized by

regulatory agency. The securities that are unit issued in primary market are listed solely in

recognized exchanges like Bombay stock exchange, NSE, Bombay exchange etc. In indiasebi

is recognizing the stock exchanges.

2.Listing of securities available exchanges:

Once the stock exchanges are recognized the securities that are needed to be listed like shares

debentures etc. Should be listed available exchanges

3.Recognition of broker:

The intermediaries, WHO facilities swish functioning of secondary market like brokers, deal

in secondary market. Sub-brokers got to be recognized by SEBI, them solely the desire be

able to interchange stock exchanges.

1.6.1 FUNCTIONS OR SERVICES OF SECONDARY MARKET

The Secondary market or exchange occupies a important position within the national

economy. In perform many economic functions and render valuable services to the investors,

corporations and to the economy as whole. They are as follows:

1. Liquidity of Securities:

Stock exchanges offer liquidity to securities, since securities is regenerate in to money at any

time in step with the discretion of the capitalist by commercialism tem at the listed costs.

2. Marketability to Securities:

Secondary market facilitate shopping for and commercialism of securities at listed costs by

providing continuous marketability to the investors in respect of securities they hold or will

hold. Therefore they produce a prepared marketplace for securities.

3. Safety of Funds happiness to investors:

Stock exchanges facilitate in maintaining safety of funds endowed as a result of they need to

perform below strict rules and rules and therefore the bye-laws are meant to make sure safety

of investible funds. These rules are framed by SEBI. This is able to strengthen the investor’s

confidence and promote larger investment.

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4. Availableness of future funds to companies:

The securities listed within the stock, market are negotiable and transferable. Because it is

transferred from one capitalist to a different, one capitalist is substituted by another; however

the corporate is secured of future availableness of funds.

5. Flow of funds to profitable projects:

The profit and recognition of corporations are mirrored available costs. The costs quoted

indicate the relative profit and performance of corporations. Funds tend to be attracted

towards securities of profitable corporations and this facilitates of profitable corporations and

these facilities the flow of capital in to profitable channels.

6. Motivation for improved performance by companies:

The performance of an organization is mirrored on worths the costs quoted within the

exchange price of economic assets depends upon the company’s performance. These costs

are additional visible within the eyes of the general public. Exchange provides space for this

worth quotation for those securities listed by it. This airing makes an organization tuned in to

its standing within the market and it acts as a motivation to enhance its performance

additional.

7. Promotion of investment opportunities:

Stock exchanges mobilize the savings of the general public and promote investment through

capital problems. Unless there's a good secondary market, investment opportunities won't be

with investors.

8. Availableness of Business Information:

The dynamical business conditions within the economy are immediate mirrored on the

secondary market/stock exchanges. Booms and depressions is known through the dealings

within the stock exchanges. Relying upon the prevailing data policies is taken by the

government. Therefore an exchange reflects the prevailing economic state of affairs to ball

involved. In order that appropriate actions is taken.

9. Promoting of latest problems by companies:

If the new problems are listed available exchanges They are without delay acceptable to the

general public, since, listing is finished when analysis of such securities by involved

exchange authorities. Prices of underwriting such problems would be less public response to

such new problems would be comparatively terribly high. Therefore a exchange helps within

the promoting of latest problems additionally.

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10. Different services:

Exchange allows the investors to scale back their risks by heterogeneous portfolio of

investment. It additionally develops savings habits among the community and paves the

manner for capital formation. It helps the investors in selecting securities by supply the daily

quotation of listed securities and by revealing the trends of dealings on the exchange. It

allows corporations and therefore the government to boost funds by providing a prepared

marketplace for their securities.

1.6.2 Primary and Secondary Markets – Similarities:

Both the first and secondary markets are closely reticular. This is often clear from the

following:

1. Trading:

If securities are to be listed within the stock exchange/ secondary market, It is necessary that

They are initial issued within the primary market.

2.Listing:

Solely those shares that are capable of listing in some purported stock exchanges are totally

signed in primary market.

3.Regulation:

The rules with reference to each primary yet as secondary market are regulated by the SEBI

and exchange. The thing is to motivate orderliness in each primary and secondary market.

4. Marketability:

The advantage of marketability provided by the secondary market greatly helps the

subscribers within the primary market. As an example, the positive trends prevailing within

the secondary market vastly facilitate the investors to scale back their holdings and acquire

new shares within the secondary market.

5. Conditional Prevailing:

The conditions prevailing within the secondary market have an effect on success or failure of

the problem created within the primary market. Consequently, wherever the conditions are

therefore favorable within the secondary market that prime market costs prevail, the

problems created within the primary market can end up to be encouraging and roaring.

Problems would fetch smart premiums.

6. Survival:

The survival of the secondary market depends upon the potency of the first market. There

may well be no stock exchanges if there's no primary market, within the same manner there'll

be no primary market within the absence of associate economical functioning of exchange.

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1.6.2 DIFFERENCES BETWEEN PRIMARY AND SECONDARY MARKET

Features Primary market Secondary market

Primary issues vs

Secondary issues

It deals only with new or fresh

issues of shares made by the

companies for the first time

Deals is existing securities which are

already issued by

companies/corporations.

Fixed/flexible

Geographical

location

There are no fixed geographical

location for primary market

It has a fixed place for trading

Eg. Bangalore Stock

Exchange/BSE/NSE

Whether transferable

For the first time securities are

issued

Securities are transferred from one

person to another through stock

exchange(s).

Market entry

All companies can enter primary

market

Only those companies which have

issued securities in primary market

can enter into secondary market for

trading purpose.

Administration and

management

No definite administration Has a definite administration set up

by recognized Indian stock

exchanges.

Purpose

It helps long term instruments for

savings and investments.

It Provides liquidity for those

instruments which are already issued

by companies.

1.6.3 Government securities market or gilt edged securities market:

It is a market wherever government securities are listed. In India there are several forms of

government securities- short term and long term. Long term securities are listed during this

market, whereas short term securities are listed in market.

Securities issued by the central government, state governments, semi-Government authorities

like town companies, port trusts etc. Improvement trusts,

state electricity boards

Trusts state electricity boards. All India and state level

money establishments and public sector enterprises are

dealt during this market.

Government securities are issued in denominations of

Rs. 100. Interest is owed half-yearly and that they carry

tax exemptions conjointly. The role of brokers in

promoting these securities in much terribly restricted

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and also the major participant during this market is that the “Commercial Banks” as a result

of they hold to satisfy their SLR necessities.The secondary marketplace for these securities is

incredibly slender since most of the institutional investors tend to retain these securities till

maturity.

The government securities are in several forms viz,

A. Stock certificates.

B. Speech act notes.

C. Bearer bonds which might be discounted.

1.7 LONG TERM LOANS MARKET

Development banks and industrial banks play a major role during this market by activity long

term to company customers. Long run loans market might any be classified into:

a. Term loans market:

In India, several industrial funding establishments are

created by the government each at the national and

regional levels to provide long run and medium term

loans to company customers directly likewise as

indirectly. These development banks dominate the

commercial finance in Republic of India.

Establishments like IDBI, IFCI, ICICI, and different

state money firms return below this class.

B. Mortgages:

The mortgages market refers to those centers that provide real estate loan chiefly to

individual customers. A real estate loan may be a loan against the protection of immoveable

property like property. The transfer of interest in an exceedingly specific immoveable

property to secure a loan is named mortgages.

C. Money Guarantee Market:

A Guarantee market may be a centre wherever finance is provided against the guarantee of a

purported person within the money circle. Guarantee may be a contract to discharge the

liability of a third party just in case of his default. Guarantee acts as a security from the

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creditors’ purpose of read. Just in case the borrowers fail to repay the loan, the liability fails

on the shoulders of the warranter. Hence, the warranter should be acknowledged each to the

recipient and also the below and he should have suggests that to discharge his liability.

1.8 MONEY MARKET

Money market contains a marketplace for short term loan or money assets. It is a marketplace

for the disposition and borrowing of short terms funds. Because

the name implies, it doesn't truly deal in money or money.

However it truly deals with close to substitutes for money or

close to money like trade bills, speech act notes and government

papers drawn for a brief amount not exceptional one year. These

short term instruments are often reborn into money promptly

with none loss and at low dealings value.

The money market doesn't seek advice from a specific place

wherever short term funds are affect. It includes all individual,

establishments and intermediaries handling short term funds.

The transactions between borrowers, lenders and middlemen

happen through telephone, telegraph, mail and agents.

No personal contact or presence of the two parties is important for negotiations in a very

market. However, a geographical name is also given to a market in step with its location. For

instance, the London markets operators from Lombard Street and also the big apple money

market operators from Wall Street. But, they attract funds from everywhere the world.

Similarly, the Mumbai market is that the center for short-run loan ready funds of not solely

Mumbai, however conjointly the complete of India.

1.8.1 Definition

Geoffrey Crow her in his book “A define of money” has explicit “Money market could be a

collective name given to numerous the varied the assorted forms and establishments that deal

within the various grades of close to money”.

The assets that are used as credit instruments are referred to as “Near money assets”.

1.8.2 Features of a money market:

The subsequent are the overall options of a market are:

1. It is a market strictly for brief term funds or money assets referred to as close to money.

2. It deals with money assets having a maturity amount up to 1 year solely.

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3. It deals with solely those assets which might be reborn into money promptly while not loss

and with minimum dealings value.

4. Typically transactions happen through i.e., language, relevant documents and written

communications are often changed later. There is no formal place like stock market as within

the case of a capital market.

5. Transactions have to be compelled to be conducted while not the assistance of brokers.

6. It is not one homogenized market. It contains of many sub-markets, every specializing in a

very specific style of finance. Eg: decision market, acceptance market, bill market and

shortly.

7. The elements of a market are the financial organization, industrial banks, non-banking

money corporations, discount homes and acceptance homes. Industrial banks typically play a

dominant role during this market.

1.8.3 Significance/importance/functions of money market

A developed business plays a crucial role within the financial set-up of a rustic by provision

short term funds adequately and quickly to trade and industry. The money market is associate

integral a part of a country’s economy. Therefore, a developed market is very indispensable

for the speedy development of the economy. A developed market helps within the swish

functioning of the financial set-up in any economy within the following ways:

1. Economic development:

The money market provides short term funds to each public and personal establishments.

These establishments would like money to finance their capital wants [ In alternative words,

the money market assures offer of funds, the finance is completed through discounting of the

trade bills, industrial banks, acceptance homes, discount houses]. During this means, the

money market facilitates within the economic development by providing money help to trade,

commerce and business.

2.Profitable investment:

The industrial banks affect the deposits of their customers(The banks are needed to place

their assets into money type to fulfill the directions of the financial organization on the one

hand, whereas on the opposite, they need to place their excess reserves into productive

channels to earn financial gain on them). The aim of the industrial banks is to maximise

profits. The surplus reserves of the banks are endowed in close to money assets. The aim is to

make sure liquidity while not fore going profits utterly.

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3. Borrowings by the government:

The money market helps the government in borrowing short term funds at terribly low

interest rates. The borrowing is completed on the idea of treasury bills.

4. Importance for central bank:

If the money market is well developed, the financial organization implements the financial

policy with success. It is solely through the money market that the financial organization will

manage the industry and therefore contribute to the event of trade and commerce.

5. Mobilization of funds:

The money market helps in transferring funds type one sector to another. The event of any

economy depends on accessibility of finance. No country will develop its trade, commerce

and business till and unless the money resources are mobilized.

6. Independency of economic banks:

Just in case of the prevalence of a developed market, the industrial banks need not borrow

from the financial organization. Just in case the industrial banks have insufficiency of

resources, they will meet their necessities by recalling a number of their loans from rather

than borrowing from the financial organization at the next rate of interest.

7. Savings and investments:

Another purpose of importance of the money market is that it helps in promoting liquidity

and safety of economic assets. By doing therefore, it will facilitate in encouraging savings

and investment.

1.8.4 Objectives Of Money Market

The subsequent are the necessary objectives of a market are:

1. To supply a parking place to use short-run surplus funds, primarily of economic banks.

2. To supply space for overcoming short-run deficits.

3. To alter the financial organization to influence and regulate liquidity within the economy

through its intervention during this market.

4. To supply an affordable access to users of short-run funds to fulfill their necessities

quickly, adequately and at affordable prices.

1.8.5 Characteristics/Features of a developed money market

So as to meet the on top of objectives, the money market ought to be totally developed and

economical.(In each country of the globe some style of market exists. A number of them are

extremely developed, whereas others don't seem to be well developed. Prof. S.N. subunit has

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represented bound essential options of a developed market. They are as follows:

1. Extremely organized banking system:

The industrial banks are the nerve centre of the complete market. They are the most suppliers

of short-run funds. Their policies concerning loans and advances have impact on the whole

market. The industrial banks function an important link between the financial organization

and also the varied segments of the money market. Consequently a well-developed market

and a extremely organized industry co-exist.

2. Presence of a central bank:

The financial organization acts because the banker’s bank. It keeps their money reserves and

provides them money accommodation in times of difficulties by discounting their eligible

securities. Through its open market operations, the financial organization absorbs surplus

money throughout off-seasons and provides extra liquidity within the busy seasons. Thus, the

financial organization is that the leader, guide and controller of the money markets.

3. Accessibility of correct credit instruments :

A developed market needs a nonstop accessibility of promptly acceptable negotiable

securities like bill of exchange, treasury bills etc…. Within the market. There ought to be

variety of dealers within the market to interact in these securities. Accessibility of negotiable

securities and also the presence of dealers and brokers in giant numbers to interact in these

securities are required for the existence of a developed market.

4. Existence of sub-markets:

The quantity of sub-markets determines the event of a market. The larger the quantity of sub-

markets, the broader and additional development is the structure of money market. The

many sub-markets along create a coherent (united) market.

5. Ample resources:

There should be accessibility of spare funds to finance transactions within the sub-markets.

These funds could return from among the country and conjointly from foreign countries. The

London, New York and Paris money markets attract funds from everywhere the globe.

6. Existence of secondary market:

There ought to be a vigorous secondary market in these instruments.

7. Demand and provide of funds:

There ought to be an oversized demand and provide of short-run funds and it ought to have

adequate quantity of liquidity within the variety of large amounts maturing among a brief

amount.

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8. Alternative factors:

Besides the on top of, alternative factors conjointly contribute to the event of a market.

Speedy industrial development resulting in the emergence of stock exchanges giant volume

of international trade resulting in the system of bills of exchange, political stability,

favourable conditions for foreign investment, worth stabilization etc… are the opposite

factors that facilitate the event of money market within the country.

London market could be a extremely developed market as a result of it satisfies all the

necessities of a developed market. If anyone or additional of those factors are absent, then the

money market is named associate beneath developed one.

1.8.6 Composition of Money Market

The money market could also be sub-divided into four, viz..,

1. Decision money market:

The decision securities industry could be a marketplace for very short amount loans say in

some unspecified time in the future to 14 days. So, It is extremely liquid. The loans are due

on demand at the opinion of either the loaner or the recipient. In India, decision money

markets are related to the presence of stock exchanges and thence, they are situated in major

industrial cities like Mumbai, Calcutta, Chennai, Delhi, Ahmadabad etc… the special options

of this market is that the rate of interest varies from day to day and even from hour to hour

and Centre to Centre. It is terribly sensitive to changes in demand and provide of decision

loans.

2. Industrial bills market:

It is a marketplace for bills of exchange (arising out of real trade transactions). Within the

case of credit sale, the vendor could draw a bill of exchange on the customer. The customer

accepts such a bill promising to pay at a later date per the bill. The sellers needn't to attend till

the maturity date of the bill. Instead, he will get money by discounting the bill.

In India, the bill market is beneath developed. The run has taken several steps to develop a

sound bill market. The run has enlarged the list of participants within the bill market. The

discount and finance house of India was setup in 1988 to push secondary market in bills. In

spite of these, the expansion of the bill market is slow in India. There are not any specialised

agencies for discounting bills. The industrial banks play a major role during this market.

3. Treasury bills market:

It is a marketplace for treasury bills that have ‘short term’ maturity. A Treasury bill could be

a certificate of indebtedness or a finance bill issued by the government. It is extremely liquid

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as a result of its reimbursement is secure by the government.. It is a crucial instrument for

short borrowing of the government.. There are 2 sorts of treasury bills viz.,

a) Ordinary or regular and

b) Adhoc treasury bills popularly called ‘adhocs’.

Normal treasury bills are issued to the general public, banks and different monetary

establishments with a read to raising resources for the central government to fulfill its short

monetary desires.

Adhoc treasury bills are issued in favour of the run solely. They are not sold through tender

or auction. They will be purchased by the run solely. Adhocs do not seem to be marketable in

India, however holders of those bills will sell them back to run.

Treasury bills have a maturity amount of ninety one days or 182 days or 364 days solely.

Monetary intermediaries will park their temporary surpluses in these instruments and earn

financial gain.

4. Short loan market:

It is a market wherever short are given to company customers for meeting their capital needs.

Industrial banks play a major role during this market. Industrial banks give short loans within

the variety of money credit and order of payment.

Order of payment facility is especially given to business folks wherever as money credit is

given to industrialists. Order of payment is only a short lived accommodation and It is given

within the accounting itself. However money street credit is for a amount of 1 year and It is

sanctioned during a separate account.

1. 9 STOCK EXCHANGES:

Stock exchanges could be a market during which securities are bought &sold and It is a vital

marketplace for developing a capital market.

The Securities Contracts (Regulation) Act 1956 defines stock market as “an association

organization or body of people whether or not incorporated or not, established for the aim of

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helping, control and dominant business in shopping for mercantilism and dealing in

securities”.

1. 9.1 FUNCTIONS OF STOCK EXCHANGES

A stock market discharges many functions. It provides a market place to sell and get freely

the stocks & shares through the licensed brokers. The important functions of stock exchanges

are as follows:

1. Market place for stock:

Stock exchanges provides a market place for mercantilism and shopping for of securities

freely by the brokers for his or her purchasers.

2. Prepared and continuous market:

Stock exchanges offer prepared and continuous marketplace for stocks & shares. This

provides prepared liquidity, price, continuity and negotiability to the capital bolted up in

securities.

3. Assessment of securities:

The stock exchanges ensures correct appraisal of security. The free play of demand for &

offer of securities determines value ceaselessly.

4.Stock exchanges forecast the future:

Besides, providing continuous market, stock exchanges, render statement operate. The worth

movements for securities replicate and forecast the longer term happenings in business

operations.

5. Mobilization of savings:

The stock markets are excellent markets that facilitate to mobilize the savings of the

individuals to productive channels.

6. Capital formation:

Besides causation public to avoid wasting & invest in securities, the exchange promotes

capital formation and provides necessary funds to the necessitous industries.

7. Economic barometer:

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Like measuring instrument that indicates the variation in temperature of the surroundings at

any purpose of your time, the stock market indicates the health of the economy. Value trends

on a stock market replicate the economic progress & socio-political conditions of a rustic. It

indicates the boom or depression existing within the country.

8. Management of company enterprises:

To induce the stocks & shares listed on stock exchanges, the businesses got to follow sure

rules and laws. “Listing” means that obtaining the name of the corporate registered with the

stock market to trot out its securities formally on the exchange. When listing the safety, the

corporate has got to follow the official policies of the exchange whereas managing its

securities. Thus, exchange exercise healthy management over the businesses.

9. Speculation:

The operators on the stock market are licensed agents. They are referred to as by totally

different names. These operators hold company securities new and previous for a brief

amount significantly the new shares, owing to temporary holding by monetary intermediaries

referred to as “speculators”. Speculators can have a seasoning amount. The speculators who

would like to form profit out of variation in costs of securities, operate skillfully and offer

sensible liquidity position to the securities. Speculation, though affects the share costs badly

at sure time, it plays an important role in moving the capital markets. These facilities are for

speedy economic development & honest dealing on shopping for & mercantilism of

securities.

10. Management of public deposits:

The government of India & all state governments are engaged in planned economic

development. Owing to this planned growth, government need Brobdingnagian capital &

they need to float loan, bonds & alternative securities to induce a locality of finance for these

securities to induce a locality of finance for these comes. These securities also are trot out

within the stock exchanges. The governments’ monetary desires within the variety of debt are

glad by stock exchanges by providing marketplace for these securities.

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11. Alternative functions:

Stock market offer facilities like giving business info of the company sector. Each listed

company of the company sector. Each listed company has got to submit annually the audited

monetary statements to the exchange. Numerous styles of reports also are submitted to the

exchange. This can be complied by the exchange and acts as a information of company

sector. This ensures most promotional material of company operations and dealing.

1. 9.2 NATIONAL STOCK EXCHANGE(NSE):

Stock exchanges may be a market throughout that

securities are bought & sold-out & it is a important

marketplace for developing a capital market.

The Securities Contracts (Regulation) Act 1956

defines stock exchange as “an association organization

or body of individuals whether or not or not

incorporated or not, established for the aim of serving

to, management and dominant business in buying & mercantilism & dealing in securities”.

1. 9.3 FUNCTIONS OF STOCK EXCHANGES

A stock exchange discharges several functions. It provides a market place to sell and find

freely the stocks & shares through the commissioned brokers. The vital functions of stock

exchanges are as follows:

1. Market place for stock:

Stock exchanges provide a market place for mercantilism and buying of securities freely by

the brokers for his or her purchasers.

2. Ready and continuous market:

Stock exchanges supply ready and continuous marketplace for stocks & shares. This provides

ready liquidity, price, continuity and negotiability to the capital fastened up in securities.

3. Assessment of securities:

The stock exchanges ensures correct appraisal of security. The free play of demand for &

supply of securities determines price endlessly.

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4. Stock exchanges forecast the future:

Besides, providing continuous market, stock exchanges, render statement operate. The price

movements for securities replicate and forecast the long term happenings in business

operations.

5. Mobilization of savings:

The stock markets are glorious markets that facilitate to mobilize the savings of the people to

productive channels.

6. Capital formation:

Besides deed public to avoid wasting & invest in securities, the exchange promotes capital

formation and provides necessary funds to the indigent industries.

7. Economic barometer:

Like measuring device that indicates the variation in temperature of the environment at any

purpose of it slow, the stock exchange indicates the health of the economy. Price trends on a

stock exchange replicate the economic progress & socio-political conditions of a country. It

indicates the boom or depression existing at intervals the country.

8. Management of company enterprises:

To induce the stocks & shares listed on stock exchanges, the companies need to follow

certain rules & laws. “listing” implies that getting the name of the company registered with

the stock exchange to upset its securities formally on the exchange. Once listing the security,

the company has to follow the official policies of the exchange whereas managing its

securities. Thus, exchange exercise healthy management over the companies.

9. Speculation:

The operators on the stock exchange are commissioned agents. They are said as by whole

totally different names. These operators hold company securities new and former for a short

quantity considerably the new shares, because of temporary holding by financial

intermediaries said as “speculators”. Speculators will have a seasoning quantity. The

speculators who would love to create profit out of variation in prices of securities, operate

skillfully & supply wise liquidity position to the securities.

Speculation affects the share prices badly at certain time. It plays a very important role in

moving the capital markets. This facilities increase the speed of economic development,

honest dealing on buying and mercantilism of securities.

10. Management of public deposits:

The Government of India and all state governments measures are engaged in planned

economic development. Because of this planned growth, government would like broadening

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of capital & they have to float loan, bonds & various securities to induce a region of finance

for these securities. These securities are also upset at intervals the stock exchanges. The

government’s financial needs at intervals the range of debt is met by stock exchanges by

providing marketplace for these securities.

11. Various functions:

Stock markets supply facilities like giving business data of the corporate sector Every listed

company has to submit annually the audited financial statements to the exchange. Varied

types of reports are also submitted to the exchange. This may be complied by the exchange

and acts as a info of company sector. This ensures most publicity of company operations and

dealing.

Summary

The financial system consists of financial institutions, intermediaries and financial

instruments. There are various financial markets such as primary, secondary, capital, money

and money markets. Primary market plays an important role in the initial issue whereas

secondary market plays in the resale of stock s and shares of the holders. The secondary

market plays a vital role in identifying the development and growth of the company and

economy. Short term market is known as money market. Stock exchanges are regulated by

SEBI.

KEYWORD/GLOSSARY

National economy as “the purpose of economic markets to assign savings expeditiously in

an economy to final users either for investment in real assets or for consumption”.

Financial institutions: Financial establishments are the intermediaries who facilitate sleek

functioning of the national economy by creating investors and borrowers meet.

Money market facilitates the transfer of resources from one person to another.

Unorganized markets: In these markets there are unit variety of money lenders, bankers,

and traders etc.

Organized markets: In the organized markets, there are unit standardized rules and rules

governing their money dealings.

The capital market could be a marketplace for monetary assets that have a protracted or

indefinite maturity.

Primary market may be a marketplace for new issue or new monetary claims.

Secondary market may be a marketplace for secondary sale of securities.

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Government securities market or gilt edged securities market: It is a market wherever

government securities are listed.

Long term loans market: Development banks and industrial banks play a major role during

this market by activity long term to company customers.

Stock Exchanges: It provides a market place to sell and get freely the stocks & shares

through the licensed brokers.

Speculation: The operators on the stock market are licensed agents.

National stock exchange(nse): The aim of serving to, management and dominant business in

buying & mercantilism & dealing in securities. Securities are bought & sold-out & it is a

important marketplace for developing a capital market.

1) What do you mean by financial system?

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2) What is primary market?

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3) What is the classification of financial system?

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4) What do mean by capital market?

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ANSWER TO CHECK YOUR PROGRESS

(2 MARKS)

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………………………………………………………………………………………

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5) What is money market?

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1. Write a note on primary market.

2. Write a note on secondary market.

3. What are the functions of primary market?

4. Write a note on financial institutions.

5. What are the differences between primary and secondary market?

6. Distinguish between capital market and money market.

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill

3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl

4. M Y Khan: Indian Financial System, TMH

5. E Gardon & K Natarajan: Financial Markets & Services.

Web:

All pictures are taken from Google Images as on 14/10/2014

SUGGESTED BOOKS/ ARTICLES

QUESTIONS (5 MARKS)

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Unit 2

FINANCIAL INSTITUTIONS

2.1 Monetary Establishments

2.2 Banking Institutions

2.3 The organised Non-Banking Financial Institutions

2.4 Mutual Funds

Types of Banking and Non-Banking Financial Institutions.Constitution, objectives &

functions of IDBI, SFCS, SIDCS, LIC, EXIM Bank.Meaning and scope of Mutual Funds.

Objectives of the study

Financial establishments are termed as monetary intermediaries as a result of they act as

middleman between the savers and borrowers. There are banking and non-banking financial

institutions. There are long term lending institutions such as IDBI, IFC, LIC and commercial

banks lends for short term as well as long term. We understand all of the above how they

function for the economic development of our country.

2.0 Introduction

The principle objective of SFC’s is to provide medium short term and long term financial

assistance to small industries particularly in a circumstance when normal banking assistance

is not available. SIDC are setup in various states under the companies Act of 1956 to later the

primary development needs of tiny, small, village industries in the state.

Insurance organization in India comprise of government organization namely, life

insurance corporation of India and general insurance corporation of India. LIC collects large

amount of funds from the public and deploys to the savings, the best advantage of the policy

holders for the industrial development as a whole. EXIM bank provides re- finance facilities

to the commercial banks and other financial institutions against their export and import

financial activities. A mutual fund collects the savings from little investors, invest them in

government and alternative company securities and earn financial gain through interest and

dividends, besides capital gains. It works on the principle of ‘small drops of water build an

enormous ocean’.

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2.1 Monetary Establishments

A financial organization is essentially a term financial institution, providing medium and

future monetary help to industrial and business units, for promoting industrial and economic

development within the country.

Financial establishments are the intermediaries World Health Organization facilitates swish

functioning of the national economy by creating investors and borrowers meet. They

mobilize savings of the excess units and allot them in productive activities pro mising a more

robust rate of returns.

Financial establishments are termed as monetary intermediaries as a result of they act as

middleman between the savers and borrowers.

2.1.1 FORMS OF MONETARY INSTITUTIONS

Monetary establishments may be classified into 2 categories:

1. Banking institutions

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2. Non-banking institutions.

2.2 Banking Institutions

Indian banking system is subject to the financial institution. I.e., banking company of

our country RBI because the apex bank establishment organizes runs, supervises, regulates

and develops the medium of exchange and therefore the national economy of the country.

The most legislation governing industrial banks in India is the Banking Regulation Act,

1949. The banking establishments is loosely classified into two categories:

A. Organized sector.

B. Unorganized sector.

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2.2.1 ORGANIZED SECTOR

The organized sector consists of economic banks, co-operative banks & regional rural banks.

I. Industrial banks

Traditionally, industrial banks accepted deposits and met the short and medium term funding

wants of the business. But now, since 1990’s banks are funding the future wants of the

business notably the infrastructure sector. The alleviation measures initiated within the Indian

economy, light-emitting diode to the entry of enormous non-public sector banks in 1993. This

has exaggerated competition among non-public and public sector banks and quality of

services has improved.

II. Co-operative banks

Source: Google image as on 15/10/2014

An important section of the organized sector of Indian Banking is that the co-operative

banking. This section is delineate by a gaggle of societies registered underneath the acts

of the states about co-operative societies. Co-operative societies could credit or non-credit

societies.

Different kinds of co-operative credit societies are in operation within the Indian

economy. These establishments may be classified into two broad categories:

a. Rural credit societies that are primarily agricultural

b. Urban credit societies that are primarily non- agricultural.

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III. Regional Rural Banks

RRBS were found out by the regime and therefore the sponsoring business banks with the

target of developing the agricultural economy. RRBS give credit facilities and banking

services to little farmers, little entrepreneurs within the rural areas. The regional rural

banks were found out with a read to produce credit facilities to weaker areas.

IV. Foreign banks:

Foreign banks are in India from British days. These banks have targeting company

purchasers and are specializing in areas about International banking.

2.2.2 Unorganized sector

People engaged in unorganized banking sector are the indigenous bankers, money

lenders, Seth, sahukars effecting the operate of banking.

Indigenous bankers are the forefathers of contemporary business banks. These are the

people or partnership corporations playing the banking functions. They are the native

bankers. The geographical region coated by the native bankers is far larger than the realm

coated by the business banks. Few characteristics of native are as follows:

• Indigenous bankers are often seen from the actual fact that they not solely provided

credit to trade & commerce, however now and then to the government of the day

additionally.

• Indigenous bankers raise funds from the general public additionally.

• They raise funds from the general public additionally.

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• They give finance for productive functions directly and indirectly to trade and trade.

• They detain bit with traders and little industrialists and finance, selling on a sizeable scale. Disposition is conducted on the premise of dedication notes.

2.2.3 Money Lenders

Money lenders rely entirely on their own funds for the capital. Money lenders is also rural or

urban, skilled or non-professional. They embody giant farmers, traders, merchants,

goldsmiths, village shopkeepers, sardars of laborers etc. The most characteristics of money

lenders are the following:

• Their funds are own funds.

• Their purchasers are principally the weaker sections of the society.

• Their loans are extremely exploitive. They charge terribly high rate of interest.

• Their operations are entirely unregulated.

• The credit is prompt & versatile.

2.2.2 Non-banking Institutions

The non-banking establishments is also classified loosely into 2 groups:

A. Organized monetary establishments.

B. Unorganized monetary establishments.

A. Organized monetary Institutions:

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Source: http://www.cfp.altius.ac.in/fpsb_india.html

2.3 The Organized Non-Banking Financial Institutions include

2.3.1 Development Finance Institutions:

• The establishments like IDBI, ICICI and IIBI in any respect India level.

• SFCS, SIDCS at the state level.

• Agricultural development finance establishments as NABARD, LDBS etc.

Development money establishments give medium and future finance to the company and

industrial sector and additionally take up promotional activities for economic development of

the country.

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• IDBI- Industrial Development Bank of India.

• ICICI- Industrial Credit Investment Corporation of India.

• IIBI- Industrial Investment Bank of India.

• SFCS- State Finance Corporation

• SIDCS- State Industrial Development Corporation.

• LDBS- Land Development Banks.

• NABARD- National Bank for Agriculture & Rural Development.

• LDBS-Land Development Banks

2.3.2 Investment Institutions

It includes those money establishments that mobilize savings of the general public at

giant through varied schemes and invest these funds in company and government

securities. These embrace LIC, GIC, UTI and Mutual funds.

2.3.2.1 INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

It is started by run in 1964. Later in 1975 it had been taken by Central government. (Indira

Gandhi emergency period) In 1995, seventy two of capital is maintained by government and

also the remaining is given to others i.e., 28%. LIC, GIC etc. For public.

It was established in July 1964 underneath IDBI Act as an entirely closely-held by run and it

had been separated by run in 1975.

A Government of India taken and disinvested its shares in 1995 to the extent of twenty eighth

& maintained to the extent of seventy two.

Role:

1. It is allotted the role of principle financial organisation for coordinative the activities of all

the financial organisation engaged in funding promoting and developing the industries.

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2. It helps within the designing, promoting & developing the industries to fill the gaps within

the industrial development.

3. It provides technical & body help for the promotion, management & enlargement of

business.

4. It undertakes market & investment researches, surveys & techno-economic studies to contribute to the event of the business.

Constitution:

1. The share capital of IDBI was control by run until 1975.

2. The share capital was transferred to the government of India and it became government

closely-held establishment.

3. Nowadays government holds seventy two of the share capital LIC, UTI, SBI and EXIM

bank along hold Sep 11 foreign establishment investors third and also the balance is control

by the general public.

Financial Resources: The main sources of funds to the IDBI are some capital, reserves &

surplus, borrowing from run, market borrowing each in India & abroad by supply certificate

of deposits, mounted deposits & financial gain bonds. Ex: IDBI flexi bonds.

Functions: IDBI performs sort of functions all those are teams into three categories:

i) Direct functions

ii) Indirect functions

iii) Promotional activities.

I) Direct functions:

• They embrace, Term loans are provided to the industries for a amount starting from 10-

12 years together with capital.

• Underwriting the securities direct subscription to shares and debentures guarantees the

loan, risk capital.

• Equipment leasing/ lease financing: It provides lease for the acquisition of equipme nts

for amount of 5-8 years.

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II) Indirect function:

• Refinancing of commercial loans to the IFCI, SFC, business banks, SIDC’s and co-

operative banks from 10-25 years.

• Resource support to the money establishments by subscribing shares and lo ans of

economic establishments.

• Discounting of bills.

III) Promotional Activities:

It refers to the efforts taken by the IDBI to market the expansion of industries within the

country by giving help to backward areas, little scale sectors and through different

development of entrepreneurs.

Direct help to backward areas within the type of concessional loans, longer

reimbursement amount, versatile debt equity quantitative relation.

IDBI conducting service of the backward space for assessing the commercial potential,

resource accessible, infrastructure facilities then on. Help to little scale sector industries

includes re-finance to state level establishments, finance to SFC’s, contribution to shares

and debentures, putting in of national equity fund and introducing of single window

theme for grant of loans.

Development of entrepreneurs has been one in all the foremost activities of IDBI by

providing seed capital help, re- finance against loans up to 21lakhs, 100% re-finance in

respect of composite loans, offer of knowledge, preparation of project profiles, technical

and management practice and coaching programs to the entrepreneurs.

Recent Trends of IDBI:

After 1991, IDBI enlarged their activities to hide merchandiser banking (advice & service

for rising capital, issue management informative services for mergers and acquisition and

loan syndication), debentures, trust territory, for-ex services, facility participant, started

subsidiaries, IDBI capital market securities restricted and IDBI investment management

company restricted was started for rising the debt, public issue and investment company

schemes.

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2.3.2.2 STATE FINANCIAL CORPORATION (SFC)

State Financial Corporation are established under the state financial corporation Act of

1951 with the view to providing medium and long term finance to the medium and small

industries. There are 18 SFCs operating in different states of our country.

At the time of setting up of IFCI the necessity to for assisting smaller industrial establishment

has been recognized because it was not possible for a single institution to satisfy the capital

needs of small concerns spread all over the country.

Punjab government took the lead in organizing the financial corporation and setup state

financial corporation in 1953. Gradually, financial institutions started in different states.

Normally, the area of operation of an SFC is confined to one stage to extend financial helps

to small enterprises. However, the activities of some of the state financial corporations cover

the neighboring states / unions territories which do not have SFCs of their own.

To reach the small concerns financial needs SFCs are opened number of regional / branch

officers.

Objectives and Scope:

1. The principle objective of SFC’s is to provide medium short term and long term

financial assistance to small industries particularly in a circumstance when normal

banking assistance is not available.

2. SFCs collectively serve the broad national objectives of economic growth through the

promotion of small industries balanced regional growth and widening of industries

through the encouragement of new entrepreneurs.

3. To provide assistance to new as well as existing industries for the purpose of

establishment, modernization, renovation, expansion and diversification of public

44

limited companies, private companies, partnership and proprietor concerns engaged in

manufacturing, mining, hotel, road transport, generation and distribution of electricity

development of lands, fishing and to provide technical services.

4. To provide for discounting of bills of exchange and direct subscription to equity as

debentures of industries and to enhance the loan ceiling from 30, 00,000 to 90,

00,000.

Functions:

1. Granting loans and advances / subscribing to debentures of industrial concerns,

repayable within 20 years.

2. Guarantying the loans raised by the industrial concerns on such terms and conditions

as may be mutually agreed upon.

3. Guarantying of such deferred payment of any industrial concern.

4. Underwrite the issue of shares and debentures.

5. Provides foreign exchange loans.

6. Participating in equity capital of small scale industrial units coming up in back ward

areas.

7. Besides, the SFC A ct as an agent of the Central government, State government, IFCI

on any other institution providing financial assistance to the industries.

Operational policies of State Financial Corporation:

1. Policy on size of assistance is Rs.60, 00,000 in case of co-operative societies.

2. Policy on forms of assistance, through granting and guarantying.

3. Policy on duration of assistance to the maximum of 20 years.

4. Policy on nature of industrial products to be assisted to the small scale units.

5. Policy on security: They provide secured loans on fixed assets.

6. Their interest rate policy: The lending rates of the SFC’s are normally linked to the

bank rate.

7. Policy on assistance to technical entrepreneurs- they provide financial assistance at a

concessional rate to develop technical industries.

45

2.3.2.3 SMALL SCALE INDUSTRIES DEVELOPMENT CORPORATION OR

STATE INDUSTRIAL DEVELOPMENT CORPORATION (SIDC)

Constitution:

SIDC are setup in various states under the companies Act of 1956 to later the primary

development needs of tiny, small, village industries in the state.

In Tamil Nadu SIDC was setup in 1970 for the promotional development of small scale

industries in the state.

Objectives:

1. To promote develop medium and small scale tiny and village industries.

2. To extend financial assistance in the form of rupees, loans, underwriting, guarantees,

letter of credit etc.

3. To take up promotional activities including flexibility reports, surveys, training and

development.

4. To provide a package of developmental services like technical guidance, assistance to

plant location, co-ordination with other organization.

5. To provide infrastructural facilities.

6. To setup industrial growth centre.

7. To keep the pace with the changing economic environment.

8. To initiate various measures to expand the scope of their activities.

Functions:

1. Formation of Industrial States: SIDC constructing industrial work sheds with all

infrastructural facilities in selected locations.

2. Marketing assistance: SIDC participates in the tenders floated by the government

departments on behalf of small scale units and obtain order for them.

3. Higher purchase and equipment leasing and scheme : Under this scheme SIDC

renders the package assistance to the allotes of industries for the supply of

machineries and on hire purchase on lease.

4. Export House: SIDC has been recognized as export house it identifies the potential

industrial units supplying export worthy products and prospective buyers of the

product abroad.

46

5. Industrial development in backward areas: It provides employments to the rural

educated youth’s constructing industrial estates in rural areas in order to develop the

backward areas.

2.3.2.4 LIFE INSURANCE CORPORATION OF INDIA (LIC):

Insurance organization in India comprise of government organization namely, life

insurance corporation of India and general insurance corporation of India.

LIC was started in India on 1st September 1956 as a fully owned by government of India.

Functions:

LIC collects large amount of funds from the public

and deploys to the savings, the best advantage of the

policy holders for the industrial development as a

whole.

LIC provides funds to the industries in 3 forms:

1. Direct lending to industries: LIC helps small

scale and medium scale industries by granting loans

by setting up of co-operative industrial estates and

provides loans and advances in the form of long term

medium term and short term loans to the industries. Total loan made up to 31st March

2005 was 3152crores.

2. Purchase of Shares and Debentures in the stock market: LIC also finance private

industries by subscribing the shares and debentures till 1964 it was a single large

47

buyer of the securities of different company’s total investment made by LIC by way

of subscription to share and debentures was 48,000crores as on 31st March 2005.

3. Subscription to the shares and bonds of financial institutions : LIC finance

industries indirectly by investing in the shares and bonds of state level financial

institution like IDBI, IFCI, ICICI etc.

LIC provides financial assistance to state electricity board for power generation by way of

loans or subscription bonds. LIC has been extending financial assistance to state level co-

operative housing societies, housing development corporation, National Housing Bank.

Providing finance for the infrastructure projects pertaining to the port, roads, railways,

airports etc. And other private projects. It was started LIC mutual scheme in June 1989 with a

view to provide various investment media’s to all the investors particularly small investors in

rural and semi-urban areas. It was started LIC housing finance limited in June1989 with the

main objective of providing finance of construction / purchase of individual houses.

2.3.2.5 EXIM BANK (EXPORT AND IMPORT BANK OF INDIA)

Constitution: It was started on 1st Jan 1982 to take over the operations of the international

financial wing of IDBI

It provides financial assistance to exporters and

importers and functions as the principle financial

institutions for coordinating the working of other

institution engaged in financing exports and imports

of goods and services.

EXIM bank provides re- finance facilities to the commercial banks and other financial

institutions against their export and import financial activities.

Functions:

1. Financing of export and import of goods and services.

2. Financing of Joint ventures, in foreign countries.

3. Financing of export and import of machinery and equipment.

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4. Provides loans to the Indians to enable them to contribute to the share capital of joint

ventures in foreign countries.

5. Undertaking merchant banking functions.

6. Providing technical administrative & financial assistance in connection with export &

import.

7. A programme to finance R&D of export oriented companies and concessional interest

rates.

8. Working capital finance for export companies.

9. Financing packages for knowledge based industries such as information technology,

computer software and pharmaceuticals.

10. Cooperation agreement with US EXIM bank for promoting bilateral trade between

USA & India.

11. Cooperation agreement with other developing and SAARC nations.

12. It acts as consultant to share its own experience in institution building.

Objectives:

1. To translate national foreign policies into concrete action plans.

2. To provide alternate financing solution to the Indian exports aiding him his efforts to

be internationally competition.

3. To develop mutually beneficial relationship with the international financial

community.

4. To initiate and participate in debates on issues related to Indians international trade.

5. To forge close working relationship with other export development and financing

agencies, multilateral funding agencies and national trade and investment promotion

agencies.

6. To anticipate and absorb new developments in banking export financing and

information technology.

7. To be responsive to export problems of Indian exporters and pursue policy

resolutions.

8. To utilize all possible financing mechanisms to promote export capabilities including

post shipment credit, export marketing, financing etc.

2.4 MUTUAL FUNDS

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Meaning

To state in easy words, a mutual funds collects the savings from little investors, invest them

in government and alternative company securities and earn financial gain through interest and

dividends, besides capital gains. It works on the principal of ‘small drops of water build an

enormous ocean’. For example, if one has Rs. One thousand to take a position, it's going to

not fetch greatly on its own. But, once it's pooled with Rs. One thousand every from plenty of

others, then, one might produce a ‘big fund’ giant enough to take a position in a very wide

kinds of shares and debentures on a commanding scale so, to fancy the economies of huge

scale operations. Hence, a fund is nothing however a type of collective investment. It's

shaped by the approaching along of variety of investors World Health Organization transfer

their surplus funds to a professionally qualified organization to manage it. To urge the excess

funds from investors, the fund adopts an easy technique. Every fund is split into atiny low

fraction known as “units” of equal price. Every capitalist is allotted units in proportion to the

scale of his investment. Thus, each capitalist, whether or not massive or little, can have a

stake within the fund and may fancy the wide portfolio of the investment control by the fund.

Hence, mutual funds change legion little and huge investors to partic ipate in and derive the

advantage of the capital market growth. It's emerged as a preferred vehicle of creation of

wealth because of high come, lower price and distributed risk.

Definition

The SEBI laws, 1993 defines a mutual funds as “a fund established within the type of a trust

by a sponsor, to boost monies by the trustees through the sale of units to the general public,

beneath one or a lot of schemes, for investment in securities in accordance with these

regulations”.

In step with Weston J. Fred and Brigham, Eugene, unit trusts are “corporations that settle for

greenbacks from savers and so use these greenbacks to shop for stocks, future bonds, short

50

term debt instruments issued by business or government units; these companies pool funds

and so scale back risk by diversification”.

Scope of fund

As started earlier, a fund is nothing however a pool of the investors’ funds. The special

feature of a fund is that the contributors and also the beneficiaries of the fund are one and also

the same category of individuals i.e. Investors. No one else will claim that fund. Since the

investors themselves contribute to the pool of fund and revel in it and its fruits, the term

‘mutual’ has been used.

The vital options of a fund are the following:

1. A fund belongs to people who have contributed to it fund and so, the possession of the

fund lies within the hands of the investors.

2. Since all investors cannot participate within the management of the fund, it's left within the

hands of investment professionals World Health Organization earn a fee for his or her

services.

3. The pool of funds collected is endowed in a very portfolio of marketable securities.

4. The investors share within the fund is drawn by “units” similar to shares within the case of

share capital of a corporation. The unit price depends upon the worth of the portfolio control

by the fund. Hence, the worth changes nearly daily and it's known as web plus value.

5. Typically the investment portfolio of the fund is formed in step with the target of the fund.

For instance a sectoral fund invests its funds in a very specific sector adore it sector, oil sector

etc.

Summary

Financial establishments are termed as monetary intermediaries as a result of they act as

middleman between the savers and borrowers. There are banking and non-banking financial

institutions. There are long term lending institutions such as IDBI, IFC, LIC and commercial

banks lends for short term as well as long term. We understand all of the above how they

function for the economic development of our country. The principle objective of SFC’s is to

provide medium short term and long term financial assistance to small industries particularly

in a circumstance when normal banking assistance is not available. SIDC are setup in various

states under the companies Act of 1956 to later the primary development needs of tiny, small,

51

village industries in the state. Insurance organization in India comprise of government

organization namely, life insurance corporation of India and general insurance corporation of

India. LIC collects large amount of funds from the public and deploys to the savings, the best

advantage of the policy holders for the industrial development as a whole. EXIM bank

provides re- finance facilities to the commercial banks and other financial institutions against

their export and import financial activities. A mutual funds collects the savings from little

investors, invest them in government and alternative company securities and earn financial

gain through interest and dividends, besides capital gains. It works on the principal of ‘small

drops of water build an enormous ocean’.

KEYWORDS/GLOSSARY

• Financial establishments are the intermediaries World Health Organization facilitate swish

functioning of the national economy by creating investors and borrowers meet. They

mobilize savings of the excess units and assign them in productive activities promising a

higher rate of returns.

• Financial establishments also are termed as money intermediaries as a result of they act as

middleman between the savers and borrowers.

• Commercial banks accepted deposits and met the short and medium term funding wants of

the business. But now, since 1990’s banks also are funding the future wants of the business

significantly the infrastructure sector. The easement measures initiated within the Indian

economy, diode to the entry of huge non-public sector banks in 1993. This has raised

competition among non-public and public sector banks and quality of services has improved.

• RRBS were established by the regime and also the sponsoring business banks with the

target of developing the agricultural economy. RRBS offer credit facilities and banking

services to little farmers, little entrepreneurs within the rural areas. The regional rural banks

were established with a read to produce credit facilities to weaker areas.

• Foreign banks are in Asian nation from British days. These banks have targeting company

purchasers and are specializing in areas about International banking.

• Indigenous bankers are the forefathers of recent business banks. These are the people or

partnership corporations acting the banking functions. They're the native bankers.

• State money Corporation are established beneath the state money corporation Act of 1951

with the read to providing medium and future finance to the medium and little industries.

52

There are eighteen SFC’s in operation in several states of our country.

• The principle objective of SFC’s is to produce medium short term and future money help to

little industries significantly in a very circumstance once traditional banking help isn't on the

market.

• SIDC are units setup in varied states beneath the businesses Act of 1956 to later the first

development wants of small, small, village industries within the state. In province SIDC was

setup in 1970 for the promotional development of little scale industries within the state.

• LIC was started in Republic of India on first September 1956 as a completely owned by

government of India.

• LIC collects great amount of funds from the general public and deploys to the savings, the

simplest advantage of the policy holders for the economic deve lopment as an entire.

• LIC provides money help to state electricity board for power generation by manner of loans

or subscription bonds. LIC has been extending money help to state level co-operative housing

societies, development corporation, National Housing Bank.

• EXIM bank was started on first Gregorian calendar month 1982 to require over the

operations of the international money wing of IDBI.

• EXIM bank provides money help to exporters and importers and functions because the

principle money establishments for coordinative the operating of alternative establishment

engaged in funding exports and imports of products and services.

• EXIM bank provides re-finance facilities to the business banks and alternative money

establishments against their export and import money activities.

• The main sources of funds to the IDBI are some capital, reserves & surplus, borrowing from

run batted in, market borrowing each in Asian nation & abroad by supplying certificate of

deposits, mounted deposits & financial gain bonds. Ex: IDBI flexi bonds.

• A fund belongs to people who have contributed to it fund and so, the possession of the fund

lies within the hands of the investors.

• Mutual funds collects the savings from little investors, invest them in government and

alternative company securities and earn financial gain through interest and dividends, besides

capital gains.

2 marks questions

1) What are financial institutions?

53

……………………………………………………………………………………

……………………………………………………………………………………

……………………………………………………………………………………

…………

2) What is banking?

……………………………………………………………………………………

……………………………………………………………………………………

……………………………………………………………………………………

………

3) State the two objectives of IDBI?

……………………………………………………………………………………

……………………………………………………………………………………

……………………………………………………………………………………

………

4) What is non-banking?

……………………………………………………………………………………

……………………………………………………………………………………

……………………………………………………………………………………

………

5) What is EXIM bank?

……………………………………………………………………………………

……………………………………………………………………………………

……………………………………………………………………………………

………

6) Define mutual fund?

……………………………………………………………………………………

……………………………………………………………………………………

……………………………………………………………………………………

……….

7) Identify from the picture Indian and foreign banks

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5 marks questions

1) State the functions of IDBI.

2) Discuss the objectives and functions of LIC.

3) Explain the functions of EXIM bank.

4) Write a note on mutual fund.

5) What are the differences between banking and non-banking?

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill

3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl

4. M Y Khan: Indian Financial System, TMH

5. E Gardon& K Natarajan: Financial Markets & Services.

SUGGESTED BOOKS/ ARTICLES

55

Unit 3

COMMERCIAL BANKS

Structure

3.1 Introduction

3.2 Functions of Commercial Banking

3.3 Types of Deposits

3.4 Lending of Funds

3.5 Discounting of Bills of Exchange

3.6 Investment of Funds on Securities

3.7 Creation of Credit or Creation Of Money

3.8 Secondary Functions of Commercial Banks

3.9 Miscellaneous or General Utility Services

3.10 Investment Norms

Introduction – Role of Commercial Banks – Functions of Commercial Banks – Primary

Functions and Secondary Functions – Investment norms

Objectives of the study:

You understand the role and functions of commercial banks. Commercial bank receives

deposits for the purpose of lending. You will understand different forms of deposits such as

savings, recurring and fixed deposits. You also understand cash credit, overdraft and the rules

related to borrowing of loans and advances. Some of the non-banking operations of bank.

3.1 Introduction

Commercial banks are the oldest banking establishment within the organized sector. They

represent the predominant section of the banking industry in India.

BANK

A bank may be a financial organisation that deals in financial. It means a bank receives

financial within the variety of deposits from the general public and lends financial for

development of trade & commerce.

56

BANKER

Dr. H.L. Hart (Native of England) defines the term banker as “one World Health

Organization is within the normal of his business honourscheques drawn upon him by

persons from & for whom he receives financial on accounting.”

BANKING

Consistent with Section five (1) (b) of the Banking Regulation Act of 1949, the term banking

is outlined as “Accepting for the aim of disposal or investment of deposits of financial from

the general public owed on demand or otherwise & withdrawable by cheques, drafts, orders

or otherwise.”

FINANCIAL INSTITUTION

Section 5(1) (c) of the Banking Regulation Act of 1949, defines the term financial institution

as “Any company that transacts the business of banking in India.”

BUSINESS BANKING

It refers thereto banking that thinks about with the acceptance of deposits from the general

public owed on demand or once the ending of sure amount & the granting of chiefly short

term credit to trade, commerce and trade through a network of branches throughout the

country.

3.2 Functions Of Commercial Banking

The operate of business banking is loosely classified into 2 classes, viz.,

A. Principal/Primary/Basic/Fundamental operation.

B. Subsidiary/Secondary/Supplementary/Ancillary operation.

A. Primary functions

The primary functions of business banks are referred to as ancient functions or core

functions. They are the following:-

1) Acceptance of deposits from the general public.

2) Lending of funds.

3) Investment of funds on securities.

4) Creation of credit/money.

57

5) Use of cheque system.

6) Remittance of funds.

I. Acceptance of deposits – supply of funds:-

Accepting deposits is one amongst primary operate of an advertisement bank. Banks receive

deposits from people, households, & company & non-corporate customers, government &

different agencies & therefore, they mobilize the savings within the country for productive

functions. Business banks provide totally different sorts of deposits to suit to the wants of

various classes of consumers. Deposits function the main supply of provide of funds to the

business banks. The various sources of provide of funds to the business banks are:-

i) Deposits of varied sorts.

ii) Borrowings from the Federal Reserve Bank of India.

iii) Borrowings from different monetary establishments.

iv) Borrowings from fellow bankers.

v) Borrowings from abroad.

3.3 Types of Deposits

Banks also are referred to as custodians of public financial. Basically, the financial is

accepted as deposit for keeping. However since the Banks use this financial to earn interest

from those that want financial, Banks share a neighborhood of this interest with the

depositors. However, accepting deposits and keeping track of the financial involves lots of

book-keeping and different operations.

The deposits are of various types:

Saving deposits

Saving accounts are opened for the aim of mobilizing savings. This account is also single or

joint. But, the speed of interest is low i.e., 4-5% p.a. Withdrawals are subject to sure

restrictions. It is appropriate for earnings and wage earners.

Fixed deposits

58

Fixed depos its are depos its at one t ime for a fixed per iod spec ified in advance.

The rate o f interest is high which var ies with the per iod o f depos its. No

withd rawal is a llowed dur ing the pe r iod. The depos ito r get a fixed depos it

rece ip t which is non-transferable. Those who have a surplus fund open fixed deposit

account.

Current deposits

– B us ine ss me n ope n c u rre n t acco unt to opera t e any number o f t imes

dur ing a work ing day. It is a lso ca lled demand depos it account because bank has

to re turn the depos it on demand. Withdrawals are free ly a llowed. No interes t is

paid. In fact, there are services charges. Overdraft facilities are given in case of current

accounts only. Businessmen operate it.

Recurring deposits

– I n r e c u r r i n g d e p o s i t a c c o u n t a c e r t a i n s u m o f m o ne y i s

periodically deposited into the banks. Salaried persons and petty traders operate such type o f

account. Withdrawals are pe rmitted only a fter the exp iry o f ce rta in per iod. A

high rate of interest is paid.

3.4 Lending of Funds

Lending of funds constitutes the main business of commercial banks. The major portion of

the funds of commercial banks is employed by way of advances, as advances from the

primary source of profits for banks. Banks lends funds to the public by way of

A) Loans.

B) Overdraft

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C) Money credit

D) Discounting of bills

Loans: A loan is a financial arrangement under

which an advance is granted by a bank to a

borrower on a separate account called the loan

account. When a loan is sanctioned to a borrower,

the entire amount of loan is debited to the loan

account of the borrower at once in lumpsum, either

in money or by transfer to the credit of his savings

bank account or current account or current account if any.

A loan is granted for short term, medium term & long term periods also. The

repayment of loan is made in lump sum or instalments also. A loan is granted either against

collateral securities or the personal securities of the borrower.

In the case of a loan interest is charged on the entire amount f loan sanctioned,

irrespective of the amount actually withdrawn by the borrower. Loans are given to against the

personal securities of the borrower. But usually & particularly where the amount involved is

heavy, tangible securities in the form of government securities, shares, debentures, fixed

deposit receipts. Life insurance policies, documents of title to goods are taken.

Money credit: A money credit is a financial

arrangement under which a borrower is allowed an

advance under a separate account called money credit

account upto a specified limit called the money credit

limit.

In the case of a money credit, the borrower

need not withdraw the entire amount at once in one lump sum. He can withdraw the amount

in installments as & when he needs.

A money credit is usually more permanent financial arrangement than an

overdraft. It can continue even for years together & is usually granted against the

hypothecation or pledge of agricultural or industrial products.

60

Sometimes, it is given against guarantees. It is rarely given against the personal

securities of the borrower. Interest is charged quarterly or half yearly & is calculated on the

daily debit balance for the actual period of utilization. The money credit arrangement is the

most popular method of borrowing in India & about 70% of the total bank credit is in the

form of money credits.

The popularity of money credit is because if two reasons viz.,

A) The borrower is required to pay interest on the actual amount utilized by him for the

actual period of utilization.

B) It is a permanent financial arrangement.

Though money credit arrangement is popular with the borrowers, it is

disadvantage to the banker, because A) He can charge interest only on the actual amount

withdrawn by the borrower. B) He is required to keep at the disposal of the borrower, the

entire amount of money credit sanctioned.

Therefore, to compensate the banker there is a provision for charging

“commitment charge” on the unutilized portion of the money credit limit.

Overdrafts:-An overdraft is a financial arrangement under which a current account holder is

permitted by the bank to overdraw his account i.e., to draw more than the amount standing to

his credit upto an agreed limit against the collateral or personal securities of the borrower.

In the case of an overdraft, interest is charged quarterly or half yearly & is

calculated on the daily debit balances for the actual period of utilization.

It is advantageous to the borrower, as interest is charged only on the amount

actually withdrawn by him. But, it is disadvantageous to the banker because, he can charge

interest only on the amount actually overdrawn by the customer & he is required to keep at

the disposal of the borrower, the full amount of the overdraft sanctioned.

Therefore, to protect the interest of the banker, generally there is a provision for

charging “commitment charge” on the unutilized portion of the credit limit.

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3.5 Discounting of Bills of Exchange

It is an arrangement under which a bank takes a bill of

exchange maturing with in a short period of 60 days or

90 days from an approved customer & pays him or

credit his current account immediately with the present

value \of the bill i.e., the face value of the bill minus

discount charges. Then on the due date of the, the bank

receives the face value of the bill from the acceptor of

the bill.

The bill discounted may be documentary bill (i.e., a bill of exchange accompanied by

documents of title to goods) or a clean bill (i.e., a bill of exchange not accompanied by

documents of title to goods.)

The interest for this financial accommodation is called the discount & is charge on the face

value of the bill for the unexpired period of the bill i.e., from the date on which the bill is

discounted to the date on which the bill matures.

3.6 Investment of Funds on Securities

Investment of funds on securities is one of the important functions of commercial banks.

They invest a considerable amount of their funds in government & industrial securities. In

India commercial banks are required by statute to invest a major portion of their funds in

government & other approved securities.

3.7 Creation of Credit or Creation of Money

Commercial banks would not have become so prominent as they are today if they merely

borrow and lend money. They do something more than this i.e., they manufacture money. As

they manufacture money, they are called as “manufacturers of money “.

Commercial banks do not create legal tender money i.e., currency notes and coins. They

create only bank money or deposit money or cheque book money.

Bank money refers to the bank deposits created by banks. They are considered as money

because they perform the same functions as money i.e., they increase the purchasing power of

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community and serve as a medium of exchange in the purchase of goods and services and in

the settlement of debts .

Bank deposits arise in two ways viz,

I) When a bank receives money from a depositor, opens an account in the name of depositor

and credits the amount received to the depositors account, bank deposits arise. Such bank

deposits are called as primary or passive or money deposits.

They are called as primary deposits, as they form the basis for loan transactions of the bank.

They are called as passive deposits, because in the creation of these deposits, the role of the

bank is passive.

They are called as money deposits as they represent money deposited by the depositors into

the bank.

II) When a bank grants financial assistance to a customer or purchases securities or fixed

assets , opens a deposit account in the name of the borrower of advance or the seller of

securities or fixed assets and credits the deposit account with the amount of advance granted

or with the price of securities or fixed assets purchased. Such deposits are called as secondary

or derivative or active deposits.

They are called as secondary deposits as they rank second in importance.They are called as

derivative deposits as they are derived from primary deposits. They are also called as active

deposits because in the creation of these deposits, the bank has to act i.e., it has to take some

action i.e. Either lending or purchase of investments or fixed assets.

Of the two types of deposits primary deposits cannot be considered as the money created by

banks, because they simply result in the transfer of money from the boxes of depositors to the

fills of banks and they do not make any addition to the total supply of money or purchasing

power in the country.

Only the derivative deposits that increase the total supply of money in the country can be

considered as the money created by banks.

Banks can create money i.e., create derivative deposits in several ways viz,

A) Creation of money by advancing loans

B) Creation of money by advancing (Providing money credits).

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C) Creation of money by allowing overdraft.

D) Creation of money by discounting bills of exchange.

E) Creation o money by purchasing securities.

F) Creation of money by purchasing fixed assets.

G) Use of cheque system

Commercial banks have

introduced an inexpensive

medium of exchange, which is as

good as money, called ‘cheque’.

In the modern business world the

use of cheques to settle debts is

found to be more convenient than the use of liquid money. Commercial banks perform the

unique function of issuing and collecting cheques. Deposits can be withdrawn with the help

of a cheque which is a negotiable instrument. As such, it can be transferred easily from one

person to another and thus it has become the most developed credit instrument.

H) Remittance of funds

Banks help their customers in transferring funds from one place to another by issuing bank

drafts, mail transfers, telegraphic transfers and electronic transfers on nominal commission

charges. Commercial banks are able to carry out this important function at lesser cost since

they have their network of branches in every nook and corner of the country.

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3.8 Secondary Functions Of Commercial Banks

Modern commercial banks besides performing the main functions viz, accepting deposits and

lending money cover a wide range of financial and non-financial services to customers and

general public. The bank’s services are steadily increasing to meet the ever growing needs of

the community.

The secondary functions of a modern banker may be classified into two as:

1) Agency functions

2) Miscellaneous functions or general utility functions

1) Agency functions:

The services rendered by a banker as an agent

of his customer (i.e. For and on behalf of his

customers) are called “agency services”.

The important agency services rendered by a

banker are as follows:

1. Collection of money on behalf of customers

2. Making payments on behalf of customers.

3. Purchase and sale on behalf of customers.

4. Advising customers regarding stock exchange investments.

5. Acting as trustee, executor, administrator or attorney of customers.

6. Serving as correspondents and representatives of customers.

7. Rendering of merchant banking services.

65

5.4 Miscellaneous Or General Utility Services

Services rendered by a banker not only to his customers, but also to the general public are

called ‘general utility services’.

The important general utility services rendered by a banker are as follows:

i) Safe custody of valuables.

ii) Dealing in foreign exchange business-export finance and import credit.

66

iii) Issuing of letters of credit and travelers cheques.

iv) Acting as a referee.

v) Collecting information about other businessmen for customers.

vi) Underwriting of shares, debentures and government securities.

vii) Collection of statistics and data.

viii) Factoring services.

ix) Lease financing.

x) Housing finance

xi) Tax consultancy.

xii) Credit cards

xiii) Gift cheques

xiv) Consultancy function

xv) Teller system

xvi) ATM facility (automated teller machine)

3.10 Investment Norms:

The reserve bank has issued guidelines on categorization and valuation of banks’

investment portfolio. These guidelines are in conformity with international best practices and

are effective from 30th September 2000. The salient features of the guidelines are below:

1) The entire investment portfolio is to be classified under three categories:

a) Held to maturity [HTM]

b) Held for trading [HFT]

c) Available for sale [AFS]

HTM includes securities acquired with the intension of being held up to maturity.

HFT includes securities acquired with the intention of being traded to take advantage of the

short term price/ interest rate movements and

AFS includes securities not included in HMT and HFT.

2) Banks should decide the category of investment at the time of acquisition.

3) In the balance sheet, investments will continue to be classified under 6 heads:

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a) Government securities

b) Other approved securities.

c) Shares

d) Debentures and bonds

e) Subsidiaries and joint ventures

f) Others.

4) Investments classified under HTM need not be market to market and will be carried at

acquisition cost. These investments will include:

a) Recapitalization bonds

b) Investments in subsidiaries and joint ventures

c) Investments in debentures deemed as advance.

HTM will also include any other investment identified for inclusion in this category subject

to the condition that such investments will not exceed 25% of the total investment excluding

(a) to (c) cited above.

5) Banks which had already marked to market more than 75% of their SLR portfolio have the

option to reclassify their investments under this category up to the permissible level.

6) Profit on sale of investment in the HTM category should be taken into the p&l a/c before

being appropriated to the capital reserve account. Loss on sale should be recognized in the

profit and loss account.

7) Banks are free to decide on the extent of holdings under the HFT and AFS categories,

based on relevant considerations like tax planning, risk management capabilities and trading

strategies. Individual’s scrip in the AFS needs to be marked to market at the yearend or at

more frequent intervals. Individual scrip’s in the HFT category are to be revalued at least at

monthly intervals.

8) Market price of the scrip available from the trades/ quotes on the stock exchange price of

SGL transactions or RBI price list would serve as the “market value” for investments in AFS

and HFT.

9) Investments under the HFT category should be sold within 90days; in the event of inability

to sell due to adverse factors like tight liquidity, extreme volatility or a unidirectional

movement in market, the unsold securities should be shifted to the AFS category.

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10) Profit or loss on sale of investments in both HFT and AFS categories should be taken in

the P&L a/c.

11) Shifting of investments from /to HTM may be done with the approval of the board once a

year, normally at the beginning of the accounting year. Investments from AFS to HFT may

be done with the approval of the board/ALCO/Investment Committee. Shifting from HFT to

AFS is generally not allowed.

12) Under all circumstances, the shifting of investments from one category to another should

be done at lowest value among acquisition cost, book value or market value, depreciation, if

any, should be fully provided for.

13) RBI will no longer announce the yield to maturity (YTM) rates for unquoted government

securities for the purpose of valuation of investments by banks.

Summary

A bank receives financial within the variety of deposits from the general public and

lends financial for development of trade & commerce. Of business banking is loosely

classified into 2 classes, viz., Principal/Primary/Basic/Fundamental operation and

Subsidiary/ Secondary/ Supplementary/ Ancillary operation. Saving accounts are opened for

the aim of mobilizing savings. Fixed deposits are deposits at one time for a fixed period

specified in advance. Businessmen open current account to operate any number of times

during a working day. In recurring deposit account a certain sum of money is periodically

deposited into the banks. Salaried persons and petty traders operate such type o f account.

In the case of a money credit, the borrower need not withdraw the entire amount at once in

one lump sum. He can withdraw the amount in installments as & when he needs. A money

credit is usually more permanent financial arrangement than an overdraft. It can continue

even for years together & is usually granted against the hypothecation or pledge of

agricultural or industrial products. Sometimes, it is given against guarantees. It is rarely given

against the personal. Modern commercial banks, besides performing the main functions viz,

accepting deposits and lending money cover a wide range of financial and non financial

services to customers and general public. The bank’s services are steadily increasing to meet

the ever growing needs of the community.The services rendered by a banker as an agent of

his customer (i.e. For and on behalf of his customers) are called “agency services”. Services

rendered by a banker not only to his customers, but also to the general public are called

69

‘general utility services’. The reserve bank has issued guidelines. In conformity with

international best practices and are effective from 30th September 2000.

KEY WORDS/ GLOSSARY

A Bank is a financial institution which deals in money. It means that a bank receives

money in the form of deposits from the public and lends money for development of

trade & commerce.

Banking is defined as “Accepting for the purpose of lending or investment of

deposits of money from the public repayable on demand or otherwise &withdrawable

by cheques, drafts, orders or otherwise.”

Banker as “one who is in the ordinary of his business honourscheques drawn upon

him by persons from & for whom he receives money on current account.”

Banking company refers to that banking which is concerned with the acceptance of

deposits from the public repayable on demand or after the expiry of certain period &

the granting of mainly short term credit to trade, commerce & industry through a

network of branches throughout the country.

Commercial banking refers to that banking which is concerned with the acceptance

of deposits from the public repayable on demand or after the expiry of certain period

& the granting of mainly short term credit to trade, commerce & industry through a

network of branches throughout the country.

B ank s a re a lso ca l led custodians o f p ub lic mo ne y. Bas ica l ly , t he

money is accepted as deposit for safekeeping. But since the Banks use this money to

earn interest from people who need money, Banks share a part of this interest with the

depositors

Fixed depos its are depos its a t one t ime for a fixed per iod spec ified in

advance. The rate o f interest is high which var ies with the per iod o f

deposits

I n re c u r r i n g d e p o s i t a c c o u n t a c e r t a i n s u m o f m o ne y is

periodically deposited into the banks. Salaried persons and petty traders operate such

type o f account. Withd rawals a re pe rmitted only a fte r the exp iry o f certa in

period. A high rate of interest is paid.

70

Lending of funds constitutes the main business of commercial banks. The major

portion of the funds of commercial banks is employed by way of advances, as

advances from the primary source of profits for banks.

A loan is a financial arrangement under which an advance is granted by a bank to a

borrower on a separate account called the loan account.

A money credit is usually more permanent financial arrangement than an overdraft. It

can continue even for years together & is usually granted against the hypothecation or

pledge of agricultural or industrial products.

An overdraft is a financial arrangement under which a current account holder is

permitted by the bank to overdraw his account ie., to draw more than the amount

standing to his credit up to an agreed limit against the collateral or personal securities

of the borrower.

Discounting of bills of exchange is an arrangement under which a bank takes a bill

of exchange maturing with in a short period of 60 days or 90 days from an approved

customer & pays him or credit his current account immediately with the present value

\of the bill i.e., the face value of the bill minus discount charges. Then on the due date

of the, the bank receives the face value of the bill from the acceptor of the bill.

Services rendered by a banker not only to his customers, but also to the general

public are called ‘general utility services’.

HTM includes securities acquired with the intension of being held up to maturity.

2 marks questions

1) What is commercial banking?

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2) State the two objectives of commercial banks?

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3) What are the primary functions of an Indian commercial bank?

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……………………………………………………………………………………

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4) Mention any four commercial banks in India?

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5 marks questions

1) Explain the functions of commercial banks.

2) What are the primary functions of commercial banks?

3) What are the secondary functions of commercial banks?

4) Explain the changing role in Indian commercial banks.

5) Explain the different forms of lending by a commercial bank.

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill

3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl

4. M Y Khan: Indian Financial System, TMH

5. E Gardon& K Natarajan: Financial Markets & Services.

SUGGESTED BOOKS/ ARTICLES

72

UNIT 4

CO-OPERATIVE BANKS

Structure

4.1 Introduction

4.2Meaning

4.3 Definition

4.4 Types & Perform Of Co-operative Banks, India

4.5 Primary Co-operative Credit Society

4.6 Central Co-operative Banks

4.7 State Co-operative Bank

4.8 Land Development Banks

4.9 Urban Co-operative Banks

4.10 Functions of Co-operative Banks

4.11 Problems of Co-operative Banks

4.12 Advantages of Co-operative Banks

4.13 Disadvantages of Co-operative Banks

4.14 Role of Co-operative Banks for Agricultural Development.

Introduction – Meaning – definition – features - functions – types – merits and demerits -

Lending policies – role of co-operative banks for agricultural development.

Objective

You learn co-operative banks, Land Mortgage bank and the role of such banks in the

agricultural development.

4.1 Introduction

Cooperative banks, another part of the Indian industry, originated with the enactment of the

co-operative credit societies act of 1904, that provided for the formation of co-operative

credit societies. Beneath the act of 1904, a no of co-operative societies wherever started. Due

to the increasing demand for co-operative credit, a brand new act was passed in 1912, that

provided for the institution of co-operative central banks by a union of primary credit

societies and people. The chief functions of those banks where:

73

(1) To attract deposits from non-agriculturist;

(2) To use excess funds of some societies briefly to create up for shortage to a different ; and

(3) To supervise and guide the related societies.

In 1914, the Maclagan committee was appointed to look at the co-operative movement and to

create recommendations concerning the advance of the movement. It suggested the institution

of a state co-operative apex bank. On the premise of the advice, a Central co-operative bank

was established in Mumbai. Alternative provinces conjointly took action on similar lines.

Though these is also thought of because the early beginnings within the direction of creating

Co-operative Banks to satisfy the monetary desires of Agriculturists, the movement received

momentum solely once the Second warfare.

4.2 Meaning

Co-operative bank is associate degree autonomous association of persons united voluntarily

to satisfy their member's monetary (loans, deposits, alternative services), economic, social,

and cultural desires and aspirations through a democratically controlled means.

4.3 Definition

Co-operative bank is associate degree autonomous association of persons united voluntarily

to satisfy their member's monetary (loans, deposits, alternative services), economic, social,

and cultural desires and aspirations through a democratically controlled means.

4.4 Types & perform of Co-operative Banks, India

The co-operative banks are small-sized units that operate each in urban and non-urban

centers. They finance little borrowers in industrial and trade sectors besides skilled and wage

categories. Regulated by the Federal Reserve Bank of India, they're ruled by the Banking

laws Act 1949 and banking laws (co-operative societies) act, 1965. The co-operative banking

structure in India is split into following five categories:

4.5 Primary Co-operative Credit Society

The primary co-operative credit society is associate degree association of borrowers and non-

borrowers residing in a very explicit neighborhood. The funds of the soc iety ar derived from

74

the share capital and deposits of members and loans from central co-operative banks. The

borrowing powers of the members additionally as of the society ar fastened. The loans are

given to members for the acquisition of oxen, fodder, fertilizers, pesticides, etc.

4.6 Central Co-operative Banks

These are the federations of primary credit societies in a very district and are of 2 types-those

having a membership of primary societies solely and people having a membership of

societies additionally as people. The funds of the bank accommodates share capital, deposits,

loans and overdrafts from state co-operative banks and joint stocks. These banks give finance

to member societies inside the boundaries of the borrowing capability of societies. They

conjointly conduct all the business of a joint stock bank.

4.7 State Co-Operative Bank

The state co-operative bank may be a federation of central co-operative bank and acts as a

watchdog of the co-operative banking structure within the state. Its funds are obtained from

share capital, deposits, loans and overdrafts from the Federal Reserve Bank of India. The

state co-operative banks lend financial to central co-operative banks and first societies and

circuitously to the farmers.

4.8 LAND DEVELOPMENT BANKS

The development banks are organized in three tiers namely; state, central, and first level and

that they meet the future credit needs of the farmers for biological process functions. The

state development banks superintend, the first development banks located within the districts

and tehsil areas within the state. They're ruled each by the government and Federal Reserve

Bank of India. Recently, the supervising of development banks has been assumed by full

service bank for Agriculture and Rural development (NABARD). The sources of funds for

these banks are the debentures signed by each central and government. These banks don't

settle for deposits from the final public.

4.9 Urban Co-Operative Banks

The term Urban Co-operative Banks (ucbs), tho' not formally outlined, refers to primary co-

operative banks placed in urban and semi-urban areas. These banks, till 1996, were allowed

75

to lend financial just for non-agricultural functions. This distinction doesn't hold these days.

These banks were historically focused on communities, localities, work place teams. They

basically lend to little borrowers and businesses. Today, their scope of operations has

widened significantly.

The origins of the urban co-operative banking movement in India are copied to the shut of

nineteenth century. Galvanized by the success of the experiments associated with the co-

operative movement in United Kingdom of Great Britain and Northern Ireland and also the

co-operative credit movement in Germany, such societies were came upon in India. Co-

operative societies are supported the principles of cooperation, mutual facilitate, democratic

deciding, and open membership. Co-operatives diagrammatic a brand new and various

approach to organization as against proprietary corporations, partnership corporations, and

joint stock firms that represent the dominant sort of industrial organization. They chiefly rely

on deposits from members and non-members and just in case of would like, they get finance

from either the district central co-operative bank to that they're related or from the apex co-

operative bank if they add massive cities wherever the apex bank has its Head workplace.

They supply credit to little scale industrialists, salaried staff, and alternative urban and semi-

urban residents.

4.10 FUNCTIONS OF CO-OPERATIVE BANKS

Co-operative banks conjointly perform the fundamental banking functions of banking

however they dissent from business banks within the following respects

1. Business banks are joint-stock corporations beneath the companies’ act of 1956, or public

sector bank beneath a separate act of a parliament whereas co-operative banks were

established beneath the co-operative society’s acts of various states.

2. Depository financial institution structure is branch banking structure whereas co-operative

banks have a 3 tier setup, with state co-operative bank at apex level, central / district co-

operative bank at district level, and first co-operative societies at rural level.

3. Just some of the sections of banking regulation act of 1949 (fully applicable to business

banks), are applicable to co-operative banks, ensuing solely in partial management by tally of

co-operative banks.

4. Co-operative banks perform on the principle of cooperation and not entirely on business

parameters.

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4.11 PROBLEMS OF CO-OPERATIVE BANKS

Duality of system of co-operative banks

However, issues concerning the expertise of urban co-operative banks gave rise to the read

that they ought to be higher regulated. Massive co-operative banks with paid share capital

and reserves of Rs.1 hundred thousand were brought beneath the view of the Banking

Regulation Act one949 with result from first March, 1966 and among the orbit of the Reserve

Bank’s superintendence. This marked the start of associate degree era of duality of

management over these banks. Banking connected functions (viz. Licensing, space of

operations, interest rates etc.) were to be ruled by tally and registration, management, audit

and liquidation, etc., by State Governments as per the provisions of various State Acts. In

1968, UCBs were extended the advantages of deposit insurance.

Towards the late Nineteen Sixties there was dialogue concerning the promotion of the tiny

scale industries. UCBs came to be seen as vital players during this context. The unit on

industrial funding through Co-operative Banks, (1968 called Damry Group) tried to broaden

the scope of activities of urban co-operative banks by recommending these banks ought to

finance the tiny and house industries. This was reiterated by the Banking Commission in

1969.

The Madhavdas Committee (1979) evaluated the role contend by urban co-operative banks in

bigger details and role player a roadmap for his or her future role recommending support

from tally and Government within the institution of such banks in backward areas and

prescribing viability standards.

The Hate unit (1981) desired higher utilization of bank’s surplus funds which the proportion

of the money Reserve quantitative relation (CRR) & the Statutory Liquidity quantitative

relation (SLR) of those banks ought to be brought at par with business banks, during a phased

manner. Whereas the Marathe Committee (1992) redefined the viability norms and ushered

within the era of easement, the Madhava Rao Committee (1999) targeted on consolidation,

management of illness, higher skilled standards in urban co-operative banks and wanted to

align the urban banking movement with business banks.

A feature of the urban banking movement has been its heterogeneous character and its

uneven geographical unfold with most banks focused within the states of Gujarat, Karnataka,

geographic area, and Madras. Whereas most banks are unit banks with none branch network,

a number of the big banks have established their presence in many countries once at their

77

bidding multi-state banking was allowed in 1985. A number of these banks are licensed

Dealers in exchange.

4.12 Advantages of Cooperative Banks

1. Straight forward to form:

The formation of a cooperative society is extremely easy as compared to the formation of the

other type of business organizations. Any 10 adults will be part of along and type a

cooperative society. The procedure involves within the registration of a cooperative society is

extremely easy and straightforward. No legal formalities are needed for the formation of

cooperative society.

2. No Obstruction for Membership:

Unless and otherwise specifically debarred, the membership of cooperative society is

hospitable everyone. No one is choked to hitch on the idea of faith, caste, creed, sex and color

etc. An individual will become a member of a society at any time he likes and might leave the

society once he doesn't prefer to continue as ; member.

3. Restricted Liability:

In most cases, the liabilities of the members of the society is proscribed to the extent of

capital contributed by them. Hence, they're alleviated from the worry of attachment of their

belongings, just in case of the society suffers money losses.

4. Service Motive:

In Cooperative society members are given higher smart and services at cheap costs. The

society conjointly provides money facilitate to its members < the concessional rates. It assists

in putting in place production units and selling of produces c tiny business homes therefore

conjointly tiny farmers for his or her agricultural product.

5. Democratic Management:

The cooperative society is managed by the electoral members from and among themselves.

Each member has equal rights through its single vote however will take active half in' the

formulation of the policies of the society. Therefore all member are equally vital for the

society.

78

6. Stability and Continuity:

A cooperative society can't be dissolved by the death financial condition, lunacy, permanent

incapability of the members. Therefore, its stable life are continued to exist for an extended

amount. It's got separate legal existence. New members might be part of and recent members

might quit the society however society continues to perform unless or otherwise all members

can set to shut identical.

7. Economic Operations:

The operation carried on by the cooperative society economical because of the eliminations

of middlemen. The services of middlemen are provided by the members of the society with

the minimum price. Within the case of cooperative society, the revenant and non-recurring

expenses are terribly less. Further, the economies of scale-ma production or purchase,

mechanically reduces the procuring value of the products, there by minimizes the price.

8. Surplus shared by the members:

The society sells merchandise to its members on a nominal profit. In some cases, the society

sells merchandise to outsiders. This profit is used for meeting the every day administration

price of the society. The procedure for distribution of profit that some portion of the excess is

spent for the welfare of the members, some portion unbroken reserve whereas the balance

shared among the members as dividend on the idea of this purchases.

9. State Patronage:

Government provides special help to the societies to change them to attain their objectives

with success. Therefore, the societies are given money at lower rates. Government conjointly

extends several kind of subsidies to cooperative societies strengthening their money stability

and property growth in future.

4.13 Disadvantages of Cooperative Banks:

Despite many another benefits, the cooperative society suffers from bound limitations c

drawbacks. A number of these limitations, that a cooperative type of business has are as

follows:

1. Restricted Resources:

Cooperative societies money strength rely upon the cap contributed by its members and loan

raising capability from state cooperative banks. The membership fee is proscribed that they're

79

unable to boost great deal of resources as their members belong to the lower and social class.

Thus, cooperative^ don't seem to be appropriate for the big scale business that need

broadening capital.

1. Inefficient Management:

A cooperative society is managed by the members solely. They are doing not possess any

social control and special skills. This is often thought of as major disadvantage of this sector.

Unskillfulness of management might not bring success to the societies.

2. Lack of secrecy:

The cooperative society doesn't maintain any secrecy in business as a result of the affairs of

the society is brazenly mentioned within the conferences. However secrecy is extremely vital

for the success of a concern. This paved the manner for competitors to vie in additional

higher manner.

3. Financial Trading:

The cooperative societies sell their product to outsiders solely in financial. But, they're

typically from the poor sections. These persons need to avail credit facilities that isn't

attainable within the case of cooperatives. Hence, selling may be a disadvantage for the

cooperatives.

4. Excessive Government interference:

Government place their candidate within the Board of management of cooperative society.

They influence the choice of the Board which can or might not be favourable for the interest

of the society. Excessive state regulation, interference with the flexibleness of its operation

affects adversely the potency of the management of the society.

5. Absence of Motivation:

The members might not feel zealous as a result of the law governing the cooperatives place

some restriction on the speed of come. Absence of relationship between work and reward

discourage the members to place their most effort within the society.

6. Disputes and Differences:

The management of the society constitutes the assorted kinds of personnel from completely

different social, economic and tutorial background. Many another times they powerfully

differ from one another on several vital problems. This becomes harmful to the interest of the

80

society. The various opinions and disputes might paralyses the effectiveness of the

management.

4.14 Role of Co-operative Banks for Agricultural Development.

Cooperative credit establishments play a major role within the readying of credit for

agriculture and rural sector and account for forty fifth per cent of total credit for the

agricultural sector. These establishment, however, lack expertise, sound management system

and autonomy in deciding. Low volume of business/low resource base, low borrowing

membership, high incidence of over dues, and twin management have adversely affected the

health of co-operative credit establishments. Additionally, poor recovery performance has

affected the flexibility of those establishments to cater to the credit wants of latest and non-

defaulting members and resulted in low paid up share capital. The very important link within

the short term co-operative system, viz., the PACS at the grassroot level is weak. Their size is

little and uneconomical and plenty of of them are dormant. Cooperatives ought to augment

their resource base, particularly the capital base and pay bigger attention to specialization and

diversification of loan business, non fund business, economical money mediation, risk

management and reduction in npas. In recognition of the importance of co-operative banks

within the development method of the agricultural economy and wish for its advance

therefore on build them economical and value effective instruments for delivery of rural

credit, a task force was official in Gregorian calendar month 1999 to review the cooperative

system and counsel measures for its strengthening. The terms of reference of the task force

were:

(i) To review the functioning of the cooperative credit structure and counsel measures to

rationalize and improve and to form cooperatives as member driven and skilled business

enterprises;

(ii) to review aspects regarding prices, spreads and effectiveness at numerous tiers of

cooperative credit structure;

(iii) to review the money performance of the cooperative banks with a read to up their money

health in order that they'll become economical and value effective within the delivery of rural

credit and

(iv) TO review the present super ordinate and restrictive mechanism for cooperative credit

establishments and counsel measures for strengthening the arrangements.

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Summary

Co-operative bank is associate degree autonomous association of persons united voluntarily

to satisfy their member's monetary (loans, deposits, alternative services), economic, social,

and cultural desires and aspirations through a democratically controlled means. The loans are

given to members for the acquisition of oxen, fodder, fertil izers, pesticides, etc. These banks

give finance to member societies inside the boundaries of the borrowing capability of

societies. The term Urban Co-operative Banks (ucbs), through not formally outlined, refers to

primary co-operative banks placed in urban and semi-urban areas. Co-operative banks

conjointly perform the fundamental banking functions of banking however they dissent from

business banks.

KEYWORDS/ GLOSSARY

Co-operative bank is an autonomous association of persons united voluntarily to meet

their member's financial (loans, deposits, other services), economic, social, and

cultural needs and aspirations through a democratically controlled way.

The co-operative banks are small-sized units which operate both in urban and non-

urban centers.

The primary co-operative credit society is an association of borrowers and non-

borrowers residing in a particular locality.

The state co-operative bank is a federation of central co-operative bank and acts as a

watchdog of the co-operative banking structure in the state.

Commercial bank structure is branch banking structure whereas co-operative banks

have a three tier setup, with state co-operative bank at apex level, central / district co-

operative bank at district level, and primary co-operative societies at rural level.

The cooperative society is managed by the elected members from and among

themselves. Every member has equal rights through its single vote but can take active

part in' the formulation of the policies of the society.

A cooperative society cannot be dissolved by the death insolvency, lunacy, permanent

incapability of the members.

Cooperative credit institutions play a significant role in the deployment of credit for

agriculture and rural sector and account for 45% per cent of total credit for the rural

sector.

82

2 marks questions

1) What is co-operative banks?

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2) Define the co-operative banks.

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3) State the two features of co-operative banks.

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4) State the two functions of co-operative banks.

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5) State any two merits and demerits of co-operative banks.

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5 MARKS QUESTIONS

1) State the functions of co-operative banks.

2) What are the types of co-operative banks?

3) What are the advantages and disadvantages of co-operative banks?

4) What are the problems of co-operative banks?

5) Write a note on role of co-operative banks for agriculture development.

83

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill

3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl

4. M Y Khan: Indian Financial System, TMH

5. E Gardon& K Natarajan: Financial Markets & Services.

SUGGESTED BOOKS/ ARTICLES

84

UNIT 5:

RURAL FINANCE

Structure

5.1 Regional Rural Banks

5.2 Objectives of RRBs

5.3 Areas of Operations of RRB

5.4 Micro Finance: Meaning

5.5 Micro Finance Products

5.6 Role of Self-Help Groups

5.7 Micro Finance-the role of Post Offices

5.8 Role of Companies in Micro Finance

RRBS: Meaning – definition – features - functions – types – merits and demerits- Lending

policies – priority areas of lending – Role of RRBs in rural development. Micro finance:

micro finance products and services – role of Self-Help Groups – post office –role of

companies in micro finance as a part of social responsibilities.

Objectives: You can understand the role of RRBS in the economic developments. Micro

finance plays a vital role among the marginalized population. You can understand the role of

self help group in micro finance.

5.1 Regional Rural Banks

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RRBs were found out by the authorities and therefore the sponsoring business banks with the

target of developing the agricultural economy. RRBs give credit facilities and banking

services to tiny farmers, tiny entrepreneurs within the rural areas. The regional rural banks

were found out with a read to supply credit facilities to weaker areas. There have been 196

RRBs at the tip of 2002, as compared to 107 in 1981 and six in 1975.

IDBI, NABARD are SIDBI additionally needed to supply social control and monetary help to

RRBs below RRB act. Introduction of kissan credit cards, self-help-groups [SHGs], etc., for

the general performance of RRBs.

5.2 Objectives of RRBs

1) To give low-cost credit and different facilities to tiny and marginal farmers, landless

agriculture labourers and entrepreneurs etc….

2) To develop the agricultural economy of country by providing liberal monetary help to

agriculture, trade and business industries within the rural areas.

3) To indicate Banking habit among individuals and mobilize their savings for economic

process of the agricultural areas.

4) To give employment to the educated youths of the agricultural areas.

5) To bring down the price of rural banking.

5.3 Areas of Operations of RRBs

RRBs are setup in areas that are relatively backward, however have potentialities for

economic development. Every RRB is operated among the boundaries such that by the Govt.

of Republic of India. It's to serve 5000 to 20000 individuals. Typically the world of

operations of a RRB contains one or a lot of districts of a State. The top workplace of RRB is

mostly placed within the capital city of a locality, whereas its branch offices are going to be

placed in Taluks or blocks.

Funds or monetary resources of RRBs

1) Share capital

2) Deposits from the general public

3) Borrowings from the sponsoring banks

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4) Refinance from NABARD UNIT

5.9 Micro Finance: Meaning

Microfinance is a general term to describe financial services to low-income individuals or

to those who do not have access to typical banking services. Microfinance is also the idea

that low-income individuals are capable of lifting themselves out of poverty if given

access to financial services. While some studies indicate that microfinance can play a role

in the battle against poverty, it is also recognized that is not always the appropriate

method, and that it should never be seen as the only tool for ending poverty.

5.10 Micro Finance Products

Microfinance offers many financial products and services to its clients - Income

Generation Loans, Mid-Term Loans, Mobile Loans, Sangam Store Loans, Housing

Loans, Funeral Assistance, Gold Loan, and Life Insurance. Some of the social benefits of

its financial product and service offerings as "providing self-employed women financial

assistance to support their business enterprises, such as raising livestock, running local

retail shops called kirana stores, providing tailoring and other assorted trade and

services."

Typical microcredit products look like this (the numbers are only hypothetical):

Product Purpose Terms Interest rate

Income Generation

Loan (IGL)

Income generation, asset

development

50 weeks loan paid

weekly

12.5% (flat) 24%

(effective)

Mid-Term Loan (MTL)

Same as IGL, available at middle (week 25) of IGL

50 weeks loan paid weekly

12.5% (flat) 24% (effective)

Emergency Loan (EL)

All emergencies such as health, funerals,

hospitalization

20 weeks loan 0% Interest free

Individual Loan (IL) Income generation, asset development

1-2 years loan repaid monthly

11% (flat) 23% (effective)

Source: http://www.microfinanceinfo.com/microfinance-products

The Income Generating Loan is used for a variety of activities that generate income for their

families. Clients submit a loan application and based on approval receive the loan after one

week. Loans are paid in 50 equal, weekly installments. After completion of a loan cycle, the

client can submit a loan application for a future loan. The approach with smaller short-term

loan is to avoid long-term economic problems with bigger loans.

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5.11 Role of Self help group

A self-help group (SHG) is a village-based financial intermediary committee usually

composed of 10–20 local women or men. A mixed group is generally not preferred. Most

self-help groups are located in India, though SHGs can also be found in other countries,

especially in South Asia and Southeast Asia.

Members make small regular savings contributions over a few months until there is

enough capital in the group to begin lending. Funds may then be lent back to the members

or to others in the village for any purpose. In India, many SHG's are 'linked' to banks for

the delivery of micro credit.

A self-help group may be registered or unregistered. It typically comprises a group of

micro entrepreneurs having homogeneous social and economic backgrounds, all

voluntarily coming together to save regular small sums of money, mutually agreeing to

contribute to a common fund and to meet their emergency needs on the basis of mutual

help. They pool their resources to become financially stable, taking loans from the money

collected by that group and by making everybody in that group self-employed. The group

members use collective wisdom and peer pressure to ensure proper end-use of credit and

timely repayment. This system eliminates the need for collateral and is closely related to

that of solidarity lending, widely used by micro finance institutions. To make the book-

keeping simple enough to be handled by the members, flat interest rates are used for most

loan calculations.( http://en.wikipedia.org/wiki/Self-help_group_%28finance%29).

Self-help groups are started by non-governmental organizations (NGOs) that generally

have broad anti-poverty agendas. Self-help groups are seen as instruments for a variety of

goals including empowering women, developing leadership abilities among poor people,

increasing school enrollments, and improving nutrition and the use of birth control.

Financial intermediation is generally seen more as an entry point to these other goals,

rather than as a primary objective. This can hinder their development as sources of village

capital, as well as their efforts to aggregate locally controlled pools of capital through

federation, as was historically accomplished by credit unions.

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5.12 Micro Finance-the role of Post Offices

The loans are set up so that NABARD provides the funds and the Post Office disburses

the loans to SHGs. The interest rate is nine percent, three percent of which is commission

for the Post Office, the rest is returned to NABARD. SHGs must open accounts with their

local post office, and once they are identified by NGOs or recommended by NABARD

they are watched for six months. A committee made up of representatives from

NABARD, relevant NGOs and the Department of Post determine a credit rating and those

SHGs with qualifying marks are eligible for these loans. The upper loan limit is Rs

24,000 (USD 515) or four times the deposit the SHG has in their post office.

(http://www.thebetterindia.com)

Adequate infrastructure and manpower in India (154,919 branches), 90% in rural India. In

comparison, SBI, the largest commercial bank, has approx. 60,000 branches only Postmaster

and Postmen have good knowledge of the area and the people already providing financial

services and have good accounting system. Being a part of the Government, it is a safe place

for savings and the people also think of their money being safe if it is in the Post Office.

5.13 Role of Companies in Micro Finance

There are companies formed mainly for micro finance in India. SKS Microfinance Ltd,

Spandana Sphoorty Financial Ltd, Share Microfin Limited, Asmitha Microfin Ltd, Shri

Kshetra Dharmasthala Rural Development Project, Bhartiya Samruddhi Finance Limited,

Bandhan, Cashpor Micro Credit, Grama Vidiyal Micro Finance Pvt Ltd and Grameen

Financial Services Pvt. Ltd are the top ten micro finance companies in India.

Summary

RRBs were found out by the authorities and therefore the sponsoring business banks with the

target of developing the agricultural economy. IDBI, NABARD are SIDBI additionally

needed to supply social control and monetary help to RRB’s below RRB act. The capital

market might be a marketplace for financial assets that have a drawn-out or indefinite

maturity. Micro finance plays a role in the economic development of small businesses in rural

India through self-help group. Many companies including post offices are part of micro

finance.

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KEY WORDS/ GLOSSARY

Regional Rural Banks give low-cost credit and different facilities to tiny and marginal

farmers, landless agriculture labourers and entrepreneurs, etc.

Microfinance is a general term to describe financial services to low-income individuals or to

those who do not have access to typical banking services.

A Self-Help Group (SHG) is a village-based financial intermediary committee usually

composed of 10–20 local women or men.

2 marks questions

1) What are the monetary resources of RRBs?

………………………………………………………………………………………

………………………………………………………………………………………

………………………………………………………………………………………

………

2) Define a SHG.

………………………………………………………………………………………

………………………………………………………………………………………

………………………………………………………………………………………

………

3) What is mid-term loan?

………………………………………………………………………………………

………………………………………………………………………………………

………………………………………………………………………………………

………

4) State the functions of SHGs.

………………………………………………………………………………………

………………………………………………………………………………………

………………………………………………………………………………………

………

5 marks questions

1. What are the objectives of RRBs?

2. Write a note on the functions of micro-financing.

3. How do SHGs help in economy development?

90

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill

3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl

4. M Y Khan: Indian Financial System, TMH

5. E Gardon& K Natarajan: Financial Markets & Services.

SUGGESTED BOOKS/ ARTICLES

91

UNIT 6

CAPITAL MARKET

Structure

6.0 Meaning

6.1 Choices Of Capital Market

6.2 Importance Of Capital Market

6.3 Classification Of Capital Market

6.4 Primary Market

6.5 Functions Or Services Of Primary Market Or New Issue Market

6.6 Secondary Market

6.7 Functioning Of Secondary Market

6.8 Primary And Secondary Markets – Similarities

6.9 Characteristics/ Functions Of Capital Market

6.10 Demat Account

6.11 Procedure

Capital market: that means – functions – primary – secondary – functionaries in capital market-D-mat Accounts – listing needs – role of exchange in capital mobilization.

Objective of the study

In order to understand the long term finance it becomes necessary to understand capital

market. You learn about primary and secondary market

6.0 Meaning

The capital market might be a marketplace for financial assets that have a drawn-out or

indefinite maturity. Usually it deals with future securities that have a maturity quantity of on

high of 1 year. It includes institutions and mechanism for the effective pooling of future funds

from individuals and institutional investors and making them on the market to industrial and

business undertakings. Capital market briefly, deals in shares, debentures, bonds and

securities.

6.1 Choices Of Capital Market

1. It deals in long and medium term funds.

2. It consists of primary market and secondary market and special financial institutions.

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3. It covers every individual and institutional investors.

4. It makes funds on the market to industrial and business undertakings.

6.2 Importance Of Capital Market

Absence of capital market acts as a deterrent issue to capital formation and process.

Resources would keep idle if finances are not funneled through capital market.

The importance of capital market are typically briefly summarized as follows:

1. The capital market may be a very important provide for the productive use of economy’s

savings. It mobilizes the savings of the oldsters for any investment, then avoids their wastage

in unproductive uses.

2. It provides incentives to saving and facilitates capital formation by giving applicable rates

of interest as a result of the value of capital.

3. It provides associate as avenue for investors, considerably the organisation sector to invest

in financial assets that ar lots of productive than physical assets.

4. It facilitates increase in production and productivity among the economy then enhances the

economic welfare of the society.

5. The operations of assorted institutions among the capital market induce process. They

provide qualitative directions to the flow of funds and convey regarding rational allocation of

scarce resources.

6. A healthy capital market consisting of knowledgeable intermediaries promotes stability in

values of securities representing capital funds.

7. Moreover, it's a significant provide for technological upgradation among the economic

sector by utilizing the funds endowed by the overall public.

Thus, a capital market may be a very important link between people save and folks who

mean to invest these savings.

6.3 Classification of Capital Market

Capital market are typically classified into three, viz,

i. Industrial exchange.

ii. Government exchange.

iii. Future loan market.

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Industrial securities market

It is because it is market for industrial securities,viz,

i. Equity shares or stock

ii.Stock.

iii.Debentures or bond

6.4 Primary Market

Primary market might be a marketplace for brand spanking new issue or new financial

claims. So it's jointly called New Issue Market. The primary market deals with those

securities that are issued to the overall public for the first time. Among the first market,

borrowers exchange new financial securities for future funds. Thus, the primary market

facilitates capital formation.

There are three ways that by that an organization might raise capital throughout a primary

market. They are:

Public issue.

rights offering.

non-public placement.

The foremost common technique of raising capital by new companies is thru sale of securities

to the overall public. It's called public issue. Once associate existing company needs to carry

any capital, securities are initial offered to the current shareholders on preventative basis. It's

called rights issue. Non-public placement might be a way of commerce securities in camera

to very little cluster of investors.

6.5 Functions Or Services Of Primary Market Or New Issue Market:

1. The Transfer: a significant perform rendered by primary market is to allow the transfer of

resources from capitalist to entrepreneurs World Health Organization establish new

companies. It's jointly called the perform of origination. The transfer perform is fast by

specialist agencies that assist in varied activities associated with such transfer.

2. Fact-Finding Services: The capitalist bankers and different agencies involved in primary

market offer the fact-finding services. These embrace, economic analysis, technical analysis,

94

financial associate degree analysis of the companies where associate degree capitalist ants to

invest. This information helps the investors in making a clear different on the type, quality

and quantity of investment to make.

3.Informative And Data Services: Varied informative services are on the market in primary

market with a scan to rising the quality of capital issues in primary market. The relevant

services embrace crucial the type, the mix, the price, the timing, the size, the commerce ways

that and thus the terms and conditions of issue of securities etc.

4. The Guarantee: If the company, stepping into capital market is not bound of raising full

amount of funds from the market, there are certain mechanism there by success of such issue

are secured. It's the perform of underwriting. Underwriting aims at guaranteeing the

subscription of public issue. Underwriters guarantee booming subscription of the matter by

enterprise to want up the securities among the event of the overall public failing to subscribe

constant. It edges all those involved in primary market rather like the provision company, the

finance public and capital market typically. The perform of underwriting is undertaken for a

commission.

5. The Distribution: The perform that facilitates the sale of securities from company to

investors is termed ‘Distribution’. The perform of distribution is rendered by the specialised

agencies like brokers and dealers in securities. They maintain a relentless and an in depth link

with the issuers on the one hand and thus the ultimate investors on the alternative.

6.6 Secondary Market:

Secondary market might be a marketplace for secondary sale of securities. In different words,

securities that have already seasoned the new issue market are listed throughout this market.

Generally, such securities are quoted among the exchange and it provides never-ending and

regular marketplace for buying and commerce of securities. This market consists of all stock

exchanges recognized by the govt..Of India. The stock exchanges in Republic of Republic of

India are regulated below the securities contracts (Regulation) Act 1956. The town exchange

is that the principal exchange in Republic of Republic of India that sets the tone of the

alternative stock markets.

The secondary market provides liquidity to financial instruments that are already issued in

primary market. Throughout a stock market, purchases and sales of securities whether or not

95

or not of presidency or semi-government bodies or different public bodies and jointly shares

and debentures issued by private joint stock companies are done.

6.7 Functioning Of Secondary Market:

For the effective functioning of secondary market, correct management ought to be exercised.

At present, management is exercised through the following three necessary processes.

1. Recognition of stock exchanges:

As a district of secondary market operation the stock exchanges ought to be compelled to be

recognized by administrative body. The securities that are issued in primary market are listed

entirely in recognized exchanges like town exchange, NSE, city exchange etc. In Republic of

Republic of India SEBI is recognizing the stock exchanges.

2. Listing Of Securities Accessible Exchanges:

Once the stock exchanges are recognized the securities that are required to be listed like

shares debentures etc. has to be listed accessible exchanges.

3. Recognition Of Broker:

The intermediaries, World Health Organization facilities swish functioning of secondary

market like brokers, deal in secondary market. Sub-brokers ought to be compelled to be

recognized by SEBI, them entirely the need be able to interchange stock exchanges.

Functions Or Services Of Secondary Market:

The Secondary market or stock market occupies a necessary position among the economy. In

perform several economic functions and render valuable services to the investors, companies

and to the economy as whole. They're as follows:

1.Liquidity Of Securities:

Stock exchanges offer liquidity to securities, since securities are typically reborn in to

financial at any time per the discretion of the capitalist by commerce tem at the listed prices.

2. Marketability To Securities: Secondary market facilitate buying and commerce of

securities at listed prices by providing continuous marketability to the investors in respect of

securities they hold or can hold. So that they manufacture a ready marketplace for securities.

96

3. Safety Of Funds Happiness To Investors:

Stock exchanges facilitate in maintaining safety of funds endowed as a results of they have to

perform below strict rules and laws and thus the bye- laws are meant to create certain safety of

investible funds. These rules are framed by SEBI. This could strengthen the investor’s

confidence and promote larger investment.

4. Accessibility Of Future Funds To Companies:

The securities listed among the stock, market are negotiable and transferable. As a result of

it's transferred from one capitalist to a distinct, one capitalist is substituted by another, but the

company is secured of future accessibility of funds.

5. Flow Of Funds To Profitable Projects:

The profit and recognition of companies are reflected accessible prices. The prices quoted

indicate the relative profit and performance of companies. Funds tend to be attracted towards

securities of profitable companies and this facilitates of profitable companies and these

facilities the flow of capital in to profitable channels.

6. Motivation For Improved Performance By Companies:

The performance of an organization is reflected on the costs quoted among the stock market

value of financial assets depends upon the company’s performance. These prices are lots of

visible among the eyes of the overall public. Stock market provides space for this value

quotation for those securities listed by it. This airing makes an organization aware of its

standing among the market and it acts as a motivation to spice up its performance any.

7. Promotion Of Investment Opportunities:

Stock exchanges mobilize the savings of the overall public and promote investment through

capital issues. Unless there is a sensible secondary market, investment opportunities will not

be with investors.

8. Accessibility Of Business Information:

The dynamic business conditions among the economy are immediate reflected on the

secondary market/stock exchanges. Booms and depressions are typically known through the

dealings among the stock exchanges. Relying upon the prevailing information policies are

97

typically taken by the govt... Therefore a stock market reflects the prevailing economic

situation to ball concerned. So as that applicable actions are typically taken.

9. Promoting Commerce Of Recent Issues By Companies:

If the new issues are listed accessible exchanges they're directly acceptable to the overall

public, since, listing is completed once analysis of such securities by concerned exchange

authorities. Costs of underwriting such issues would be less public response to such new

issues would be relatively really high. Therefore a stock market helps among the commerce

of recent issues jointly.

10. Different Services:

Stock exchange permits the investors to chop back their risks by heterogeneous portfolio of

investment. It jointly develops savings habits among the community and paves the strategy

for capital formation. It helps the investors in choosing securities by provide the daily

quotation of listed securities and by revealing the trends of dealings on the exchange. It

permits companies and thus the govt. To carry funds by providing a ready marketplace for his

or her securities.

6.8 Primary And Secondary Markets – Similarities

Both the primary and secondary markets are closely related .

1.Trading:

If securities are to be listed among the stock exchange/ secondary market, it's necessary that

they're initial issued among the first market.

2.Listing:

Solely those shares that are capable of listing in some putative stock exchanges are

completely signed in primary market.

3.Regulation:

The laws concerning every primary what is more as secondary market are regulated by the

SEBI and exchange. The item is to induce orderliness in every primary and secondary

market.

4. Marketability:

98

The advantage of marketability provided by the secondary market greatly helps the

subscribers among the first market. For instance, the positive trends prevailing among the

secondary market immensely facilitate the investors to chop back their holdings and acquire

new shares among the secondary market.

5.Conditional Prevailing:

The conditions prevailing among the secondary market have a bearing on success or failure

of the matter created among the first market. Consequently, where the conditions are so

favorable among the secondary market that high market prices prevail, the issues created

among the first market will find yourself to be encouraging and booming. Issues would fetch

smart premiums.

6.Survival:

The survival of the secondary market depends upon the efficiency of the primary market.

There may well be no stock exchanges if there is no primary market, among an equivalent

manner there will be no primary market among the absence of associate economical

functioning of exchange.

6.9 Characteristics/ Functions Of Capital Market

Capital market deals in future and medium term funds. Possession securities like equity

shares and stock and securities like debentures and bonds dealt in capital market.

Capital market arranges heap of funds.

Capital market makes future funds on the market i.e., produce funds on the marketplace for

investment on mounted assets.

Capital markets facilitates large scale nationwide mobilisation of savings and massive

amount of funds.

The dealers among the capital markets are the business and business enterprises and thus the

investors like individuals and institutional investors.

99

6.10 Demat Account

In India, a demat account, the abbreviation for dematerialized account, could be a form of

banking account that dematerializes paper-based physical stock shares. The dematerialized

account is employed to avoid holding physical shares: the shares are bought and

oversubscribed through a stock broker.

This account is in style in Republic of India. The Securities and Exchange Board of Republic

of India (SEBI) mandates a demat account for share commerce on top of five hundred shares.

As of Apr 2006, it became obligatory that anyone holding a demat account ought to possess a

Permanent Account variety (PAN), and therefore the point in time for submission of PAN

details to the deposit irreligious on January 2007.

6.11 Procedure

1. Fill demat request kind (DRF) (obtained from a deposit participant or DP with whom your

deposit account is opened).

2. Deface the share certificate(s) you wish to vanish by writing across given for

dematerialization.

3. Submit the DRF & share certificate(s) to DP. DP would forward them to the establishment

/ their R&T Agent .

4. When dematerialization, your deposit account together with your DP, would be attributable

with the dematerialized securities.

The edges

- a secure and convenient thanks to hold securities;

- Immediate transfer of securities;

- No taxation on transfer of securities;

- Elimination of risks related to physical certificates like unhealthy delivery, pretend

securities, delays, thefts etc.;

- Reduction in work concerned in transfer of securities;

100

- Reduction in dealing cost;

- No odd heap downside, even one share are often sold;

- Nomination facility;

- amendment in address recorded with DP gets registered with all firms during which

capitalist holds securities electronically eliminating the requirement to correspond with every

of them separately;

- Transmission of securities is completed by DP eliminating correspondence with companies;

- Automatic credit into demat account of shares, arising out of

bonus/split/consolidation/merger etc.

- Holding investments in equity and debt instruments during a single account.

Required Documents

The extent of documentation needed to open a demat account could vary consistent with your

relationship with the establishment. If you propose to open a demat account with a bank, a

savings, current and, or alternative account that the holder are issued a check book, such

holder has a footing over the non-account holder. In fact, banks sometimes supply further

incentives to customers World Health Organization open a demat account with them. In

conjunction with the appliance kind, your images (with co-applicants) and proof of

identity/residence/date of birth ought to be submitted. The dps conjointly enkindle a DP-

client agreement to be dead on non-judicial stamp paper. Here could be a broad list:

- A canceled check, ideally MICR

- Proof of Identification

- Proof of Address

- Proof of Pan card (mandatory)

- Recent images, one and, or more

For proof of identification and, or address self-attested facsimile copies of PAN card, Voter’s

ID, Passport, card, Driver’s license, citation card, worker ID card, Bank attestation, latest IT

returns and, or latest Electricity/Landline telephone bill are comfortable. Whereas they solely

enkindle photocopies of the documents, They are going to want the originals for verification.

101

Summary

Capital market briefly, deals in shares, debentures, bonds and securities. The capital market

may be a very important provide for the productive use of economy’s savings. It mobilizes

the savings of the oldsters for any investment, then avoids their wastage in unproductive uses.

Capital market deals in future and medium term funds. Possession securities like equity

shares and stock and securities like debentures and bonds dealt in capital market. In India, a

demat account, the abbreviation for dematerialized account, could be a form of banking

account that dematerializes paper-based physical stock shares. The dematerialized account is

employed to avoid holding physical shares. The capital market might be a marketplace for

financial assets that have a drawn-out or indefinite maturity. The capital market may be a

very important provide for the productive use of economy’s savings. It mobilizes the savings

of the oldsters for any investment, then avoids their wastage in unproductive uses. Primary

market might be a marketplace for brand spanking new issue or new financial claims. So it's

jointly called New Issue Market. Secondary market might be a marketplace for secondary

sale of securities. In different words, securities that have already seasoned the new issue

market are listed throughout this market. Capital market deals in future and medium term

funds. Possession securities like equity shares and stock and securities like debentures and

bonds dealt in capital market. A demat account, the abbreviation for demate rialized account,

could be a form of banking account that dematerializes paper-based physical stock shares.

KEYWORDS/ GLOSSARY

• The capital market could be a marketplace for money assets that have a protracted or

indefinite maturity.

• Capital market deals with future securities that have a maturity amount of on top of one

year. It includes establishments and mechanism for the effective pooling of future funds from

people and institutional investors and creating them on the market to industrial and business

undertakings.

• Capital market makes funds on the market to industrial and business undertakings.

102

• A healthy capital market consisting of knowledgeable intermediaries promotes stability in

values of securities representing capital funds.

• Primary market could be a marketplace for new issue or new money claims. Thus It is

conjointly known as New Issue Market. The first market deals with those securities that are

issued to the general public for the primary time.

• The commonest technique of raising capital by new firms is through sale of securities to the

general public. It is known as public issue.

• When associate degree existing company desires to lift further capital, securities are initial

offered to the present shareholders on preventative basis. It is known as rights offering.

• Private placement could be a method of commercialism securities in private to little cluster

of investors.

• Secondary market could be a marketplace for secondary sale of securities. In alternative

words, securities that have already seasoned the new issue market are listed during this

market.

• The secondary market provides liquidity to money instruments that are already issued in

primary market. During a securities market, purchases and sales of securities whether or not

of presidency or semi-government bodies or alternative public bodies and conjointly shares

and debentures issued by non-public joint stock firms are done.

• Only those shares that are capable of listing in some purported stock exchanges are totally

signed in primary market.

• Capital markets facilitates massive scale nationwide mobilisation of savings a nd enormous

quantity of funds.

• In India, a demat account, the abbreviation for dematerialized account, could be a form of

banking account that dematerializes paper-based physical stock shares. The dematerialized

account is employed to avoid holding physical shares: the shares are bought and

oversubscribed through a stock broker.

2 MARKS QUESTIONS

1) What is capital market?

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………………………………………………………………………………………

………………………………………………………………………………………

………………………………………………………………………………………

………………

2) What is D-mat account?

………………………………………………………………………………………

………………………………………………………………………………………

………………………………………………………………………………………

………………

3) What is capital mobilization?

………………………………………………………………………………………

………………………………………………………………………………………

………………………………………………………………………………………

………………

4) State any two functions of capital market?

………………………………………………………………………………………

………………………………………………………………………………………

………………………………………………………………………………………

………………

5 MARKS QUESTIONS

1) State the functions of capital market?

2) Explain the role of stock exchange in capital mobilization?

3) Write a note on D-mat account?

4) State the Differences between capital market and money market?

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill

3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl

4. M Y Khan: Indian Financial System, TMH

5. E Gardon & K Natarajan: Financial Markets & Services.

SUGGESTED BOOKS/ ARTICLES

104

Unit 7

REGULATORY INSTITUTIONS

Introduction.RBI – Organization – Objectives – Role and Functions.The Securities and

Exchange Board of India – Organization and Objectives – IRDA and its functions.

7.1 Meaning And Significance:

7.2 Need / Importance:

7.3 Types:

7.4 Organization Of RBI:

7.5 Objectives:

7.6 Functions:

7.7 Main Functions:

7.7 Supervisory Functions:

7.8 Promotional Functions:

7.9 Methods Of Credit Control

7.10 Quantitative Methods:

7.11 Securities And Exchange Board Of India (SEBI)

Introduction.RBI – Organization – Objectives – Role and Functions.The Securities and

Exchange Board of India – Organization and Objectives – IRDA and its functions.

Objective: To understand the role of RBI and its functions. You also understand and learn

about the role of SEBI who is a regulatory body of companies whose shares are dealt in the

market. You learn also about IRDA and its functions.

REGULATORY INSTITUTION

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7.1 Meaning and Significance: The institutions which control and monitor the over all

activities or functions of financial institutions operating in the country like Banking

institutions, capital and money market, etc., are known as Regulatory institution.

7.2 Need / Importance

Economic Growth: Adequate and proper regulatory frame work shall be put in place for the

process of smooth financial growth in the country otherwise economic growth will be

effected. Promoting savings and investments in the country: The financial services industry

besides putting savings into investment helps economic activities to take place without much

difficulty. Provision of efficient financial services: The efficiency with which the various

institutions in the financial market render services such as bankers, credit card companies,

insurance companies, stock brokers etc. Depends upon functioning of the regulatory frame

work. Investors’ protection: Regulations of many types are required for safeguarding and

sustaining the interest of the investors especially the small and individual investors.

7.3 Types

Institutional regulations : These regulations are those that flow from regulatory institution

(RBI & SEBI) setup in a financial market by the government with an objective of promoting

healthy development of financial system in the country.

Investors’ regulations: Regulations that are designed to protect the interest of the small and

individual investors are called investors regulations. Investors’ regulations main objective is

to create confidence among the investors.

Internal regulations: Regulations regarding the internal management of financial institutions

regarding fund management, capital adequacy, liquidity, and solvency are called as internal

regulations.

Self Regulations: In addition to the regulations framed by the RBI etc. There are self

imposed regulations for ex: the lead managers/ team leaders, stock brokers, etc. Have their

own regulations for the proper development.

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Legislative Regulations: These are regulations brought out by the government form time to

time keeping in mind the need for overall development of the economy, ex: Banking

regulation Act of 1949, securities, contracts and regulation Act of 1972, etc.

7.4 Organization of RBI

1. It was started functioning as a share holder bank with a paid up capital of 5crore

divided into 5lakhs shares of Rs.10/- each.

2. The issue was over subscribed by 100% and all the major policy decisions were

dominated by British rulers.

3. After independence RBI was nationalized with a view to secure monitor cooperatio n

between government and the banks and it was nationalized by means of passing an

Act in 1948 and it began to function as a government owned central bank from

1.1.1949 by giving compensation to the private share holders at the rate of Rs.118 for

every 100.

4. Nationalization was done with a view to follow international attitude towards state

ownership of central banks.

5. Even though it has been nationalized it retaining all independent organization and

there is no interference of the government in day to day affairs of the bank.

7.5 Objectives

1. RBI functions within the framework of mixed economic system with regard to

framing policies to maintain close and continuous relation between government

and RBI.

2. The preamble of RBI Act of 1934 states that RBI is required to regulate the issue

of bank notes to maintain the reserve and to control the monetary system of the

country.

3. The other objectives of RBI are:

To maintain monetary stability

To maintain financial stability

To maintain stable payment system

To promote the development of financial infrastructure

To ensure the credit allocation to all the sectors

To regulate the over all volume of money

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7.6 Functions

1. RBI discharges all the functions of central bank. Its main function is to maintain and

regulate monetary mechanism by means of controlling the currency and credit system in

India.

2. It enjoys complete monopoly of note issue it issues notes of all types of denominations

except one rupee and coins.

3. It is also banker to the scheduled banks and maintain stability in the external value of the

currency and undertake the responsibility of providing financial assistance to the

economic development and publishes various matter connecting on the economy,

currency and undertaken the responsibility of providing financial ass istance to the

economic development and publishes various matter connecting on the economy.

7.7 Main Functions

Central banking functions:

RBI Governor RaghuramRanjan (2014)

1. Monopoly of Note issue: RBI has the sole right to issue notes in the country under Sec 22

of the RBI Act. RBI has the monopoly right to issue currency notes except 1 rupee notes and

coins which is the responsibility of the central government. According to Sec 22 of the RBI

Act, the assets of issue department against which banks notes are issued comprise of gold

coins, bullions, foreign securities and bills of exchange and promissory notes payable by the

bank. There are 2 system of notes issue namely: 1. Proportional reserve system. 2. Minimum

reserve system.

To commence with RBI started with proportional reserve system of note issue accordingly

the issue had to cover 40% of the total note issue in the form of gold and foreign securities.

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This system of note issue continued up to 1956 when the RBI amended its Act 1957 this

resulted in shift from the proportional system to the minimum reserve system the bank is at

present issuing note on the bases of minimum reserve system.

1. Banker to the government:

RBI transact banking business of central and state government as obliga tory function of the

bank as per sections 20, 21, 21A are the RBI Act accordingly it undertakes to accept money

makes payments and also carries out their exchange remittance and other banking operations

including the management of public debt as per the agreements with the government without

any remuneration for their service.

RBI of India authorized to issue of new loans and treasury bills on behalf of the central and

state government. The bank sells treasury bills whenever necessary to provide short term

finance to the government and to absorb any excess money in the money market.

RBI authorized to make ways and means advances to the central and state government these

advances are re-payable not later than 3 months from the date of issue and granted witho ut

any collateral security. It also acts as the agent of the government in its transactions with

IMF and IBRD.

2. Advisor to the government: RBI advises the government of a wide range of economic

issues it includes banking and financial matter resource mobilization planning etc. RBI

advice was sought on certain aspects of the formulation of 5 year plans. It also guides the

government in connection with the flotation of new loans small saving proposals, agricultural

credit, industrial finance, International finance and research and statistical organization for

the proper functioning of the government.

3. RBI acting as an agent of the government: As an agent it collects taxes and other dues

on behalf of the government, floats public loans to the government manages the public debts

and represents the government in the international bodies.

4. As a financial advisor: It advices the government on all financial matters as it has very

close link with the money market. It can keep huge balances of the government without

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paying the interest and management of the debts. The central bank is allowed some special

remuneration.

5. Central bank as a banker’s bank:

As a bankers bank it acts in 3 capacities:

As a custodian of money reserves: All

commercial bank required to keep certain percentage of

their deposit with central bank in the form of money

reserves. As it is a statutory obligation that’s why it is

called as central bank of India as reserve bank.

As a lender of last resort: The centralizing of money reserves of the commercial

banks in its hands has enabled the central bank to serve as the lender of the last resort

for commercial bank.

As a bank of clearance : Central bank acts as the clearing house for the commercial

bank. It helps in setting outstanding balances between commercial bank. Inter-bank

claims are settled by mere transferring from one bank to another bank maintained in

the book of central bank without actual payment of money by 1 bank to another

Acting as a controller of credit: RBI has powers to influence the volume of credit

created by banks in India. It controls credit expansion by using bank credit policy,

open market operation, and variable reserve ratio.

7.7 Supervisory Functions

RBI performs certain non-monetary functions in the nature of supervision of banks and

promotion of sound banking in India. RBI has wide power of control over commercial bank

and cooperative bank in relation to licensing, establishment, branch expansion, management

and methods of working, amalgamation etc. RBI carries out periodical inspections on the

banks and call for returns and necessary information. The supervisory functions of RBI have

helped in improving banking standards in India.

7.8 Promotional Functions

In recent years RBI performs variety of development and promotional functions which are

considered to be outside the normal functions of RBI. They include promotion of banking

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habit among the general public extending banking facilities to the rural and un banked India

establishment and promoting of specialized institutions like UTI, SFC, RBI developed

cooperative credit movement to encourage savings and to eliminate money lenders etc.

7.9 Methods of Credit Control

Quantitative Method:

Bank rate policy

Open market operations

Variable reserve ratio

Qualitative Method:

Regulation of consumer credit

Regulation of margin requirement

Control through directives

Rationing of credit

Moral request

Direct action

Publicity

7.10 Quantitative Methods

1. Bank rate policy: The bank rate is the official / minimum rate at which the central

banks of a country re-discount the eligible bills of exchange of a commercial bank and

other financial institutions for providing short term loans to them against approved

securities. In other words, it is a rate at which RBI lends the loans to the commercial

banks. By offering bank credit RBI can control the circulation of money in the hands

of the banks and customers.

2. Open market operations : Deliberate and direct buying and selling of securities and

bills in the money market by the RBI on its own initiative called as open market

operations and influence the volume of credit and control the circulation of money.

3. Variable reserve ratio: In every country commercial bank keep a certain portion of

their money reserve with a central bank because of legal requirements by altering this

ratio. Central bank can control the supply of money.

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Qualitative Methods:

1. Regulation of consumer credit: The credits of banks of purchase the durable

consumer goods. Such as radio, television etc is called as consumer credit. The RBI

can regulate the type of goods, methods and purpose of consumer credit depending

upon the inflationary and deflationary condition.

2. Regulation of margin requirement: Under this method RBI controls the credit by

prescribing the margin (difference between loan value and security value) with the

commercial bank & other lending institution must maintain for advance granted by

them against shares, stocks & goods.

3. Control through directives: Under this method the central bank controls bank

advances by issuing directives to the commercial banks in respect of their lending

operations from time to time.

4. Rationing of credit: It is a method of controlling and regulating the purpose for which

credit is granted by commercial banks.

5. Moral request: It implies the persuasion and request made by the central bank to the

commercial bank to follow the general monetary policy of the RBI.

6. Direct Action: It is widely used method. It implies correction and punishable

measures taken by the RBI against commercial banks and other institutions which are

borrowing excessively for the central banks.

7. Publicity: Under this method RBI gives wide publicity to what is good and what is

bad in the credit system of the country and includes publishing the statement of

commercial banks, assets and liabilities.

7.11 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Introduction

It was started in India in 1988 through an executive resolution passed by the government of

India subsequently it became autonomous body as per the SEBI Act of 1992 which control all

the capital market transactions.

Organization

SEBI is managed by statutory board consisting of 6 members. The chairman and 2 members

are to be appointed by the Central government. Member is to be appointed by the reserve

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bank and Members having experience of securities market to be appointed by the central

government. It has 6 operational departments:

Primary market department: It deals with all policy matters and regulatory issues.

Issue management and intermediaries department: It deals with matters like

registration, regulation and monitoring of issues related to intermediaries.

Secondary market department: It looks after all matters related to secondary market

administration of stock exchanges etc.

Institutional investment department: It deals with framing rules and regulations

relating to foreign institutional investors, mutual funds etc

Legal department: It deals with the legal matter of the SEBI.

Investigation department: It deals with market research activities of SEBI.

Objectives:

To protect the interest of the investors in securities.

To promote the development of securities market

To regulate the securities market.

For matters there with are incidental there to.

Since its inception SEBI has been working, targeting the securities and is attending to

the fulfillment of its objectives.

To improve the capitalization requirements, reducing the risk of credit.

To introduce comprehensive regulatory measure, code of conduct for brokers.

To make the dealing insecurities both safe and transparent to the investors.

Functions:

Section 11 of the SEBI Act specifies the functions as follows:

Regulatory functions:

Regulation of stock exchange and other self regulatory organization in the country.

Registration and regulation of stock brokers.

Registration and regulation of various investment scheme including mutual funds.

Prohibition of fraudulent and unfair trade practices in securities market.

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Prohibition insider trading in securities market regulation acquisition of shares

through mergers and acquisitions.

Development functions:

Promote investors education to increase their participation.

Training of intermediaries.

Conducting research and publishing information.

Promoting self regulatory organizations.

Powers:

SEBI has been vested with following powers in order to protect the interest of the investors.

Power to call for any information / explanation from recognized stock exchange /

their members at anytime.

Power to call periodical returns from stock exchange.

Power to direct enquiries into the functioning of stock exchange.

Power to amend bylaws of recognized stock exchange.

Power to control and regulate stock exchange.

Power to over see listing of securities.

Power to grant registration to market intermediaries and controlling their activities.

Power to levy fees or other charges for carrying out regulatory activities.

Granting license to dealers in securities market.

KEY WORDS/ GLOSSARY

The institutions which control and monitor the over all activities or functions of

financial institutions operating in the country like Banking institutions, capital and

money market etc. Are known as Regulatory institution.

Regulations that are designed to protect the interest of the small and individual

investors are called investors regulations.

Regulations regarding the internal management of financial institutions regarding

fund management, capital adequacy, liquidity, and solvency are called as internal

regulations.

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RBI functions within the framework of mixed economic system with regard to

framing policies to maintain close and continuous relation between government and

RBI.

Present RBI Governor is Raghu Ram Rajan.

RBI is a banker bank.

RBI of India authorized to issue of new loans and treasury bills on behalf of the

central and state government. The bank sells treasury bills whenever necessary to

provide short term finance to the government and to absorb any excess money in the

money market.

RBI advises the government of a wide range of economic issues it includes banking

and financial matter resource mobilization planning etc…

RBI authorized to make ways and means advances to the central and state government

these advances are re-payable not later than 3 months from the date of issue and

granted without any collateral security. It also acts as the agent of the government in

its transactions with IMF and IBRD.

Central bank acts as the clearing house for the commercial bank. It helps in setting

outstanding balances between commercial bank.

The bank rate is the official / minimum rate at which the central banks of a country re-

discount the eligible bills of exchange of a commercial bank and other financial

institutions for providing short term loans to them against approved securities. In

other words, it is a rate at which RBI lends the loans to the commercial banks. By

offering bank credit RBI can control the circulation of money in the hands of the

banks and customers.

Central bank can control the supply of money.

Rationing of credit it is a method of controlling and regulating the purpose for which

credit is granted by commercial banks.

SEBI was started in India in 1988 through an executive resolution passed by the

government of India subsequently it became autonomous body as per the SEBI Act of

1992 which control all the capital market transactions.

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2 MARKS QUESTIONS

1) What is RBI?

………………………………………………………………………………………

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2) What is IRDA?

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3) State any two objectives of regulatory institutions.

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4) What is SEBI?

………………………………………………………………………………………

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5) State any two objectives of SEBI.

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5 MARKS QUESTIONS

1) Explain the organization structure of RBI?

2) What are the functions of RBI?

3) State the objectives of SEBI?

4) What are the functions of IRDA?

5) Write a note on SEBI?

116

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill

3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl

4. M Y Khan: Indian Financial System, TMH

5. E Gardon& K Natarajan: Financial Markets & Services.

SUGGESTED BOOKS/ ARTICLES

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Unit 8

FINANCIAL SERVICES

Structure

8.1 Introduction

8.2 Meaning

8.3 Choices of Economic Services

8.4 Importance of Economic Services

8.5 Factoring

8.6 Partitioning Mechanism

8.7 Steps In Partitioning

8.8 Services rendered with difficulties

8.9 Features of Leasing

8.10 Venture Capital

8.11 Features of Venture Capital

Introduction – Meaning – Features – Importance. Types of Financial Services – factoring,

leasing, venture capital, Consumer finance; housing & vehicle.

Objective of the study

Having studied financial markets, you are learning financial services and their role in the

economic development of the country. India is turning from manufacturing to service

oriented industries.

8.1 Introduction

The Indian financial services trade has undergone a change since 1990. Throughout the late

seventies and eighties, the Indian financial services trade was dominated by industrial banks

and various service institutions that cater to the requirements of the Indian trade. Infact the

capital market vie a secondary role alone. The economic relaxation has brought in associate

extremely complete transformation inside the Indian financial services trade.

Before the economic relaxation, the Indian financial service sector was defined by such

plenty of things that restarted the enlargement of this sector. Variety of the many factors

were:

(i) Excessive management inside the sort of rules of interest rates, financial rates etc.

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(ii) Too many controls over the prices of securities beneath the erstwhile controller of capital

issues.

(iii) Non-availability of economic instruments on associate oversize scale additional as on

utterly totally different varieties

(iv) Absence of freelance credit rating and credit analysis agencies.

(v) Strict rules of the exchange market with too many restrictions on foreign investment and

foreign equity holdings in Indian companies.

(vi) Lack of information regarding international developments inside the money sector.

(vii) Non-availability of debt instruments on large scale.

However, once the economic relaxation, the full financial sector has undergone a sea-saw

modification and presently we tend to tend to are witnessing the emergence of recent

financial merchandise and services nearly every day. Thus, this scenario is defined by

financial innovation and financial ability and before going deep into it, it's imperative that

one got to understand the meaning and scope of economic services.

8.2 Meaning

In general, every kind of activities that are of a financial nature could be brought beneath the

term ‘financial services’. The term “financial services” in associate extremely broad sense

implies that “mobilizing and allocating savings”. Thus, it includes all activities involved

inside the transformation of saving into investment. The ‘financial service’ could also be

referred to as ‘financial intercession’ financial intervention may well be a way by that funds

are mobilized from associate oversize style of savers and build them on the market to any or

all people that are in wish of it and considerably to company customers. Thus, financial

services sector may well be a key area and it's very necessary for industrial developments. A

well-developed financial services trade is completely necessary to mobilize the savings

associated to allot them to various investable channels and thereby to plug industrial

development in an extremely country.

8.3 Choices of Economic Services

Financial services have certain basic choices as stand below:

(i)Customer-oriented: like all various business financial business is in addition a customer-

oriented one. The consumer is that the king and his wants ought to be happy absolutely got to

be basic tenent of any financial business. It involves turning out with innovative financial

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merchandise acceptable to varied risk-return wants of shoppers. Above all, there got to be

timely delivery of services.

(ii)Intangibility: financial services are intangible and then, they can not be standardized or

reproduced inside a similar kind. Hence, there is a necessity to possess a documentation of

integrity, reputation, good company image and timely delivery of services.

(iii) Coinciding performance : however an added feature is that every production and supply

of economic services ought to be compelled to be performed at a similar time. Therefore,

every suppliers of services associated customers got to have an honest rapport, clear-cut

perception and effective communication.

(iv) Dominance of human component: financial services are dominated by human part and

then, they're people- intensive. It involves competent and skillful personnel to push the quality

financial merchandise. But, quality cannot be homogenized since it varies with time, place

and consumer to consumer.

(v) Perishability: financial services are quickly consumed and thus inventories cannot be

created. There is a larger wish for leveling demand and supply properly. In various words,

mercantilism and operations got to be closely inter-linked.

8.4 Importance of Economic Services

Financial services cater to the requirements of every individual and company customers. In

reality the eminent functioning of any economy depends upon the vary of economic services

offered by vendors of services. Financial services are typically made public to include not

alone the provision of a financial service but together sale of a financial product or every. The

importance of economic services typically accomplished from the following:

(i) Economic growth: The money business mobilizes the savings of the oldsters and

channels them into productive investment by providing varied services to the oldsters. In fact,

the economic development of a nation depends upon these savings and investment.

(ii) Promotion of savings: The money business promotes savings inside the country by

providing transformation services. It provides liability, and and size transformation service by

providing large loans on the concept of various small deposits. It together provides maturity

transformation services by giving short claim to savers on their liquid deposit and providing

long loans to borrowers.

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(iii) Capital formation: the money business facilitates capital formation by rendering varied

capital market mediator services. Capital formation is that the very basis for process. It is the

principal mobilize, of surplus funds to finance productive activities and then, it promotes

capital accumulation.

(iv) Provision of liquidity : The money business promotes liquidity inside the system by

allocating and reallocating savings and investment into varied avenues of economic activity.

It facilitates easy voice communication of economic assets into liquid financial at the

discretion of the holder of such assets.

(v) Money intercession: The money business facilitates the operate of intervention between

savers and investors by providing how and a medium of exchange and by endeavor

innumerable services.

(vi) Contribution to value: The contribution of economic services to GNP has been

occurring increasing year once year in most countries in recent times.

(vii) Creation of employment opportunities : the money business creates and provides

employment opportunities to voluminous of us all over the world.

8.5 Factoring

Factoring refers to the tactic of managing the sales ledger of a consumer by a financial

service company. In various words, it's a briefing beneath that a financial mediator assumes

the credit risk inside the assortment of book debts for its purchasers. The full responsibility of

aggregation the book debts passes on to the difficulty. His services are typically compared to

a del- credre agent international organization agency undertakes to collect debts, monitors the

sales ledger and provides finance against debts. Thus, he provides style of services except for

finance.

Factoring is in addition made public as a relationship between the financial institution or

banker (factor) and a business (the supplier), promoting product or providing services to trade

customers (the customers) whereby the difficulty purchases book debts e ither with or whereas

not recourse to the supplier and in relationship thereto management credit extended to the

consumers and administers the sales ledger of the supplier.

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8.6 Partitioning Mechanism

Factoring business originates from credit sales. The foremost operate of partitioning services

is that the conclusion of credit sales. The difficulty enters into the idea of credit sales once the

sale dealings is completed. Principally three parties are involved inside the partitioning

transactions-the vendee, the seller and conjointly the difficulty.

8.7 Steps In Partitioning

(A) The vendee negotiates with the seller the terms of shopping for materials anreceives

delivery of product with invoice associated directions by the seller to create payment on the

day of the month or gets an extension of it slow.

(B) The vendor sells the product to the client. He sends copies of invoice, delivery note and

directions to create the payment to the difficulty. The seller receives 80-90% of the price of

product ahead from the difficulty and conjointly the balance minus the factor’s charges on the

maturity of the debts.

(C) The difficulty enters into an agreement with the seller for rendering issue services. On

receipt of copies of sale documents, he advances 80-90% of the price of the invoice. Then he

want gather the amounts due from the client and remits the balance minus his charges to the

seller.

8.8 Services rendered with difficulties

The difficulty in rendering services (i) body, (ii) assortment, (iii) finance, (iv) Credit

management and credit protection, and (v) informative services.

Administrative services

The issue manages the trade debts of a supplier. Throughout this association, he renders the

following services:

I. Maintains client’s sales ledger.

II. Keeps the invoice and collects the amounts promptly once they become due.

III. Relieves the seller of the chief burden.

IV. Offers periodic reports to the patron on this standing of his assets.

V. Maintains a consumer wise record of payments contact a quantity of it slow.

A lease is an agreement beneath that a company or a firm, acquires a right to create use of

a capital and like machinery, on payment of a prescribed fee referred to as “rental

charges”. The renter cannot acquire any possession to the and, but he can use it and have

full management over it. He's foreseen to induce all maintenance charges and repairing

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and operational costs. In countries similar to the U.S.A., the U.K and Japan

instrumentality leasing is extraordinarily fashionable and nearly twenty fifth of plant and

instrumentality is being supported by leasing companies. In India conjointly, many

financial companies have started instrumentality leasing business. Industrial banks have

together been permissible to carry on this business by forming subsidiary companies.

8.9 Features Of Leasing

• 100% finance facility on the market beneath leasing.

• It may well be a tax saving device.

• It provides the tax benefits on rental to the renter.

• It provides the tax benefits to the less on depreciation.

• Leasing is provided for a selected quantity of it slow.

• it's established through a deal or agreement.

8.10 Venture Capital:

A capital is another technique of finance inside the sort of equity participation. A

speculator finances a project supported the potentialities of a current innovative project.

It's in distinction to the quality “security based totally financing”. Lush through is given

to new ideas or technological innovations. Finance is being provides not only for ‘start-up

capital’ but together for ‘development capital’ by the money intermediaries.

8.11 Features Of Venture Capital

• Risk capital is provided by specialised financial institutions.

• Risk capital is provided inside the sort of capital.

• Rs 10 crores is provided inside the sort of capital.

• The number of capital is for 10 years.

• Risk capital operates through capital agreement.

• Risk capital funds are provided implies that of initial stage finance and later stage

finance.

• The banker not alone provides the finance but together provides the group action and

mercantilism facilitate.

Issues of capital

• Awareness level is low

• Risk capital may well be a replacement conception.

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• State and central government are not encouraging as per the expected lines.

• The conception of capital is extraordinarily risk connected activity.

• Conversion of information into product is extraordinar ily difficult in India owing to

corruption, discrimination and favourism.

Summary

In this chapter the styles of economic services– factoring, leasing and venture capital were

discussed. These economic services are discussed in detail for clear understanding of the

concepts.

Keywords/ glossary

• The economic relaxation has brought in associate extremely complete transformation inside

the indianfinancial services trade.

• The consumer is that the king and his wants ought to be happy absolutely got to be basic

tenent of any financial business.

• Money services are intangible and then, they can not be standardized or reproduced inside a

similar kind.

• The contribution of economic services to worth has been occurring increasing year once

year in most countries in recent times.

• Money services are quickly consumed and thus inventories cannot be created. There is a

larger wish for leveling demand and supply properly.

• The money business facilitates capital formation by rendering varied capital market

mediator services.

• The money business creates and provides employment opportunities to voluminous of us all

over the world.

• Resolution refers to the tactic of managing the sales ledger of a consumer b y a financial

service company.

• A lease is an agreement beneath that a company or a firm, acquires a right to create use of a

capital and like machinery, on payment of a prescribed fee referred to as “rental charges”.

• Leasing is established through a deal or agreement.

• Lease has two parties specifically renter and lesser.

• Renter may well be a vendee and lesser frequently a banker.

• Risk capital is provided by specialised financial institutions.

• The banker not alone provides the finance but together provides the group action and

mercantilism facilitate.

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TWO MARKS QUESTIONS

1) What are financial services?

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2) State any two objectives of financial services.

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3) What is leasing?

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4) What is factoring?

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5) What is venture capital?

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5 MARKS QUESTIONS

1) State the objectives of financial services?

2) What are the Importance of financial services?

3) Write a note on venture capital?

4) What are the types of financial services?

5) Write a note on leasing?

125

1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill

2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill

3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl

4. M Y Khan: Indian Financial System, TMH

5. E Gardon & K Natarajan: Financial Markets & Services.

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