Financial Market and Commercial

Banking
Code: RMB FM 03
UNIT-2
UNIT I : Introduction (3 Hours )
Structure of Indian financial system: An overview. Theories of the Impact of financial
development and savings; Prior saving theory, Credit creation Theory, Theory of forced
savings, Financial regulation theory, Financial liberation Theory.
UNIT II: Financial Institutions (11 Hours)
Reserve Bank of India: organization, management and functions, Recent monetary
policy of RBI, Commercial banks: meaning, functions, present structure, types, e-
banking and recent developments in commercial banking, NBFC, Sectorial financial
institution NABARD, Exim Bank and PFC.
UNIT III: Financial Markets (8 Hours )
Money and capital market, Money market: meaning, constituents, functions of money
market, Money market instruments: call loans, treasury bills, certificates of deposits,
commercial bills, trade bills, Recent trends in Indian money market, Capital market:
primary and secondary markets, their role recent developments, Government
securities market, SEBI: objectives and functions.
UNIT IV Financial Instruments and Foreign Investments (7 Hours)
An overview of Shares, Debentures, Bonds, Zero-coupon bonds, Deep-discount
bonds, Warrants. Derivatives: futures, and options swaps, ADRs, GDRs, IDRs. Foreign
Investments Trends and implications, Regulatory framework for foreign investments in
India.
UNIT V: BANKING ( 7 Hours)
Banking role and structure of banking in India, Products and services: Credit card
,Debit card Smart card ,Internet banking , mobile banking, Demand and time deposits,
Types of collateral Savings account ,current account(CASA), Third party products :Life
Insurance ,Mutual fund, Equity ,General Insurance
 RBI
PREAMBLE
“To regulate the issue of Bank notes and keeping of
reserves with a view to securing monetary stability in
India and generally to operate the currency and credit
system of the country to its advantage; to have a
modern monetary policy framework to meet the
challenge of an increasingly complex economy, to
maintain price stability while keeping in mind the
objective of growth.”
Reserve Bank of India
 Origin of RBI
• 1926: The Royal Commission on Indian Currency and Finance recommended
creation of a central bank for India.
• 1927: A bill to give effect to the above recommendation was introduced in the
Legislative Assembly, but was later withdrawn due to lack of agreement among
various sections of people.
• 1934: The Bill was passed and received the Governor General’s assent
• 1935: The Reserve Bank commenced operations as India’s central bank on April 1
as a private shareholders’ bank with a paid up capital of rupees five crore (rupees
fifty million).
• 1942: The Reserve Bank ceased to be the currency issuing authority of Burma (now
Myanmar).
• 1947: The Reserve Bank stopped acting as banker to the Government of Burma.
• 1948: The Reserve Bank stopped rendering central banking services to Pakistan.
• 1949: The Government of India nationalized the Reserve Bank under the Reserve
Bank (Transfer of Public Ownership) Act, 1948
 Reserve Bank of India
 Central Banking : Protection of trust and Financial
regulation in the Financial System
 RBI was established in 1935 (RBI Act,1934) and nationalised
in 1949 ( RBI Act 1948)
 The Preamble of the Reserve Bank of India describes
the basic functions of the Reserve Bank as to regulate
the issue of Bank Notes and keeping of reserves with a
view to securing monetary stability in India and
generally to operate the currency and credit system of
the country to its advantage.
 Managed by a Central Board of Directors, four Local
Board of Directors and a committee of the Central Board
of Directors
6
 RBI
• The Reserve Bank of India (RBI) is the apex
financial institution of the country's financial
system entrusted with the task of control,
supervision, promotion, development and
planning. RBI influences the commercial banks'
management in more than one way. The RBI
influences the management of commercial banks
through its various policies, directions and
regulations. In fact, the RBI performs the four
basic functions of management, viz., planning,
organising, directing and controlling in laying a
strong foundation for the functioning of
commercial banks
 RBI (Organisation)
Central Board:
• The RBI is monitored by a central board of
directors. The board is appointed by the
Government of India in accordance with the RBI
act.
Local Boards
• Local Boards are present in the four metros of
Mumbai, Calcutta, Chennai and New Delhi.
• Local Board consists of five members.
• Local Board is appointed by the Central
Government.
• Local Board is for a period of four years.
 Organization and Management of RBI
Central Board – Appointed / Nominated by central
government for a period of 4 years – Should meet at
least 6 times in an year and once in 3 months.
• Official Directors - Governor and not more than 4
deputy directors
• Non official Directors – 15 in number . Ten directors
from various fields and one government official are
nominated by government and 4 directors from 4 local
boards
• Local Boards – 4 Local board region ( Mumbai,
Kolkata, Chennai, New Delhi consist of 5 members
appointed by central government for a period of 4 years.
 RBI (Organisation)
Financial Supervision:
• The RBI accomplishes the role of financial
supervision through the Board for Financial
Supervision (BFS).The BFS was initiated in 1994.
Functions of BFS
• Streamlining the system of bank inspections.
• Induction of offsite surveillance.
• Consolidating the role of statutory auditors and
• Consolidating the internal defenses of supervised
institutions.
 RBI (Organisation)
• Current Focus of BFS
• Supervise financial institutions.
• Consolidate accounts.
• Deal with legal issues in bank frauds.
• Variance in assessment of nonperforming
assets and
• Supervisory rating model for banks.
 RBI (Organisation)
• Legal Framework:
• Umbrella Acts
• Reserve Bank of India Act 1934 governs the
Reserve Bank functions.
• Banking Regulation Act 1949 governs the
financial sector.
 RBI (Organisation)
• (RBI has 22 regional offices, most of them in
state capitals.)
• Board of directors
• The Reserve Bank's affairs are governed by a
central board of directors. The board is
appointed by the Government of India in
keeping with the Reserve Bank of India Act.
 Traditional Functions of RBI
.
• Issue of Currency Notes :
• Banker to other Banks :
• Banker to the Government :
• Exchange Rate Management
• Credit Control Function :.
• Supervisory Function :.
 Functions of RBI
1. The monetary functions: Formulates, implements and
monitors the monetary policy
2. To maintain Financial Stability
3. Monitoring & supervision of financial institutions
4. Maintain stable payment systems in the country
5. Strengthening of the role of financial institutions
6. To regulate overall volume and credit in the economy
7. To ensure credit allocation as per national economic policy
8. To promote the development of financial infrastructure of
markets & system

18
 Roles of RBI
 Note Issuing Authority
 Government Banker
 Ways & Means Advances
 Overdrafts
 Banker’s Bank
 Supervising Authority
 Exchange Control Authority  Promoter of the Financial System
 Money Market
 Agricultural Sector Financing
 Industrial Finance
 Credit Delivery
 Formulating Prudential Norms
 Regulator of Money & Credit
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 Monetary Policy Objective of RBI
 Monetary Policy: Techniques of monetary control at
the disposal of the central Bank for achieving
following objectives

1. Expansion of Bank Credit & Money supply

2. To accelerate economic development
3. Reasonable Price stability
4. To develop appropriate institutional set-up for
effective policy transmission
5. Export promotion and Exchange rate policy
20
 contd...

6. Introduce new money market instruments

7. Reducing rigidities from the Financial
System
8. Introducing Flexibility in the Financial
System
9. Encouraging diversion
10.Promoting more Competitive environment
11.Imparting greater discipline and prudence in
the financial system

21
 Developmental / Promotional Functions of RBI

• Development of the Financial System : The sound and efficient

financial system is a precondition of the rapid economic development
of the nation.
• Development of Agriculture : Agriculture Refinance and
Development Corporation (ARDC) to look after the credit, National
Bank for Agriculture and Rural Development (NABARD) and
Regional Rural Banks (RRBs).
• Provision of Industrial Finance : ICICI Ltd. IDBI, SIDBI and
EXIM BANK etc.
• Provisions of Training : National Institute of Bank Management i.e
NIBM, Bankers Staff College i.e BSC and College of Agriculture
Banking i.e CAB are few to mention.
• Collection of Data :.
• Publication of the Reports :
• Promotion of Banking Habits :
• Promotion of Export through Refinance :
 Supervisory Functions of RBI
The reserve bank also performs many supervisory
functions. It has authority to regulate and
administer the entire banking and financial system.
Some of its supervisory functions are given below.
• Granting license to banks :
• Bank Inspection :
• Control over NBFIs :
• Implementation of the Deposit Insurance Scheme
:.
Monetary Policies of RBI
Economic policies for Stabilization

Economic Policy

Fiscal Policy Monetary Policy

Definition:

• The part of the economic policy which regulates

the level of money in the economy in order to
achieve certain objectives
• In INDIA,RBI controls the monetary policy. It is
announced twice a year, through which RBI ,
regulate the price stability for the economy.
 Objectives of monetary policy:
• Maximum feasible output.
• High rate of growth.
• Fuller employment.
• Price stability.
• Greater equality in the distribution of income
and wealth.
• Healthy balance in balance of payments(BOP).
Instruments / Tools Of Monetary
Policy

Tools of
Monetary Policy

Quantitative / Qualitative /
Traditional Selective
Measures Measures
 Quantitative Measures

Quantitative
Measures

REPO,
Open Market Discount Rate / Cash Reserve
Reverse Repo,
Operations (OMO) Bank Rate Ratio (CRR)
MSF
 1) Open Market Operations ( OMO)
• RBI sells or buys government securities in open
market depend upon - it wants to increase the
liquidity or reduce it.
• RBI sells government securities
It reduces liquidity (stock of money) in the
economy. So overall it reduces the money supply available
with banks, Reduces the capital available for lending and
interest rate goes up.
• RBI buys securities
Increases the money supply available with
banks , so interest rate moves down and business
activities like new investments, capacity
expansion goes up.
 The sale of govt. bonds and securities
effect both demand and supply of credit
– Supply of Credit
• The Govt. bonds are bought by cheques drawn on the
commercial bank in favour of the central bank. So
money gets transferred from the buyers account to
central bank account. So this reduces total deposits
with the commercial bank and their cash reserve and
also their cash creation capacity.
• When Commercial Bank buys, their cash reserve goes
down leads to fall in flow of credit.
– Demand for Credit
Selling of Bonds by Central Bank, Interest
rate goes up. Reduces demand for credit
 Limitations of OMO
– If Commercial bank possess excess liquidity then
OMO are not effective.

– Popularity of Govt bonds and securities maters.

They are not so popular as they have a low rate
of return.

– In Underdeveloped countries where Banking

system are not well
developed and integrated they have limited
effectiveness.

– In a unstable market economy OMO is not

effective due to lack of demand for credit.
 2) Discount Rate / Bank Rate

Bank rate is the minimum rate at which the central

bank provides loans to the commercial banks. It is also
called the discount rate.
or
Is the interest rate charged on borrowings ( Loans and
Advances)
made by the commercial bank from the central bank.

• Central Bank can change this rate – depending upon

Expansion or Contraction of credit flow.
• A fall in Bank Rate- Expansionary Monetary Policy
• A rise in Bank Rate – Contractionary Monetary Policy
 The action of the Central Bank
effects the flow of credit :
1) Rise or fall in rate of Central Bank raises its rate
leads to rate
change of commercial bank. So demand for funds
by borrowers
get effected.
2) Bankers lending rates get adjusted to deposit rates.
Rise in
deposit rate turns borrowers into depositors.

3) Rise in in Bank rate reduces the net worth of Govt.

Bonds against
which commercial banks borrow funds from the
central bank.
They find it difficult to maintain high cash reserve.
 Limitations of Bank Rate policy
It can work effectively when:
1) When Commercial Bank approach the
Central Bank for borrowings.2) The
Commercial Bank are more dependent upon
Capital Market.
Share of banking credit ahs declined
3) Changes in Bank Rate must influence
interest rates. But these days
Commercial Bank hold on to their interest
rate than get affected by Bank Rate.
 3) Cash Reserve Ratio (CRR) ( 4% )
All commercial banks are required to keep a certain amount of
its deposits in cash with RBI. This percentage is called the
Cash Reserve Ratio.
– To prevent shortage of cash
– To control Money supply
– In Contractionary policy the bank raises the CRR
– In Expansionary policy bank reduces the CRR
– A hike in CRR will lead to high interest rate, credit
rationing, huge decline in investment and large
reduction in National Income and Employment
 Other Methods…….
1) Statutory Liquidity Requirement ( SLR) ( 21% )
– Another kind of reserve, in addition to CRR.
– It’s the proportion of the total deposits which
commercial banks are
required to maintain with the central bank in the
form of liquid assets
- Cash reserve, Gold, Government Bonds
– This measure was undertaken to prevent the
commercial bank to liquidate their liquid assets
when CRR is raised.
2) Reporate ( 6.5%)
• Whenever the banks have any shortage of
funds they can borrow it from RBI.
• Repo rate is the rate at which our banks
borrow rupees from RBI.
• A reduction in the repo rate will help
banks to get money at a cheaper rate.
• When the repo rate increases borrowing
from RBI becomes more expensive.
• The repo rate transactions are for very
short duration
• It denotes injection of liquidity.
3) Reverse Reporate ( 6%)
• A reverse repo rate is the interest rate earned by
a bank for lending money to the RBI in exchange
for Government securities.
• Reverse repo is an arrangement where RBI sells
the securities to the bank for a short term on a
specified date.
• RBI us his tool when there is to much liquidity in
the banking system.
• Reverse reporate means absorption of liquidity.
• They give money to depositors at 4% and turn
around and lend that money to others that want
to buy a home or expand their business at 6-8%
or higher depending on the risk. If they lend more
money than they take in on a given day they may
have to borrow money from the fed on a short
term basis which would be the bank rate.
 Qualitative Measures

Qualitative
Measures

Change in
Credit Rationing Moral Suasion Direct Control
Lending Margin
1) Credit Rationing
• Shortage of funds, priority and weaker industries get
starved of necessary funds.
• Central Bank does credit rationing
» Imposition of upper limits on the credit available to large
industries.
» Charging higher interest rate on bank loans beyond a limit
2) Change in Lending Margins
• Bank provides loans upto a certain percentage of value of
mortgaged property.
• The gap between the value of the mortgaged property and
amount advanced is called as lending margin.
• Central Bank has the authority to determine the lending
margin with the view to decrease and increase the bank
credit
• The objective is to control speculative activity in the stock
market.
3) Moral Suasion
– It’s a Psychological instrument of monetary policy
– Persuading and convincing the commercial bank to
advance credit in accordance with directive of the
central bank.
– The Central bank uses moral pressure on the
commercial bank
by going public on the unhealthy banking practices.
4) Direct Controls
– Where all the methods become ineffective
– Central bank gives clear directives to banks to carry
out their lending activity in a specified manner.
 Monetary Policy to Control Recession
Problem: Recession
Measures:
1) Central Banks buy securities through OMO
2) Lowers Bank Rate
3) Reduces CRR

Money Supply Increases

Interest Rate Falls

Investment Increases

Aggregate Demand Increases

Aggregate Output increases

 Monetary Policy to Control Inflation
Problem: Inflation
Measures:
1) Central Banks sells securities through OMO
2) Increases Bank Rate
3) Raises CRR

Money Supply Decreases

Interest Rate Rises

Investment Declines

Aggregate Demand Declines

Price Level Falls

 Limitations Of Monetary Policy
1) Time Lags
• Time taken in – Implementation and working
– ‘Inside lag’ or preparatory time
– ‘Outside lag’ or response time
• If the time lag are long, the policy may become ineffective
• The response time lag of monetary policy are longer than
fiscal policy
2) Problem In forecasting
• Its important to forecast the effect of monetary actions
• However prediction of the outcome and formulation of the
policy is a difficult task
3) Non- Banking Financial Intermediaries
Huge share in financial operation reduces the effectiveness of monetary
policy

4) Underdevelopment of Money and Capital Market

Markets are fragmented, unorganised and does work independently
 Highlights of RBI’s Current bi-monthly
monetary policy statement:
• Short-term lending (Repo) rate at 6.5 %
• Reverse Repo rate 6.25%
• Bank Rate 6.75 %
• Cash reserve ratio (CRR) at 4%
• SLR :19.5%
Analysis Of Current Monetary Policy
• Amidst the problems of inflation and Growth , Conservative
approach is followed... against the expectation of Long term RBI
watchers .
• RBI has focused on disinflation First, Rather than Growth
• We are not against growth but we think growth will be most
benefited if we disinflate the economy,” Dr. Rajan said.
• The RBI is expecting a robust growth revival after sometime .
• By decreasing SLR liquidity is improved in economy ...
• The SLR cuts would release substantial sums for banks to invest.
• The monetary and liquidity measures have entirely been in line
with expectations
• RBI has concentrated on getting Revenue as repo rate has not
been decreased.
Types of BankS
 Banks

Commercial Regional Rural Cooperative

Banks Banks Banks

Non
Scheduled
Scheduled
Banks
Banks

Indian Banks Foreign Banks

Public Sector Private Sector

State Bank of Nationalized

India bank
 Scheduled banks

• Scheduled commercial banks are those included in the

second schedule of the Reserve Bank of India Act,
1934.
• For this, they have to satisfy three conditions:
– It must have paid-up capital and reserves of an
aggregate value of at least Rs. 5 lakhs.
– It is carrying on the business of banking in India.
– It must be a corporation or cooperative society and
not a partnership or sole proprietorship firm.
 Scheduled Banks
INDIAN BANKS
• Registered or incorporated
in India.
• They have their headquarter
in India and can have
branches all over India.
• They can also operate in
foreign countries.
FOREIGN BANKS
• Registered or incorporated
in their home country, not in
India.
• They have their office
and/or branches in India.
• They play an important role
in shaping the attitude and
policies of foreign govt.,
companies and their clients
towards India.
 Public sector banks
• Public sector banks are
banks in which the
government has a major
holding.
• At least 51% ownership
is vested with the
government.
• The shares of these
banks are listed on stock
exchanges.
 State Bank of india
• Government of India State Bank Group
entered in commercial • State Bank of Hyderabad
banking when it took over • State Bank of Patiala
Imperial Bank of India
and converted into State • State Bank of Travancore
Bank of India on 1 July • State Bank of Bikaner &
1955. Jaipur
• It was first one to make • State Bank of Mysore
public issue in 1993-94 • State Bank of Saurashtra
after which the share • State Bank of Indore
holding of RBI has come
down to 68.93%.
 Nationalized banks
• In 1969, 14 banks with deposit Andhra Bank
base of Rs. 50 Crores or more
were nationalized. In 1980,, 6 Punjab National Bank
more banks were nationalized. Indian Overseas Bank
• This step brought more than
90% of commercial banking in IDBI
the public sector. Allahabad Bank
• The main function of
Syndicate Bank
nationalised bank is provide
finance for the housing projects, UCO Bank
health facilities and increase the
chance to providinig the
Dena Bank
products and services to the
people of rural areas.
 Private banks
• All those banks in which
majority of stake are held by
private individuals
• The banks, which came in
operation after 1991, with
the introduction of
economic reforms and
financial sector reforms are
called "new private-sector
banks“
• New banks are strategic in
their thinking and
operations.
 Non Scheduled Banks
• The banks which are not included in the 2nd schedule of RBI
Act, 1934.
• These also have to maintain statutory cash reserve but not with
RBI.
• Their banking activities are limited, e.g., they cannot deal in
foreign exchange.
• The share of these banks are almost nil.
 Regional rural banks
• They were set up on the
recommendation of Narasimham
Committee in 1975.
• The objective was to provide
credit and other facilities to small
and marginal farmers, agricultural
labours and artisans.
• RRBs are working in all states
except GOA and Sikkim.
• They are governed by Regional
Rural Bank act, 1976
• 50% capital is provided by central
govt., 15% by state govt., 35% by
sponsoring public sector bank.
Features of RRB:
• The area of RRB is limited to
only a region, comprising of some
district of a state
• These banks grant loan only to the
rural agriculture sector and small
artisans.
• The lending rates would be some
what lower than the commercial
banks.
• These are intended to eliminate
money lenders.
• These banks are to supplement the
effort of cooperative banks.
 Cooperative banks
Feature of cooperative banks:
• Cooperative banking is a • Government sponsored, supported and
small scale banking carried subsidized financial agencies in India.
on a no profit no loss basis • Work on the principle of cooperation, self
for mutual cooperation and help and mutual help.
help. • They function on “no profit no loss”
• Engaged in financing rural basis.
and agricultural • Perform limited banking functions.
development. • Some of them are scheduled banks but
most are non- scheduled banks.
• They are established under
• Cooperative banks are financial
the Cooperative Credit intermediaries only because a significant
Societies Act of 1904. amount of their borrowings is from the
RBI, NABARD, central and state
government and cooperative apex
institutions.
 Cont…
Characteristics
• Customer owned
Entity

• Democratic Control

• Profit Allocation
• A commercial bank is a type of financial
institution that provides services such as accepting
deposits, making business loans, and offering basic
investment products. Commercial bank can also refer
to a bank, or a division of a large bank, which more
specifically deals with deposit and loan services
provided to corporations or large/middle-sized
business - as opposed to individual members of the
public/small business -
 Role
•The general role of commercial banks is to provide financial services to
general public and business and companies, ensuring economic and
social stability and sustainable growth of the economy.
•"credit creation" is the most significant function of commercial
banks. While sanctioning a loan to a customer, they do not provide
cash to the borrower. Instead, they open a deposit account from which
the borrower can withdraw. In other words, while sanctioning a loan,
they automatically create deposits,
•Commercial banks accept various types of deposits from public
especially from its clients, including saving account deposits, recurring
account deposits, and fixed deposits. These deposits are returned
whenever the customer demands it or after a certain time period
•Commercial banks provide loans and advances of various forms,
including an overdraft facility, cash credit, bill discounting, money at
call etc. They also give demand and term loans to all types of clients
against proper security
 Banks help in accelerating the economic
growth of a country in the following ways:
1. Accelerating the Rate of Capital Formation:
Commercial banks encourage the habit of thrift and
mobilise the savings of people. These savings are
effectively allocated among the ultimate users of
funds, i.e., investors for productive investment. So,
savings of people result in capital formation which
forms the basis of economic development.
2. Provision of Finance and Credit: Commercial banks are
a very important source of finance and credit for
trade and industry. The activities of commercial
banks are not only confined to domestic trade and
commerce, but extend to foreign trade also.
 Banks help in accelerating the economic
growth of a country in the following ways:
3. Developing Entrepreneurship: Banks promote entrepreneurship by
underwriting the shares of new and existing companies and granting
assistance in promoting new ventures or financing promotional
activities. Banks finance sick (loss-making) industries for making them
viable units.
4. Promoting Balanced Regional Development: Commercial banks provide
credit facilities to rural people by opening branches in the backward
areas. The funds collected in developed regions may be channelized
for investments in the under developed regions of the country. In this
way, they bring about more balanced regional development.
5. Help to Consumers: Commercial banks advance credit for purchase of
durable consumer items like Vehicles, T.V., refrigerator etc., which are
out of reach for some consumers due to their limited paying capacity.
In this way, banks help in creating demand for such consumer goods.
 RECENT TRENDS IN BANKING

1) Electronic Payment Services – E Cheques

Now-a-days we are hearing about e-governance,
e-mail, e-commerce, e-tail etc. In the same manner,
a new technology is being developed in US for
introduction of e-cheque, which will eventually
replace the conventional paper cheque. India, as
harbinger to the introduction of e-cheque, the
Negotiable Instruments Act has already been
amended to include; Truncated cheque and E-
cheque instruments.
 RECENT TRENDS IN BANKING
2) Real Time Gross Settlement (RTGS)
Real Time Gross Settlement system, introduced in India
since March 2004, is a system through which electronics
instructions can be given by banks to transfer funds from
their account to the account of another bank. The RTGS
system is maintained and operated by the RBI and provides a
means of efficient and faster funds transfer among banks
facilitating their financial operations. As the name suggests,
funds transfer between banks takes place on a ‘Real Time'
basis. Therefore, money can reach the beneficiary
instantaneously and the beneficiary's bank has the
responsibility to credit the beneficiary's account within two
hours.
 RECENT TRENDS IN BANKING

3) Electronic Funds Transfer (EFT)

Electronic Funds Transfer (EFT) is a system whereby anyone
who wants to make payment to another person/company etc.
can approach his bank and make cash payment or give
instructions/authorization to transfer funds directly from his
own account to the bank account of the receiver/beneficiary.
Complete details such as the receiver's name, bank
account number, account type (savings or current account),
bank name, city, branch name etc. should be furnished to the
bank at the time of requesting for such transfers so that the
amount reaches the beneficiaries' account correctly and faster.
RBI is the service provider of EFT.
 RECENT TRENDS IN BANKING

4) Electronic Clearing Service (ECS)

Electronic Clearing Service is a retail payment system that can be
used to make bulk payments/receipts of a similar nature especially
where each individual payment is of a repetitive nature and of
relatively smaller amount. This facility is meant for companies and
government departments to make/receive large volumes of
payments rather than for funds transfers by individuals.

5) Automatic Teller Machine (ATM)

Automatic Teller Machine is the most popular devise in India,
which enables the customers to withdraw their money 24 hours a
day 7 days a week. It is a devise that allows customer who has an
ATM card to perform routine banking transactions without
interacting with a human teller. In addition to cash withdrawal,
ATMs can be used for payment of utility bills, funds transfer
between accounts, deposit of cheques and cash into accounts,
balance enquiry etc.
 RECENT TRENDS IN BANKING

6) Point of Sale Terminal

Point of Sale Terminal is a computer terminal that is linked
online to the computerized customer information files in
a bank and magnetically encoded plastic transaction card
that identifies the customer to the computer. During a
transaction, the customer's account is debited and the
retailer's account is credited by the computer for the
amount of purchase.

7) Tele Banking
Tele Banking facilitates the customer to do entire non-
cash related banking on telephone. Under this devise
Automatic Voice Recorder is used for simpler queries and
transactions. For complicated queries and transactions,
manned phone terminals are used.
• Non-Bank Financial Intermediaries (NBFIs)

72
 Introduction
• Non-Bank Financial Intermediaries (NFIs)
 Fund based Activity :Non-Bank Financial Companies (NBFCs)
 Financial Service Activity : Non-Bank Financial Service
Companies (NBFSCs)

• NBFCs have grown much faster (1981-1996) than commercial

banks over the years

• All NBFCs except Housing Finance Companies are regulated by

RBI

• NBFCs are accessing certain depositor segment & catering

specialised credit requirements and they have a relationship of
substitution & complementarity with banks
73
 Recourses of NBFCs
 Financial Resources
1. Regulated Deposits
 Non-convertible debentures
 Deposits from shareholders
 Deposits guaranteed by directors in their personal capacity
 Fixed deposits received from public
2. Exempted Deposits
 Borrowing from banks and specified financial institutions
 Money received from state/central/Foreign Govt.
 Advances received against orders
 Convertible Debentures
3. Net-owned Funds 74
 Growth of NBFCs
• Reasons for Growth:

 Tailor-made services to the clients

 Liberal policy stand from regulating authorities
 Customer-orientation , simplicity , speed of
service, lesser degree of documentation
 Monetary and credit policy resulted a separate
segment of customers outside the purview of
banks
 Relatively higher interest rates on deposits
75
 Types of NBFIs
• Loan Companies (LCs)
• Investment Companies (Ics)
• Hire-Purchase Finance Companies (HPFCs)
• Lease Finance Companies (LFCs)
• Housing Finance Companies(HFCs)
• Mutual benefit Financial Companies (MBFCs0
• Residuary Non-Banking Companies (RNBCs)
• Merchant Banks
• Venture Capital Funds
• Factors
• Credit Rating Agencies
• Depository and custodial Services
• Miscellaneous Non-Banking Company (MNBC) 76
 Loan Companies

• Major part of NBFCs

• High interest rates on deposits with higher risk
• Loans sanctioned by LCs are mostly short-term
• Over emphasis of LCs can create danger for effective
Monetary Policy

• Other Services Includes

 Discounting post-dated Cheques

 Collecting dividends on behalf of customers
 Purchasing & Discounting Hundis
77
 Investment Companies

• Loans for consumption, commerce and trading

purposes
• Accepts mostly time deposits rather demand deposits

• Policy Implications

 Dishonest Managerial practice with risk to depositors

interest
 Loans may be issued for the purpose of speculation and
hoarding
 Undermine the monetary policy objectives

78
 Hire-Purchase Finance
• A financing system under which term loans for purchase
of goods and services are advanced to be fractionally
liquidated through a contractual obligation

• Hire-purchase credit Vs. Instalment Credit and consumer

credit

• Two broad category of Finance:

 By cash instalment credit

 By commodity instalment credit

79
 Lease Finance

• New emerging market in India for equipment finance in

heavy industries and infrastructure Industry

• Types of Lease:
 Operating Lease
 Financial Lease
 Sale and Lease Back
 Direct Lease
 Leveraged Lease

• Lease Vs. Hire purchase

80
 Housing Finance
• National Housing Bank (1988) is the apex
institution for regulation and supervision
• Liberalisation of guidelines by RBI for housing
finance by commercial banks & the entry of LIC
(1991) & GIC (1990) as a serious market player

• Suppliers of Housing Mortgage Loans

 Housing and Urban Development Corporation (HUDCO)

 State Housing Finance Societies (SHFSs)
 Housing Development Finance Corporation Ltd. (HDFC)
 Commercial Banks (ex. Canfin Homes Ltd.)

81
 contd.

• Policy Issues for the development of Housing Finance

System

 Housing Finance institutions must be self–sustaining

bodies
 Housing Finance companies should mobilise household
savings at market rate of interest
 Housing Finance companies should stress both supply
and demand for dwelling units
 Policy initiative for the development of secondary
market for mortgages

82
 Mutual Benefit Financial Companies

• MBFCs (nidhis) are public limited joint stock

companies regulated by the directives of RBI

• Features :

 They offer savings schemes which are linked with assurance

to make credit available when required
 Local in nature, easy documentation and familiarity
 Comparative advantage with the commercial bank interest
structure
83
 Residuary Non-Banking Companies

• RNBCs are able to mobilise household small

savings from the very unorganised segment

• The investment pattern of RNBCs is regulated

by Residuary Non-Banking (Reserve Bank)
directions, 1987

• They are prone to mismanagement

84
 Merchant Bankers
• Non-Banking Financial Service Companies
• Regulated and registered under SEBI (categorised under broad
headings I, II, III, IV in view of different activities and minimum
networth requirements)
• Services:
 Venture capital financing
 Management, marketing and  Mutual funds and offshore
underwring of new issues funds
 Project promotion & finance  Investment management
services including
 Syndication of credit  Assistance for technical and
 Project leasing financial collaboration
 Corporate advisory services  Investment services for NRIs
 Investment advisory services  Management of dealings in
 Bought-out commercial papers 85
 Venture Capital Funds (VCFs)
• Provide equity finance or risk capital to highly risky and
new business venture
• Venture capital Vs. Development Capital
• High risk-high return business
• Scope of Activities:
 Seed capital for industrial start-ups
 Additional Capital to new business at various stages of their
growth
 Bridge Finance
 Equity financing or leverage buy-out financing
 Seed Capital for new entrepreneurs
 Capital for mature enterprises for expansion, diversification and
restructuring 86
 contd.
Venture Capital Funds (VCFs)
Types of Venture Capital Funds
 Subsidiaries of large financial corporations and banks
 Private independent specialised firms
 Publicly funded small business investment corporations
 Subsidiaries or divisions of large manufacturing corporations

Major Market Players:

 VCF of IDBI
 VCFs of UTI
 Technology Development and Information Company (TDICI)
 Risk Capital and Technology Finance Corporation Ltd. (RCTFC)
 VCFs of commercial Banks
 Credit Capital Venture Fund (India) Ltd. (CCVF) 87
 Factors

• A financial institution which manages the collection of

accounts receivables for the companies on their behalf
and bears the credit risk associated with those accounts
• Three major parties in a Factoring arrangements: the
factor, the client (seller),the buyer
Minimises credit risk and exist only for credit
transactions
Major market player: SBI commercial and Factoring
Services Ltd.

88
 Credit Rating
• An Act of assigning values/grades to credit instruments
by estimating or assessing the solvency position of the
borrower
• It does not create fiduciary relationship between the
credit rating agency (CRA) and the rating user or
investor
Major Market Players
 Credit Rating Information Services of India Ltd. (CRISIL)
 Investment Information and Credit Rating Agency of India Ltd.
(ICRA)
 Credit Analysis and Research Ltd. (CARE)
 Onida Individual Credit Rating Agency of India Ltd. (ONICRA)
89
 contd.
Objectives
 It imposes a healthy discipline on borrowers
 It lends greater credence to financial and other
representations
 It helps formulation of public guidelines on institutional
investment
 It helps merchant bankers, brokers and regulatory
authorities
 It encourages greater information disclosure
 Reduces interest costs for highly rated companies
 As a marketing tool for the issuer

90
 Depository and Custodial Services
• Requisite:

 The phenomenal growth of both primary and secondary

market and debenture market
 Increase in systematic risks – counterparty risk, credit risk, bad
deliveries, counterfeit scrips, forged certificates etc.

• Major Institutional Set-up

 Stock Holding Corporation of India Ltd. (SHCIL)
 National Clearance and Depository System (NCDS)
 National Stock Depository Ltd. (NSDL)
91
 NABARD
• The Committee’s interim report, submitted on 28 November 1979, outlined
the need for a new organisational device for providing undivided attention,
forceful direction and pointed focus to credit related issues linked with rural
development. Its recommendation was formation of a unique development
financial institution which would address these aspirations and formation of
National Bank for Agriculture and Rural Development (NABARD) was
approved by the Parliament through Act 61 of 1981.

• NABARD came into existence on 12 July 1982 by transferring the agricultural

credit functions of RBI and refinance functions of the then Agricultural
Refinance and Development Corporation (ARDC). It was dedicated to the
service of the nation by the late Prime Minister Smt. Indira Gandhi on 05
November 1982.

• Set up with an initial capital of Rs.100 crore, its’ paid up capital stood at Rs.
5,000 crore as on 31 March 2016. Consequent to the revision in the
composition of share capital between Government of India and RBI, the
Government of India today holds Rs. 4,980 crore (99.60%) while Reserve
Bank of India holds Rs. 20.00 crore (0.40%).
 MISSION

"Promote sustainable and equitable agriculture

and rural prosperity through effective credit
support, related services, institution
development and other innovative initiatives."
 NABARD’S FUNCTION

• Credit Functions

• Development Functions

• Supervisory Functions
Functions of NABARD
The full form of NABARD is National Bank for Agriculture and Rural
Development. The major functions of NABARD are as follows:
• It acts as an apex body for meeting the credit needs of all types of
agricultural and rural development.
• It provides refinancing facilities to State Co-operative Banks
(SCBs), Land Development Bank (LDBs), Regional Rural Banks
(RRBs) and other approved financial institutions for financing rural
economic activities.
• It co-ordinates all agricultural and rural development activities
with the objective of tying them up with planned development
activities in the rural sector.
• It provides short-term, medium-term and long-term credit to
SCBs, LDBs, RRBs and approved financial institutions.
• It provides long-term assistance (not exceeding 20 years) to State
Governments.
• It has the responsibility of inspecting co-operative banks and RRBs.
• It maintains a research and development fund to promote
research in agriculture and rural development.
 DEVELOPMENT FUNCTION
• Institution Development
• Farmer Sector
• Non Farmer Sector
• Micro Sector
• Research & Development
 Export-Import Bank of India
The Bank, set up in 1982, is the principal financial
institution in the country for co-ordinating working
of institutions engaged in financing exports and
imports.
The Bank offers a range of financing programmes
that match the menu of Exim Banks of the
industrialized countries. However, the Bank is a
typical in the universe of Exim Banks in that it has
over the years evolved, so as to anticipate and
meet the special needs of a developing country.
The Bank provides competitive finance at various
stages of the export cycle. 107
 Export-Import Bank of India
The Bank finances exports of Indian machinery,
manufactured goods, consultancy and technology services on
deferred payment terms. It also seeks to co-finance projects
with global and regional development agencies to assist
Indian exporters in their efforts to participate in such
overseas projects.

The Bank is involved in promotion of two-way technology

transfer through the outward flow of investment in Indian
joint ventures overseas and foreign direct investment flow
into India. It is also a Partner Institution with European Union
and operates for facilitating promotion of joint ventures in
India through technical and financial collaboration with
medium sized firms of the European Union.
108
 Export-Import Bank of India
ROLE OF EXIM BANK IN PROMOTING INTERNATIONAL TRADE
Export-Import Bank of India (Exim Bank, In short) is a wholly
cerement-owned financial institution, set up for the purpose of
financing, facilitating and promoting Indian's 'foreign trade. Exim
Bank plays a four-pronged role with 'regard to India's foreign
trade: those of a coordinator, a source of finance, consultant and
promoter.

Exim Bank offers a diverse range of financing services for the

Indian exporter, including a variety of Export Credit Facilities and
Finance for Export Oriented Companies. Exim Bank's mission is
to facilitate globalisation of Indian business.

109
 Export-Import Bank of India
Board
• Exim Bank of India is led at the Board level by a team
of eminent personnel Currently, the Board comprises
12 directors appointed by the Government of India,
including the Chairman and Managing Director.
• These include five high-ranking Government of India
functionaries, three directors from scheduled
commercial banks and four industry/trade experts.
Key roles are fulfilled by three directors nominated by
the Reserve Bank of India (RBI), Industrial
Development Bank of India (IDBI) and ECGC Ltd.
110
 Export-Import Bank of India
Functional Objectives
 Post-shipment term finance
 Preshipment Credit
 Term loans for export oriented units
 Overseas investment Finance
 Finance for export marketing
 Overseas buyer’s credit lines of credit to foreign governments
 Relending facility to banks abroad
 Rediscounting of export bills
 Refinance of export credit
 Bulk import finance
 Research, analysis, advisory and information services
111
 Export-Import Bank of India
The important functions of the EXIM Bank are as
follows:
1. Financing of export and import of goods and services
both of India and of outside India.
2. Providing finance for joint ventures in foreign
countries.
3. Undertaking merchant banking functions of
companies engaged in foreign trade.
4. Providing technical and administrative assistance to
the parties engaged in export and import business.
5. Offering buyers’ credit and lines of credit to the
foreign governments and banks. 112
 Export-Import Bank of India
The important functions of the EXIM Bank are as
follows:
6. Providing advance information and business advisory
services to Indian exports in respect of multilaterally
funded projects overseas.

113
 Export-Import Bank of India
During the year 1994-95, the EXIM Bank introduced the
‘Clusters of Excellence’ programme for up-gradation of
quality standards and obtaining ISO 9000 certification in
various parts of the country.
The Bank also entered into framework cooperation
agreement with European Bank for Reconstruction and
Development (EBRD) for acquiring advance information
on EBRD funded projects in order to enter into co-
financing proposals with EBRD in Eastern Europe and
CIS.

114
 Power Finance Corporation
Power Finance Corporation Ltd. (a Government of India Undertaking
under the administrative control of Ministry of Power, Government of
India) was conceived and came into existence in the year 1986 with a
view to inter-alia provide a range of fund based and non fund based
support to Indian power
PFC was conferred the title of a 'Navratna CPSE' in June,2007, and was
classified as an Infrastructure Finance Company by the RBI on 28th
July,2010.
PFC plays a crucial role in the rise of India as a global player.
Increasingly, a country's development is gauged by measuring its energy
usage sector.
Organization – The corporation is run by a Board of Directors which the
highest decision is making body. It works through a hierarchy of whole
time executives and employees. The number of employees currently
employed in managerial capacity including whole time Chairman and
Managing Director and Directors stand at 391, while those in non-
managerial capacity stand at 111, total being 502.
 Power Finance Corporation
Main Functions – The objects and functions of
the corporation in relation its customer and
clients include providing a range of services and
products in the area of:-

a)Financial and fund based services;

b)Institutional Development services; and
c)Others include fee based consultancy
services.
 Power Finance Corporation
The Major objectives of PFC are as follows:
1. To provide financial resources and boost flow of investment to
the power and its associated sectors.
2. To act as a catalyst to accomplish institutional improvements in
streamlining the functioning of borrowers in the areas of finance,
technical knowhow and management to ensure optimal use of
available resources.
3. To mobilise different types of resources viz. National and
international at competitive rates.
4. To aim at improvement of skills in the power sector for effective
and efficient growth of the sector.
• To optimize rate of return through efficient operations and
launching of innovative financial instruments and services for the
power sector.
 Power Finance Corporation
PFC provides three types of services
• Financial Services: These services include Term loan to power
utilities, Lease financing, Direct Discounting of Bills, Guarantee
Services, Loan Syndication, and Short term loan.
• Institutional Development Services: It provides support to
power utilities to improve their technical, financial and
managerial skills for which utilities may engage consultants,
hold workshops, work out utility development plans and carry
out various reform & restructuring related studies.
• Other Services: PFC also provides fee based consultancy
services to state owned utilities, state regulatory commissions,
state governments, etc.