MA0036 Financial System and Commercial Banking Q:-1 Explain the components of financial market.

Ans:-1 Components of Financial System A financial system is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities. Financial Market A financial market is the place where financial assets are created or transferred. Financial market is the place where all the financial transactions take place. Financial market includes money market and capital market. Money market is the place where transactions take place for short period and on the other hand in capital market transactions are made for a longer period. Financial Instruments Another important constituent of financial system is financial instruments. They represent a claim against the future income and wealth of others. It will be a claim against a person or institutions, for the payment of the some of the money at a specified future date. Financial Services Efficiency of emerging financial system largely depends upon the quality and variety of financial services provided by financial intermediaries. The term financial services can be defined as "activities, benefits and satisfaction connected with sale of money that offers to users and customers, financial related value". Financial Institutions Financial institutions include the banking and non-banking institutions. Financial institutions are the intermediaries who facilitate smooth functioning of the financial system by making investors and borrowers meet. They mobilize savings of the surplus units and allocate them in productive activities promising a better rate of return. Financial institutions also provide services to entities seeking advice on various issues ranging from restructuring to diversification plans. They provide whole range of services to the entities who want to raise funds from the markets elsewhere. Financial institutions act as financial intermediaries because they act as middlemen between savers and borrowers. Financial institution can be classified as: 1. Banking institutions 2. Non-banking financial institutions Q:-2 Explain the meaning of sweet equity shares. Ans:-2 The phrase 'sweat equity' refers to equity shares given to the company's employees on favorable terms, in recognition of their work. Sweat equity usually takes the form of giving options to employees to buy shares of the company, so they become part owners and participate in the profits, apart from earning salary. This gives a boost

to the sentiments of employees and motivates them to work harder towards the goals of the company. The Companies Act defines 'sweat equity shares' as equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. Derivatives A derivative is a financial instrument whose characteristics and value depend upon the characteristics and value of some underlying asset typically commodity, bond, equity, currency, index, event etc. Advanced investors sometimes purchase or sell derivatives to manage the risk associated with the underlying security, to protect against fluctuations in value, or to profit from periods of inactivity or decline. Derivatives are often leveraged, such that a small movement in the underlying value can cause a large difference in the value of the derivative. Derivatives are usually broadly categorised by: The relationship between the underlying and the derivative (e.g. forward, option, swap) The type of underlying (e.g. equity derivatives, foreign exchange derivatives and credit derivatives) The market in which they trade (e.g., exchange traded or over-the-counter)

Demand deposits are mainly used for transaction purposes and for the safekeeping of funds. Funds can be withdrawn on demand. Demand deposits do not earn interest, but banks provide a number of services to demand deposit-holders like cheque facilities, standing orders, Automated Teller Machine (ATM) cards and debit cards to facilitate withdrawals and payments. Savings deposits earn interest, which may be calculated on a daily, weekly, monthly or annual basis. Funds may be withdrawn from savings accounts at any time. However, if the number of withdrawals exceeds four in any month, interest will not be paid for that particular month. Q:-3 Write a note on emerging trends in financial services? Ans:-3 Emerging Trends in Financial Services Every industry undergoes periodic changes and in that context the financial services industry is certainly not an exception. The only exception is that changes in the financial services industry have occurred more rapidly as compared to other industries, the most probable reason being its dynamic nature. Emerging trends in the financial services industry provide a definitive clue to the ongoing changes and here are some of those to help you get a better understanding: 1. Increased automation: With rapid advancements in Information Technology and allied systems and processes, the financial services industry has witnessed increased automation over the years. Financial projects are still managed under the watchful eyes

of highly qualified professionals, but the actual processing and transacting is being done by automated software systems. It is certainly a positive development because automated systems eliminate the chances of human errors and inaccuracies and also allow firms to handle large financial projects with veritable ease. 2. Diminishing size limitations: At the beginning, financial services outsourcing was embraced mostly by business heavyweights such as Goldman Sachs, Lehman Brothers, Morgan Stanley, Citi Group etc. Things however have changed over the years as can be seen from the dramatic increase in the number of Small & Medium Enterprises (SMEs) hiring financial outsourcing services. Business size is no longer a criterion for choosing financial services outsourcing, something that is good news for both SMEs and small outsourcing service providers that cater to niche market segments. 3. Rapidly expanding wider presence: There was a time when financial services were limited to a few advantageous geographical locations like Mumbai. However, due to rising demand for financial services, other locations like countries such as Ahmedabad, New Delhi, Chandigarh, Kolkata, etc. have also started offering financial services. It signifies that financial services industry now enjoys a wide presence and is not limited to a few regional pockets. And that is good because businesses now have a lot more options to choose from. 4. Introduction of Web Technology: Predicting the future is never easy, but in the use of web technology for the financial services industry, there are a number of trends and technologies. Q:-4 What are the key reforms in cooperative credit? Ans:-4 Reforms in Cooperative Credit In the new economic environment, cooperatives at all levels are making efforts to reorient their functions according to the market demands. The government is committed to cooperative development and it wants cooperatives to succeed. The government knows that cooperatives have inherent advantages in tackling the problems of poverty alleviation, food security and employment generation. Cooperatives are also considered to have immense potential to deliver goods and services in areas where both the state and the private sector have failed. Financial assistance alone cannot revive cooperatives and empower them to realise their full potential to reach adequate credit to villages and the rural population there. Cooperatives can only be revived if they become democratic, self-governing, self-reliant organisations for mutual thrift and credit. The financial sector reforms have been components of the overall economic reforms undertaken in a phased manner from

1991-92 by Govt. of India. These reforms also envisaged improving the efficiency and productivity of the rural. credit delivery system which in turn would accelerate the requisite credit flow to the productive sectors of the economy. The major objectives of these reforms in the cooperative sector were: To make the institutions competitive by removing external constraints having a bearing on their operations, To improve their financial health, To ensure transparency in their business operations, To improve their profitability, and Institutional building and strengthening.

Rural cooperative credit institutions have played a large role in providing institutional credit to the agricultural and rural sectors in the past. Typically, these credit institutions have been part of two distinct structures, commonly known as the Short-term Cooperative Credit Structure (ST CCS) and the Long-term Cooperative Credit Structure (LT CCS). The ST CCS, comprising Primary Agricultural Credit Societies (PACS) at the village level, District Central Cooperative Banks (DCCBs) at the intermediate level, and the State Cooperative Bank (SCB) at the apex level, primarily provides short term crop loans and other working capital loans to farmers and rural artisans, although over the last few years, it has also been providing longer duration loans for investments in the rural sector. Q:-5 Write a note on
a) Core Banking; b) Teller machine

Ans:-5 Core Banking Core banking is a general term used to describe the services provided by a group of networked bank branches. Bank customers may access their funds and other simple transactions from any of the member branch offices. Core Banking is normally defined as the business conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking customers, and have a separate line of business to manage small businesses. Larger businesses are managed via the Corporate Banking division of the institution. Core banking basically is depositing and lending of money. For example: ICICI Bank underwent a phase of organic and inorganic growth, first by acquiring Bank of Madura followed by a reverse merger of the bank with its parent organization, ICICI Limited. The scalable and open systems based architecture, enabled Finacle to successfully manage the resultant increase in transaction levels from

400,000 transactions a day in 2000 to nearly 2.1 million by 2005 with an associated growth in peak volumes by 5.5 times.

Teller Machines at the Bank Counter An Automated Teller Machine (ATM) or Automatic Banking Machine (ABM) is an electronic banking outlet, which allows customers to complete basic financial transactions without the aid of a branch representative or teller. The first ATM was installed in India by HSBC in 1987, 20 years after the cash dispensers made their first appearance in the world. Thanks to liberalization and the reduction in ATM cost due to fall in customs duty, banks are able to install more ATMs in order to render efficient customer service. Yet, the number of ATMs in India today is not more than 1% of the number of ATMs in the world. With the pace of change sweeping Indian banking scene, the world ATM survey has ranked India as No. 1 among the top 10 countries ranked according to the percentage growth in installation. ATM is capable of discharging a variety of functions, some of which are as under: It can perform both cash and non-cash transactions in a totally secured environment Cash transactions for both deposits and withdrawals

Q:-6 Analyse mutual fund companies in India. Ans:-6 Mechanism for pooling resources by issuing units to the investors and investing fund in securities in accordance with objectives as disclosed in offer document. Mutual funds are conceived as institutions for providing small investors with avenues of investments in the capital market.. Since small investors generally do not have adequate time, knowledge, experience and resources for directly accessing the capital market, they have to rely on an intermediary which undertakes informed investment professional expertise. Net Asset Value Net Asset Value is the market value of securities held by the Scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation date. The performance of a particular scheme of mutual fund is denoted by Net Asset value. Since market value of the securities change everyday, NAV of the scheme also varies from day to day. Types of Mutual Funds Most funds have a particular strategy they focus on when investing. For instance, some invest only in Blue Chip companies that are more established and are relatively low risk. On the other hand, some focus on high-risk start up companies that have the potential for double and triple digit growth. Finding a mutual fund that fits your investment criteria and style is important. Different types of mutual funds are as follows: Open-ended scheme

It is the one that is available for subscription and repurchase on a continuous basis. These schemes do not have fixed maturity period. Redemption price is the price at which open-ended schemes repurchase its units and close-ended schemes redeem their units on maturity.

Close-ended scheme It has a stipulated maturity period e.g., 5-7 years. The fund is open for subscription only during a specific period at the time of launch of the scheme. These schemes disclose NAV on weekly basis. Repurchase price is the price at which a close-ended scheme repurchases its units and it may include a back-end load. Growth oriented fund The aim of Growth Fund is to provide capital appreciation over medium to long-term. As normally major investment is in equities, such funds have comparatively high risks. These schemes are good for investors having a long-term outlook seeking appreciation over a period of time. It may also be called Equity oriented Schemes. Income oriented fund The aim of Income Oriented funds is to provide regular and steady income to investors. The investment is generally in fixed income securities such as Bonds, Corporate debentures, Govt. Securities and money market instruments.