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Finance Terms
Finance: The proper management of money. Money: The current medium of exchange or means of payment. Credit or Loan: A sum of money to be returned normally with interest.
Classification of finance
1. Public finance
It studies the sources of funds of public authorities such as states, local self-governments and the Central Government. It is concerned with the income and expenditure of public authorities and with the adjustment of one to another.
Contd
Classification of finance
Private finance
An individual Profit-seeking business organizations
External finance (outside sources)
Direct financing (through issuing securities) Indirect financing (through middlemen)
Financial system
A set of institutions, instruments and markets which promote savings and channel them to their most efficient use.
Contd
Financial system
Financial Institutions Financial Markets
(Claims, assets, securities)
Financial instruments
Financial Services
Regulatory
Intermediaries
Non-Intermediaries
Banking
Nonbanking
Organised
Primary
Secondary
Financial Institutions
Banking
These are participate in the economys payments mechanism Their deposit liabilities constitute a major part of the national money supply They can, as a whole, create deposits or credit, which is money
Financial Institutions
Non-Banking
Lend only out of resources put at their disposal by the savers. LIC, UTI, IDBI
Financial Markets
These are the centers or arrangements that provide facilities for buying and selling of financial claims and services. These are classified into
Primary and secondary markets Money and capital markets
Secondary Markets
deal in securities already issued or existing or outstanding. these do not contribute directly to the supply of additional capital
Financial instruments
Subsidies
There are three main forms of subsidies in the operations of DFIs in practice
High level of liquidity; An ability to access technical assistance funds; and Subsidies passed on directly to beneficiaries.
Universal Banking
Universal banking is a combination of Commercial banking, Investment banking, Development banking, Insurance and many other financial activities. It is a place where all financial products are available under one roof. A universal bank is a bank which offers commercial bank functions plus other functions such as Merchant Banking, Mutual Funds, Credit cards, Housing Finance, Auto loans, Retail loans, Insurance, etc.
Financial Institutions
Provider of financial services such as
transforming financial assets in terms of maturity of liquidity (these are financial intermediaries) trading financial assets for themselves and others creating financial assets and then selling those assets on the behalf of customers giving professional investment advice to others managing investment portfolios for others
Depository institutions acquire most of their funds through accepting deposits Non depository institutions receive funds from other sources
Asset/Liability Management
Not all liabilities of financial intermediaries are created equal! They differ in terms of the certainty of their amount and timing
Type I liabilities: timing and amount are certain
example: bank fixed rate CD. Bank knows how much it owes the depositor and when.
Asset/Liability Management
Type III liabilities: amount is not certain but timing is
example: variable rate Certificate of Deposits (CD). Bank knows the maturity date, but the interest owed is not known when the CD is issued.
The type of liabilities created by a financial intermediary will determine how they invest their funds (i.e. the type of assets that they hold)
Financial Innovation
What is it?
creation of new financial assets or new ways to use financial assets changing circumstances: increased instability in interest rates, stock prices and exchange rates led to the development of derivative securities advances in technology make new trading strategies feasible competition among institutions for unique products and strategies desire to avoid regulations or tax laws
Banking History
In the first half of the nineteenth century, three Presidency Banks were started in Madras, Bombay and Bengal with the financial participation of the government for conducting banking business and issue currency notes. Towards the end of the 19th Century the cash balances of the government were kept in the government treasuries and the government shed its connections with the Presidency Banks.
Contd
Banking History
The Imperial Bank came into existence on the 27th January, 1921 by the Imperial Bank of India Act of 1920. It was established by the amalgamation of the three Presidency Banks. The Imperial Bank was the biggest bank until 1935. Until the establishment of the Reserve Bank of India in 1935, the Imperial Bank performed certain central banking functions, although it was purely a commercial bank. It acted as the sole-banker to the Government.
Introduction
It is the Central Bank of India Established in 1934 under the RESERVE BANK OF INDIA ACT 1934. Its head quarters is in Mumbai (Maharashtra). Its present governor is Duvvuri Subbarao. It has 26 offices in which four are regional offices located in metropolitan cities.
Preamble
The Preamble of the Reserve Bank of India describes the basic objectives 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."
Subsidiaries
The Reserve Bank of India has fully-owned four subsidiaries which include National Housing Bank(NHB). Deposit Insurance and Credit Guarantee Corporation of India(DICGC). Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL). National Bank for Agriculture and Rural Development (NABARD, 12 July, 1982). The Reserve Bank of India has recently divested its stake in State Bank of India to the Government of India. RBI has also set up some trainning institutions.
Functions of RBI
Monetary functions
Note issue (except one rupee note all other notes are issued) Banker to the government Bankers bank Custodian of foreign reserves Controller of credit
Bank Rate Open market operations Variable reserve requirements (Cash Reserve Requirement & Statutory Liquidity Requirements)
Non-Monetary Functions
Supervisory functions Promotional functions
interest.
Receiving Carrying
out the Govts exchange remittances and other banking operations. both Central and State Govts float new loans and mange public debt. ways and means advances to the state and local authorities.
Helping
Making Acting
Bankers Bank
Apex banking institution Controls the banking activities and credit system in India It provides financial assistance to scheduled banks by rediscounting eligible securities
Controller of Credit
Bank Rate
Sec.49 of RBI Act, empowers the Reserve Bank to publish the bank rate from time to time. Standard rate which is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase under this act. RBI is able to regulate commercial bank credit and the general credit situation in the country to a certain extent. 9.00% (w.e.f. close of business of 17/04/2012) Decreased from 9.50% to 9.00% which was continuing since 13/02/2012
Contd
Controller of Credit
Open market operations
The purchase and sale of Govt. securities by the RBI from/to the public and bank on its own account. Section 17(8) provides this right to RBI. To provide seasonal finance to commercial banks by purchase of securities from them.
Non-Monetary Functions
Supervisory Function
RBI Act 1934 & than Banking Regulations Act 1949 have given wide range of powers to RBI to control over commercial banks. The Section 22 of Banking Regulations Act 1949, every bank has to obtain a license from RBI carrying on banking business. Sanction of new branch or a new place of business. It promotes banking habits Extend banking facilities to rural and semi urban areas Establish and promote new specialized financing agencies
Promotional Functions
Central Bank
Introduction
It regulates and makes policy relating to monetary management in the country. It is an organ of the government which participates in financial markets in different ways. By issuing of currency notes which is directly and solely under the purview of the Central Bank.
Introduction
By working as the agent and adviser of the Government specifically concerning to the financial matters, such as loans, advances, servicing of debts, etc. By acting as bankers bank in the financial market and it regulates the banking operations in the country. By maintaining adequate foreign exchange reserve for meeting the requirements of foreign trade and servicing of foreign debts.
Functions
Note issue Governments banker, agent and adviser Bankers bank and lender of last resort Custodian of foreign balances of the country Central clearance, settlement and transfer Credit control