Jaiib Indian Financial System Module A Paper 1 PDF

Facebook Page Facebook Group Telegram Group Telegram Channel
AMBITIOUSBABA.COM | MAIL US AT
1
CONTACT@AMBITIOUSBABA.COM
Indian Financial System (Module A)

Index
Unit1-Indian Financial System – An Overview
Unit2-Banking Regulation
Unit3-Retail Banking, Wholesale and International Banking
Unit4-Role Of Money Markets, Debt Markets & Forex Market
Unit5-Role and Functions of Capital Markets, SEBI
Unit6-Mutual Funds & Insurance Companies, Bancassurance & IRDA
Unit7-Factoring, Forfaiting Services and Off-Balance Sheet items
Unit8-Risk Management, Basel Accords
Unit9-CIBIL, Fair Practices Code for Debt Collection, BCSBI
Unit10-Recent Developments in the Financial System
Overview of Indian Financial System

The word system implies a set of complex and interrelated factors organized in a
particular form. These factors are mostly interdependent but not always mutually
exclusive. The financial system of any country consists of several ingredients. It includes
financial institutions, markets, financial instruments, services, transactions, agents, claims
and liabilities in the economy.
An efficient financial system not only encourages savings and investments, it also
efficiently allocates resources in different investment avenues and thus accelerates the rate
of economic development. The financial system of a country plays a crucial role of
allocating scarce capital resources to productive uses. Its efficient functioning is of critical
importance to the economy.
FINANCIAL SYSTEM:
•It is a system for the efficient management and creation of finance. According
to Robinson, financial system provides a link between savings and investment for the
2
creation of new wealth and to permit portfolio adjustment in the composition of the
existing wealth. According to Van Horne, financial system is defined as the purpose of
financial markets to allocate savings efficiently in an economy to ultimate users –either for
investment in real assets or for consumption. Thus the financial system mainly stands on
three factors
Ø Money
Ø Credit
Ø Finance
1.Money‘s the unit of exchange or medium of payment. It represents the value of financial
transactions in qualitative terms.
2. Credit’, on the other hand, is a debt or loan which is to be returned normally with
interest.
3. Finance‘ is monetary wealth of the state, an institution or a person. Comprising these
factors in a systematic order forms a financial system.
Objectives
The objectives of the financial system are
1. Accelerating the growth of economic development.
2. Encouraging rapid industrialization
3. Acting as an agent to various economic factors such as industry, agricultural sector,

Government etc.
4. Accelerating rural development
5. Providing necessary financial support to industry
6. Financing housing and small scale industries
7. Development of backward areas, infrastructure and livelihood
8. Imposing price control in need
3
9. Protecting environment. Functions of financial system are distributed from creation of

money to efficient Management. It is the sum total of the functions of the various
intermediaries.
The functions of financial system can be classified into two broad categories:
1. Controlling functions
2. Promotional functions.
Components of Financial System:
Financial system Institutions Markets Financial Institutions Instruments

Services Structure of
Financial Institutions:
Commercial Banks Classification of Commercial Banks

Ø Financial Institutions
Ø Banking
Ø Non Banking
Ø Companies
Ø Non Banking
Ø Financial companies
Ø Central Bank
Ø Commercial
Ø Banks
4
Ø Co-Operative
Ø Banks
Ø Non Banking
Ø Financial
Ø Intermediaries
Ø Joint Stock companies
Classification of Co-operative Banks NON BANKING FINANCIL INTERMEDIARIES

Classification of Non Banking Financial Intermediaries (B) FINANCIAL MARKETS:
Components of Financial Market Co-operative Banks
Ø State Co-operative Apex Banks
Ø State Co-operative Urban Banks
Ø Co-operative Land Development Banks
Ø Central Co-operative bank
Ø Primary Co-operative Land Development Banks
Ø Primary Co-operative Banks
Limitations of the financial system in India
The following are the limitations of the Indian financial system. • The Indian Financial
system has failed to meet the financial needs of small scale Industries. It has rather
patroned the big industrial houses who are already well off. • The mushrooming of
financial institutions has deteriorated the quality and effectiveness of the sector to some
extent. • In many cases, it could not impose adequate control towards financial
irregularities and frauds, often influenced by politically and economically organized
pressure groups. • The Indian financial system fails to create a well defined and organized
capital market. • It fails to motivate economically marginal or small entrepreneurs by
5
providing micro credit to them. • The Indian financial system is not flexible at the desired
level. It takes abnormal time to cope with the changing situation.
Ø Factoring Asset Liability Management
Ø Leasing Housing Finance
Ø Forfeiting Portfolio Finance
Ø Hire Purchase Finance Underwriting
Ø Credit Card Credit rating
Ø Merchant Banking Interest and Credit Swap
Ø Book Building Mutual fund
Securities and Exchange Board of India (Merchant Bankers) Rules, 1992 ― A

merchant banker has been defined as any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying or subscribing to
securities or acting as manager, consultant, adviser or rendering corporate advisory
services in relation to such issue management.
Charles P. Kindleberger ―Merchant banking is the development which frequently

encountered a prolonged intermediate stage known in England originally as merchant
banking. The Notification of the Ministry of finance defines A merchant banker as any
person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to the securities as manager,
consultant, adviser or rendering corporate advisory service in relation to such issue
management.
Objectives
Ø Channelizing the financial surplus of the general public into productive investments
avenues
Ø Co-coordinating the activities of various intermediaries like the registrar, bankers,

advertising agency, printers, underwriters, brokers, etc., to the share issue
6
Ø Ensuring the compliance with rules and regulations governing the securities market.
5 Functions of merchant Banking: Merchant banking functions in India is the same

as merchant banks in UK and other European countries. The following are the functions of
merchant bankers in India.
Ø Corporate counseling
Ø Project Counseling
Ø Capita l Structuring
Ø Portfolio Management
Ø Issue Management
Ø Credit Syndication
Ø Working capital
Ø Venture Capital
Ø Lease Finance
Ø Fixed Deposits
(i) Corporate counseling: Corporate counseling covers counseling in the form of

project counseling, capital restructuring, project management, public issue management,
loan syndication, working capital fixed deposit, lease financing, acceptance credit etc., The
scope of corporate counseling is limited to giving suggestions and opinions to the client and
help taking actions to solve their problems. It is provided to a corporate unit with a view to
ensure better performance, maintain steady growth and create better image among
investors.
(ii) Project counseling Project counseling is a part of corporate counseling and relates to
project finance. It broadly covers the study of the project, offering advisory assistance on
the viability and procedural steps for its implementation.
Identification of potential investment avenues.
7
A general view of the project ideas or project profiles.

Advising on procedural aspects of project implementation d. Reviewing the technical
feasibility of the project
Assisting in the preparation of project report
Assisting in obtaining approvals, licenses, grants, foreign collaboration etc., from
government
Capital structuring
Arranging and negotiating foreign collaborations, amalgamations, mergers and takeovers.
Assisting clients in preparing applications for financial assistance to various national and
state level institutions banks etc.,
Providing assistance to entrepreneurs coming to India in seeking approvals from the
Government of India.
(iii) Capital Structure Here the Capital Structure is worked out i.e., the capital required,
raising of the capital, debt-equity ratio, issue of shares and debentures, working capital,
fixed capital requirements, etc.,
(iv) Portfolio Management It refers to the effective management of Securities i.e., the
merchant banker helps the investor in matters pertaining to investment decisions.
Taxation and inflation are taken into account while advising on investment in different
securities. The merchant banker also undertakes the function of buying and selling of
securities on behalf of their client companies. Investments are done in such a way that it
ensures maximum returns and minimum risks.
(v) Issue Management: Management of issues refers to effective marketing of

corporate securities viz., equity shares, preference shares and debentures or bonds by
offering them to public. Merchant banks act as intermediary whose main job is to transfer
capital from those who own it to those who need it. The issue function may be broadly
divided in to pre issue and post issue management.
a. Issue through prospectus, offer for sale and private placement.

b. Marketing and underwriting
c. pricing of issues
(vi) Credit Syndication: Credit Syndication refers to obtaining of loans from

single development finance institution or a syndicate or consortium. Merchant Banks help
corporate clients to raise syndicated loans from commercials banks. Merchant banks helps
8
in identifying which financial institution should be approached for term loans. The
merchant bankers follow certain steps before assisting the clients approach the
appropriate financial institutions. a.
Merchant banker first makes an appraisal of the project to satisfy that it is viable b. He
ensures that the project adheres to the guidelines for financing industrial projects. c. It
helps in designing capital structure, determining the promoter‗s amount of term loan to be
raised. d. After verifications of the project, the Merchant Banker arranges for a preliminary
meeting with financial institution. e. If the financial institution agrees to consider the
proposal, the application is filled and submitted along with other documents.
(vii) Working Capital: The Companies are given Working Capital finance, depending
upon their earning capacities in relation to the interest rate prevailing in the market.
(viii)Venture Capital: Venture Capital is a kind of capital requirement which carries more
risks and hence only few institutions come forward to finance. The merchant banker looks
in to the technical competency of the entrepreneur for venture capital finance.
(ix). Fixed Deposit: Merchant bankers assist the companies to raise finance by way of
fixed deposits from the public. However such companies should fulfill credit rating
requirements.
(x)Other Functions
•Treasury Management- Management of short term fund requirements by client

companies.
•Stock broking- helping the investors through a network of service units
•Servicing of issues- servicing the shareholders and debenture holders in distributing

dividends, debenture interest.
•Small Scale industry counseling- counseling SSI units on marketing and finance
•Equity research and investment counseling –merchant banker plays an important role
in providing equity research and investment counseling because the investor is not in a
position to take appropriate investment decision.
9
•Assistance to NRI investors - the NRI investors are brought to the notice of the various
investment opportunities in the country.
•Foreign Collaboration: Foreign collaboration arrangements are made by the Merchant

bankers.
Functions of Reserve Bank of India
The Reserve Bank was established in 1935 by the Banking Regulation Act, 1934 with a
capital of Rs. 5 cr. Reserve Bank of India (RBI) is the central bank of the country. RBI is a
statutory body.
Initially the ownership of almost all the share capital was in the hands of non-government
share holders. So in order to prevent the centralisation of the shares in few hands, the RBI
was nationalised on January 1, 1949.
Functions of Reserve Bank

1. Issue of Notes —The Reserve Bank has the monopoly for printing the currency notes in
the country. It has the sole right to issue currency notes of various denominations except
one rupee note (which is issued by the Ministry of Finance). The Reserve Bank has adopted
the Minimum Reserve System for issuing/printing the currency notes. Since 1957, it
maintains gold and foreign exchange reserves of Rs. 200 Cr. of which at least Rs. 115 cr.
should be in gold and remaining in the foreign currencies.
2. Banker to the Government–The second important function of the Reserve Bank is to
act as the Banker, Agent and Adviser to the Government of India and states. It performs all
the banking functions of the State and Central Government and it also tenders useful advice
to the government on matters related to economic and monetary policy. It also manages
the public debt of the government.
10
3. Banker’s Bank:- The Reserve Bank performs the same functions for the
other commercial banks as the other banks ordinarily perform for their customers. RBI
lends money to all the commercial banks of the country.
Structure of Banking Sector in India
4. Controller of the Credit:- The RBI undertakes the responsibility of controlling credit
created by the commercial banks. RBI uses two methods to control the extra flow of money
in the economy. These methods are quantitative and qualitative techniques to control and
regulate the credit flow in the country. When RBI observes that the economy has
sufficient money supply and it may cause inflationary situation in the country then it
squeezes the money supply through its tight monetary policy and vice versa.
Where do Printing of Security Papers, Notes and Minting take Place in India?
5. Custodian of Foreign Reserves:-For the purpose of keeping the foreign exchange rates
stable, the Reserve Bank buys and sells the foreign currencies and also protects the
country's foreign exchange funds. RBI sells the foreign currency in the foreign exchange
market when its supply decreases in the economy and vice-versa. Currently India has
Foreign Exchange Reserve of around US$ 417bn.
6. Other Functions:-The Reserve Bank performs a number of other developmental works.
These works include the function of clearing house arranging credit for agriculture (which
has been transferred to NABARD) collecting and publishing the economic data, buying and
selling of Government securities (gilt edge, treasury bills etc)and trade bills, giving loans to
the Government buying and selling of valuable commodities etc. It also acts as the
representative of Government in International Monetary Fund (I.M.F.) and represents the
membership of India.
11
New department constituted in RBI:- On July 6, 2005 a new department, named financial
market department in reserve bank of India was constituted for surveillance on financial
markets.
This newly constituted dept. will separate the activities of debt management and monetary
operations in future. This department will also perform the duties of developing and
monitoring the instruments of the money market and also monitoring the government
securities and foreign money markets.
So it can be concluded that as soon as the our country is growing the role of RBI is going to
be very crucial in the upcoming years.
Overview of Commercial Banks in India

Commercial banks in India are broadly classified into three categories:
Public Sector Banks: The term “public sector banks” refers to a situation where the
majority equity stake in the banks is held by the government. The Indian Government
keeps default holdings of minimum 51% shareholding, but management control is only
with the Central Government, thereby classifying them as Public Sector Banks.
Public sector banks include the State Bank of India and its Associates, Nationalized Banks
and Regional Rural Banks.
Private Sector Banks: They are the banks in which individuals and corporations are the
majority shareholders. In India, banks were nationalized in two phases, in 1969 and 1980.
In 1993, the Reserve Bank of India (RBI), the regulating body for all the country’s banking
organizations, allowed many new commercial banks in India to start operations. Some of
the major commercial banks in India that were given licenses are ICICI Bank, HDFC Bank,
Axis Bank, Yes Bank, and Kotak Mahindra Bank.
Private sector banks are recognized as the banks for the new generation, providing
innovative products, better IT support system and competitive pricing for their products.
As of the end of March 2017, there are 21 private sector banks in India. Besides these, four
local areas banks are also categorized as private banks.
Foreign Banks: They are the final category of banks that serve as an important segment of
the commercial banking sector. They are headquartered outside India, and they operate
from their wholly-owned subsidiaries or branches in the country. The foreign banks
include Royal Bank of Scotland, Bank of America, Barclays Banks, Deutsche Bank, etc.
12
NBFC
Banking sector throughout the world constitutes a large number of financial operations
such as deposits, loans etc. Most nations have a centralized bank that regulates all the other
banks that operates in that nation. There are various types of financial companies that exist
which indulge in financial businesses. A Non-Banking financial company is one such type of
a financial company with a difference from banks.
The Reserve Bank of India (RBI) defines a Non-Banking Financial Company as,
“A Non-Banking Financial Company (NBFC) is a company registered under the Companies

Act, 1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or
other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit
business but does not include any institution whose principal business is that of agriculture
activity, industrial activity, purchase or sale of any goods (other than securities) or
providing any services and sale/purchase/construction of immovable property.”
Simply put, a Non-Banking Financial Company (NBFC) receives money as a whole or in

instalments connected to a scheme and runs its financial process. There are a variety of
NBFCs that an individual comes across in day to day life that involves itself in various
financial activities.
Difference between Non-Banking Financial company and a Bank
It is of prime importance to understand the basic difference between a bank and a Non-
Banking Financial Company (NBFC). The basic differences from a bank are:
Demand deposits cannot be accepted by NBFC
Demand deposits are those that can be by anyone into the financial institution and can be
withdrawn at any time as per the wish of the depositor without any prior notice to the
institution eg. current accounts in banks. These deposits are restricted to NBFCs by the RBI.
Unlike banks, NBFC is not a part of payments and settlements system regulated by
RBI
Payment and settlement systems in India include credit cards, debit cards, Real Time Gross
Settlement (RTGS), National Electronic Fund Transfer (NEFT) and few others. NBFC cannot
do these operations as per RBI regulations.
NBFC cannot issue cheques on its name
13
As the NBFCs are restricted to be a part of payments and settlement system by the RBI,
issuing cheques by NBFC cannot be done.
For the depositors in NBFC the deposit insurance facility and credit guarantee corporation
is not available.
Deposit Insurance and Credit Guarantee Corporation (DICGC) is a subsidiary of RBI that
insures all the deposits such as savings, fixed, recurring etc. upto a limit of ₹1,00,000 for
each deposit and provides a guarantee for credit facilities. This facility is not extended to
NBFC by the RBI.
Types of Non-Banking Financial Companies
Non-Banking Financial Companies are of many types depending on various factors.

They are:
Asset Finance Company (AFC)
Asset Finance companies are those that are involved in the financing of physical assets for
an economic activity. The physical assets may be automobiles, generator sets, earth movers
etc.
Investment Company (IC)
Investment Company involves its business activity to the acquisition of securities such as
shares, debentures, equity etc.
Loan Company (LC)
Loan Companies are those that are into proving finances such as loans or advances for an
activity or a business.
Infrastructure Finance Company (IFC)
A company can be classified as an Infrastructure company if it satisfies the following

conditions:
A company having at least 75% of its total assets in infrastructure loans.
Having a minimum of ₹ 300 crores of net fund.
Having an ‘A’ in credit rating.
14
Having Capital to Risk weighted Assets Ratio (CRAR) of 75%.
Systematically Important Core Investment Company (CIC-ND-SI)
This type of company carries out business in the acquisition of securities, shares. And also
following conditions should be satisfied:
1. Having a minimum of 90% of total assets in form of investments in securities of

companies.
2. Investments in equity shares should contribute not less than 60% of total assets
of the company.
3. Having asset size over ₹ 100 crores.
4. Involves only in the block sale of its investments with the sole intention of
disinvestment or dilution.
5. Public funds should be accepted.
6. Should not involve in any other activity other than investing.
Infrastructure debt fund Non-Banking Financial Company (IDF-NBFC)
It is a company that facilitates the long-term flow of long-term debt into infrastructure
projects. It raises finances through the issue of Rupee or Dollar bonds with the minimum
maturity period of 5 years. IDF-NBFC is liable to get sponsor only from IFC companies.
Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)
It is a non-deposit accepting NBFC having the minimum of 85% of its assets satisfying
following criteria:
1. Loans are given to people from a rural background with income not
exceeding ₹1,00,000 or an urban person with income not exceeding ₹1,60,000.
15
2. The loan should not exceed ₹50,000 in the first cycle and ₹1,00,000 in
consecutive cycles.
3. Total debt of a person should not exceed ₹1,00,000.
4. The tenure of loan for the amount more than ₹15,000 should not be less than 24
months if prepaid should be with the penalty.
5. Loans can be expanded without collateral.
6. Loans can be repaid in instalments on weekly, monthly or fortnightly basis left to
borrower’s choice.
7. Total aggregate loans given for income generation by the company should not be
less than 50% of total loans given.
Non-Banking Financial Company-Factors (NBFC-Factors)
This type of company involves itself in the business of factoring. It should the
minimum of 50% of its total assets through factoring and should constitute more
than 50% of its gross income from factoring.
Mortgage Guarantee Company (MGC)
It is a company having a net fund ₹100 crore and having at least 90% of its income
from mortgage guarantee.
NBFC- Non-Operative Financial Holding Company (NBFC-NOFHC)
It is a set up of a new bank opened by the promoters. It’s a wholly-owned Non-

Operative Financial Holding Company that holds the bank and other financial
services regulated by RBI.
Is it Necessary to Register a Non-Banking Financial Company with RBI?
No, it is not necessary for every NBFC to be registered with the Reserve bank of India
(RBI). Though the question is binary, it has to have a brief explanation for this. A
Non-Banking Financial Company can operate without registering itself with RBI and
16
also without having the net fund of ₹2,00,00,000 in its company. However since
there are many types of NBFCs there are certain other bodies that come into picture
for regulating, other than RBI. In order to avoid dual regulation, certain types of
NBFC’s are exempted from registering with the RBI and are in turn controlled by
concern regulating bodies connected with the business type of the company. Below
table gives few types of companies and its respective regulatory body of that type
company:
Company Type Regulating Body
Chit Funds State Government
Venture Capital Fund Securities and Exchange Board of India (SEBI)
Stock Brokering Securities and Exchange Board of India (SEBI)
Merchant Banking Securities and Exchange Board of India (SEBI)
Housing Finance National Housing Bank (NHB)
Nidhi Company Ministry of Corporate Affairs
What are the procedural requirements to start an NBFC in India?
Owing to the scope and the diversification of NBFCs, any person with an idea of venturing
into a new business having funds would be tempted into financing sector. Though there are
a lot of financing individuals who can be found in every area of a place mostly using undue
17
standards in financing there are many who would like to venture into financing complying
with legal formalities.
Below is an example of how to register an NBFC (in this case, a Microfinance institution)
Registering the Company
Firstly a name for the company has to be decided and has to be registered with the ROC.
Also, it has to be registered as either a private limited or a public limited company.
Capital for the company
The minimum capital requirement for starting up a Micro Finance Institution is

₹2,00,00,000 for companies in the Northeastern region of India and ₹5,00,00,000 for rest of
India.
Certificate for the capital holding
After the capital requirement is achieved it is necessary to deposit this amount in a bank
account on a fixed deposit and obtain the certificate for the same from the bank.
Documents checklist for registration
Registration certificate of the company.
Company’s Memorandum of Association (MOA) certified copy.
Resolution of the Board copy.
Certificate of banking for deposited money.
Report of the Bank for the company.
Submission the Application
18
With all the documents mentioned above-prepared application with those documents can
be applied to the RBI for approval. Online application with all the required documents can
be submitted in RBI online portal [https://cosmos.rbi.org.in]. Also, all the documents have
to be physically submitted to the regional office of RBI in the respective region of the
company.
Registration charges
The professional fee charged by RBI for registration of a new Micro Finance Institution is
₹4 to ₹4.5 lakh since this is a tedious, time consuming and a complicated process. The total
registration charges will be up to ₹8.5 lakh.
It is to be noted that the registration process is complicated, time-consuming and costly but
on the other side it is also worth it and has a great scope.
SLR & CLR

CRR stands for Cash Reserve Ratio and SLR is Statutory Liquidity Ratio. CRR and SLR are
the basic tools in the economy which manages inflation and flow of money in the country.
RBI control bank capacity of lending through CRR and SLR.
What is CRR?
Cash Reserve ratio is calculated by RBI, CRR is the ratio of total deposit that banks need to
keep as a reserve with RBI (Reserve Bank of India) in form of cash instead of keeping
amount with them. This is a powerful tool to control the flow of money in the market. If
CRR is high, bank deposit with RBI increases which leads to decrease in capacity of the
bank to lend and hence, interest rate increase as borrowing becomes expensive and flow of
money in market decrease inflation decreases, this is how CRR ratio help to reduce
inflation. Whereas, when CRR decreases bank deposit with RBI decreases which leads to
increase in capacity of the bank to lend and hence, interest rate decrease as borrowing
become cheap and flow of money in market increase inflation increases. Through this RBI
control flow of money in the market, CRR also helps RBI to handle inflation.
In short, if RBI wants to increase the flow of money in the market it will reduce CRR
whereas; if RBI wants to decrease the flow of money in the market it will increase CRR.
19
Let us understand CRR through example.

If CRR is 5%, the bank has maintained INR 5 from the deposit of INR 100, that means if the
bank has the deposit of INR 200 Million then the bank has to maintain 10 Million with RBI
i.e. 5% of total 200 Million and the bank can use rest 190 Million for lending.
What is SLR?
SLR is Statutory Liquidity Ratio which is calculated by RBI, this is the ratio of compulsory
ratio of deposit that bank has to maintain in form of cash, gold, other securities prescribe
by RBI. In short, it is kept by the bank in for of liquid assets. The purpose of maintaining
SLR is that bank will have an amount in the form of liquid assets which can be used to
handle a sudden increase in demand of amount from the depositor. It is used by RBI to limit
credit facility offered by the bank to borrowers which maintain the stability of the bank.
SLR can be said as a percentage of net time and demand liability kept by the bank. Here,
time liability the amount which is payable to the customer after interval and demand
liability means the amount which is payable to the customer when he is demanding for the
same. SLR also protect the bank from bank run situation and provide confidence to the
customer in the banking system.
SLR Example
Let SLR is 20% then bank have to keep INR 20 from the deposit of INR 100, that means if
the bank has a deposit of INR 200 Million then bank have to keep 40 Million i.e. 20% of
total 200 Million and a bank can use rest 160 Million for banking purpose.
Equity Market Debt Market

Debt Markets
Investments in debt securities typically involve less risk than equity investments and offer
a lower potential return on investment. Debt investments by nature fluctuate less in price
than stocks. Even if a company is liquidated, bondholders are the first to be paid.
Bonds are the most common form of debt investment. These are issued by corporations or
by the government to raise capital for their operations and generally carry a fixed interest
rate. Most are unsecured but are issued with a rating by one of several agencies such as
Moody's to indicate the likely integrity of the issuer.
Equity Market
Equity, or stock, represents a share of ownership of a company. The owner of an equity
stake may profit from dividends. Dividends are the percentage of company profits that is
20
returned to shareholders. The equity holder may also profit from the sale of the stock if the
market price should increase in the marketplace.
The owner of an equity stake can also lose money. In the case of bankruptcy, they may lose
the entire stake.
The equity market is volatile by nature. Shares of equity can experience substantial price
swings, sometimes having little to do with the stability and good name of the corporation
that issued them.
Volatility can be caused by social, political, governmental, or economic events. A large
financial industry exists to research, analyze, and predict the direction of individual stocks,
stock sectors, and the equity market in general.
The equity market is viewed as inherently risky while having the potential to deliver a
higher return than other investments. One of the best things an investor in either equity or
debt can do is to educate themselves and speak to a trusted financial advisor.
Money Market: Money market refers to the market where the requirement or
arrangement of funds is for a period of less than one year. Calls and Inter Bank Term
Money, repo transactions (i.e. banks' borrowing window from the RBI), Certificate of
Deposits, Commercial Papers, Treasury Bills, Bill Rediscounting, etc. are some of the money
market instruments through which short term requirement of funds are met by banks,
institutions and the State and Central Government.
Bank and Corporate Deposits: While bank fixed deposits (FDs) are very common
amongst the investors as a traditional investment avenue for decades, corporate deposits
21
are nothing but fixed deposits where the issuer is a company or an institution other than a
bank.
Government Securities: G-Secs or Government Securities are Sovereign rated debt papers
issued by the Government with a face value of a fixed denomination. In India, G-secs are
issued by Government of India and State Government at face value of Rupees One Hundred
in lieu of their borrowings from the market.
Corporate & PSU Bond Market: Corporate Bonds are issued by Public Sector
Undertakings (PSUs) and private corporations. These bonds are issued for a wide range of
tenor normally; say for a period of 1 year to 15 years or even more. As compared to
Government Securities which are nearly free of default risk; corporate bonds may turn out
to be risky.
Insurance Regulatory and Development Authority

The Insurance Regulatory and Development Authority of India (IRDAI) is an autonomous,
statutory body tasked with regulating and promoting the insurance and re-insurance
industries in India. It was constituted by the Insurance Regulatory and Development
Authority Act, 1999, an Act of Parliament passed by the Government of India. The agency's
headquarters are in Hyderabad, Telangana, where it moved from Delhi in 2001.
IRDAI is a 10-member body including the chairman, five full-time and four part-time
members appointed by the government of India.
Function
Issuing, renewing, modifying, withdrawing, suspending or cancelling registrations
Protecting policyholder interests
Specifying qualifications, the code of conduct and training for intermediaries and agents
Specifying the code of conduct for surveyors and loss assessors
Promoting efficiency in the conduct of insurance businesses
Promoting and regulating professional organisations connected with the insurance and re-
insurance industry
Levying fees and other charges
Inspecting and investigating insurers, intermediaries and other relevant organisations
22
Regulating rates, advantages, terms and conditions which may be offered by insurers not
covered by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4
of 1938)
Specifying how books should be kept
Regulating company investment of funds
Regulating a margin of solvency
Adjudicating disputes between insurers and intermediaries or insurance intermediaries
Supervising the Tariff Advisory Committee
Specifying the percentage of premium income to finance schemes for promoting and
regulating professional organisations
Specifying the percentage of life- and general-insurance business undertaken in the rural or
social sector
Specifying the form and the manner in which books of accounts shall be maintained, and
statement of accounts shall be rendered by insurers and other insurer intermediaries.
23
Banking Regulation
THE ESTABLISHMENT OF RBI
The establishment of RBI was based on the recommendations of a Royal Commission on
Indian Currency and Finance known as the Hilton Young Commission after which it was on
1st April 1935 that the Reserve Bank of India was established as the central banking
authority in India and was nationalized on 1st January 1948.
Subsequently, in 1949, the Banking Regulations Act was passed which empowered the
Reserve Bank to regulate, control and inspects the banks in India.
The outlook and guidelines of the RBI were conceptualized by Dr B.R. Ambedkar in his
book “ The Problem of the Rupee- Its origin and its solutions “
RBI was established with the aim to regulate the issue of bank notes, to maintain reserves,
secure monetary stability and to operate the credit and currency system of the country.
The RBI actually took over from the government the functions so far being performed by
the Controller of Currency and Imperial Bank of India.
Currently, the Governor of RBI is Mr Urjit Patel and is headquartered at Mumbai. It has four
zonal offices at Chennai, Delhi, Kolkata and Mumbai.
THE NEED TO NATIONALIZE BANKS IN INDIA
Despite the presence of a central regulatory authority i.e., the RBI which could control the
banks, except for the State Bank Of India, other banks were owned by private individuals. It
was in the 1960s that Mrs Indira Gandhi; the then Prime Minister initiated the process of
Bank Nationalization. She summed up the objectives of nationalization as “The present
decision to nationalize major banks is to accelerate the achievements of our objectives “..
24
i)Controlling private monopolies of the banks that were owned by private business houses
and corporate families and to ensure supply of credit to socially desirable sections.
ii) Reducing regional imbalance as there was a large rural-urban divide it was necessary
for banking to seep into rural areas also.
iii) Lending credit to priority sectors like agriculture, which was the largest contributor to
national income.
iv) Developing banking habits in India as the maximum population lived in rural areas and
for the development of the national banking, habits were necessary among such a huge
population.
THE REGULATIONS OVER BANKS IN INDIA
The Banking Regulation Act of 1949 and the RBI Act 1953 has given the RBI the power to
regulate the banking system. The Indian banking sector is broadly classified into scheduled
banks and non-scheduled banks. All banks included in the Second Schedule to the Reserve
Bank of India Act, 1934 are Scheduled Banks. Some of the regulatory functions of RBI are :
RBI issues license to commence new banking operations or to open new branches of the
existing banks through the power given to the RBI under the Banking Regulation Act 1949.
RBI controls the appointment of the chairman, directors and additional directors of banks
in India.
RBI ensures banks maintain transparency in disclosing any charges that they levy on their
customers and also ensures that money laundering is curbed through its KNOW YOUR
CUSTOMER guidelines that need to be ensured when anyone opens an account with them.
RBI has its own monitoring procedure and system for audit and inspection on the basis of
“CAMELS” that stands for Capital adequacy, Asset quality, Management, Earning, Liquidity,
System and Control.
The BANKING REGULATIONS ACT 1949 was passed with the aim of having a specific Act
for Banking companies. Prior to this act, the banking companies were regulated by the
Indian Companies Act, 1913. This comprehensive legislation ensured a minimum capital
requirement to prevent bank failures and it also eliminated cut-throat competition by
regulation the opening of branches and deciding the location of banks. The BR Act has thus
helped in the balanced growth of banks in India and their working also. It has ensured that
the interests of the depositors are safeguarded.
ARE THERE BANKS WHICH DO NOT COME UNDER RBI?
Yes. There are some banks which do not come under the regulations of the RBI. They are :
25
PRIMARY AGRICULTURE SERVICE CO-OPERATIVE BANKS:

These banks accept deposits and lend loans to members only.
LAND DEVELOPMENTS BANKS:
These banks give long-term loans and are exempted by RBI
REPCO BANK LTD:
Formed under Govt. Act for Repatriates is not regulated by RBI
STATE BANK OF SIKKIM:
Deemed as treasury bank of Sikkim is also exempted from RBI
HOW DOES RBI ENSURE COMPLIANCE BY BANKS?
Every bank in India has to comply with the norms set by the RBI which are legal obligations
that have to be abided. To ensure the compliance RBI has various departments which work
in their specific fields and ensure the proper functioning of the economic activities.
BFS (Board of Financial Supervision) which suggests new reforms and is the main
guiding force behind RBIs regulatory and supervisory initiatives since 1994.
DBOD (Department of Banking Operations and Development) frames regulations for
commercial banks in India.
DBS (Department of Banking Supervision) supervises commercial banks including local
area banks and all India financial institutions. It controls the audit and inspection of banks.
DNBS (Department of Non-Banking Supervision) regulates and supervises the Non-
Banking Financial Companies and their audit.
UBD (Urban Banks Department) to regulate urban cooperative banks.
RPCD (Rural Planning and Credit Department) regulates regional rural banks and they
are supervised by NABARD.
Monetary Policy
The objective of monetary policy is to achieve the desired expansion of economy by
facilitating the availability of money supply needed for the expansion. The role of
formulating monetary policy in India is performed by Reserve Bank of India. It is aimed at
ensuring the availability required money supply for all the legitimate economic activities
while it should not be available so as to create inflationary pressure.The primary aim of
26
monetary policy in India is to maintain price stability while keeping in mind the objective
of economic growth.
Types of Monetary Policy
There are three common types of monetary policy. These are:
Expansionary Monetary Policy
Contractionary Monetary Policy
Unconventional Monetary Policy
Expansionary Monetary Policy
Expansionary monetary policy is the monetary policy which seeks to increase aggregate
demand and economic growth in the economy. It involves increasing the money supply and
lowering the interest rates. The lower interest rate encourages the borrowers to buy more
which increases the economic activity. The increased economic activity leads to more
employment opportunities thus decreasing unemployment. It also increases the inflation as
more money is available to buy goods and services. It is also known as Easy Money Policy
or Loose Money Policy as central banks seeks to increase the money supply by lowering the
interest rates.
Contractionary Monetary Policy
Contraction monetary policy is the monetary policy which is used to fight the inflation in
economy. It involves decreasing the money supply and increasing the interest rates. As
reduction in money supply increases the interest rates, the borrowers will be reluctant to
borrow the money due to higher borrowing cost which ultimately reduces the economic
activity. It leads to decrease in inflation, increase in unemployment and slowdown in
economy. It is also known as tight money policy as central banks seeks to reduce the money
supply by restricting credit by increasing interest rates.
Unconventional Monetary Policy
Unconventional monetary policy is pursued by central banks when their traditional
instruments of monetary policy cease to achieve their goals. The one such unconventional
monetary policy was employed us United States after the financial crisis of 2007 in the
form Quantitative Easing (QE).
Instruments of Monetary Policy in India
27
The Reserve Bank of India employs various instruments of monetary policy in India to
achieve the objectives of price stability and higher economic growth. Some of the important
instrument or tools of monetary policy in India are:
Open Market Operations (OMO)
Cash Reserve Ration (CRR)
Statutory Liquidity Ratio (SLR)
Liquidity Adjustment Facility (LAF)
Selective Credit Control
Moral Suasion
Open Market Operations (OMO)
It is the process of buying and selling of government securities, bond or Treasury Bills (T-
Bills) to regulate the money supply in economy. If government wants to reduce money
supply, it issues these bonds. The money is consumed to buy these bonds thus it reduced
the monetary base of the economy. Similarly to increase the money supply, the government
sells these bonds thereby increasing the monetary base of the economy. In India, the open
market operations are conducted by Reserve Bank of India through its core banking
solution e-Kuber.
Cash Reserve Ratio (CRR)
It refers to the cash which banks have to maintain with the Reserve Bank of India as
percentage of Net Demand and Time Liabilities (NDTL). An increase in CRR makes it
mandatory for banks to hold large portion of their deposits with the RBI. Therefore it
reduces their deposit available for credit and they lend less which affect their profitability
and also reduces the money supply in economy.
Statutory Liquidity Ratio (SLR)
Apart from CRR, the banks in India are required to maintain liquid assets in the form of
gold, cash and approved securities. The increase/decrease in SLR affects the availability of
money for credit with banks.
Liquidity Adjustment Facility (LAF)
Under Liquidity Adjustment Facility (LAF) the banks purchase money from RBI on
repurchase agreements.
28
Repo Rate: It is the interest rate at which the Reserve Bank provides overnight liquidity to
banks against the collateral of government and other approved securities under the
liquidity adjustment facility (LAF)
Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity,
on an overnight basis, from banks against the collateral of eligible government securities
under the LAF
Marginal Standing Facility
Under SF, the scheduled commercial banks can borrow additional amount of overnight
money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR)
portfolio up to a limit at a penal rate of interest. This provides a safety valve against
unanticipated liquidity shocks to the banking system.
Bank Rate
It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or
other commercial papers.
Selective Credit Control
Under this method, the central influence the credit growth in country through following
techniques:
Specifying the margin requirements and differential rate of interests
Regulating the credit for consumer durables
Moral Suasion
The central persuades the commercial banks to regulate the credit growth through oral and
verbal communication.
Why monetary policy is ineffective in India?
There are many reasons for monetary policy not able to achieve its intended objectives.
Some of the reasons are:
Higher proportion of Non-Bank Credit
The credit market in India is largely occupied by non-bank credit providing institutions like
money lenders, cooperatives, relatives, friends etc. This large segment is not affected by
monetary policy instrument.
Introduction of new financial instruments
29
Mutual Fund, Venture Capital, IPO etc. have influence on overall liquidity in the economy.
The monetary policy intervention by Reserve Bank of India is insignificant in these
segments of financial system.
High currency-deposit ratio
The rural economy in India has more inclination towards the usage of cash. Thus there is
high currency-deposit ratio. The monetary policy only touches the deposit section. Thus
any intervention by way of monetary policy has meager effect on economy.
Retail Banking, Wholesale and International Banking
Retail Banking
The issue of retail banking is extremely important and topical. Across the globe, retail
lending has been a spectacular innovation in the commercial banking sector in recent
years. The growth of retail lending, especially, in emerging economies, is attributable to the
rapid advances in information technology, the evolving macroeconomic environment,
financial market reform, and several micro-level demand and supply side factors.
India too experienced a surge in retail banking. There are various pointers towards this.
Retail loan is estimated to have accounted for nearly one-fifth of all bank credit. Housing
sector is experiencing a boom in its credit. The retail loan market has decisively got
transformed from a sellers’ market to a buyers’ market. Gone are the days where getting a
retail loan was somewhat cumbersome. All these emphasise the momentum that retail
banking is experiencing in the Indian economy in recent years.
What is Retail Banking?
Retail banking is, however, quite broad in nature - it refers to the dealing of commercial
banks with individual customers, both on liabilities and assets sides of the balance sheet.
Fixed, current / savings accounts on the liabilities side; and mortgages, loans (e.g.,
personal, housing, auto, and educational) on the assets side, are the more important of the
products offered by banks. Related ancillary services include credit cards, or depository
services. Today’s retail banking sector is characterized by three basic characteristics:
• multiple products (deposits, credit cards, insurance, investments and securities);

• multiple channels of distribution (call centre, branch, Internet and kiosk); and
• multiple customer groups (consumer, small business, and corporate).
What is the nature of retail banking? In a recent book, retail banking has been described as
"hotter than vindaloo". Considering the fact that vindaloo, the Indian-English innovative
30
curry available in umpteen numbers of restaurants of London, is indeed very hot and spicy,
it seems that retail banking is perceived to be the in-thing in today’s world of banking.
Retail banking in India
Retail banking in India is not a new phenomenon. It has always been prevalent in India in
various forms. For the last few years it has become synonymous with mainstream banking
for many banks.
The typical products offered in the Indian retail banking segment are housing loans,
consumption loans for purchase of durables, auto loans, credit cards and educational loans.
The loans are marketed under attractive brand names to differentiate the products offered
by different banks. As the Report on Trend and Progress of India, 2003-04 has shown that
the loan values of these retail lending typically range between Rs.20,000 to Rs.100 lakh.
The loans are generally for duration of five to seven years with housing loans granted for a
longer duration of 15 years. Credit card is another rapidly growing sub-segment of this
product group.
In recent past retail lending has turned out to be a key profit driver for banks with retail
portfolio constituting 21.5 per cent of total outstanding advances as on March 2004. The
overall impairment of the retail loan portfolio worked out much less then the Gross NPA
ratio for the entire loan portfolio. Within the retail segment, the housing loans had the least
gross asset impairment. In fact, retailing make ample business sense in the banking sector.
While new generation private sector banks have been able to create a niche in this regard,
the public sector banks have not lagged behind. Leveraging their vast branch network and
outreach, public sector banks have aggressively forayed to garner a larger slice of the retail
pie. By international standards, however, there is still much scope for retail banking in
India. After all, retail loans constitute less than seven per cent of GDP in India vis-à-
vis about 35 per cent for other Asian economies — South Korea (55 per cent), Taiwan (52
per cent), Malaysia (33 per cent) and Thailand (18 per cent). As retail banking in India is
still growing from modest base, there is a likelihood that the growth numbers seem to get
somewhat exaggerated. One, thus, has to exercise caution is interpreting the growth of
retail banking in India.
Drivers of retail business in India
What has contributed to this retail growth? Let me briefly highlight some of the basic
reasons.
First, economic prosperity and the consequent increase in purchasing power has given a
fillip to a consumer boom. Note that during the 10 years after 1992, India's economy grew
31
at an average rate of 6.8 percent and continues to grow at the almost the same rate – not
many countries in the world match this performance.
Second, changing consumer demographics indicate vast potential for growth in

consumption both qualitatively and quantitatively. India is one of the countries having
highest proportion (70%) of the population below 35 years of age (young population). The
BRIC report of the Goldman-Sachs, which predicted a bright future for Brazil, Russia, India
and China, mentioned Indian demographic advantage as an important positive factor for
India.
Third, technological factors played a major role. Convenience banking in the form of debit
cards, internet and phone-banking, anywhere and anytime banking has attracted many
new customers into the banking field. Technological innovations relating to increasing use
of credit / debit cards, ATMs, direct debits and phone banking has contributed to the
growth of retail banking in India.
Fourth, the Treasury income of the banks, which had strengthened the bottom lines of
banks for the past few years, has been on the decline during the last two years. In such a
scenario, retail business provides a good vehicle of profit maximisation. Considering the
fact that retail’s share in impaired assets is far lower than the overall bank loans and
advances, retail loans have put comparatively less provisioning burden on banks apart
from diversifying their income streams.
Fifth, decline in interest rates have also contributed to the growth of retail credit by
generating the demand for such credit.
In this backdrop let me now come two specific domains of retail lending in India, viz., (a)
credit cards and (b) housing.
Credit Cards in India
While usage of cards by customers of banks in India has been in vogue since the mid-1980s,
it is only since the early 1990s that the market had witnessed a quantum jump. The total
number of cards issued by 42 banks and outstanding, increased from 2.69 crore as on end
December 2003 to 4.33 crore as on end December 2004. The actual usage too has
registered increases both in terms of volume and value. Almost all the categories of banks
issue credit cards. Credit cards have found greater acceptance in terms of usage in the
major cities of the country, with the four major metropolitan cities accounting for the bulk
of the transactions.
In view of this ever increasing role of credit cards a Working Group was set up for
regulatory mechanism for cards. The terms of reference of the Working Group were fairly
32
broad and the Group was to look into the type of regulatory measures that are to be
introduced for plastic cards (credit, debit and smart cards) for encouraging their growth in
a safe, secure and efficient manner, as also to take care of the best customer practices and
grievances redressal mechanism for the card users. The Reserve Bank has been receiving a
number of complaints regarding various undesirable practices by credit card issuing
institutions and their agents. Some of them are:
• Unsolicited calls to members of the public by card issuing banks/ direct selling
agents pressurising them to apply for credit card.
• Communicating misleading / wrong information regarding credit cards regarding
conditions for issue, amount of service charges/ waiver of fees, gifts/prizes.
• Sending credit cards to persons who have not applied for them / activating
unsolicited cards without the approval of the recipient.
• Charging very high interest rates /service charges.
• Lack of transparency in disclosing fees/charges/penalties. Non-disclosure of
detailed billing procedure.
The Working Group deliberated a number of major issues relating to: a) to customer
grievances and rights: a) Transparency and Disclosure, b) Customer Rights Protection, and
c) Code of Conduct. The Group recommended that the Most Important Terms and
Conditions should be highlighted and advertised and sent separately to the prospective
customer. These terms and conditions include various issues relating to: a) fees and
charges, (b) drawal limits, (c) billing, (d) default, (e) termination / revocation of card
membership, (f) loss / theft / misuse of card, and (g) disclosure.
These recommendations are being processed within the RBI and a set of guidelines would
be issued which are going to pave the path of a healthy growth in the development of
plastic money in India. The RBI is also considering bringing credit card disputes within the
ambit of the Banking Ombudsman scheme. While building a regulatory oversight in this
regard we need to ensure that neither does it reduce the efficiency of the system nor does it
hamper the credit card usage.
Housing Credit in India
In view of its backward and forward linkages with other sectors of the economy, housing
finance in developing countries is seen as a social good. In India, growth of housing finance
segment has accelerated in recent years. Several supporting policy measures (like tax
benefits) and the supervisory incentives instituted had played a major role in this market.
Housing credit has increased substantially over last few years, but from a very low base.
During the period 1993-2004, outstanding housing loans by scheduled commercial banks
and housing finance companies grew at a trend rate of 23 per cent. The share of housing
33
loans in total non-food credit of scheduled commercial banks has increased from about 3
per cent in 1992-93 to about 7 per cent in 2003-04. Recent data reveal that non-priority
sector housing loans outstanding as on February 18, 2005 were around Rs. 74 thousand
crore, which is, however, only 8.0 per cent of the gross bank credit. As already pointed out,
direct housing loans up to Rs. 15 lakh irrespective of the location now qualify as priority
sector lending; housing loans are understood to form a large component of such lending. In
addition, housing credit is also being provided by housing finance companies, which in turn
are also receiving some bank finance.
Thus, from miniscule amounts, the exposure of the banking sector to housing loans has
gone up. Unlike many other countries, asset impairment on account of housing finance
constitutes a very small portion. However, with growing competition in the housing finance
market, there has been a growing concern over its likely impact on the asset quality. While
no immediate financial stability concerns exist, there is a need to put in place appropriate
risk management systems, strengthen internal control procedures and also improve
regulatory oversight in this area. Banks also need to monitor their exposure and the credit
quality. In a fiercely competitive market, there may be some temptation to slacken the loan
scrutiny procedures and this needs to be severely checked.
Having delineated the broad contours of retail banking in India let me now come to its
opportunities and challenges.
Opportunities and Challenges of Retail Banking in India
Retail banking has immense opportunities in a growing economy like India. As the growth
story gets unfolded in India, retail banking is going to emerge a major driver. How does the
world view us? I have already referred to the BRIC Report talking India as an economic
superpower. A. T. Kearney, a global management consulting firm, recently identified India
as the "second most attractive retail destination" of 30 emergent markets.
The rise of the Indian middle class is an important contributory factor in this regard. The
percentage of middle to high income Indian households is expected to continue rising. The
younger population not only wields increasing purchasing power, but as far as acquiring
personal debt is concerned, they are perhaps more comfortable than previous generations.
Improving consumer purchasing power, coupled with more liberal attitudes toward
personal debt, is contributing to India's retail banking segment.
The combination of the above factors promises substantial growth in the retail sector,
which at present is in the nascent stage. Due to bundling of services and delivery channels,
the areas of potential conflicts of interest tend to increase in universal banks and financial
conglomerates. Some of the key policy issues relevant to the retail banking sector are:
financial inclusion, responsible lending, access to finance, long-term savings, financial
34
capability, consumer protection, regulation and financial crime prevention. What are the
challenges for the industry and its stakeholders?
First, retention of customers is going to be a major challenge. According to a research by

Reichheld and Sasser in the Harvard Business Review, 5 per cent increase in customer
retention can increase profitability by 35 per cent in banking business, 50 per cent in
insurance and brokerage, and 125 per cent in the consumer credit card market. Thus,
banks need to emphasise retaining customers and increasing market share.
Second, rising indebtedness could turn out to be a cause for concern in the future. India's
position, of course, is not comparable to that of the developed world where household debt
as a proportion of disposable income is much higher. Such a scenario creates high
uncertainty. Expressing concerns about the high growth witnessed in the consumer credit
segments the Reserve Bank has, as a temporary measure, put in place risk containment
measures and increased the risk weight from 100 per cent to 125 per cent in the case of
consumer credit including personal loans and credit cards (Mid-term Review of Annual
Policy, 2004-05).
Third, information technology poses both opportunities and challenges. Even with ATM
machines and Internet Banking, many consumers still prefer the personal touch of their
neighbourhood branch bank. Technology has made it possible to deliver services
throughout the branch bank network, providing instant updates to checking accounts and
rapid movement of money for stock transfers. However, this dependency on the network
has brought IT departments additional responsibilities and challenges in managing,
maintaining and optimizing the performance of retail banking networks. Illustratively,
ensuring that all bank products and services are available, at all times, and across the entire
organization is essential for today’s retails banks to generate revenues and remain
competitive. Besides, there are network management challenges, whereby keeping these
complex, distributed networks and applications operating properly in support of business
objectives becomes essential. Specific challenges include ensuring that account transaction
applications run efficiently between the branch offices and data centres.
Fourth, KYC Issues and money laundering risks in retail banking is yet another important
issue. Retail lending is often regarded as a low risk area for money laundering because of
the perception of the sums involved. However, competition for clients may also lead to KYC
procedures being waived in the bid for new business. Banks must also consider seriously
the type of identification documents they will accept and other processes to be completed.
The Reserve Bank has issued details guidelines on application of KYC norms in November
2004.
Wholesale Banking
35
Wholesale banking refers to the complete banking solution provided by the merchant
banks to the large scale business organizations and the government agencies or
institutions. To avail the facility of wholesale banking, the companies need to possess a
strong financial statement and operate on a large scale. Usually, multinational companies
are the clients of wholesale banking.
Features of Wholesale Banking
As the name signifies, wholesale banking operates to serve the large scale business
objectives.
To know more about the concept, let us understand its various characteristics:
• Large Scale Operations: Wholesale banking majorly meets the enormous financial
requirements of the large scale companies and the government.
• Low Operational Cost: The cost of carrying out transactions and other banking
operations is quite low due to a limited customer base and few numbers of
transactions.
• High Risk Involved: The risk level involved in wholesale banking is very high. T the
failure of the borrower company can lead to the collapse of all the parties associated
with it.
• Control Over Financial Transaction Monitoring and Recovery: Due to limited
customers, it becomes convenient for the banks to monitor the financial transactions
and recover the loans and advances.
36
• Huge Impact on Non-Performing Asset: If there is delay or default in the

repayment of loans and advances provided under wholesale banking, the non-
performing assets of the bank increases.
• High Cost of Deposit: The interest rates paid by the banks on the deposits made by
the substantial business entities is high.
Functions of Wholesale Banking

Wholesale banking is an entirely different concept and does not serve the purpose of small
businesses or individual clients.
Primary Functions
Some of the major services performed by wholesale banks are as follows:
• Making Advances: The principal purpose of wholesale banks is to provide loans

and advances of high value to the large scale business entities.
• Accepting Deposits: These banks also receive deposits from the big companies and
provides high interest on the deposited funds.
• Credit Creation: The wholesale banks increase the flow of funds in the economy by
initiating loans and deposits by the government and large scale companies.
Secondary Functions
The banks have some additional responsibilities which hare mentioned below:
• Underwriting: The wholesale bank raises capital for the projects of large business
organizations by issuing debt or equity shares to the investors on behalf of the
respective companies.
37
• Mergers and Acquisitions: Through operations like currency conversion, these

banks facilitate the merger of two or more companies across the globe and also the
acquisition of one business unit by the other is organization.
• Trust and Consultancy Services: The merchant banks provide various other
services like investment advice and trust-building to the client companies.
• Fund Management: The merchant banks continuously function towards managing
and handling of the funds deposited by the clients wisely.
Wholesale Banks to Market Conditions

Wholesale banks function in the economy and need to adjust and cope up with the market
conditions.
Following are the different adjustments and updations made by the merchant banks in this
context:
• Global Expansion: Wholesale banks expand to the places where the multinational
client companies have branches.
• Wholesale Credit Transformation: A wholesale bank focus on consistent client’s
experience, processes, roles and technology used in the credit product and bank’s
operations.
• Client Onboarding: The primary concern is enhancing the information,
transparency, service speed and experience of the client companies.
• Data Management: The banks control and enhance the security, governance and
quality of the confidential data.
• Monetize Mobile Capabilities: These banks facilitate customers with self-service
operations and information related to various products and services through mobile
channels.
38
• Platform Modernization, Simplification and Migration: The wholesale banks

function to simplify and modernize the business operations by accepting of deposits
and providing loans and advances.
• Relationship Management: Building up long term relationship with the clients is
essential for the merchant banks.
Advantages of Wholesale Banking
We can now say that wholesale banking is a suitable option for the companies which need
substantial financial assistance from time to time. ANd also for the ones looking forward to
availing the opportunities for growth and development.
The following are other benefits of wholesale banking:
• Provides Extra Safety to Depositors: In wholesale banking, the banks treat the
deposited funds with a high level of safety and put the amount in comparatively
secured investment opportunities.
• Low Transaction Fees: The banks charge the transaction fees at a discounted rate
for the customers of wholesale banking.
• Facilitates Large Trade Transactions: It supports the high-value transactions of
the companies operating on a large scale.
• Fulfils Huge Working Capital Requirements: Large business associations require
a considerable amount of funds to carry out day to day operations. Thus, wholesale
banking accomplishes this need by providing funds for working capital.
• Lending to Government: These banks even lend funds to the government of the
country for carrying out various long-term projects.
39
• Provides Cash Management Solution: Wholesale banking also facilitates effective

cash management, i.e. acquisition and investment of cash into the right opportunity.
Disadvantage of Wholesale Banking
The transactions of wholesale banking involve a high amount of funds which makes it a
complicated affair.
Let us now go through some of the limitations of wholesale banking:
• High Risk: As we know that the lumpsum transactions take place in wholesale
banking, there is a high level of risk involved.
• Expensive Business Accounts: Maintaining accounts and records is a costly affair
in wholesale banking when compared to traditional bank accounts.
• High-Interest Rates and Processing Fees: The borrower company is liable to pay
off high interest and processing fees on loans and advances to the banks.
• Relies on Stability of Location: When the company deposits a large amount at a
single location, i.e. the wholesale bank, there is a risk of loss if the bank faces a
situation of downfall.
• Payment for Unused Services: In wholesale banking, there is always a complaint
that the client companies have to pay even for those services which are not used by
them.
• May Lead to Client’s Exploitation: When the borrowed sum is of high value, there
are chances that the borrower company may be exploited by the bank.
40
Wholesale Banking in India
We know that India is a developing country, and with the increasing globalization, Indian
firms are converting into multinational companies. These companies operate across the
globe and therefore requires enormous funds to serve the working capital requirements,
investment needs and other financial obligations.
Even the Indian government promotes medium scale industries to build a reliable
infrastructure, facilitate sound market conditions, minimize deficits and for overall
economic development. All these factors result in the need for business finance.
In fact, in India, the revenue generated from the banking industry comprises majorly of
wholesale banking services. Since, these banks fulfil major corporate requirements such as
merchant banking services, project finance, working capital needs, investment banking
services, leasing finance, facilitates mergers and acquisitions, etc.
Wholesale banking is a whole sole solution to all the banking requirements of the
companies with huge turnover and high net worth facilitating the smooth transfer of funds,
proper allocation and investment of excess capital, internal stock transfer, etc.
There is a vast scope for wholesale banking in the Indian banking industry, and it is
flourishing rapidly with the increase in globalization and industrialization.
International Banking
International banking is just like any other banking service, but it takes place across
different nations or internationally. To put in another way, international banking is an
arrangement of financial service by a residential bank of one country to the residents of
another country. Mostly multinational companies and individuals use this banking facility
for transacting.
EXAMPLE OF INTERNATIONAL BANKING
Suppose Microsoft, an American company is functioning in London. It is in need of funds to
meet its working capital requirements. In such scenario, Microsoft can avail the banking
services in form of loans, overdraft or any other financial service through banks in London.
Here, the residential bank of London shall be giving its services to an American company.
Therefore, the transaction between them can be said to be part of international banking
facility.
FEATURES AND BENEFITS OF INTERNATIONAL BANKING
FLEXIBILITY
41
International banking facility provides flexibility to the multinational companies to deal in

multiple currencies. The major currencies that multinational companies or individuals can
deal with include euro, dollar, pounds, sterling, and rupee. The companies having
headquarters in other countries can manage their bank accounts and avail financial
services in other countries through international banking without any hassle.
ACCESSIBILITY
International banking provides accessibility and ease of doing business to the companies
from different countries. An individual or MNC can use their money anywhere around the
world. This gives them a freedom to transact and use their money to meet any requirement
of funds in any part of the world.
INTERNATIONAL TRANSACTIONS
International banking allows the business to make international bill payments. The
currency conversion facility allows the companies to pay and receive money easily. Also,
the benefits like overdraft facility, loans, deposits, etc. are available every time for overseas
transactions.
ACCOUNTS MAINTENANCE
A multinational company can maintain the records of global accounts in a fair manner with
the help of international banking. All the transactions of the company are recorded in the
books of the banks across the globe. By compiling the data and figures, the accounts of the
company can be maintained.
Participatory notes
What are participatory notes?
Foreign investment in India can broadly be classified into two categories—Foreign direct
investment (FDI) and investment made by foreign institutional investors (FIIs). In both of
these cases, foreign money enters the Indian markets and fuels growth of economy,
industries and capital market.
However, with the number of increasing regulations in India, it is not easy for foreign
money to enter the markets.
There are strict guidelines laid down by market regulator SEBI (Securities and Exchange
Board of India) for seeking approvals and documentation for FDI. Also, there are several
restrictions laid down on the exit of this money.
On the other hand, FII is mainly characterised as portfolio investment i.e. quick money
entering the Indian capital market for short-term. Due to its short-term nature, the
42
regulators have laid down fewer guidelines on FII than on FDI. But, the fact remains that
foreign money cannot enter Indian markets without regulatory approvals.
So, what happens to all those overseas investors, who want to invest in the Indian stock
markets without getting into the regulatory approval process and other hassles? Well, the
answer is participatory notes.
P-notes: Offshore derivative instruments
Participatory notes also called P-Notes are offshore derivative instruments with Indian
shares as underlying assets. These instruments are used for making investments in the
stock markets. However, they are not used within the country. They are used outside India
for making investments in shares listed in the Indian stock market. That is why they are
also called offshore derivative instruments.
Participatory notes are issued by brokers and FIIs registered with SEBI. The investment is
made on behalf of these foreign investors by the already registered brokers in India. For
example, Indian-based brokerages buy India-based securities and then issue participatory
notes to foreign investors. Any dividends or capital gains collected from the underlying
securities go back to the investors.
The brokers that issue these notes or trades in Indian securities have to mandatorily report
their PN issuance status to SEBI for each quarter. These notes allow foreign high networth
individuals, hedge funds and other investors to put money in Indian markets without being
registered with SEBI, thus making their participation easy and smooth. P-Notes also aid in
saving time and costs associated with direct registrations.
Why are participatory notes used?
Investing through P-Notes is very simple and hence very popular amongst FIIs. Overseas
investors who are not registered with SEBI have to go through a lot of scrutiny, such as
know-your-customer norms, before investing in Indian shares. To avoid these hurdles,
foreign investors take this route. Also, since the end beneficiary of these notes is not
disclosed, many investors who want to remain anonymous use it. These instruments aid
investors who do not want to register with SEBI and reveal their identities to take positions
in the Indian market.
Advantages of participatory notes
Anonymity: Any entity investing in participatory notes is not required to register with
SEBI, whereas all FIIs have to compulsorily get registered. It enables large hedge funds to
carry out their operations without disclosing their identity.
43
Ease of trading: Trading through participatory notes is easy because they are like contract
notes transferable by endorsement and delivery.
Tax saving: Some of the entities route their investment through participatory notes to take
advantage of the tax laws of certain preferred countries.
Disadvantages of P-notes
Indian regulators are not very happy about participatory notes because they have no way
to know who owns the underlying securities. It is alleged that a lot of unaccounted money
made its way to the country through the participatory note route.’
Role of Money Market, Forex Market, Debt Market

Money Market
Money Market is a segment of the financial market in India where borrowing and lending of
short-term funds take place. The maturity of money market instruments is from one day to
one year. In India, this market is regulated by both RBI (the Reserve bank of India) and
SEBI (the Security and Exchange Board of India). The nature of transactions in this market
is such that they are large in amount and high in volume. Thus, we can say that the entire
market is dominated by a small number of large players.
Objectives of the money market in India
The following are the important objectives of an Indian money market –
• Facilitate a parking place to employ short-term surplus funds.
• Aid room for overcoming short-term deficits.
44
• To enable the Central Bank to influence and regulate liquidity in the economy
through its intervention in this market.
• Help reasonable access to users of short-term funds to meet their requirements

quickly, adequately and at reasonable costs.
Segments of the Indian money market

The Indian money-market has the following two segments. The existence of the
unorganized market, though illegal, yet operates. However, we that is out of the scope of
the present article. So we will concentrate exclusively on the organized money-markets in
India. Wherever, in the blog article or elsewhere in the site we refer money-markets, it is in
organized money-market only.
1. Unorganized money-market
The unorganized money market is an old and ancient market, mainly it made of indigenous
bankers and money lenders, etc.
2. Organized money-market
The organized money market is that part which comes under the regulatory ambit of RBI &
SEBI. Governments (Central and State), Discount and Finance House of India (DFHI),
Mutual Funds, Corporate, Commercial or Cooperative Banks, Public Sector Undertakings,
Insurance Companies, and Financial Institutions and Non-Banking Financial Companies
(NBFCs) are the key players of the organized Indian money market.
Structure of organized money market of India
The organized money market in India is not a single market. It is a combination of markets
of various instruments. The following are the instruments that are integral parts of the
Indian money market system.
Call money or notice money
Call money, notice money, and term money markets are sub-markets of the Indian money
market. These markets provide funds for very short-term. Lending and borrowing from the
call money market for 1 day. Whereas lending and borrowing of funds from notice money
market are for 2 to 14 days. And when there are borrowing and lending of funds for the
tenor of more than 14 days, it refers to “Term Money”.
45
Treasury bills
The Bill market is a sub-market of this market in India. There are two types of the bill in
the money market. They are treasury bills and commercial bill. The treasury bills are also
known as T-Bills, T-bills are issued by the Central bank on behalf of Government, whereas
Commercial Bills are issued by Financial Institutions.
Treasury bills do not yield any interest, but it is issued at discount and repaid at par at the
time of maturity. In T-bills there is no risk of default; it is a safe investment instrument.
Commercial bills
Commercial bill is a money market instrument which is similar to the bill of exchange; it is
issued by a Commercial organization to raise money for short-term needs. In India, the
participants of the commercial bill market are banks and financial institutions.
Certificate of deposits
Certificate of Deposits also known as CDs. It is a negotiable money market instrument. It is

like a promissory note. Rates, terms, and amounts vary from institution to institution. CDs
are not supposed to trade publically neither it is traded on any exchange.
In general institutions issue certificate of deposit at discount on its face value. The banks
and financial institutions can issue CDs on a floating rate basis.
Commercial paper
The commercial paper is another money market instrument in India. We also call
commercial paper as CP. CP refers to a short-term unsecured money market instrument.
Big corporations with good credit rating issue commercial paper as a promissory note.
There is no collateral support for CPs. Hence, only large firms with considerable financial
strength can issue the instrument.
Money market mutual funds (MMMFs)
The money-market mutual funds were introduced by RBI in 1992 and since 2000 they are
brought under the regulation of SEBI. It is an open-ended mutual fund which invests in
46
short-term debt securities. This kind of mutual fund solely invests in instruments of the
money market.
Repo and the reverse repo market
Repo means “Repurchase Agreement”. It exists in India since December 1992. REPO means
selling a security under an agreement to repurchase it at a predetermined date and rate.
Those who deal in government securities they use the repo as an overnight borrowings.
Features of the Indian money market
The following are the important features of the money market in India –
The money market is purely for short-term funds or assets called near money.
All the instruments of the money market deal only with financial assets that are financial in
nature. Also, such instruments have maturity period up to one year.
It deals assets that can convert into cash readily without much loss and with minimum
transaction cost.
Generally, transactions take place through oral communication (for eg. phone or mobile).
The exchange of relevant documents and written communications take place subsequently.
There is no formal place for the trading ( like a stock exchange).
Brokers free transactions are there.
The components of a money market are the Central Bank, Commercial Banks, Non-banking
financial companies, discount houses, and acceptance house. Commercial banks are
dominant player of this market.
Functions of Indian money markets
The instruments of this market are liquid when we compare it with other financial
instruments. We can convert these instruments into cash easily. Thus, they are able to
47
address the need for the short-term surplus funds of the lenders and short-term fund
requirements of the borrowers.
The major functions of such market instrument are to cater to the short-term financial
needs of the economy. Some other functions are as following:
1. It helps in effective implementation of the RBI’s monetary policy.

2. This market helps to maintain demand and supply equilibrium with regard to short-
term funds.
3. It also meets the need for short-term fund requirement of the government.
4. It helps in maintaining liquidity in the economy.
One important consideration about money market investment is that retail investors have
very limited scope for directly participating in it. Recently with NSE being offering some
instruments of the money market for retail investors. However, due to the large ticket size
of trade and low liquidity, it is out of reach of retail investors. But nothing to worry much
on this front. As retail investors of India, you can passively invest in any of such
instruments through money market mutual funds.
India Debt Market

Debt market refers to the financial market where investors buy and sell debt securities,
mostly in the form of bonds. These markets are important source of funds, especially in a
developing economy like India. India debt market is one of the largest in Asia. Like all other
countries, debt market in India is also considered a useful substitute to banking channels
for finance.
The most distinguishing feature of the debt instruments of Indian debt market is that the
return is fixed. This means, returns are almost risk-free. This fixed return on the bond is
often termed as the 'coupon rate' or the 'interest rate'. Therefore, the buyer (of bond) is
giving the seller a loan at a fixed interest rate, which equals to the coupon rate.
Classification of Indian Debt Market
Indian debt market can be classified into two categories:
48
Government Securities Market (G-Sec Market): It consists of central and state

government securities. It means that, loans are being taken by the central and state
government. It is also the most dominant category in the India debt market.
Bond Market: It consists of Financial Institutions bonds, Corporate bonds and debentures
and Public Sector Units bonds. These bonds are issued to meet financial requirements at a
fixed cost and hence remove uncertainty in financial costs.
Advantages
The biggest advantage of investing in Indian debt market is its assured returns. The returns
that the market offer is almost risk-free (though there is always certain amount of risks,
however the trend says that return is almost assured). Safer are the government securities.
On the other hand, there are certain amounts of risks in the corporate, FI and PSU debt
instruments. However, investors can take help from the credit rating agencies which rate
those debt instruments. The interest in the instruments may vary depending upon the
ratings.
Another advantage of investing in India debt market is its high liquidity. Banks offer easy
loans to the investors against government securities.
Disadvantages
As there are several advantages of investing in India debt market, there are certain
disadvantages as well. As the returns here are risk free, those are not as high as the equities
market at the same time. So, at one hand you are getting assured returns, but on the other
hand, you are getting less return at the same time.
Retail participation is also very less here, though increased recently. There are also some
issues of liquidity and price discovery as the retail debt market is not yet quite well
developed.
Debt Instruments
There are various types of debt instruments available that one can find in Indian debt
market.
Government Securities
It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the
Government of India. These securities have a maturity period of 1 to 30 years. G-Secs offer
fixed interest rate, where interests are payable semi-annually. For shorter term, there are
Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days.
Corporate Bonds
49
These bonds come from PSUs and private corporations and are offered for an extensive
range of tenures up to 15 years. There are also some perpetual bonds. Comparing to G-Secs,
corporate bonds carry higher risks, which depend upon the corporation, the industry
where the corporation is currently operating, the current market conditions, and the rating
of the corporation. However, these bonds also give higher returns than the G-Secs.
Certificate of Deposit
These are negotiable money market instruments. Certificate of Deposits (CDs), which
usually offer higher returns than Bank term deposits, are issued in demat form and also as
a Usance Promissory Notes. There are several institutions that can issue CDs. Banks can
offer CDs which have maturity between 7 days and 1 year. CDs from financial institutions
have maturity between 1 and 3 years. There are some agencies like ICRA, FITCH, CARE,
CRISIL etc. that offer ratings of CDs. CDs are available in the denominations of ` 1 Lac and in
multiple of that.
Commercial Papers
There are short term securities with maturity of 7 to 365 days. CPs are issued by corporate
entities at a discount to face value.
Forex Market
What Is Foreign Exchange Market?
The foreign exchange market, also referred to as the forex market, is a decentralized global
marker for trading currencies. Forex market is an over the counter (OTC) market. The forex
market determines the foreign exchange rates. It involves selling, buying and exchanging
currencies at the current market price. Forex market is the largest market in the world in
terms of trade volume.
Foreign Exchange Market In India
Features Of Foreign Exchange Market
Below mentioned are the features of foreign exchange market:
1) Low Trading Cost:
Lower trading cost has enabled even small investors to earn good profits. Forex traders
charge a minimal fee towards commission, unlike other investment options. The forex
commission is restricted to the spread or the difference between buying and selling prices
for a currency pair.
50
2) Trading Opportunity For 24 Hours, 5 Days A Week
The foreign exchange market is open 24 hours from Monday to Friday. With a 24 hours
market, you have more opportunities to execute trades. Foreign exchange market opens at
Sunday 22:05 GMT and closes at Friday 21:50 GMT.
3) High Leverage
You can trade on margins which are technically on borrowed money in forex market. The
value for your investment is high as the returns can be seen increasing exponentially. As
forex market is highly volatile, you can suffer huge losses by trading with leverage
(borrowed money) if the market works against you. Forex market is a double-edged sword.
If the market plays in your favor, you make good profits. If the market plays against your
bet, you suffer huge losses.
4) Highly Transparent
Foreign exchange market is a transparent market in which the traders have full access to
market related data and information that are required to place successful transactions.
With transparent markets, traders have good control over their investments and can
decide on their further steps on the basis of information available.
5) Accessibility Of Forex Market
You can access your forex market account from anywhere, provided you have an internet
connection. You can trade from anywhere at any time. The accessibility enables forex
market to score over other markets as it is convenient for the traders to place trade
transactions at leisure.
6) High Liquidity
Traders are free to buy and sell currencies of their own choice in forex market. This facility
allows traders exchange currencies without affecting the prices of the currency pair being
traded.
Types Of Foreign Exchange Market
Following are the types of foreign exchange market:
51
1) Spot Market
The transactions involving currency pairs in this market happen swiftly. Transactions
made in spot market include instant payment at the present exchange rate which is also
called as the ‘spot rate’. Spot market does not expose the traders to the volatility of the
forex market which raises or lowers the price between the trade and agreement.
2) Futures Market
As the name suggests, transactions in future market involve future payment and future
delivery at a previously agreed exchange rate, which is also called as the future rate. These
deals and contracts are standardized which means that the elements of the deal or
agreement are fixed and cannot be negotiated. Future market transactions are popular
amongst those traders who perform large forex transactions and seek a steady return on
their investments.
3) Forward Market
Forward market transactions work on the similar lines of future market. The major
difference is that the terms are negotiable by the parties under forward market. The terms
can be negotiated and tailored as per the needs of the parties involved in the agreement.
Forward market allows flexibility.
Functions Of Foreign Exchange Market
Following are the important points on foreign exchange market:
1) Transfer Function:
The most basic function of the forex market is to transfer purchasing power across
countries. Forex market enables the conversion of one currency into another. The currency
conversion is enabled through financial instruments like foreign bills of exchange, bank
drafts, and telephonic transfers among others.
2) Credit Function:
Forex market offers both national and international credits to promote foreign trades. The
bill of exchange used in the international payments usually matures in three months.
52
3) Hedging Function:
In risky situations, the forex market operates as a hedge. Hedging is an act of equating
assets and liabilities in foreign currency to avoid the risk due to future changes in the value
of foreign currency.
Advantages Of Foreign Exchange Market
Below mentioned are the advantages of foreign exchange market:
• Highly flexible
• Can trade on the currency pair of your choice
• Highly leveraged
• Low cost transactions
• Highly transparent
RBI’s FEMA guidelines
The Foreign Exchange Management Act (FEMA) was an official Act that consolidated and amended
laws governing foreign exchange in India. The primary objective of FEMA act was “facilitating
external trade and payments and...promoting the orderly development and maintenance of foreign
exchange market in India”. FEMA was enacted by the Parliament of India in the winter session of
1999 to replace the Foreign Exchange Regulation Act (FERA) of 1973.
FERA vs FEMA - From Regulation to Management
When FERA was introduced in 1973, the Indian economy was suffering from an all-time low of
foreign exchange (forex) reserves. To rebuild these reserves, the government took a stance that all
forex earned by Indian residents -- living within India or abroad -- belonged to the Government of
India and had to be surrendered to the Reserve Bank of India (RBI). FERA, thus, severely regulated
all forex transactions that had a direct or indirect impact on India’s forex reserves, which included
the import and/or export of currency.
However, FERA did not quite have the effect that was envisioned and the Indian economy
continued to decline. To compound matters, the strict regulatory environment created under the
‘License Raj’ dampened the Indian economy further. To mitigate the downturn, then-Finance
Minister Manmohan Singh unleashed economic liberalization in 1991 and as a result, the
government had to make a series of concessions to FERA’s stipulations under the new rules. These
concessions made FERA largely irrelevant under the new economic regime. Eventually, the
government decided to move from “currency regulation” to “currency management”, and set up
FEMA.
53
The RBI proposed FEMA in 1999 to administrate foreign trade and exchange transactions.
According to the official order, FEMA would “consolidate and amend the law relating to foreign
exchange (forex) with the objective of facilitating external trade and payments and for promoting
the orderly development and maintenance of foreign exchange market in India”.
The The Foreign Exchange Management Act officially came into existence on 1st June 2000 and its
arrival paved the way for the introduction of the Prevention of Money Laundering Act (PMLA) of
2002.
Important FEMA Guidelines and Features
Most significantly, FEMA regarded all forex-related offences as civil offences, whereas FERA
regarded them as criminal offences. Additionally, there were other important guidelines such as:
• FEMA did not apply to Indian citizens who resided outside India. This criterion was
checked by calculating the number of days a person resided in India during the previous
financial year (182 days or more to be a resident). It was noted that even an office, a branch,
or an agency could be a ‘person’ for the purpose of checking residency.
• FEMA authorized the central government to impose restrictions on and supervise three
things – payments made to any person outside India or receipts from them, forex, and
foreign security deals.
• It specified the areas around acquisition/holding of forex that required specific permission
of the Reserve Bank of India (RBI) or the government.
• FEMA put foreign exchange transactions into two categories – capital account and current
account. A capital account transaction altered the assets and liabilities outside India or
inside India but of a person resident outside India. Thus, any transaction that changed
overseas assets and liabilities for an Indian resident in a foreign country, or vice versa, was
classified as a capital account transaction. Any other transaction fell into the current
account category.
FEMA and Capital Account Transactions
FEMA also gave the RBI the authority to regulate capital account transactions. As per the Foreign
Exchange Management (Permissible Capital Account Transactions) Regulations of 2000, “no
person shall undertake or sell or draw foreign exchange to or from an authorised person for any
capital account transaction”. The Regulations prohibited any person resident outside India from
investing in Indian firms or organisations in the business of chit funds such as a Nidhi company,
agricultural or plantation activities, real estate (excluding development of townships, construction
of residential/commercial premises, roads or bridges), or construction of farm houses, and/or in
trading in Transferable Development Rights (TDRs).
54
It did allow for transactions carried out by Indian residents that included investments in foreign
securities, foreign currency loans raised in and out of India, transfer of immovable property outside
India, the issue of guarantees in favour of anybody living outside India, and the export/import and
holding of currency/currency notes.
FEMA and Current Account Transactions
Under The Foreign Exchange Management Act, the central government issued the Foreign
Exchange Management (Current Account Transaction) Rules of 2000 which restricted forex deals
made by authorised persons under their current account. Under the FEMA rules, current account
transactions that were prohibited, not prohibited, and permitted, required the prior approval of
the central government and/or RBI.
Prohibited transactions included the remittance of lottery winnings, income from racing/riding,
purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes,
commission on exports made towards equity investment in JVs/wholly owned subsidiaries of
Indian companies abroad, amongst others. Additionally, Nepal and Bhutan allowed the use of
Indian currency for local transactions, and the citizens of these countries were considered at par
with Indian citizens from a legal standpoint. Because of these provisions allowing for a common
currency market in India, Nepal and Bhutan, use of forex for transactions in – or with the residents
of – Nepal and Bhutan was also prohibited.
Moreover, FEMA recognized the growing international presence of Indians as well as the rising
contribution of Non Resident Indians (NRIs) to the Indian economy. Thus, it allowed individuals to
avail forex facility (up to a limit of US$250,000) for a variety of purposes that included international
travel to any country (except Nepal and Bhutan), gifts, donations, travel for overseas employment,
emigration and maintenance of close relatives living abroad.
How Does FEMA Empower Authorities and Citizens?
The RBI was the overall controlling authority as far as FEMA was concerned. It worked with and
empowered the central bank to specify the different classes of capital account transactions along
with the exchange rate admissible for each such transaction.
• Authorised persons could withdraw or sell forex; however, the Act empowered the RBI to
put several restrictions on their capital account. Authorized persons were expected to
provide details and information regarding forex transactions to the RBI on a regular basis.
• FEMA allowed Indian residents to carry out transactions in forex, foreign security, or to
own immovable property abroad. This was permitted if the currency, security, or property
was owned or acquired when he/she was living outside India, or if it was inherited by
him/her from someone living outside India.
55
• FEMA regulations covered forex transactions and remittances which included individuals
or entrepreneurs moving money in or out of India, or exchanging foreign currency in India
for travel purposes.
• There were many subsequent regulations and notifications issued under the Act
addressing specific issues such as authentication of documents, current account
transactions, adjudication proceedings and appeal, compounding proceedings, permissible
capital account transactions and borrowing or lending in forex, amongst others.
Indeed, FEMA was drafted to create a more liberal foreign exchange market in India. The Act
encouraged deregulation of foreign exchange and smooth international trade. FEMA also has a
distinct administrative difference from FERA, which sought to impose sweeping regulations on
every aspect of India forex transactions. On the other hand, FEMA aimed to manage only certain
forex transactions that might have an impact on national security and the wider national economy,
and opened up individual forex transactions to the free market.
With Drip Capital’s expert guidance and consulting, entities can better comply with FEMA. This
includes specific guidance on FEMA-applicable areas and export businesses within India as well as
all branches, offices, and agencies located outside India that are owned or controlled by a resident
of India.
London InterBank Offered Rate (LIBOR)
What Is London InterBank Offered Rate (LIBOR)?

The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major
global banks lend to one another in the international interbank market for short-term
loans.
LIBOR, which stands for London Interbank Offered Rate, serves as a globally accepted key
benchmark interest rate that indicates borrowing costs between banks. The rate is
calculated and published each day by the Intercontinental Exchange (ICE).
About LIBOR
LIBOR is the average interest rate at which major global banks borrow from one another. It
is based on five currencies including the US dollar, the euro, the British pound, the Japanese
yen, and the Swiss franc, and serves seven different maturities—overnight/spot next, one
week, and one, two, three, six, and 12 months.
56
The combination of five currencies and seven maturities leads to a total of 35 different
LIBOR rates calculated and reported each business day. The most commonly quoted rate is
the three-month U.S. dollar rate, usually referred to as the current LIBOR rate.
Each day, ICE asks major global banks how much they would charge other banks for short-
term loans. The association takes out the highest and lowest figures, then calculates the
average from the remaining numbers. This is known as the trimmed average. This rate is
posted each morning as the daily rate, so it's not a static figure. Once the rates for each
maturity and currency are calculated and finalized, they are announced/published once a
day at around 11:55 am London time by IBA.
LIBOR is also the basis for consumer loans in countries around the world, so it impacts
consumers just as much as it does financial institutions. The interest rates on various credit
products such as credit cards, car loans, and adjustable rate mortgages fluctuate based on
the interbank rate. This change in rate helps determine the ease of borrowing between
banks and consumers.
But there is a downside to using the LIBOR rate. Even though lower borrowing costs may
be attractive to consumers, it does also affect the returns on certain securities. Some
mutual funds may be attached to LIBOR, so their yields may drop as LIBOR fluctuates.
Important Point
LIBOR is the benchmark interest rate at which major global lend to one another.
LIBOR is administered by the Intercontinental Exchange which asks major global banks
how much they would charge other banks for short-term loans.
The rate is calculated using the Waterfall Methodology, a standardized, transaction-based,
data-driven, layered method.
How Is LIBOR Calculated?
The ICE Benchmark Administration (IBA) has constituted a designated panel of global
banks for each currency and tenor pair. For example, 16 major banks, including Bank of
America, Barclays, Citibank, Deutsche Bank, JPMorgan Chase, and UBS constitute the panel
for US dollar LIBOR. Only those banks that have a significant role in the London market are
considered eligible for membership on the ICE LIBOR panel, and the selection process is
held annually.
As of April 2018, the IBA submitted a new proposal to strengthen the LIBOR calculation
methodology. It suggested using a standardized, transaction-based, data-driven, layered
method called the Waterfall Methodology for determining LIBOR.
57
The first transaction-based level involves taking a volume-weighted average price (VWAP)
of all eligible transactions a panel bank may have assigned a higher weighting for
transactions booked closer to 11:00 a.m. London time.
The second transaction-derived level involved taking submissions based on transaction-
derived data from a panel bank if it does not have a sufficient number of eligible
transactions to make a Level 1 submission.
The third level—expert judgment—comes into play when a panel bank fails to make a
Level 1 or a Level 2 submission. It submits the rate at which it could finance itself at 11:00
a.m. London time with reference to the unsecured, wholesale funding market.
Uses of LIBOR
LIBOR is used worldwide in a wide variety of financial products. They include the
following:
Standard interbank products like the forward rate agreements (FRA), interest rate swaps,
interest rate futures/options, and swaptions
Commercial products like floating rate certificate of deposits and notes, syndicated loans,
and variable rate mortgages
Hybrid products like collateralized debt obligations (CDO), collateralized mortgage
obligations (CMO), and a wide variety of accrual notes, callable notes, and perpetual notes
Consumer loan-related products like individual mortgages and student loans
LIBOR is also used as a standard gauge of market expectation for interest rates finalized by
central banks. It accounts for the liquidity premiums for various instruments traded in the
money markets, as well as an indicator of the health of the overall banking system. A lot of
derivative products are created, launched and traded in reference to LIBOR. LIBOR is also
used as a reference rate for other standard processes like clearing, price discovery, and
product valuation.
Mumbai Interbank Offered Rate – MIBOR

What Is the Mumbai Interbank Offered Rate – MIBOR?
The Mumbai Interbank Offer Rate (MIBOR) is one iteration of India's interbank rate, which
is the rate of interest charged by a bank on a short-term loan to another bank. As India's
financial markets have continued to develop, India felt it needed a reference rate for its
debt market, which led to the development and introduction of the MIBOR.
58
Banks borrow and lend money to one another on the interbank market in order to maintain
appropriate, legal liquidity levels, and to meet reserve requirements placed on them by
regulators. Interbank rates are made available only to the largest and most creditworthy
financial institutions.
What Does the Mumbai Interbank Offered Rate (MIBOR) Tell You?
MIBOR is calculated every day by the National Stock Exchange of India (NSEIL) as a
weighted average of lending rates of a group of major banks throughout India, on funds
lent to first-class borrowers. This is the interest rate at which banks can borrow funds from
other banks in the Indian interbank market.
The Mumbai Interbank Offer Rate (MIBOR) is modeled closely on LIBOR. The rate is used
currently for forward contracts and floating-rate debentures. Over time and with more use,
MIBOR may become more significant.
MIBOR is calculated based on input from a panel of 30 banks and primary dealers, and it
represents India's interbank borrowing rate.
Role and Functions of Capital Markets, SEBI

SEBI – Securities and Exchange Board of India
You all must have heard about the Securities Exchange Board of India (SEBI). As a banking
aspirant, it is necessary for you to have knowledge about SEBI. Not only this, the general
awareness and banking awareness section in banking exams feature questions based on
the regulatory authorities. One of the major regulatory authorities is the Securities
Exchange Board of India (SEBI).
Let’s move on to read more about SEBI, its role and objective and key functional areas. This
post intends to equip you with all the relevant information about the SEBI. This will help
you in banking entrance exams and group discussions.
About SEBI
Securities Exchange Board of India (SEBI) was established in 1988 to regulate the functions
of securities market.
SEBI promotes orderly development in the stock market.
SEBI was set up with the main idea to keep a check on malpractices and protect the interest
of investors.
Now, let us gain more insights into the objectives and functions of SEBI.
59
Objectives of SEBI
The objectives of SEBI are:
To regulate activities in stock exchange and ensure safe investments
To prevent fraudulent practices by striking a balance between business and its statutory
regulations
Functions of SEBI
The three main functions of SEBI are as follows:
Protective function
Developmental function
Regulatory function
Protective functions are performed by SEBI to protect interest of investors and provide
safe investments. This entails:
Checks on prices rigging: Price rigging refers to manipulating the prices of securities.
Prevents insider trading: Insider refers to directors, promoters of the company. These
people have sensitive information which they can use to make profit. SEBI keeps a
stringent check whether insiders are buying securities of the company.
Prohibits fraudulent and unfair practices: SEBI does not allow companies to make
misleading statements.
Developmental functions are performed by the SEBI to develop activities in stock
exchange to increase the business in stock exchange. Under this category, following
functions are performed by SEBI:
Promoting training of intermediaries of the securities market
Promote activities of stock exchange by adopting flexible methods such as internet trading
Initial public offer of primary market is permitted through stock exchange.
Regulatory functions are performed by SEBI to regulate the business in stock exchange.
SEBI registers and regulates the working of mutual funds and other investment options.
SEBI regulates takeover of the companies.
60
SEBI conducts inquiries and audit of stock exchanges.

Now, let’s understand the organizational structure of SEBI.
Organizational Structure of SEBI
SEBI is a corporate sector divided into five departments. Each department is headed by an
executive director.
The current chairman of SEBI is Ajay Tyagi.
The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and Delhi.
There are two advisory committees to deal with primary and secondary markets.
After reading this post, you must have got a fair idea about the Securities Exchange Board
of India (SEBI). Stay tuned for more updates on general awareness articles.
Capital Markets in India

The capital market provides the support to the system of capitalism of the country. The
Securities and Exchange Board of India (SEBI), along with the Reserve Bank of India are the
two regulatory authority for Indian securities market, to protect investors and improve the
microstructure of capital markets in India. With the increased application of information
technology, the trading platforms of stock exchanges are accessible from anywhere in the
country through their trading terminals.
Capital Markets In India
India has a fair share of the world economy and hence the capital markets or the share
markets of India form a considerable portion of the world economy. The capital market is
vital to the financial system.
The capital Markets are of two main types. The Primary markets and the secondary
markets. In a primary market, companies, governments or public sector institutions can
raise funds through bond issues. Alos, Corporations can sell new stock through an initial
public offering (IPO) and raise money through that. Thus in the primary market, the party
directly buys shares of a company. The process of selling new shares to investors is called
underwriting.
In the Secondary Markets, the stocks, shares, and bonds etc. are bought and sold by the
customers. Examples of the secondary capital markets include the stock exchanges like
NSE, BSE etc. In these markets, using the technology of the current time, the shares, and
bonds etc. are sold and purchased by parties or people.
61
Broad Constituents in the Indian Capital Markets

Fund Raisers
Fund Raisers are companies that raise funds from domestic and foreign sources, both
public and private. The following sources help companies raise funds.
Fund Providers
Fund Providers are the entities that invest in the capital markets. These can be categorized
as domestic and foreign investors, institutional and retail investors. The list includes
subscribers to primary market issues, investors who buy in the secondary market, traders,
speculators, FIIs/ sub-accounts, mutual funds, venture capital funds, NRIs, ADR/GDR
investors, etc.
Intermediaries
Intermediaries are service providers in the market, including stock brokers, sub-brokers,
financiers, merchant bankers, underwriters, depository participants, registrar and transfer
agents, FIIs/ sub-accounts, mutual Funds, venture capital funds, portfolio managers,
custodians, etc.
Organizations
Organizations include various entities such as MCX-SX, BSE, NSE, other regional stock
exchanges, and the two depositories National Securities Depository Limited (NSDL) and
Central Securities Depository Limited (CSDL).
Market Regulators
Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve
Bank of India (RBI), and the Department of Company Affairs (DCA).
Role Of Capital Market In India
The capital market has a crucial significance to capital formation. For a speedy economic
development, the adequate capital formation is necessary. The significance of capital
market in economic development is explained below:
Mobilization Of Savings And Acceleration Of Capital Formation:
In developing countries like India, the importance of capital market is self-evident. In this
market, various types of securities help to mobilize savings from various sectors of the
population. The twin features of reasonable return and liquidity in stock exchange are
62
definite incentives to the people to invest in securities. This accelerates the capital
formation in the country.
Raising Long-Term Capital
The existence of a stock exchange enables companies to raise permanent capital. The
investors cannot commit their funds for a permanent period but companies require funds
permanently. The stock exchange resolves this dash of interests by offering an opportunity
to investors to buy or sell their securities, while permanent capital with the company
remains unaffected.
Promotion Of Industrial Growth
The stock exchange is a central market through which resources are transferred to the
industrial sector of the economy. The existence of such an institution encourages people to
invest in productive channels. Thus it stimulates industrial growth and economic
development of the country by mobilizing funds for investment in the corporate securities.
Ready And Continuous Market
The stock exchange provides a central convenient place where buyers and sellers can easily
purchase and sell securities. Easy marketability makes an investment in securities more
liquid as compared to other assets.
Technical Assistance
An important shortage faced by entrepreneurs in developing countries is technical
assistance. By offering advisory services relating to the preparation of feasibility reports,
identifying growth potential and training entrepreneurs in project management, the
financial intermediaries in capital market play an important role.
Reliable Guide To Performance
The capital market serves as a reliable guide to the performance and financial position of
corporate, and thereby promotes efficiency.
Proper Channelization Of Funds
The prevailing market price of a security and relative yield are the guiding factors for the
people to channelize their funds in a particular company. This ensures effective utilization
of funds in the public interest.
Provision Of Variety Of Services:
The financial institutions functioning in the capital market provide a variety of services
such as a grant of long-term and medium-term loans to entrepreneurs, provision of
63
underwriting facilities, assistance in the promotion of companies, participation in equity

capital, giving expert advice etc.
Development Of Backward Areas
Capital Markets provide funds for projects in backward areas. This facilitates economic
development of backward areas. Long-term funds are also provided for development
projects in backward and rural areas.
Foreign Capital
Capital markets make possible to generate foreign capital. Indian firms are able to generate
capital funds from overseas markets by way of bonds and other securities. The government
has liberalized Foreign Direct Investment (FDI) in the country. This not only brings in the
foreign capital but also foreign technology which is important for economic development of
the country.
Easy Liquidity
With the help of secondary market, investors can sell off their holdings and convert them
into liquid cash. Commercial banks also allow investors to withdraw their deposits, as and
when they are in need of funds.
Stock Exchange
What is an exchange?
Put simply, an exchange is an institution, organization, or association which hosts a market
where stocks, bonds, options, futures, and commodities are traded. Buyers and sellers
come together to trade during specific hours on business days. Exchanges impose rules and
regulations on the firms and brokers that are involved with them. If a particular company is
traded on an exchange, it is referred to as "listed."
Securities that are not listed on a stock exchange are sold OTC, which stands for Over-The-
Counter. Companies that have shares traded OTC are usually smaller and riskier because
they do not meet the requirements to be listed on a stock exchange. Many giant blue-chip
stocks, such as Berkshire Hathaway, at one time traded on the over-the-counter market
before migrating to the so-called "Big Board," or New York Stock Exchange.
What Is the Purpose of a Stock Exchange?
When a business raises capital by issuing shares, the owners of those new shares are likely
going to want to sell their stake someday. Maybe they have a child going to college and
need to cover the tuition bill. Perhaps they pass away, and their estate is subject to some
hefty estate taxes. They may even leave it to their grandchildren, who get to enjoy the
64
stepped-up basis loophole, but the heirs want to liquidate to buy a house. Whatever is
driving their decision, they aren't likely to tie up their funds unless they know somehow,
someway, at some point in the future, they'll be able to find a buyer for their holdings
without too much trouble in what is known as "the secondary market."
Without a stock exchange, these owners would have to go around to friends, family
members, and community members, hoping to find someone to whom they could sell their
shares. (Technically, you can do this. You don't have to sell your shares on a stock
exchange. You can take physical possession of your stocks in certificate form, endorse
them, and sign them over to someone in exchange for payment in your lawyer's office, or at
your dining room table if you are so inclined. When the stock exchange was closed during
World War I, many people did just that, creating a secondary shadow market.
The downside is that there is no transparency. Nobody knows what the best price is for a
given stock at any given moment in time. You could be selling your shares for $50 while the
guy two towns over is getting $70.) With a stock exchange, you will never know the person
on the other end of the trade. He, she, or it could be halfway around the world. It could be a
retired teacher. It could be a multi-billion dollar insurance group. It could be a publicly
traded mutual fund or hedge fund.
The need for convenience is what led to the establishment of the biggest stock exchange in
the world. In the United States, a group of stockbrokers met under a buttonwood tree in
New York City. On May 17th, 1792, twenty-four of these stockbrokers got together outside
of 68 Wall Street to sign the now-famous Buttonwood Agreement, which effectively created
the New York Stock & Exchange Board. Almost three-quarters of a century later, in 1863, it
was officially renamed the New York Stock Exchange. These days, most people refer to it as
the NYSE.
What Are the Major Stock Exchanges in the World?

At one time, the United States had thriving regional stock exchanges that were major hubs
for their particular part of the country. In San Francisco, for example, the Pacific Stock
Exchange had an open outcry system where brokers would handle buy and sell orders for
local investors who wanted to purchase or liquidate their ownership stakes. Most of these
were shut down, purchased, absorbed, or merged following the rise of the microchip, which
made electronic networks much more efficient for finding liquidity so that an investor in
California could just as easily sell his or her shares to someone in Zurich.
15 biggest stock exchanges in the world by market capitalization of listed securities
are:
65
The New York Stock Exchange - Located in New York City; $22.923 trillion in listed
market capitalization.
NASDAQ - Short for the "National Association of Securities Dealers Automated Quotation,"
this electronic stock exchange is located in New York City; $10.857 trillion in listed market
capitalization.
Tokyo Stock Exchange - Formally known as the Japan Exchange Group, located in Tokyo,
Japan; $4.485 trillion in listed market capitalization.
Shanghai Stock Exchange - Located in Shanghai, China; $3.986 trillion in listed market
capitalization.
Hong Kong Stock Exchange - Located in Hong Kong, Hong Kong; $3.936 trillion in listed
Euronext - Located throughout Europe (France, Portugal, The Netherlands, and Belgium);
$3.927 trillion in listed market capitalization.
London Stock Exchange - Located in London, England; $3.767 trillion in listed market
capitalization.
Shenzhen Stock Exchange - Located in Shenzhen, China; $2.504 trillion in listed market
capitalization.
TMX Group - The Canadian stock exchange is located in Toronto, Canada; $2.095 trillion in
Bombay Stock Exchange - Located in Mumbai, India; $2.056 trillion in market
capitalization.
National Stock Exchange of India - Located in Mumbai, India; $2.030 trillion in market
capitalization.
Deutsche Börse - The German stock exchange, located in Frankfurt, Germany; $1.864
trillion in market capitalization.
SIX Swiss Exchange - The Zurich stock exchange, located in Zurich, Switzerland; $1.523
trillion in listed market capitalization.
Korea Exchange - The South Korean stock exchange located in Seoul, South Korea; $1.463
trillion in listed market capitalization.
Nasdaq Nordic - Located in Stockholm, Sweden; $1.372 trillion in listed market
capitalization.
66
What Is the Difference Between a Stock Exchange and a Commodity Exchange?

A stock exchange is where pieces of ownership in businesses (stocks) are bought and sold
among investors. A commodity exchange is where goods that come from the Earth, such as
corn, soybeans, cattle, oil, silver, gold, coffee, and pork bellies are bought and sold among
parties, frequently not just for investment purposes but for actual use in business
operations.
Registration of brokers and sub-brokers share transfer agents etc

Registration of stock brokers, sub-brokers, share transfer agents, etc. .
12 . (1) No stock broker, sub-broker, share transfer agent, banker to an issue, trustee of
trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager,
investment adviser and such other intermediary who may be associated with securities
market shall buy, sell or deal in securities except under, and in accordance with, the
conditions of a certificate of registration obtained from the Board in accordance with the
[regulations] made under this Act :
Provided that a person buying or selling securities or otherwise dealing with the securities
market as a stock broker, sub-broker, share transfer agent, banker to an issue, trustee of
trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager,
investment adviser and such other intermediary who may be associated with securities
market immediately before the establishment of the Board for which no registration
certificate was necessary prior to such establishment, may continue to do so for a period of
three months from such establishment or, if he has made an application for such
registration within the said period of three months, till the disposal of such application :
[Provided further that any certificate of registration, obtained immediately before the
commencement of the Securities Laws (Amendment) Act, 1995, shall be deemed to have
been obtained from the Board in accordance with the regulations providing for such
registration.
(1A) No depository, [participant,] custodian of securities, foreign institutional investor,
credit rating agency, or any other intermediary associated with the securities market as the
Board may by notification in this behalf specify, shall buy or sell or deal in securities except
under and in accordance with the conditions of a certificate of registration obtained from
the Board in accordance with the regulations made under this Act :
Provided that a person buying or selling securities or otherwise dealing with the securities
market as a depository, 3[participant,] custodian of securities, foreign institutional investor
67
or credit rating agency immediately before the commencement of the Securities Laws
(Amendment) Act, 1995, for which no certificate of registration was required prior to such
commencement, may continue to buy or sell securities or otherwise deal with the securities
market until such time regulations are made under clause (d) of sub-section (2) of section
30.
(1B) No person shall sponsor or cause to be sponsored or carry on or caused to be carried
on any venture capital funds or collective investment schemes including mutual funds,
unless he obtains a certificate of registration from the Board in accordance with the
regulations :
Provided that any person sponsoring or causing to be sponsored, carrying or causing to be
carried on any venture capital funds or collective investment schemes operating in the
securities market immediately before the commencement of the Securities Laws
(Amendment) Act, 1995, for which no certificate of registration was required prior to such
commencement, may continue to operate till such time regulations are made under clause
(d) of sub-section (2) of section 30.]
[Explanation.—For the removal of doubts, it is hereby declared that, for the purposes of
this section, a collective investment scheme or mutual fund shall not include any unit
linked insurance policy or scrips or any such instrument or unit, by whatever name called,
which provides a component of investment besides the component of insurance issued by
an insurer.]
(2) Every application for registration shall be in such manner and on payment of such fees
as may be determined by regulations.
(3) The Board may, by order, suspend or cancel a certificate of registration in such manner
as may be determined by regulations :
Provided that no order under this sub-section shall be made unless the person concerned
has been given a reasonable opportunity of being heard.
68
Mutual Funds & Insurance Companies, Bancassurance

Mutual Funds
What Are Mutual Funds?
A mutual fund is an investment instrument which pools in money from different investors
and invests the collected corpus in a set of different asset classes such as equity, debt, gold,
foreign securities etc. Mutual funds are becoming increasingly popular in India due to the
various benefits they come with. Mutual funds feature an attractive performance history of
returns higher than those earned on conventional instruments of investment. Mutual funds
enable investors to create diversified investment portfolios with investments as low as Rs.
500.
Another feature which makes mutual funds a preferred choice among investors is the
professional management of funds. A mutual fund is managed by a fund manager who is an
expert carrying vast experience in the investment industry. This provides an assurance to
the investors that their money is in safe and secure hands. Another fact which further
strengthens investors’ confidence in mutual fund is that they are regulated by capital
markets regulator SEBI (Securities and Exchange Board of India) and AMFI (Association of
Mutual Funds in India).
Types of Mutual Funds in India
As per SEBI, mutual funds can be broadly classified into 3 categories – Equity Funds, Debt
Funds and Hybrid Funds.
Equity Funds : An equity fund is a mutual fund which invests a minimum of 65% of its
assets in equity and equity related instruments. It can invest the balance 0%-35% in debt
or money market securities. Equity funds are capable of giving relatively high returns as
they primarily invest in stocks of companies which are responsive to changes in the stock
market and the economy. Due to this reason, equity funds also come with a relatively
higher risk quotient. As per SEBI classification, there are 11 types of equity funds. Among
them one of the most popular ones is ELSS – Equity Linked Savings Scheme. An ELSS
invests a minimum of 80% of its total assets in equities. An ELSS is the only equity fund
which is eligible for a tax deduction of up to Rs. 1.5 lakh under section 80C of the Income
Tax Act. An ELSS comes with a lock-in period of 3 years.
Debt Funds: A debt fund is a mutual fund which invests a majority of its assets in debt and
money market securities. According to the Income Tax Act, a mutual fund which invests
less than 65% of its total assets in equities is termed as a debt fund. Debt funds are
preferred by investors mainly because they come with relatively lower levels of risk. Since
69
they undertake lower risk, debt funds in India yield returns which though higher than
returns offered by fixed return investments, tend to be lower than those provided by equity
funds in the long term. As per SEBI classification, there are as many as 16 types of debt
funds.
The most popular type of debt fund in terms of AUM (Assets Under Management) is liquid
fund as they are often used by corporations to park their excess cash for short periods. A
liquid fund predominantly invests in debt and money market securities with maturities of
up to 91 days. Due to the shorter maturity period, liquid funds feature the least amount of
risk among all debt funds. Liquid funds generally give returns that are higher than savings
accounts and at par with fixed deposits while being a lot more liquid than the latter.
Hybrid Funds: As the name suggests, a hybrid fund is a mutual fund which invests its assets
in two or more asset classes including equities, debt, money market instruments, gold,
overseas securities, etc. A hybrid fund generally invests in only two asset classes namely
equity and debt. The blend of equity and debt enables a hybrid fund to give returns similar
to those generated by equity funds while undertaking relatively lower risk levels like debt
funds. As per SEBI classification, there are 7 types of hybrid funds.
The most popular type of scheme in this category is the Dynamic Asset Allocation Fund. A
Dynamic Asset Allocation Fund has the flexibility to invest any amount between 0%-100%
of its assets in either equity or debt. Typically this type of fund aims to sell equities and
book profits in overvalued equity market conditions while doing the reverse when equity
market valuations are attractive. A Dynamic Asset Allocation Fund decreases its debt
exposure in undervalued markets and increases its debt holding during a bull run.
Benefits of Mutual Fund Investments
The following are the benefits of investing in mutual funds:
Flexible Investment Amounts
A mutual fund investment can be started with an amount as low as Rs. 500 while there is
no limit on the maximum amount you can invest. But do keep in mind that in case of ELSS
investments, you get the tax benefit only up to the Rs. 1.5 lakh 80C limit in a financial year.
Professional Management of Funds
With mutual fund, an investor can benefit from the professional management of his/her
funds by an expert fund manager. Fund houses charge a nominal fee for the administration
and management of a mutual fund scheme called Expense Ratio. The expense ratio of a
mutual fund generally ranges between 0.5% to 1.5% and cannot exceed the limit of 2.5%
70
set by SEBI. Fund houses always mention the returns generated by a mutual fund scheme
after deducting the applicable expense ratio.
High Returns
Mutual funds offer long term returns that range from 7% (in lowest risk carrying liquid
funds) and 15% or higher in case of most equity funds over a 5 year period. These inflation
beating returns provided by mutual funds are one of the key reasons why many are
choosing these market-linked investments over fixed income instruments such as fixed
deposits.
Diversification
Mutual funds allow investors to access a wide and diversified investment portfolio that can
include equities of varying market capitalisations as well as debt and money market
instruments for an investment amount which can be as low as Rs. 500. The diversified
investment portfolio allows a mutual fund to provide an unmatched balance between risk
and return.
Systematic Investment Option
A systematic investment plan (SIP) is a method of investing in mutual funds which allows
investors to invest a fixed sum in a mutual fund scheme at predetermined intervals (daily,
weekly, monthly, bi-annual or annual). SIP investments reduce the potential financial risk
associated with a lump sum investment. It also enables an investor to increase/decrease
the investment in line with the current financial situation of the investor.
Tax Benefit
An Equity Linked Savings Scheme (ELSS) is a type of mutual fund which helps an investor
in getting a tax benefit in addition to the above-mentioned benefits. An ELSS comes with a
lock-in period of 3 years and every ELSS investment qualifies for a tax deduction of up to
Rs. 1.5 lakh under Section 80C of the Income Tax Act. Even in the case of other (non-ELSS)
equity schemes, capital gains from unit redemption up to Rs. 1 lakh in a fiscal are exempt
from tax.
Insurance & Functions of an Insurance Company

Insurance is defined as a contract, which is called a policy, in which an individual or
organisation receives financial protection and reimbursement of damages from the insurer
or the insurance company. At a very basic level, it is some form of protection from any
possible financial losses.
71
The basic principle of insurance is that an entity will choose to spend small periodic
amounts of money against a possibility of a huge unexpected loss. Basically, all the
policyholder pool their risks together. Any loss that they suffer will be paid out of their
premiums which they pay.
Functions of an Insurance Company
Provides Reliability
The main function of insurance is that eliminates the uncertainty of an unexpected and
sudden financial loss. This is one of the biggest worries of a business. Instead of this
uncertainty, it provides the certainty of regular payment i.e. the premium to be paid.
Protection
Insurance does not reduce the risk of loss or damage that a company may suffer. But it
provides a protection against such loss that a company may suffer. So at least the
organisation does not suffer financial losses that debilitate their daily functioning.
Pooling of Risk
In insurance, all the policyholders pool their risks together. They all pay their premiums
and if one of them suffers financial losses, then the payout comes from this fund. So the risk
is shared between all of them.
Legal Requirements
In a lot of cases getting some form of insurance is actually required by the law of the land.
Like for example when goods are in freight, or when you open a public space getting fire
insurance may be a mandatory requirement. So an insurance company will help us fulfil
these requirements.
Capital Formation
The pooled premiums of the policyholders help create a capital for the insurance company.
This capital can then be invested in productive purposes that generate income for the
company.
Principles of Insurance
As we discussed before, insurance is actually a form of contract. Hence there are certain
principles that are important to ensure the validity of the contract. Both parties must abide
by these principles.
Utmost Good Faith
72
A contract of insurance must be made based on utmost good faith ( a contract of

uberrimate fidei). It is important that the insured disclose all relevant facts to the insurance
company. Any facts that would increase his premium amount, or would cause any prudent
insurer to reconsider the policy must be disclosed.
If it is later discovered that some such fact was hidden by the insured, the insurer will be
within his rights to void the insurance policy.
Insurable Interest
This means that the insurer must have some pecuniary interest in the subject matter of the
insurance. This means that the insurer need not necessarily be the owner of the insured
property but he must have some vested interest in it. If the property is damaged the insurer
must suffer from some financial losses.
Indemnity
Insurances like fire and marine insurance are contracts of indemnity. Here the insurer
undertakes the responsibility of compensating the insured against any possible damage or
loss that he may or may not suffer. Life insurance is not a contract of indemnity.
Subrogation
This principle says that once the compensation has been paid, the right of ownership of the
property will shift from the insured to the insurer. So the insured will not be able to make a
profit from the damaged property or sell it.
Contribution
This principle applies if there are more than one insurers. In such a case, the insurer can
ask the other insurers to contribute their share of the compensation. If the insured claims
full insurance from one insurer he losses his right to claim any amount from the other
insurers.
Proximate Cause
This principle states that the property is insured only against the incidents that are
mentioned in the policy. In case the loss is due to more than one such peril, the one that is
most effective in causing the damage is the cause to be considered.
Bancassurance
What Is Bancassurance?
73
Bancassurance is an arrangement between a bank and an insurance company allowing the

insurance company to sell its products to the bank's client base. This partnership
arrangement can be profitable for both companies. Banks earn additional revenue by
selling insurance products, and insurance companies expand their customer bases without
increasing their sales force or paying agent and broker commissions.
Important Point
Bankassurance is a partnership between a bank and an insurance company.
The insurance company benefits because it can reach a bank's client base to sell their
products. They earn additional revenues without having to build a salesforce or pay agent
and broker commissions.
The bank benefits by improving customer satisfaction. More services are provided under
one roof. Moreover, the bank gains additional revenues from sales of insurance products.
Factoring, Forfaiting Services and Off-Balance Sheet items

Factoring
Factoring is defined as a method of managing book debt, in which a business receives
advances against the accounts receivables, from a bank or financial institution (called as a
factor). There are three parties to factoring i.e. debtor (buyer of goods), the client (seller of
goods) and the factor (financier). Factoring can be recourse or non-recourse, disclosed or
undisclosed.
In a factoring arrangement, first of all, the borrower sells trade receivables to the factor and
receives an advance against it. The advance provided to the borrower is the remaining
74
amount, i.e. a certain percentage of the receivable is deducted as the margin or reserve, the
factor’s commission is retained by him and interest on the advance. After that, the
borrower forwards collections from the debtor to the factor to settle down the advances
received.
Forfaiting
Forfaiting is a mechanism, in which an exporter surrenders his rights to receive payment
against the goods delivered or services rendered to the importer, in exchange for the
instant cash payment from a forfaiter. In this way, an exporter can easily turn a credit sale
into cash sale, without recourse to him or his forfaiter.
The forfaiter is a financial intermediary that provides assistance in international trade. It is

evidenced by negotiable instruments i.e. bills of exchange and promissory notes. It is a
financial transaction, helps to finance contracts of medium to long term for the sale of
receivables on capital goods. However, at present forfaiting involves receivables of short
maturities and large amounts.
Differences Between Factoring and Forfaiting
The major differences between factoring and forfaiting are described below:
1. Factoring refers to a financial arrangement whereby the business sells its trade
receivables to the factor (bank) and receives the cash payment. Forfaiting is a form
of export financing in which the exporter sells the claim of trade receivables to the
forfaiter and gets an immediate cash payment.
75
2. Factoring deals in the receivable that falls due within 90 days. On the other hand,
Forfaiting deals in the accounts receivables whose maturity ranges from medium to
long term.
3. Factoring involves the sale of receivables on ordinary goods. Conversely, the sale of
receivables on capital goods are made in forfaiting.
4. Factoring provides 80-90% finance while forfaiting provides 100% financing of the
value of export.
5. Factoring can be recourse or non-recourse. On the other hand, forfaiting is always
non-recourse.
6. Factoring cost is incurred by the seller or client. Forfaiting cost is incurred by the
overseas buyer.
7. Forfaiting involves dealing with negotiable instruments like bills of exchange and
promissory note which is not in the case of Factoring.
8. In factoring, there is no secondary market, whereas in the forfaiting secondary
market exists, which increases the liquidity in forfaiting.
Comparison Chart
BASIS FOR
FACTORING FORFAITING
COMPARISON
Meaning Factoring is an arrangement that Forfaiting implies a transaction

converts your receivables into ready in which the forfaiter purchases
cash and you don't need to wait for claims from the exporter in
the payment of receivables at a return for cash payment.
future date.
Maturity of Involves account receivables of short Involves account receivables of

receivables maturities. medium to long term
maturities.
Goods Trade receivables on ordinary goods. Trade receivables on capital

goods.
76
BASIS FOR
FACTORING FORFAITING
COMPARISON
Finance up to 80-90% 100%
Type Recourse or Non-recourse Non-recourse
Cost Cost of factoring borne by the seller Cost of forfaiting borne by the
(client). overseas buyer.
Negotiable Does not deals in negotiable Involves dealing in negotiable

Instrument instrument. instrument.
Secondary No Yes
market
Off-Balance Sheet (OBS)

What Is Off-Balance Sheet (OBS)?
Off-balance sheet (OBS) items is a term for assets or liabilities that do not appear on a
company's balance sheet. Although not recorded on the balance sheet, they are still assets
and liabilities of the company. Off-balance sheet items are typically those not owned by or
are a direct obligation of the company. For example, when loans are securitized and sold off
as investments, the secured debt is often kept off the bank's books. An operating lease is
one of the most common off-balance items.
Types of Off-Balance Sheet Items
There are several ways to structure off-balance sheet items. The following is a short list of
some of the most common:
Operating Lease
77
An OBS operating lease is one in which the lessor retains the leased asset on its balance
sheet. The company leasing the asset only accounts for the monthly rental payments and
other fees associated with the rental rather than listing the asset and corresponding
liability on its own balance sheet.At the end of the lease term, the lessee generally has the
opportunity to purchase the asset at a drastically reduced price.
Leaseback Agreements
Under a leaseback agreement, a company can sell an asset, such as a piece of property, to
another entity. They may then lease that same property back from the new owner.
Like an operating lease, the company only lists the rental expenses on its balance sheet,
while the asset itself is listed on the balance sheet of the owning business.
Accounts Receivables
Accounts receivable (AR) represents a considerable liability for many companies. This
asset category is reserved for funds that have not yet been received from customers, so the
possibility of default is high. Instead of listing this risk-laden asset on its own balance sheet,
companies can essentially sell this asset to another company, called a factor, which then
acquires the risk associated with the asset. The factor pays the company a percentage of the
total value of all AR upfront and takes care of collection. Once customers have paid up, the
factor pays the company the balance due minus a fee for services rendered. In this way, a
business can collect what is owed while outsourcing the risk of default.
Risk Management, Basel Accords
78
What Is the Basel Accord?

The Basel Accords are three series of banking regulations (Basel I, II, and III) set by the
Basel Committee on Bank Supervision (BCBS). The committee provides recommendations
on banking regulations, specifically, concerning capital risk, market risk, and operational
risk. The accords ensure that financial institutions have enough capital on account to
absorb unexpected losses.
Basel Accord Deconstructed
The Basel Accords were developed over several years beginning in the 1980s. The BCBS
was founded in 1974 as a forum for regular cooperation between its member countries on
banking supervisory matters. The BCBS describes its original aim as the enhancement of
"financial stability by improving supervisory knowhow and the quality of banking
supervision worldwide." Later, the BCBS turned its attention to monitoring and ensuring
the capital adequacy of banks and the banking system.
Important Point:
The Basel Accords are three series of banking regulations set by the BCBS.
The accords are designed to ensure that financial institutions have enough capital on
account to meet obligations and absorb unexpected losses.
The latest accord is Basel III, which was agreed in November 2010. Basel III requires banks
to have a minimum amount of common equity and a minimum liquidity ratio.
Basel I
The first Basel Accord, known as Basel I, was issued in 1988 and focused on the capital
adequacy of financial institutions. The capital adequacy risk (the risk that an unexpected
loss with hurt a financial institution), categorizes the assets of financial institutions into
five risk categories (0%, 10%, 20%, 50% and 100%). Under Basel I, banks that operate
internationally are required to have a risk weight of 8% or less.
Basel II
The second Basel Accord, called the Revised Capital Framework but better known as Basel
II, served as an update of the original accord. It focused on three main areas: minimum
capital requirements, supervisory review of an institution's capital adequacy and internal
assessment process, and the effective use of disclosure as a lever to strengthen market
79
discipline and encourage sound banking practices including supervisory review. Together,
these areas of focus are known as the three pillars.
Basel III
In the wake of the Lehman Brothers collapse of 2008 and the ensuing financial crisis, the
BCBS decided to update and strengthen the Accords. The BCBS considered poor
governance and risk management, inappropriate incentive structures, and an
overleveraged banking industry as reasons for the collapse. In November 2010, an
agreement was reached regarding the overall design of the capital and liquidity reform
package. This agreement is now known as Basel III.
Basel III is a continuation of the three pillars along with additional requirements and
safeguards. For example, Basel III requires banks to have a minimum amount of common
equity and a minimum liquidity ratio. Basel III also includes additional requirements for
what the Accord calls "systemically important banks" or those financial institutions that are
considered "too big to fail."
The Basel Committee on Banking Supervision greed on the terms of Basel III in November
2010, and it was scheduled to be introduced from 2013 until 2015. Basel III
implementation has been extended repeatedly, and the latest completion date is expected
to be January 2022.
CIBIL, Fair Practices Code for Debt Collection, BCSBI

Credit Information Bureau (India) Limited
CIBIL stands for Credit Information Bureau (India) Limited. It is India’s first Credit
Information Company, which was founded in August 2000. After establishment, CIBIL
played vital role in Indian Financial System. It helps in collection and maintaining records
of Individual payment affecting loans and Credit Card. The member bank and all the credit
institution submit their records to CIBIL on monthly basis. The information received from
banks and credit institutions would be used to create Credit Information Report and Credit
Score that are provided to credit institution to help in evaluation and approving loan
applications.
Objectives of CIBIL
• It takes pride in having the topmost credit information sharing in India that makes
enable the credit grantor in accepting payment and information backed decisions.
• CIBIL has gained knowledge, experience and expertise to offer data and technology
backed solutions.
80
• Wide gamut solutions were developed diligently for helping our customers in
making intelligent decision in entire stage of customer life cycle.
Evolution of CIBIL
Apr 2011: individuals were able to avail CIBIL TransUnion Score
Sep 2010: First centralized database on Mortgages in India- CIBIL Mortgage Check was
launched
Jul 2010: CIBIL Detect - India's first repository for information on high-risk activity was
initiated
Nov 2007: CIBIL TransUnion Score introduced to Banks
May 2006: Started Commercial Bureau operations
Apr 2004: CIBIL Launched Credit Bureau services in India (Consumer Bureau)
Aug 2000: CIBIL was Incorporated basis the recommendations made by the Siddiqui
Committee
Nov 1999: CIBIL is also Report submitted by Siddiqui Committee for setting up India's first
Credit Information Bureau
Functions of CIBIL
• The Consumer Bureau of CIBIL keep its dynamic information repository of India for
providing its member comprehensive risk management tools
• Consumer Credit Information is important tool used by credit grantor at the time of
new customer acquisition.
• Portfolio Review provides the credit grantor with a comprehensive view of their
borrower’s credit relationships across multiple lenders.
What is the CIBIL Score?

We learnt last week that the Credit Information Report (CIR) summarizes your payment
history of loans and credit cards borrowed from all banks and financial institutions. Based
on this credit history, a ‘Credit Score’ is generated. The CIBIL Score is a 3-digit number
ranging from 300-900. The closer your score is to 900, the stronger your credit profile.
81
A Credit Score plays a critical role in the loan and credit card approval process. This is the
first screening criterion applied by banks and financial institutions when reviewing your
loan application.
In the illustration below, two individuals with Credit Scores of 810 and 620 respectively
apply for a home loan. Depending on the credit policy of the bank, it is more likely that the
bank will screen the individual with an 810 Credit Score for further evaluation, while the
application with the Credit Score of 620 may not be processed.
How does the CIBIL Score affect me as an individual?
A Credit Score is looked upon by lenders to determine your creditworthiness. So whilst a

CIR is like a report card, a Credit Score is like the overall rank you get. It analyzes all the
information in a CIR and returns a score value which quantifies your credit and financial
health. So by looking at your Credit Score, you can get a sense of your financial standing.
A low Credit Score does not mean that your loan will not be sanctioned. In addition to your
Credit Score, your CIR, income and existing loan obligations (debt-burden ratio) also play a
key role in the evaluation of your loan application. So if you have a low Credit Score, Bank A
may not approve your loan while a Bank B may do so, depending on their respective credit
policies. It may do so at a higher interest rate.
How does my CIBIL Score impact loan approval?
Today, the CIBIL Score provides lenders the ability to differentiate between those who have
honored their obligations responsibly and those who have defaulted. Individuals who have
managed their obligations appropriately build a ‘reputational collateral’ with lenders. In
turn, this reputational collateral may allow individuals to negotiate better terms with a
lender.
It is always advisable to purchase and review your Credit Score and CIR prior to
commencing your loan hunt. It helps you:
i)To understand what the lender will review while evaluating your application.
ii) To identify and rectify any discrepancies in your CIR and thereby prevent unwelcome
surprises during the loan evaluation process.
If on purchase of your Credit Score, you do not receive a score value- i.e., a number
between 300 and 900- but a “NA” or “NH” instead, this may be because:
i)You do not have a credit history: you have not availed any credit facility be it loan or
credit cards till date.
82
ii)You have a credit history but no credit activity or transactions in the last two years.
iii) You only have add-on credit cards and have no direct credit exposure.
Banking Codes and Standards Board of India

The Banking Codes and Standards Board of India (BCSBI) is an independent banking
industry watchdog that protects consumers of banking services in India. The board oversee
compliance with the "Code of Bank's Commitment to Customers". It is not a compensation
mechanism and looks into an individual complaint only to the extent it points to any
systemic compliance failure. It is an independent and autonomous body, registered as a
separate society under the Societies Registration Act, 1860 on 18 February 2006.The
Reserve Bank of India extended financial support to the Board, meeting its expenses for the
first five years.
Main aims
To plan, evolve, prepare, develop, promote and publish voluntary, comprehensive Code and
Standards for banks, to provide fair treatment to their customers.
To function as an independent and autonomous watchdog to monitor and ensure that the
Codes and Standards are adhered to.
To conduct and undertake research of Codes and Standards currently in use around the
world.
To enter into covenants with banks on observance of codes and standards and to train
employees of such banks about the Codes.
To help people affected by natural calamities.
Debt Collection
Goals and Objectives
To create a network of Debt Collection Professionals for Indian Market
To share best practices of collection of Debts in India
To suggest policy to Government of India/ Reserve Bank of India (RBI) based on Fair Debt
Collection Practices across the Globe
To Carry out Networking Events for Debt Collection Professionals in India.
To Carry out Education among Law Students and Professionals on best practices for
Collection of Debts in India.
83
Recent Developments in the Financial System

Reforms in the Indian Financial System
In India, a decade old on-going financial reforms have transformed the operating
environment of the finance sector from an “administrative regime to a competitive market
base system”.
Since mid-1991, a number of reforms have been introduced in the financial sector in India.
Rangarajan once noted that domestic financial liberalisation has brought about “the
deregulation of interest rates, dismantling of directed credit, reforming the banking system,
improving the functioning of the capital market, including the government securities
market”. The main emphasis on the financial sector reform has been on the banking system
so as to improve the performance of public sector banks. The Narasimhan Committee
constituted in 1991 laid the foundation for the revamping of the financial sector in India.
The Committee had submitted two reports- in 1992 and 1998 which gave immense
importance on enhancing the efficiency and viability of this sector.
Taking a cue from the developments in the finance sector taking place globally, India
undertook structural changes by way of these reforms and successfully relaxed the external
constraints in its operation i.e. reduction in Cash Reserve Ratio and Statutory Liquidity
Ratio, capital adequacy reforms, restructuring and recapitulation of banks and
enhancement in the competitive element in the market through the entry of new banks.
Banks in India had to give a go-by to their traditional operational methods of directed
credit, fixed interest rates and directed investments, all of which, had the effect of
deteriorating the quality of loan portfolios and inadequacy of capital and erosion of
profitability.
Another prominent consequence of the reforms was the sprouting up of a number of banks
due to the entry of new private and foreign banks, increased transparency in the banking
system through the introduction of prudential norms and increase in the role of the market
forces due to the deregulated interest rates. All these measures lead to major changes in
the operational environment of the finance sector.
The objective of this paper is to analyse the financial sector reforms that have been carried
out in India since the 1990s. The first chapter analyses the objectives of the reforms in the
financial sector. Chapter II goes on explain in detail the policy reforms undertaken in this
sector and puts forth a four-pronged approach to understand the various elements within
the financial sector which have undergone changes. This is followed by Chapter IV which
essentially recognises the elements integral to the reformation process. It includes the
84
suggestions made by Y.V. Reddy. Finally, the penultimate chapter concludes the
submissions and the analysis made in this research paper.
Objectives of Reforms in the Financial Sector
The primary objective of financial sector reforms in the 1990s was to “create an efficient,
competitive and stable that could contribute in greater measure to stimulate growth”.
Economic reform process took place amidst two serious crises involving the financial
sector:
The crisis involving the balance of payments that had threatened the international
credibility of the country and dragged it towards the brink of default.
The crisis involving the grave threat of insolvency threatening the banking system which
had concealed its problems for years with the aid of defective accounting policies.
Apart from the above two dilemmas, there were many deeply rooted problems of the
Indian economy in the early 1990s which were strongly related to the finance sector.
Prevalent amoung these were:
As mentioned by McKinnon and Shaw, till the early 1990s, the Indian financial sector could
be described as an example of financial repression. The sector was characterised by
administered interest rates fixed at unrealistically low levels, large pre-emption of
resources by authorities and micro regulations which direct the major flow of funds back
and forth from the financial intermediaries.
The act of the government involving large scale pre-emption of resources from the banking
system to finance its fiscal deficit.
More than necessary structural and micro-regulation that inhibited financial innovation
and increased transaction costs.
Relatively inadequate level of prudential regulation in the financial sector.
Inadequately developed debt and money markets.
Obsolete and out-dated technological and institutional structures that lead to the
consequent inefficiency of the capital markets and the rest of the financial system.
Till the early 1990s, the Indian financial system was characterised by extensive regulations
viz. administered interest rates, weak banking structure, directed credit programmes, lack
of proper accounting, risk management systems and lack of transparency in operations of
major financial market participants. [15] Furthermore, this period was characterised by the
85
restrictive entry of foreign banks since after the nationalisation of banks in 1969 and 1980,
almost 90 per cent of the banking assets were under the control of government owned
banks and financial institutions. [16] The financial reforms initiated in this era attempted
to overcome these weaknesses with the view of enhancing efficient allocation of resources
in the Indian economy.
The Reserve Bank of India had been making efforts since 1986 to develop efficient and
healthy financial markets which were accelerated after 1991. RBI focused on the
development of financial markets especially the money market, government securities
market and the forex markets. Financial markets also benefited from close coordination
between the Central Government and the RBI as also between the other regulators.
Major contours of the financial sector reforms in India
On a general understanding, there are three groups of reform measures that are used to
handle the problems faced by the financial sector. These are that of removal of financial
repression, rehabilitation of the banking system and lastly, deepening and development of
capital markets.
The focal issues addressed by financial sector reforms in India have primarily aimed
to include the following:
i)Removal of the problem of financial repression.

ii) Creation of an efficient, profitable and healthy financial sector.
iii) Enabling the process of price discovery by market determination of interest rates which
leads to an improvement in the efficiency in the allocation of resources.
iv) Providing institutions with greater operational and functional autonomy.
v) Prepping up the financial system for international exposure and competition.
vi) Introduction of private equity in public sector banks and their listing.
vii) Opening up of the external sector in a regulated manner.
viii) Promoting financial stability in the back-drop of domestic and external shocks.
The Two Phases of Financial Reform
To overcome the economic crisis that plagued the Indian economy in May 1991, the
government undertook extensive economic reform policies that brought along with them
an era of privitisation, deregulation, globalisation and most importantly, liberalisation. [20]
86
The financial reforms since the 1990s can be classified into two phases. The first phase,
also known as the first generation reforms, was aimed at the creation of an efficient,
productive, profitable and healthy financial sector which would function in an environment
of functional autonomy and operational flexibility. The first phase was initiated in 1992
based on the recommendations of the Committee on Financial System. While the early
phase of reforms was being implemented, the global economy was also witnessing
prominent changes coinciding with the movement towards global integration of financial
services. Narasimhan Committee I noted that the objective of Financial Sector Reforms in
India should not focus on correcting the present financial weaknesses but should strive to
eliminate the roots of the cause of the present challenges being faced by the Indian market
economy.
The second generation reforms or the second phase commenced in the mid-1990s and laid
greater emphasis on strengthening the financial system and on the introduction of
structural improvements. Narasimhan Committee II was to look into the extent of the
effectiveness of the implementation of reforms suggested by Narasimhan Committee I and
was entrusted with the responsibility to lay down a course of future reforms for the growth
and integration of the Indian banking sector with international standards.
Principles of Financial Sector Reforms in India
Dr. Y.V. Reddy has stated that the financial sector reforms in India are based on Punch-
sutra or five principles which are explained as follows:
Introduction of various measures by cautious and gradual phasing thus giving time to
various agents to carry out the necessary norms. For instance, the gradual introduction of
prudential norms.
Mutually reinforcing measures, that would serve as enabling reforms which would not in
anyway disrupt the confidence in the system. E.g. Improvement in the profitability of banks
by the combined reduction in refinance and Cash Reserve Ratio.
Complementary nature of the reforms in the banking sector with other commensurate
changes in fiscal, external and monetary policies.
Development of the financial infrastructure in terms of technology, changing legal
framework, setting up of a supervisory body, and laying down of audit standards.
Introducing initiatives to nurture, integrate and develop money, forex and debt market so
as to give an equal opportunity to all major banks to develop skills and to participate.
Policy Reforms in the Financial Sector
87
Indian financial reforms can be explained by way of a four-pronged approach viz. (a)
banking reforms, (b) debt market, (c) forex market reforms, and (d) reforms in other
segments of the financial sector. These are explained in detail in the subsequent sub-
headings.
Banking Reforms
Despite the general approach of the financial sector reform process, many of the regulatory
and supervisory norms were started out first for commercial banks and thereafter were
expanded to other financial intermediaries. Banking reforms consisted of a two-fold
process. Firstly, the process involved recapitaltiation of banks from government resources
to bring them at par with appropriate capitalisation standards. On a second level, an
approach was adopted replacing privatisation. Under this, increase in capitalisation has
been brought about through diversification of ownership to private investors up to a cap of
49 per cent and thus keeping majority ownership and control with the government.
The main idea was to increase the competition in the banking system by a gradual process
and unlike other countries, banking reform in India, did not involve large-scale
privatisation. Due to such widening of ownership, majority of these banks have been
publicly listed which in turn has brought about greater transparency through enhanced
disclosure norms. The phased introduction of new banks in the private sector and
expansion in the number of foreign banks provided for a new level of competition.
Furthermore, increasingly tight capital adequacy norms, prudential and supervision norms
were to apply equally across all banks, regardless of their ownership.
Government Debt Market Reforms
A myriad of reforms have been introduced in the government securities debt market. Only
in the 1990s a proper G-Sec debt market had been initiated which had progress from
strategy of pre-emption of resources from banks at administered rates of interest to a
system that is more market oriented. The main instrument of pre-emption of bank
resources in the pre-reform period was through the prescription of a Statutory Liquidity
Ratio i.e. the ratio at which banks are required to invest in approved securities. It was
initially introduced as a prudential measure. The high SLR reserve requirements lead to
the creation of a captive market for government securities which were issued at low
administered interest rates. After the introduction of reforms, the SLR ratio has been
brought down to a statutory minimum level of 25 per cent. Numerous measure have been
taken to broaden the G-Sec market and to increase the transparency. Automatic
monetisation of the government’s deficit has been given a go-by. At present, the market
borrowings of the central government are undertaken through a system of auctions at
market-related rates.
88
Forex Market Reforms

The foreign exchange market in India had been characterised by heavy control since the
1950s commensurate with increasing trade controls designed to foster import substitution.
As a result of these practises, the current and capital accounts were shut and forex was
made available through a complex licensing system undertaken by the RBI. Thus, the
major task before the government was to move away from a system of total control to a
market-based exchange rate system. This transformation in 1993 and the subsequent
adoption of current account convertibility were the highlights of the forex reforms
introduced in the Indian market. Under these reforms, authorised dealers of foreign
exchange as well as banks have been given greater autonomy to carry out a wide range of
activities and operations. Furthermore, the entry of new players has been allowed in the
market. The capital account has become effectively convertible for non-residents but still
has some reservations fore residents.
Reforms in other segments of the Finance Sector
Several measures have been introduced for non-banking financial intermediaries as well.
No-banking financial companies (NBFCs) including those involved in public deposit taking
activities, have been brought under the supervision of the RBI. As for development finance
institutions (DFIs), NBFCs, urban cooperative banks, specialised term-lending institutions
and primary dealers- all of these have been brought under the regulation of the Board for
Financial Supervision. Reforms were introduced in phases for this segment as well.
Till the 1990s, insurance business was under the public ownership. After the passage of the
Insurance Regulation and Development Act in 1999, many changes have been introduced.
The most prominent amounst these was the setting up of the Insurance Regulatory and
Development Agency as well as the setting up of joint ventures to handle insurance
business on a risk sharing or commission basis.
Another important step has been the setting of the Securities and Exchange Board of India
as a regulator for equity markets and to improve market efficiency and integration of
national markets and to prevent unfair practices regarding trading. The reform measures
in the equity market since 1992 have laid emphasis mainly on regulatory effectiveness,
enhancement of competitive conditions, reduction of information asymmetries,
development of modern technological infrastructure, mitigation of transaction costs and
lastly, controlling of speculation in the securities market. Furthermore, the reform process
had the effect of putting an end to the monopoly of the United Trust of India by opening up
of mutual funds to the private sector in 1992. Mutual funds have been permitted to open
offshore funds for the purpose of investing in equities in other jurisdictions. Another
89
development which took place in 1992 was the opening up of the Indian capital market for
foreign institutional investors. The Indian corporate sector has been granted permission to
tap international capital markets through American Depository Receipts, Foreign Currency
Convertible Bonds, Global Depository Receipts and External Commercial Borrowings.
`Moreover, now Overseas Corporate Bodies and non-resident are allowed to invest in
Indian companies.
Integral aspects of future reform policies
Though it is quite impossible to prioritize the various aspects which are relevant for
reform, the author has mentioned a few critical elements which have been highlighted by
Y.V. Reddy in a lecture delivered by him.
Need for greater legislative measures
It is mandatory that financial reforms are accompanied by legislative measure
commensurate with these reforms to enable further progress. These are required mainly
with regard to ownership, development of financial markets, regulatory focus, and
bankruptcy procedures. Shortcomings in benefits of reforms such as in credit delivery
require changes in the legal framework. Furthermore, it is required to concentrate in
reduction of transaction costs in economic activity and to enhance economic incentives.
Increased enforceability cannot be substituted by the increase in the severity of penalties
in criminal proceedings. Lastly, in the institutional element, there is an increasing need to
clearly demarcate the roles and functions of the owner, financial intermediary and market
participant so as to “replace the joint-family approach that is a legacy of the pre-reform
framework”.
Fiscal Empowerment
Notwithstanding the existing level of fiscal deficit, which appears to be manageable, the
cushion available for meeting unforeseen circumstances is limited. This problem is acute
especially in regard to finances of states which have major structural problems and are in
constant need of fiscal support from the Central Government. Y.V. Reddy remarks that the
nature of fiscal dominance constrains the effectiveness of the monetary policy to meet
unforeseen contingencies as well as to main price stability and contain inflationary
expectations.
Reforms in the real sector
Reforms in the real sector would be necessary to bring about structural changes in the
Indian economy, particularly in domestic trade. Further growth can be successfully
achieved by liberalisation of the financial and external sector.
90
Social obligations distribution amoung banks and financial institutions

It is necessary to distinguish between the contributions of a financial sector and fiscal
actions in matters relating to poverty alleviation. Social obligations should be distributed
equitably amoung banks and other financial intermediaries but would be difficult to
achieve in the context of emerging capital markets and an economy which is relatively
open. Intermediation may have to be multi-institutional rather than being wholly bank-
centered. Often banks, which are the foundational stones of payment systems, face
problems if they are subjected to disproportionate burdens. This needs to be looked into.
Y.V. Reddy mentioned in his speech that monetary and fiscal policies in India should be
focussed on what Dreze and Sen termed as “growth mediated security” while “support lead
security”. This primarily consists of direct anti-poverty interventions tackled by fiscal and
other governmental activities.
Overhang problems in the financial sector
The presence of ‘overhang’ problems is another element which needs to be addressed. To
exemplify the meaning of this phrase, problems such as non-performing assets of banks
and financial institutions would come within the meaning of this phrase. However,
overhang issue are contrasting in nature from flow issues. There is merit in insulating the
overhang problem from the flow issues and thereby solve the flow problem. Taking the
example of the power sector, any addition to capacities to generate without taking into
account cost recovery would add to the problem of accumulated losses. Overhang
problems, apart from the financial sector, are prevalent in public enterprises, provident
fund and pension liabilities and the cooperative sector. They have a cumulative effect on
the finance sector.
Payment and Settlement Systems in India

Payment and settlement systems play a vital role in improving overall economic efficiency
of any country. The system consist of all type of arrangements that use to systematically
transfer money-currency, paper instruments such as cheques, and various electronic
channels. The central bank of any country is usually the driving force in the development of
national payment systems. In India, the RBI has been playing this developmental role.
The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), a
sub-committee of the RBI is the highest policy making body on payment systems in the
country. In India, the payment and settlement systems are regulated by the Payment and
Settlement Systems Act, 2007 (PSS Act).
91
Payment System Initiatives

The RBI has taken many initiatives towards introducing and upgrading safe, sound and
efficient modes of payment systems in the country. At present, there are payments in India
can be made through paper based instruments , electronic instruments and other
instruments , such as, mobile banking, ATM based, Point-of-sale terminals, online
transactions.
Paper-based Payments
Use of paper-based instruments like cheques, drafts etc. accounts for nearly 60% of the
volume of total non-cash transactions in the country. In value terms, the share is presently
around 11%. This share has been steadily decreasing over a period of time and electronic
mode gained popularity.
Electronic Payments
The initiatives taken by the RBI in the early-nineties focused on technology-based solutions
for the improvement of the payment and settlement system in the country.
Electronic Clearing Service (ECS) Credit

The RBI introduced the ECS (Credit) scheme during the 1990s to handle bulk and repetitive
payment requirements like salary, interest, dividend payments of corporates and other
institutions. ECS (Credit) facilitates customer accounts to be credited on the specified value
date and is presently available at all major cities in the country.
In 2008, the RBI launched a new service known as National Electronic Clearing Service
(NECS). NECS (Credit) facilitates multiple credits to beneficiary accounts with destination
branches across the country against a single debit of the account of the sponsor bank.
Regional ECS (RECS)
Next to NECS, RECS has been launched during the year 2009.RECS, a miniature of the NECS
is confined to the bank branches within the jurisdiction of a Regional office of RBI.
Electronic Clearing Service (ECS) Debit

The Scheme was introduced by RBI to provide a faster method of effecting periodic and
repetitive collections of utility companies. It facilitates consumers of utility companies to
make routine and repetitive payments by ‘mandating’ bank branches to debit their
accounts and pass on the money to the companies.
National Electronic Funds Transfer (NEFT) System

In November 2005, a more secure system was introduced for facilitating one-to-one funds
transfer requirements of individuals / corporates. This system provides for batch
settlements at hourly intervals.
Real Time Gross Settlement (RTGS) System
92
RTGS is a funds transfer systems where transfer of money takes place from one bank to
another on a "real time" and on "gross" basis. Settlement in "real time" means payment
transaction is not subjected to any waiting period. "Gross settlement" means the
transaction is settled on one to one basis without bunching or netting with any other
transaction. Once processed, payments are final and irrevocable. This was introduced in
2004.
Clearing Corporation of India Limited (CCIL)

The CCIL was set up in April, 2001 for providing exclusive clearing and settlement for
transactions in Money, GSecs and Foreign Exchange. The prime objective has been to
improve efficiency in the transaction settlement process, debt and forex markets in the
country.
Other Payment Systems
Mobile Banking System
Mobile phones as a medium for providing banking services have been attaining enlarged
importance. RBI brought out a set of operating guidelines on mobile banking for banks in
2008, according to which only banks which are licensed and supervised in India and have a
physical presence in India are permitted to offer mobile banking after obtaining necessary
permission from RBI.
ATMs / Point of Sale (POS) Terminals / Online Transactions

As per data released by RBI presently, there are over 61,000 ATMs in India. Savings Bank
customers can withdraw cash from any bank terminal up to 5 times in a month without
being charged for the same.
The POS terminals help in carrying out cashless transactions at merchant outlets by
swiping credit/ debit cards on the POS machine.
Online Mock Test Available on App as well as Web:
How to Access on App:-

1. Go to Playstore search Ambitious Baba or Click here to Install App
2. After Install Login with Google Account or Facebook Account
Related Links:
• More Daily Current Affairs Click here
• Get Free PDFs
93
• Banking Awareness Study Notes

• WhatsApp Group Join here
• Telegram Group:- Click Here
• Telegram Channel: Click here
• Like & Follow our Facebook Page:- Click here
• Join our Facebook Group:- Click Here
94
95

Jaiib Indian Financial System Module A Paper 1 PDF

Enviado por

Dados do documento

Descrição original:

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Jaiib Indian Financial System Module A Paper 1 PDF

Enviado por

Direitos autorais:

Formatos disponíveis

Facebook Page Facebook Group Telegram Group Telegram Channel

Indian Financial System (Module A)

Overview of Indian Financial System

1. Accelerating the growth of economic development.

2. Encouraging rapid industrialization

3. Acting as an agent to various economic factors such as industry, agricultural sector,

4. Accelerating rural development

5. Providing necessary financial support to industry

6. Financing housing and small scale industries

7. Development of backward areas, infrastructure and livelihood

8. Imposing price control in need

9. Protecting environment. Functions of financial system are distributed from creation of

Components of Financial System:

Financial system Institutions Markets Financial Institutions Instruments

Commercial Banks Classification of Commercial Banks

Ø Joint Stock companies

Classification of Co-operative Banks NON BANKING FINANCIL INTERMEDIARIES

Ø State Co-operative Urban Banks

Ø Co-operative Land Development Banks

Ø Central Co-operative bank

Ø Primary Co-operative Land Development Banks

Ø Primary Co-operative Banks

Limitations of the financial system in India

Ø Leasing Housing Finance

Ø Forfeiting Portfolio Finance

Ø Hire Purchase Finance Underwriting

Ø Credit Card Credit rating

Ø Merchant Banking Interest and Credit Swap

Ø Book Building Mutual fund

Securities and Exchange Board of India (Merchant Bankers) Rules, 1992 ― A

Charles P. Kindleberger ―Merchant banking is the development which frequently

Ø Co-coordinating the activities of various intermediaries like the registrar, bankers,

5 Functions of merchant Banking: Merchant banking functions in India is the same

(i) Corporate counseling: Corporate counseling covers counseling in the form of

Identification of potential investment avenues.

A general view of the project ideas or project profiles.

(v) Issue Management: Management of issues refers to effective marketing of

a. Issue through prospectus, offer for sale and private placement.

(vi) Credit Syndication: Credit Syndication refers to obtaining of loans from

•Treasury Management- Management of short term fund requirements by client

•Stock broking- helping the investors through a network of service units

•Servicing of issues- servicing the shareholders and debenture holders in distributing

•Foreign Collaboration: Foreign collaboration arrangements are made by the Merchant

Functions of Reserve Bank

Overview of Commercial Banks in India

“A Non-Banking Financial Company (NBFC) is a company registered under the Companies

Simply put, a Non-Banking Financial Company (NBFC) receives money as a whole or in

Difference between Non-Banking Financial company and a Bank

Demand deposits cannot be accepted by NBFC

NBFC cannot issue cheques on its name

Types of Non-Banking Financial Companies

Non-Banking Financial Companies are of many types depending on various factors.

Asset Finance Company (AFC)

Investment Company (IC)

Loan Company (LC)

Infrastructure Finance Company (IFC)

A company can be classified as an Infrastructure company if it satisfies the following

A company having at least 75% of its total assets in infrastructure loans.

Having a minimum of ₹ 300 crores of net fund.

Having an ‘A’ in credit rating.

Having Capital to Risk weighted Assets Ratio (CRAR) of 75%.

Systematically Important Core Investment Company (CIC-ND-SI)