Management of Financial

Institutions
Dr Surendra Kumar Vyas

Issues
I
The role and importance of Financial
Institutions
Financial Management Models-Financial
Institutions
Evaluating risk and returns of Assets &
Liabilities of Financial institutions.

Issues
II
Flow of funds analysis of the borrowing and lending behavior
of financial institutions
Interest rate analysis
Interest rates in the financial system
Yield curve
Risk and inflation
Financial management of commercial banks
Banking law and regulation
RBI; provisions of operations, credit and monetary planning.

Financial Structure
E c o n o m ic g r o w th
F in a n c ia l S y s t e m
F in a n c ia l In s t it u t io n s
F in a n c ia l S e r v ic e s

F i n a n c i a l in s t u m e n t s

F in a n c ia l M a r k e ts

Economic Growth
Economic growth implies a long term rise
in per capita national output. Such an
increase in output in developed countries
has been associated with radical changes in
production techniques and organisations, in
the institutional set-up and in the sociocultural and attitudes of the people.

Economic Growth
While the process , pattern and rate of
growth have differed between countries
over period of time-Shift from Agr-indusservices
Industrialisation is necessary for the rapid
economic growth of underdeveloped
regions-providing employment

Rate of growth
The basic conditions determining the rate of
growth are
Effort
Capital
knowledge

Capital formation
Savings- Public Private
Investment-interest-Future earnings
Finance
Finance is the link between savings and investment
by providing the mechanism through which
savings (claims to resources) are pooled together
and are put into the hands of those who are able
and willing to invest.

Mechanism
The mechanism includes wide variety of institutions
which cater, on the one hand, to safety, liquidity
and profitability notions of the savers; and on the
other, to the different requirements for working
and fixed capital of the investors. These
institutions are grouped into two:
The money market
Capital market

The Money Market & Capital

Market
The money market includes banks and other
institutions advancing loans for short and
medium period.
The capital market comprises institutions
which grant long-term loans and invest in
securities in different forms and for
different purposes

So..
Financial institutions do not directly add to
the volume of real capital formation, though
they are a necessary link between savers
and investors in a free enterprise economy.

Money Market Institutions

Central Bank-Apex monetary institution
Issue of currency notes
Govt. Banker
Bankers Bank
Foreign exchange
Commercial Banks-another imp. Segment of MM
Repository function-CASA,FD
Deployment-loans-OD,CC,LAS,BD,securedunsecured,ST,LT, Instalment
Miscell functions

Capital Market Institutions

Investment banks-LT Finance,
Middlemen,expert advice,
Formation of new capital
Subordinate to capital formation
Mutual Funds
Insurance Companies
Development Banks.

Financial System
The growth of output in any economy
depends on the increase in the proportion of
savings/Investments to a nations output of
goods and services.
The financial system and financial
institutions help in the diversion of rising
current income into savings/investments.

Money Flows
Money = Cash + Credit
Created by RBI
- Cash
Created by Banks
- Credit
Income Expenditure = Savings

Money Flows

Created by RBI
Investments

Created by Banks

Income-Expend.=Sav

Future Claims on Money

Physical Assets

Financial Assets = Instruments

A Short Term DDs MTs
B Long Term Securities ,Shares, Deb etc.
Primary Market

Secondary Market

What is Financial System?

F IN A N C IA L S Y S T E M
O r g a n is e d M a r k e ts
RBI

B a n k s ,F Is ,IB M a r k e ts

M o n e y M a rk e t
S to c k M a r k e t

B u llio n M a r k e t

What is Financial System?

B
UN-ORGANISED MARKETS

INDIGENEOUS BANKERS
MONEY LENDERS
PAWN BROKERS
TRADERS,LANDLORDS ETC.

What Constitutes Financial

System?
A. Trading in Liquidity
Cash
Credit
Lending Claims
Through RBI, Banks,FIs and Financial
Markets
B. Mobilisation of Savings & Promotion
of
Investment
In the Household,Foreign, Business and
Govt. sector.

Banking Structure
R e s e rv e B a n k o f In d i a
C o m m e rc ia l B a n k s
P u b lic S e c to r
N a tio n a lis e d
(1 4 ) 1 9 6 9

(6 ) 1 9 8 0

S B I & A sso.

RRBs

F o re ig n B In d i a

C o o p e ra ti v e b a n k s

O th e r In s ti t u ti o n s

P riv a te S e c to r

S ta te c o o p e ra tiv e

S ta te L a n d D e v

G o v e rn m e n t

P u b lic S e c to r

P riv a te S e c to r

O th e r In d i a n B a n k s

N o n -S c h .B a n k s

C e n tra l L a n d D b

N S C ,P O ,E P F

L IC ,G IC ,U T I,E X IM ,

C H IT ,N B F C S

PLDBS

Financial System
RBI AND FINANCIAL SYSTEM
The original source of liquidity in the economy is
the Reserve Bank of India. As a controller of
currency and credit the RBI is the central piece of
the Financial System. As a banker to the banks,
the RBI controls the credit and banking system
including the financial institution. These are all
together called the organised sector of financial
system.

Financial Institutions
Financial Institutions
RBI,CB,DFHI
Commercial Banks
Funds/Depo
Insurance Cos Funds/Loans
Mutual Funds
Supply of NBFCs
Demand of
Funds

Funds

Financial Markets

Financial Institutions
Financial Institutions

Promoting savings
Mobilising savings
Distributing savings
Creating credit
Facilitating produsction
Providing financial services
Strenthening financial markets
Building infrastructure
Accelerating economic development.

Financial Markets

F in a n c ia l M a r k e ts
M o n e y M a rk e t
c a ll m o n e y

t r e a s u r y b i l ls

C a p it a l M a r k e t
cp

s h o r t t e r m lo a n s

p r im a r y

s to c k
m o rtg a g e

s e c o d a ry

debt

m u tu a l f
te rm

o tc e i

rs e

nse

RESERVE BANK OF INDIA

Establishment
Preamble
Central Board
Board for Financial Supervision
Board for Payment and Settlement Systems
Local Boards
Legal Framework
Main Functions
Departments
Offices
Training Establishments
Subsidiaries

DFHI
Discount and finance house of India
Limited has been set up by the RBI jointly
with public sector banks and all India
financial institutions to deal in short term
money market instruments

Inter bank call money

Treasury bills
CDs
CPs

Role and Importance of FI

AS a financial Intermediary
AS a Catalytic agent
AS a Creator of Money
AS a Promoter
AS a Counsellor.

Financial Management ModelsFinancial Institutions

Financial Management may be defined as
ways and means of managing money.
Financial Management Process

Fin.planning
Fin.Decision making
Fin. Analysis
Fin. Control

Goals
Maximising profit
Maximisation of wealth
LT-ST-MIX-DIVIDEND

Risk and returns of Assets &

Liabilities of financial institutions

Define-Risk & Return

Assets-Loans
Liabilities-Deposits
Types of Risk
Default risk-intt.prin.
Financial risk-dscr
Liquidity risk-deposits

Contd..
Exchange rate or currency -risk-free float

Returns
The term return is the amount or rate of
produce, proceeds, gain, profit which
accrues to an economic agent from an
undertaking or investment.
Return on a typical investment has two
components: periodic (intt/div), capital
gain/loss (apprec/deprec of asset)

Return-Types

IRR or Yield rate

Coupon rate
Holding period yield/return
RRR

Risk Return trade-off.

 IRR
IRR is the rate of discount which makes the
present value of all revenues (cash flows)
from the investment equal to the total cost
of that investment.

Repo
Repurchase agreement is a window which
enables a bank or a financial institution to
borrow money in the short term. In the
transaction, the entity in question sells govt.
secu. Or bonds to the lender (another bank
or insti) with an agreement to buy the
securities back after a specified time and
price.

BYE..
THANK YOU

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