Financial

Institutions &
Markets
Semester- 5th B.com, BAF, BBA
Semester – 3rd M.Com
Modules
• Unit I: Structure of Indian Financial
System
• Unit II: Introduction to Financial
Markets in India
• Unit III: Secondary Market in India
• Unit IV: Money Markets & Debt
Markets in India: Money Market
 Unit I: Structure of Indian Financial
System

• Unit I: Structure of Indian Financial System: An

overview of the Indian financial system, financial
sector reforms: context, need and objectives; major
reforms in the last decade; competition; deregulation;
capital requirements; issues in financial reforms and
restructuring; future agenda of reforms; Regulation of
Banks, NBFCs & FIs: Salient provisions of banking
regulation act and RBI Act;
• Role of RBI as a central banker; Products
offered by Banks and FIs: Retail banking and
corporate banking products. Universal
Banking: need, importance, trends and RBI
guidelines, Core banking solution(CBS);
RTGS and internet banking, NBFCs and its
types; comparison between Banks and NBFCs.
 An overview of the Indian
financial system
• The Indian Financial System plays a very
important role in the Indian Economy and it
shows the economic growth of our economy.
This chapter covers all the government sector
exams in our economy. It helps in the flow of
funds to people and the people use this
money economically for their betterment.
 Indian Financial System –
Overview
• The various type of services that are provided by
financial institutions like banks, insurance companies,
pensions, fund etc. to the people of the country makes a
financial system.
• 1. The Financial Institutions in India are broadly divided
into two categories viz. Banks and Non-Banking Financial
Institutions (NBFI). A bank accepts demand deposits
while NBFIs do not accept them. The banks have been
authorised to issue checks but NBFIs cannot issue them.
• 2. Banks are classified into
commercial and cooperative.
Commercial banks operate their
business for profit purposes
while the basis of operation for
cooperative banks is on
cooperative lines i.e. service to
its members and the society. In
comparison to a commercial
bank, Cooperative banks
provide a higher rate of interest.
Commercial banks are of two
categories viz.
• a) Scheduled commercial banks
b) Non-scheduled commercial
banks.
• A scheduled bank is a bank that has been included in
the 2nd schedule of the RBI Act 1934. A scheduled
bank also had to be a corporation and the Paid-up
capital for it should be at least Rs. 500 crores.
• The Non-Scheduled banks have to put some reserve
requirements like SLR, and CRR according to the
banking regulation act 1949. Scheduled Banks are
required to maintain reserve requirements with RBI
as per the RBI Act 1934.
• 3. Co-operative Banks: These are of two types-
• a) Urban Co-operative banks (UCB)
b) Rural Co-operative banks.
The Urban Co-operative banks (UCB) are also known as
Primary Co-operative Banks. They help the communities,
and localities workplace groups and are set up mostly in
urban and semi-urban areas. Their main customers are
mainly small borrowers and businesses.
These UCBs are also classified into Scheduled and Non-
scheduled categories, which are then further classified
into a single state and multi-state.
• 4. Public Sector Banks:
• Banks are controlled by the federal or state
governments, with a combined ownership of
more than 51 percent. SBI and its affiliates,
Punjab National Bank, Bank of India, and others
are examples. Those Nationalized Banks (private
banks taken over by the government) which were
nationalized in 1969 and 1980s are also public
sector banks as the government owns more than
51% of these banks.
• 5. Private Sector Banks:
• These are those Indian Banks that are owned by
private individuals for example ICICI bank, HDFC
bank, Axis Bank etc.
• 6. Foreign Banks:
• Those Banks that are established and provided
services of banking in India but are owned by
foreign entities are called foreign banks. for
example, Citi Bank, HSBC Banks, Standard
chartered banks etc.
• 7. Regional Rural Banks (RRBs):
• The Regional Rural Banks Act of 1976 established
RRBs in 1975 with the goal of developing the rural
economy by providing credit and other facilities,
particularly to small and marginal farmers,
agricultural labourers, artisans, and small
entrepreneurs, for the purpose of developing
agriculture, trade, commerce, industry, and other
productive activities in rural areas. The national
government, the concerned state government, and
the sponsor bank each own 50:15:35 of RRBs (each
RRB is sponsored by a particular bank). RRBs are
required to distribute 75% of their funding to priority
industries. NABARD also supervised RRBs.
• 8. Local Area Banks (LAB):
• They were established in 1996 as part of a Government of
India scheme. The government intended to establish new
private local banks with control over two or three adjacent
areas. The goal of establishing local area banks was to
allow local institutions to mobilise rural savings and make
them available for investments in local areas. There are
just four Non-Scheduled Local Area Banks in India, one of
which is Coastal Local Area Bank in Vijayawada, Andhra
Pradesh.
• The RBI regulates and supervises three main areas of the
Non-Banking Financial Institutions (NBFIs) sector in India:
All India Financial Institutions (AIFIs), Non-Banking
Financial Companies (NBFCs), and Primary Dealers (PDs).
Credit Information Companies (CIC) are a type of non-
banking financial organisation regulated by the Reserve
Bank of India.
• 9. AIFIs are institutional mechanisms tasked with
delivering long-term finance to specific sectors. The RBI
currently regulates and supervises four AIFIs, also
known as Development Financial Institutions (DFIs).
• 10. NABARD:
• NABARD was established in 1982 under the provisions
of the National Bank for Agriculture and Rural
Development Act 1981. NABARD gives credit to
promote agriculture, small scale industries, cottage and
village industries, handicrafts and other rural crafts and
other allied economic activities in rural areas. NABARD
extends assistance to the government, RBI and other
organizations in matters relating to rural development.
It offers training and research facilities for banks,
cooperatives and organizations in matters relating to
rural development
• 11. Small Industries Development Bank of India
(SIDBI):
• SIDBI was established in 1990 under the provisions
of the Small Industries Development of India Act
1989 SIDBI serves as the primary financial
institution for promoting, funding, and developing
the Micro, Small, and Medium Enterprise (MSME)
sector, as well as for coordinating the functions of
other organisations involved in similar activities.
SIDBI primarily provides banking institutions with
indirect financial support (in the form of
refinancing) in order for them to lend to MSMEs.
• 12. MUDRA Bank:
• MUDRA (Micro Units Growth and Refinance Agency Ltd.)
is a government-owned financial agency dedicated to the
development and refinancing of micro-enterprises.
MUDRA Ltd, a non-banking finance company, has been set
up as a subsidiary of SIDBI pending the passing of an act
creating MUDRA Bank. MUDRA’s goal is to provide funding
to non-corporate (informal sector) small businesses in
rural and urban areas with financing needs of up to Rs 10
lakhs, such as small manufacturing units, shopkeepers,
etc. MUDRA would be in charge of refinancing all Last
Mile Financiers, including Micro Financial Institutions,
Non-Banking Finance Companies, Societies, Trusts,
Companies, Co-operative Societies, Small Banks,
Scheduled Commercial Banks, and Regional Rural Banks,
who lend to micro/small business entities engaged in
manufacturing, trading, and services.
• 13. Non-Banking Financial Companies (NBFCs):
• The NBFC is a company governed by the Companies Act,
1956/2013, that deals with loans and advances, the acquisition
of shares/bonds/debentures issued by the government or a
local authority, or other marketable securities of a similar
nature, leasing, hire-purchase, insurance, and chit business, but
not with agriculture, industrial activity, or the purchase or sale
of any goods. Private sector institutions make up the majority of
NBFCs.
• 14. Primary dealers (PDs):
• Primary dealers are RBI-registered companies with the
authority to buy and sell government securities. In the primary
market, PDs purchase government securities directly from the
government (RBI issues these assets on behalf of the
government), with the intention of reselling them to other
buyers in the secondary market. As a result, they play an
important role in the primary and secondary government
securities markets.
• 15. Credit Information Companies (CIC):
• A CIC is a non-profit organisation that accepts banks,
NBFCs, and financial institutions as members and collects
data and identity information for individual customers
and enterprises. CICs tell banks whether or not a
potential borrower is creditworthy based on his payment
history. The ability of lenders to assess risk and of
consumers to receive credit at competitive rates is
determined by the quality of information available. The
RBI regulates and licenses credit information companies
(CICs) under the Credit Information Companies
(Regulation) Act 2005. Trans Union Credit Information
Bureau of India Limited (CIBIL), Equifax, Experian, and
High Mark Credit Information Services are the four CICs
currently operating in India.
• 16. Payment Banks:
• In August 2015, the Reserve Bank of India (RBI) approved
11 applications for Payment Bank licenses. The Reserve
Bank of India has capped the amount of deposits that
payment banks can receive from individuals at Rs. 1 lakh.
Only those companies that are truly engaged in targeting
the poor will be able to apply for payment bank licenses as
a result of this restriction. As a result, migrant workers,
self-employed individuals, low-income households, and
others will be the primary beneficiaries of payment banks’
low-cost savings accounts and remittance services,
allowing those who currently transact only in cash to make
their first foray into the formal banking system (payment
banks will not be permitted to lend or issue credit cards).
Only demand deposits will be accepted by payment banks.
• 17. Small Finance Banks:
• In September 2015, RBI granted licenses to 10
applicants for Small Finance Banks which is a
step in the direction of furthering financial
inclusion.
• The small finance banks shall primarily
undertake basic banking activities of acceptance
of deposits and lending to unserved and
underserved sections including small business
units, small and marginal farmers, micro and
small industries and unorganized sector entities.
• Financial Sector Reforms are the steps taken to
change the banking system, capital market,
government debt market, foreign exchange
market, etc. An efficient financial sector enables
the mobilization of household savings and
ensures their proper utilization in productive
sectors.
 Need for Financial Sector
Reforms
• After independence India inherited a colonial legacy that
was full of various social and economic deprivations.
• The planned economic development strategy adopted
based on the Mahalanobis model had its limitations that
started showing in the 1980s.
• In order to achieve various economic goals, the
government resorted to increased borrowings at
concessional rates which lead to weak and
underdeveloped financial markets in India.
• The nationalization of banks increased government
control and decreased the role of market forces in the
financial sector.
• Increased bureaucratic control, issues of red-
tapism increased the non-performing assets.
• Turbulent international events such as the war in
the Middle East and the fall of the USSR
increased the pressure on the Foreign Exchange
Reserves of India.
 Narasimham Committee Report
(1991)
• It was established to give reforms pertaining to the financial
sector of India including the capital market and banking
sector.
• Some of its major recommendations have been mentioned
below:
• It recommended reducing the cash reserve ratio (CRR) to
10% and the statutory liquidity ratio (SLR) to 25% over the
period of time.
• It suggested fixing at least 10% of the credit for priority
sector lending to marginal farmers, small businesses,
cottage industries, etc.
• In order to provide required independence to the banks for
setting the interest rates themselves for the customers, it
recommended de-regulating the interest rates.
 Reforms in the Banking Sector
• Reduction in CRR and SLR has given banks more financial
resources for lending to the agriculture, industry and other sectors
of the economy.
• The system of administered interest rate structure has been done
away with and RBI no longer decides interest rates on deposits
paid by the banks.
• Allowing domestic and international private sector banks to
open branches in India, for example, HDFC Bank, ICICI Bank,
Bank of America, Citibank, American Express, etc.
• Issues pertaining to non-performing assets were resolved
through Lok adalats, civil courts, Tribunals, The Securitisation
And Reconstruction of Financial Assets and the Enforcement of
Security Interest (SARFAESI) Act.
• The system of selective credit control that had increased the
dominance of RBI was removed so that banks can provide greater
freedom in giving credit to their customers.
Reforms in the Debt Market
• The 1997 policy of the government that included automatic
monetization of the fiscal deficit was removed resulting in the
government borrowing money from the market through the
auction of government securities.
• Borrowing by the government occurs at market-determined
interest rates which have made the government cautious
about its fiscal deficits.
• Introduction of treasury bills by the government for 91
days for ensuring liquidity and meeting short-term financial
needs and for benchmarking.
• To ensure transparency the government introduced a system
of delivery versus payment settlement.
 Reforms in the Foreign
Exchange Market
• Market-based exchange rates and the current account
convertibility was adopted in 1993.
• The government permitted the commercial banks to undertake
operations in foreign exchange.
• Participation of newer players allowed in rupee foreign
currency swap market to undertake currency swap transactions
subject to certain limitations.
• Replacement of foreign exchange regulation act (FERA),
1973 was replaced by the foreign exchange management act
(FEMA), 1999 for providing greater freedom to the exchange
markets.
• Trading in exchange-traded derivatives contracts was
permitted for foreign institutional investors and non-resident
Indians subject to certain regulations and limitations.
 Impact of Various Reforms in
the Financial Sector
• It increased the resilience, stability and growth rate of the
Indian economy from around 3.5 % to more than 6% per
annum.
• A resilient banking system helped the country deal with
the Asian economic crisis of 1977-98 and the Global
subprime crisis.
• The emergence of private sector banks and foreign banks
increased competition in the banking sector which has
improved its efficiency and capability.
• Better performance by stock exchanges of the country and
adoption of international best practices.
• Better budget management, fiscal deficit, and public debt
condition have improved after the financial sector reforms.
 Salient features of the Banking
Regulation Act
• A broad definition of banking is to put any entities that
accept deposits, refundable on demand or otherwise,
for lending or investment within the ambit of the law.
• Non-banking institutions are prohibited from
accepting demand deposits.
• Trading is prohibited from removing non-banking
concerns.
• Minimum capital requirements are imposed.

• Dividend payouts are being restricted.

• Inclusion of banks established outside India’s
provinces in the scope of the law
• Implementation of a comprehensive licensing
system for banks and their subsidiaries
• Prescription of a specific type of balance sheet
and the Reserve Bank’s authority to demand
periodic returns
• The Reserve Bank inspects a bank’s books and
accounts.
• Providing the central government with the authority to
take measures against banks that conduct business in a
way that is harmful to depositors’ interests
• Provision for increasing the RBI’s interaction with
financial institutions.
• Provision of a fast-track liquidation procedure.
• Including the Indian Reserve Bank in Bill’s provisions
• Increasing the Reserve Bank of India’s capabilities to
aid banks in times of crisis.
 Questions
• Q1: What is the maximum period for call money?
• A. 60 days
B. 30 days
C. 20 days
D. 15 days
E. 14 days
• Q2: Which of the following regulate the scheduled
commercial banks of India?
• A. RBI
B. SEBI
C. NABARD
D. SIDBI
E. NHB
• Q3: Which of the following is issued as a promissory note?
• A. Commercial paper
B. Treasury bills
C. Participatory notes
D. Certificate of deposits
E. Govt securities
• Q4: What is the minimum subscription required for
commercial paper?
• A. 1 cr
B. 2 cr
C. 3 cr
D. 4 cr
E. 5 cr
• Q5: What is the minimum subscription required for the
Certificate of deposits?
• A. 1 lakh
B. 3 lakh
C. 2 lakh
D. 4 lakh
E. 5 lakh
• Q6: What is the sale and purchase of short term
government securities by the central government
called?
• A. T-bills
B. Commercial bills
C. P notes
D. Promissory notes
E. Cash management bills
• Q7: Which of the following agencies issue T-bills in India?
• A. RBI
B. SBI
C. SEBI
D. SIDBI
E. Ministry of finance
• Q08: Which of the following market deals for the short term
period?
• A. Financial market
B. Money market
C. Capital market
D. Gilt-edged security market
E. Stock market
• Q09: Which of the following market deals for the medium and
long term period?
• A. Financial market
B. Money market
C. Capital market
D. Primary market
E. Stock market
• Q10: Which of the following is not a type of financial service?
• A. Banking
B. Insurance
C. Brokerage
D. Foreign exchange
E. Investment
 Components of Indian
Financial System
• Financial institutions
The term financial institution defines those
institutions which provide a wide variety of
deposit, lending, and investment products to
individuals, businesses, or both. Some other
financial institutions provide services and
account for the general public, others are more
likely to serve only certain consumers with more
specialized offerings.
• 1. Central Banks
• These are the financial institutions that regulate, oversight
and look after the management of all other banks. RBI is
known as the central bank of India. An individual does not
have direct contact with a central bank instead, large
financial institutions work directly with the RBI to provide
products and services to the general public.
• 2. Retail and Commercial Banks
• These Banks provide products to consumers and
commercial banks worked directly with businesses. At
present, most banks offer deposit accounts, lending and
financial advice. These banks cater for services like
checking and savings accounts, certificates of deposit
(CDs), personal and mortgage loans, credit cards, and
business banking accounts.
• 3. Internet Banks
• These types of banks work the same as retail banks. Internet bank
is of two type-
• Digital banks- These are online-only platforms affiliated with
traditional banks.
• Neo banks- These banks are not affiliated with any bank but
themselves. These are pure digital native banks.
• 4. Credit Unions
• These are the financial institution that was founded and
administered by its member and provide standard banking
services.
These unions help a specific population based on their field of
membership, such as military personnel or teachers.
• 5. Insurance Companies
• These companies help individuals in transferring the risk of loss.
These companies take care of individuals and businesses from
financial loss caused due to disability, death, accidents, property
damage and other catastrophes.
 Financial Markets
• The marketplace where buyers and sellers participate in
the trade of assets such as equities, bonds, currencies,
and derivatives.
• There are 2 types of Financial Markets:
1. Money Market – deals in short-term credit (< 1 yr).
2. Capital Market –handles medium-term & long-term
credit. (> 1 yr)
• Money Market:
• It is characterized by two sectors:
• 1. Organized sector – this sector comes within the
direct purview of RBI. It includes banking & sub-
markets.
• a. Banking sector – Commercial banks [under Banking
regulation act 1949 & consist of both private & public],
RRBs, Cooperative Banks.
b. Sub Markets – Meet the need of govt and
industries. It includes call money, Bill market
[Commercial bill, T-Bill], Certificate of Deposit [CD] &
Commercial Paper [CP].
• 2. Unorganized sector – consists of indigenous
bankers, money lenders, non-banking financial
institutions, etc.
• Capital Market:
• This market comprises buyers & sellers, who trade in
equity (ownership of asset) &debt (loan). It is
regulated by SEBI (established in 1992).
The institutions in the capital market are called NBFCs
(Non-banking financial companies). But it’s not
necessary that all NBFCs are capital market
institutions.
• RBI defines NBFC as – ‘A NBFC is a company registered
under the Companies Act, 1956 and is engaged in the
buss of loans & advances, acquisition of share/ stock
issued by Government. It doesn’t include any
institution whose principal buss is agriculture activity,
industrial activity, or sale/purchase of the immovable
property.
• Security Market:

• This market is known as-

• a) Government Securities [gilt edge] security market

and
b) Industrial Security Market [New Issue Market is the
primary market & Old Issue Market is the secondary
market].
Development Financial Institutions: They provide long-
term loans to industries engaged in infrastructure where
projects have long gestation periods & require long
term loans.
• Financial services:
• The purpose of Financial Services is to cater for a person
with borrowing, selling or purchasing securities, allowing
payments and settlement, lending and borrowing. These
services help in the management of funds as the money is
invested efficiently and also help to get the required funds.
These services are provided by the assets management
and liability management companies.
These services are-
• Banking services- like cash deposit, issuing debit and
credit cards, opening accounts, Fixed deposit, loan facility
etc.
• Insurance services- like issuing of insurance, selling
policies, insurance undertaking and brokerages, etc.
• Foreign exchange services- currency exchange, foreign
exchange, etc.
• Investment services- like asset management etc.
 NBFC & FI’s
• 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.
• A non-banking institution which is a
company and has principal business of
receiving deposits under any scheme or
arrangement in one lump sum or in
installments by way of contributions or in
any other manner, is also a non-banking
financial company
 Unit II: Introduction to Financial
Markets in India
• Role and Importance of Financial Markets, Financial
Markets: Money Market; Capital Market; Factors
affecting Financial Markets, Linkages Between
Economy and Financial Markets, Integration of Indian
Financial Markets with Global Financial Markets,
Primary & secondary market, Currency Market, Debt
Market- role and functions of these markets.
 Role and Importance of Financial
Markets
• Financial markets refer broadly to any marketplace where
the trading of securities occurs.
• There are many kinds of financial markets, including (but
not limited to) forex, money, stock, and bond markets.
• These markets may include assets or securities that are
either listed on regulated exchanges or else trade over-
the-counter (OTC).
• Financial markets trade in all types of securities and are
critical to the smooth operation of a capitalist society.
• When financial markets fail, economic disruption
including recession and unemployment can result.
 Financial Markets
• Money Market
• The money market is the trade in short-term debt. It is a constant
flow of cash between governments, corporations, banks, and
financial institutions, borrowing and lending for a term as short as
overnight and no longer than a year.
• Capital Market
• The capital market encompasses the trade in both stocks and
bonds.
• These are long-term assets bought by financial institutions,
profession
• The capital market is where stocks and bonds are traded. Its
movements from hour to hour are constantly monitored and
analyzed for clues as to the health of the economy at large, the
status of every industry in it and the consensus for the short-term
future. Brokers, and individual investors.
 Primary and Secondary
• The capital market is roughly divided into a primary market and
a secondary market. A company that issues a round of stock or
a new bond places it in the primary market for sale directly to
investors or institutions. If and when those buyers decide to sell
their shares or bonds, they do so on the secondary market. The
original issuer of those stocks or bonds does not immediately
benefit from their resale, although companies certainly have an
interest in the price of their stock shares rising over time.
• The capital market is by nature riskier than the money market
and has greater potential gains and losses.
 Capital and Money Market
Instruments
• Stock market, the bond market, and the forex
market
• Certificate of deposit (CDs),
• Commercial paper,
• Treasury bills (T-bills),
• Banker's acceptances.
 Factors affecting Financial
Markets
• Economic activity can influence market trends, for the
better or for the worse.
• Government policy and geopolitical events are factors
that can lead to either stability or instability in
markets.
• Market participant expectations and the natural
balance of supply and demand are other important
factors.
 Major Market Forces
• Government
Government holds much sway over the free markets.
The fiscal and monetary policies that governments and
their central banks put in place have a profound effect on
the financial marketplace. By increasing and
decreasing interest rates, the U.S. Federal Reserve can
effectively slow or attempt to speed up growth within
the country. This is called monetary policy.
• International Transactions
The flow of funds between countries affects the
strength of a country's economy and its currency.
The more money that is leaving a country, the
weaker the country's economy and
currency. Countries that predominantly export,
whether physical goods or services are continually
bringing money into their countries. This money can
then be reinvested and can stimulate the financial
markets within those countries.
• Speculation and Expectation
• Speculation and expectation are integral parts of
the financial system. Consumers, investors, and politicians
all hold different views about where they think the
economy will go in the future, and that affects how they act
today. The expectation of future action is dependent on
current acts and shapes both current and future
trends. Sentiment indicators are commonly used to gauge
how certain groups are feeling about the current economy.
Analysis of these indicators as well as other forms
of fundamental and technical analysis can create a bias or
expectation of future price rates and trend direction.
• Supply and Demand
Supply and demand for products, services,
currencies, and other investments creates a push-
pull dynamic in prices. Prices and rates change as
supply or demand changes. If something is in
demand and supply begins to shrink, prices will rise.
If supply increases beyond current demand, prices
will fall. If supply is relatively stable, prices can
fluctuate higher and lower as demand increases or
decreases.
Unit III: Secondary Market in India
• Introduction to Stock Markets, Regional and Modern
Stock Exchanges, International Stock Exchanges,
Demutualization of exchanges, Comparison between
NSE and BSE, Raising of funds in International
Markets: ADRs and GDRs, FCCB and Euro Issues;
Indian Stock Indices and their construction,
maintenance, adjustment for corporate actions (rights,
bonus and stock split;) on index with numerical, free
float vs. full float methodology,
• Classification of Securities to be included in the Index,
Bulls and Bears in Stock Markets, Factors influencing
the movement of stock markets, indicators of maturity
of stock markets, Major Instruments traded in stock
markets: Equity Shares, Debentures, Myths attached to
Investing in Stock Markets. Trading of securities on a
stock exchange, Settlement mechanism at BSE & NSE.
Unit IV: Money Markets & Debt Markets in
India: Money Market

• Meaning, role and participants in money markets,

Segments of money markets, Role of STCI and
DFHI in money market, Debt Market: Introduction
and meaning, Market for Government/Debt
Securities in India, Secondary market for
government/debt securities.
• Over subscription and devolvement of Government
Securities, Government securities issued by State
Governments, Municipal Bonds, Corporate Bonds vs.
Government Bonds.