2
Table of Contents
Unit
1
2
3
4
5
Chapter Name
Financial System
Financial Institutions
Commercial Banks
Regulatory Institutions
Financial services
Page No
INDIAN FINANCIAL SYSTEM
Unit 1: FINANCIAL SYSTEM 12 Hrs
Introduction – Meaning – Classification of Financial System. Financial Markets – Functions
andSignificance of Primary Market, Secondary Market, Capital Market, & Money Market.
Unit 2: FINANCIAL INSTITUTIONS 14 Hrs
Types of Banking and Non-Banking Financial Institutions.Constitution, objectives &
functions ofIDBI, SFCs, SIDCs, LIC, EXIM Bank. Mutual Funds – features and types.
Unit 3: COMMERCIAL BANKS 10 Hrs
Introduction – Role of Commercial Banks – Functions of Commercial Banks – Primary
Functions andSecondary Functions – Investment Policy of Commercial Banks.Narasimaham
committee report onbanking sector reforms.
Unit 4: REGULATORY INSTITUTIONS 10 Hrs
Reserve Bank of India (RBI) – Organization – Objectives – Role and Functions.The
SecuritiesExchange Board of India (SEBI) – Organization and Objectives.
Unit 5: FINANCIAL SERVICES 10 Hrs
Meaning& Definition – Features – Importance. Types of Financial Services – factoring,
leasing,venture capital, Consumer finance - housing & vehicle finance.
Unit 1: FINANCIAL SYSTEM 12 Hrs
Introduction – Meaning – Classification of Financial System. Financial Markets – Functions
andSignificance of Primary Market, Secondary Market, Capital Market, & Money Market
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Unit 1 –INDIAN FINANCIAL SYSTEM
Financial System: It is a set of all financial institution which facilitates financial transactions
in financial markets. It brings under its fold the financial markets and the financial institution
which support the system.
Indian financial system
Definition
Indian Financial system is a complex well integrated set of sub system of financial
institutions, market, instruments and services which facilitates the transfer and allocation of
funds efficiently and effectively .System helps to mobilize the surplus funds and utilizing in
productive manner
IFS
Fin
institutions
Banking
Non
banking
private
Non bank
fin
companies
public
Devlp fin
institu
Fin market
Mutual
funds
Capital
market
insurance
equity
primary
secondary
money
market
debt
derivative
Fin
instrument
s
Short,medi
um
long
Fin services
Regulatory
depositorie
s
Min of fin
Tresury bill
Credit
rating
RBI
Call
money
factoring
SEBI
IRDA
foreign
Public issue
NSE
Futures
cp
hire
purchase
RRB
Privite
placement
BSE
Options
CD
Merchant
banking
rigrrrht
issue
Reg stock
exc
Bills of
exchange
portfolioma
ng
bonous issu
OTCEI
leasing
4
Functions
1. Link between savers and investor
It helps in utilizing savings from savers and channelizes it to productiveinvestors
2. Review the performance of market and products
Helps in assessing the performance of market, institutions and instruments and
take required actions
3. Provides payment mechanism
It helps in exchange of goods and services by providing systematic payment
mechanism
4. Transfer of resource across borders
Financial system helps in transfer of capital resources from one place to another
5. Managing and controlling risk
Financial transaction involvesrisk. Efficient system helps us to control risk and
increase the return
6. Lowering cost of transactions
Formal mechanism reduces transaction cost there by increasing returns
7. ‘provides information
Government, central bank and various institution who are part of system provides
various information to investors and dealers
IFS COMPONENTS





Financial Markets
Financial Institution
Financial Instruments
Financial Services
Regulatory Authority
Financial Markets
Financial market is a place or mechanism which facilitates the transfer of resources from one
entity to another
Types of financial markets
1) Money market- money market is collective name given to the various firms and
institutions that deal in various grades of near money
2) Capital market- capital market refers to the market for long term funds. it includes
institutions and mechanism for effective pooling of long term funds. it includes shares
debentures bonds and securities
5
Financial Institutions
They are intermediaries who facilitate smooth functioning of financial system by making
investors and borrowers meet. Financial institution can be divided under 2 head- banking and
non banking
Financial Instruments
It is a claim against a person or an institution for payment at future date of sum of money or a
periodic payment in form of interest or dividend.
Financial Services
It is product or services offered by financial industries to its customers like stock broking,
insurance mutual funds etc .there are various assets based and fee based services
Regulatory Authorities
Ministry of finance RBI SEBI IRDA
Financial Markets
Financial market refers to institutional arrangement for dealing in financial assets and credit
instruments of different types such as currency, cheques, shares debentures bills of exchange
etc.It is a place or mechanism which facilitates the transfer of resources from one entity to
another
Features of financial market
1. Market involves large volume of transaction on daily basis
2. There are various segments in financial market like stock market, forex market,
money market etc
3. Market in highly volatile in nature. Prices of instrument will change every day every
minute. There is no stability in market
4. Since market is highly volatile there is scope for speculation or making quick profit.
5. Market is dominated by intermediaries and private dealers
6. Indian financial market is well integrated/ connected with world market
Function of financial markets
1. It facilitatesprice discovery for various instrument of companies and other financial
institutions.it helps the company to know the value of asset.
2. Facilitate creation and allocation of credit
3. It provides liquidity for asset.helps in conversion of asset into cash and viceversa
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4.
5.
6.
7.
To provide platform for sellers and buyers of fund to meet for exchange process
Serves as intermediaries for mobilizing savings
Assist process of economic growth
Caters financial needs or provides long term fund for the company
Organised FinancialMarket consists of :
1.
2.
3.
4.
Capital market
Money market
FOREX (foreign exchange )market
Derivative Market
Capital Market: capital market refers to institutional arrangement for facilitating the
borrowing and lending of long term funds.It includes shares debentures bonds and securities
Importance/ Role/significance of Capital Markets
1. It helps in Productive use of economy’s savings
2. It Provides incentives for saving
3. It Facilitates capital formation
4. Increases production and productivity
5. It also helps in Stabilizes value of securities
Functions of capital market
1. Credit function-To provide long term permanent capital for the company by
mobilization of savings from investors to companies and entrepreneurs
2. Liquidity function- market provides and exchange mechanism for buyers and seller
of securities there by allows better liquidity (conversion of asset to cash)
3. Transfer function- it helps in transfer of resources / assets from one place to another
and helps in securing foreign capital
Primary or New issue Market
Primary market is the place where securities which are issued to the public for first time.
Companies raise capital through issue of instruments through primary market. New
companies and existing companies raise capital through primary market
Features
 Securities are issued by the company directly to the investors
 Company raise fund for their formation and expansion through primary market
 There is no any fixed location for primary market. Institutions which deals with issue
of shares forms market
 It deals with shares and debentures
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Functions of Primary Market
1. Origination- primary market facilitates all activities for origination of shares.
2. It provides Guarantee for issue through underwriting
3. It facilitates distribution of shares to geographically dispersed investors
4. Aids in expansion/diversification/modernization of existing units
5. To provides working avenues for major players of primary market like merchant
bankers, underwriting, brokers, advt agencies etc
Methods of issue in primary market
1. Public through prospectus: Under this method, issuing company directly offers to
the general public/ institutions a fixed number of shares at a stated price through a
document called prospectus. This is the most common method followed by joint stock
companies to raise capital through the issue of securities it is also called as IPO –
Initial public offering/ FPO follow public offering
2. Rights issue: under this method shares are offerd to existing share holders.
3. Bonus shares: share given to shareholders out of accumulated profit as a substitute
for dividend
4. Private Placements: It is a way of selling securities privately to a small group of
investors. shares are offered to few group of customers under reservation method
Secondary market:
It is a market for secondary sale of securities, such shares quoted in the stock exchange
market. It provides continuous and regular market for buying and selling. It is also called
as stock market.
Features
1. Market for securities: where securities of corporate bodies, government and
semi-government bodies are bought and sold.
2. Deals in second hand securities : It deals with shares, debentures bonds and
such securities already issued by the companies.
3. Regulates trade in securities. It regulates the trade activities so as to ensure
free and fair trade
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4. Specific location : dealings happens in Stock exchange on the floor of market
Continuous and ready market for securities
5. It provides ready outlet for buying and selling of securities.
Functions of Secondary market
1. Liquidity of securities as securities can be converted into cash readily
2. Marketability of securities as it facilitates buying and selling of securities.
3. Safety of funds belonging to investors
4. Provides long term funds
5. Flow of funds to profitable projects.
6. Motivation for improved performance by companies to get competitive edge.
7. Promotion of investment opportunities.
8. Reflection of business cycle.
9. Promotes marketing of new issues by companies.
Money Market:It is a market for dealing financial assets and securities which have a
maturity period of up to one year. It is a market for short term funds.
Importance of Money Market
1.
2.
3.
4.
5.
6.
It helps in development of Trade and Industry
It support development of Capital market
Enables smooth functioning of commercial banks
Effective functioning of central bank
Formulation of suitable Monetary policy
Non inflammatory source of Finance to government.
Money market instruments
1)Call money Market: money at call and short notice-it is a market for extremely short
period of time like one day to fourteen days.
Features
1. Issued for short period from 1 day to 14 days
2. it is highly liquid
3. interest rates vary from day to day and even hour to hour according to demand
and supply
4. its used for adjusting cash reserve and day to day transactions
5. Call money is repayable on demand at the option of either the lender or the
borrower.
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2)Commercial Bills Market: is a market for bills of exchange arising out of trade
transaction .bills of exchange is short term negotiable instrument between debtor and creditor.
the creditor can discount the bill of exchange to commercial bank before the due date and can
avail 90m to 95 percentage of money
Features
1. Where commercial bill is a draft accompanied by a bill of lading and which is
drawn by a seller in one country against a buyer in another on account of goods
sold by the latter.
2. In India market id underdeveloped
3)Treasury bill Market: It is a market for Treasury bill. Treasury bills or T bills are kind of
finance bills which are in the nature of promissory note issued by the government under
discount for fixed period not exceeding 1 yea rcontaining a promise to pay the amount stated
on the instrument.
Features
1.
2.
3.
4.
It has short term maturity.
It is a promissory note or a finance bill issued by Government.
It is highly liquid as its repayment is guaranteed.
It is issued in maturity period of 91 days,182 days and 364 days
Types
Ordinary treasury bills-are issued to public, commercial banks and other financial
institutions for raising short term fund for government
Ad hoc treasury bills-are issued in favour of RBI
4)Commercial papers
It is unsecured promissory notes which are issued by well reputed companies with minimum
face value of 5 lakhs
Features
1.
2.
3.
4.
It is promissory note issued by a company.
Buyers are banks, insurance companies, and other firms
Minimum face value of cp is 5 lakhs
It is used for seasonal requirement and working capital management.
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5) Certificate deposits
It is unsecured negotiable short term instrument in bearer form issued by commercial banks
and developed financial institutions
Features
1. It is short term borrowings by banks
2. Rate for interest is higher than normal fixed deposits
3. It is transferable from one person to another before maturity
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Unit -2FINANCIAL INSTITUTIONS
Meaning of financial institution:
A financial institution is basically a term lending institution .Its an
establishment that focuses on dealings financial transaction such as investment loans
deposits.
Features of FI
1.
2.
3.
4.
It provides liquidity position of the entity by maintaining cash inflows and out flows
FI periodically adjust their deposits rates in tune with market trend
Large scale operation and usage of formal mechanism reduces operation cost
It can spread risk by giving a large number of loans with varying degreeof risk and
return
Function of FI
1.
2.
3.
4.
Facilitating exchange of goods and services
Management of liquidity risk
Monitoring of investment project
Resolving marketing imperfection by accepting funds from surplus units and channel
to deficit units
5. Mobilizing saving
6. Accelerating industrialization
7. Provides information about market and trend to end users
Types of financial institutions
I.
Banking Institutions
II.
Non Banking Financial Institutions
I.
Banking Institutions :they are governed by RBI, and come under
Banking Regulations Act 1949.
1. Commercial Banks: are established with a objective to create saving habit
among the people , provide banking services like accepting deposits and lending
money
a) Scheduled bank-banks which are registered in the second schedule of
RBI.
Features of scheduled bank
 The scheduled banker must be in business of banking in India .
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 It is either a company under companies act or or an institution
notifies by the central government
 It must have paid up capital and reserve of an aggregate of less
than 5 lakhs rupees
 It must be working as per RBI rules and regulation
b)
i.
Public sector banks- include all banks in which government has
major share holdings. SBI & it s & subsidiaries and all
nationalized banks belongs to this category eg; SBI ,
Indianbank, Bank Of India, Canara Bank
ii.
Private sector-banks in which owned by shareholders. At
present there are 30 private sector bankeg south indian bank,
iii.
Foreign banks-banks belong to foreign country and started their
branches in india.eg; standard chartered bank,citi bank
c) Non scheduled bank-banks which are not under the scheduled of RBI.
At present in India there are no bon scheduled bank
2. RRBs: Regional Rural Bank s are to be set-up mainly with a view to develop
rural economy by providing credit facilities for the purpose of development of
agriculture, trade, commerce, industry and other productive activities in the rural
areas. Such facility is provided particularly to the small and marginal farmers,
agricultural labourers, artisans, and small entrepreneurs and for other related
matters.
3. Co-operative banks: are registered under Cooperative societies Act in 1912,
give credit facilities to small farmers, SSI etc.
Unorganized sector
Indigenous Banks-Indigenous bankers are private firms or individuals who operate as banks
and as such both receive deposits and give loans. The Banking Commission (1972) had
grouped them under four main sub-groups Gujarati shroffs, Shikarpuri or Multani shroffs,
Chettiars of the South, and Marwari Kayas of Assam.
Moneylender - Money lender is a person or group who typically offers small personal loans
at high rates of interest. They play an active role in lending to people with less access to
banking activities, such as the unbanked or underbanked or in situations where borrowers do
not have good credit history. In India licensed money lenders are governed by Money
Lenders Acts of respective states.
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Non Banking Financial Institutions: These are institutions which do not have full
license or is not supervised by a National or International Banking Regulatory Agency. They
facilitate bank related financial services such as investment, risk pooling, market brokering
etc .
Features of NBFI
a)
b)
c)
d)
e)
It is registered with RBI
They are subject to fulfill the requirements by RBI for commencement of business
RBI can cancel the registration on non compliance of rules
chit funds are exempted from the rule
RBI does not permit to use the name of RBI in the advertisements
Role of NBFI
It promotes savings
They may be categorized into 2 groups:
A) Organized Financial Institution
i)
Development Finance Institution: they are the organized financial
institutional. IDBI, ICICI, IFCI , SFC, SIDC etc
ii)
Investment Institution: These mobilize savings of Public at large
through various schemes eg. LIC , GIC, UTI
iii)
Refinancing institution: These institutions extend financial
assistance to banks and non banking financial intermediaries
eg:NABARD, NHB
B) Unorganized Financial Institution/ NBFC: These include hire purchase
and consumer finance companies, leasing companies, credit rating
agencies, merchant banking companies, housing finance companies.
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Development Financial Institutions
It is specialized and hybrid financial institutions that are engaged in the provision of
financial and the other assistance for the purposed of undertaking long term development
activities in certain identified sectors of economy such as small scale sector , export
promotion , industrial development , agricultural development.
Functions of DFI
1.
2.
3.
4.
5.
6.
7.
8.
Undertakes financial function- includes granting long term and short term loans
subscribing shares and debenture of company, guaranteeing loans,
Act as a catalyst for development of industry
Promotes development of entrepreneurial cult
Provides technical and managerial advices to the industry.
Helps in identification, evaluation and execution of new investment projects.
Helps in balanced economic growth
Helps in optimal utilization of resources
Types of DFI
INDUSTRIAL DEVELOPMENT BANK OF INDIA:IDBI
The Industrial Development Bank of India was set up in July 1964 as a wholly owned
subsidiary of the Reserve Bank of India.. After a decade of its working, it was delinked from
RBI in 1976, when its ownership was transferred to the Government of IndiaIDBI is now the
principal financial institution for coordinating the working of institutions engaged in
financing, promoting or developing industry, assisting the development of such institutions
and providing credit and other facilities for the development of industry.









Functions Of Idbi:
Act an apex financial institution and coordinates the working of other financial
institutions.
It assists in the development of other financial institutions.
It provides credit, Technical and Administrative for promotion and expansion of
industry.
It provides refinance to scheduled banks and cooperative banks.
It is the principle financial institution for coordinating in conformity with national
priorities, promoting or developing industries.
Direct assistance like giving concessions in the form of interest longer repayment
period, longer grace period and lower margin requirement
Undertaking market and investment research and surveys.
Seed capital assistance through SFC’S and SID’S.
Provides help for preparation of project profile.
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 Assistance to state level institutions in the formulation and implementation of training
programs for entrepreneur
INDUSTRIAL FINANCE CORPORATION OF INDIA
The Industrial Finance Corporation of India (IFCI) was the first development bank
established in 1948 in the country for providing medium and long term credits to industrial
concerns, particularly in such circumstances where normal banking accommodation is
inappropriate or recourse to capital issue methods is impracticable.
Functions Of IFCI
1. Granting of loans both in Rs and foreign currencies.
2. Raised by industrial concern in the capital market.
3. Underwriting of shares debentures and bonds.
4. Direct subscription to the shares and debentures of public Ltd companies.
Objectives Of Ifci:
1) To provide financial assistance in short medium and long term.
2) To provide consultancy and merchant banking.
3) To carry on business of leasing and higher purchase.
4) To undertake activities like wear housing, factoring custodial services, etc.
5) To set up investment company.
6) To deal, transact buy and sell foreign currencies.
7) Act’s as trustee, executor, administrator, treasurer and trust.
STATE FINANCIAL CORPORATIONS (SFC’S):
Under the provision of the State Financial Corporation Act, 1952, the SFCs are set up in the
different states for providing term finance to medium and small scale industries.
At present there are 18 state finance corporations in India.
Constitution
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The State Finance Corporations management is vested in a Board of ten directors. The State
Government appoints the managing director generally in consultation with the Reserve Bank
and nominates three other directors.The insurance companies, scheduled banks, investment
trusts, co-operative banks and other financial institutions elect three directors. Thus the
majority of the directors are nominated by the government and quasi-government institutions.
Objectives
1.
2.
3.
4.
To provide long term and short financial assistance to small and medium industries
Ensures balanced regional development
Higher investment and broad ownership of industries
Employment generation.
Functions of State Financial Corporation (SFCs)
1. Provide financial assistance to small and medium industrial concerns like
manufacture, preservation or processing of goods, mining, hotel industry, transport
undertakings, generation or distribution of electricity, repairs and maintenance of
machinery, setting up or development of an industrial area or industrial estate, etc.
2. Provide long and medium-term loan repayable ordinarily within a period not
exceeding 20 years.
3. Grant financial assistance to any single industrial concern undercorporate or cooperative sector with an aggregate upper limit of rupees Sixty lakhs
4. Provide Financial assistance generally to those industrial concerns whose paid up
share capital and free reserves do not exceed Rs.3 crore.
5. To lay special emphasis on the development of backward areas and small scale
industries.
.
6. Guaranteeing deferred payments due from an industrial concern for purchase of
capital goods in India.
7. Underwriting of the issue of stock, shares, bonds or debentures by industrial concerns.
8. Subscribing to, or purchasing of, the stock, shares, bonds or debentures of an
industrial concern subject to a maximum of 30 percent of the subscribed capital, or 30
percent of paid up share capital and free reserve, whichever is less.
9. Act as agent of the Central government, State government, IDBI,IFCI or any other
financial institution in the matter of grant of loan or business
10. Providing technical and administrative assistance to any industrial concern or any
person for the promotion, management or expansion of any industry.
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LIFE INSURANCE CORPORATION OF INDIA:
Life insurance is a contract in which the insurer in consideration of certain premium either in
lump sum or other periodical payments, agrees to pay to the assured or to the person for
whose benefit the policy is taken
The life insurance business was nationalised on 19th January, 1956 and the Life Insurance
Corporation of India came into being on 1st September, 1956 to carry on life business in
India with capital of Rs.5 crores contributed by the Central Government. The Corporation is a
body corporate having perpetual succession with a common seal with powers to acquire, hold
and dispose of property and may by its name sue and be sued.
Functions.
1.
2.
3.
4.
5.
6.
7.
8.
9.
to carry on life insurance business
to invest the funds of the Corporation in such manner as the Corporation may think fit
to acquire, hold and dispose of any property for the purpose of its business;
to transfer the whole or any part of the life insurance business carried on outside India
to any other person or persons,
to advance or lend money upon the security of any movable or immovable property or
otherwise;
to borrow or raise any money in such manner and upon such security as the
Corporation may think fit;
to carry on either by itself or through any subsidiary any other business in any case
where such other business was being carried on by a subsidiary of an insurer whose
controlled business has been transferred to and vested in the Corporation by this act;
to do all such things as may be incidental or conducive to the proper exercise of any
of the powers of the Corporation.
In the discharge of any of its functions the Corporation shall act so far as may be on
business principles.C was established in 1956
EXIM BANK [Export import bank of India]
Export-Import Bank of India is the premier export finance institution in India, established
in 1982 under the Export-Import Bank of India Act 1981. Exim Bank of India has been both
a catalyst and a key player in the promotion of cross border trade and investment
Objectives
1. To ensure and integrated and co-ordinated approach in solving the allied problems
encountered by exporters in India.
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2. To pay specific attention to the exports of capital goods;
3. Export projection;
4. To facilitate and encourage joint ventures and export of technical services and international
and merchant banking;
5. To extend buyers’ credit and lines of credit;
6. To tap domestic and foreign markets for resources for undertaking development and
financial activities in the export sector.
.Functions
1. Planning, promoting and developing exports and imports;
2. Providing technical, administrative and managerial assistance for promotion,
management and expansion of exports;
3. Undertaking market and investment surveys and techno-economic studies related to
development of exports of goods and services.
4. Financing of exports and imports of goods and services, not only of India but also of
the third world countries;
5. Financing of exports and imports of machinery and equipment on lease basis;
6. Financing of joint ventures in foreign countries;
7. Providing loans to Indian parties to enable them to contribute to the share capital of
joint ventures in foreign countries;
8. to undertake limited merchant banking functions such as underwriting of stocks,
shares, bonds or debentures of Indian companies engaged in export or import; and
9. To provide technical, administrative and financial assistance to parties in connection
with export and import.
SIDC [STATE INDUSTRIEDS DEVELOPMENT CORPORATION]
The State Industrial Development Corporations have been set up by the State Governments as
companies wholly owned by them. At present, 22 such SIDCs are functioning in India.
SIDCs are not merely financing agencies, but are intended to act as instruments for
accelerating the pace of industrialization in the respective States. State Industrial
Development Corporation operate at slightly higher level than SFCs though these institutions
are also primarily working as development banks promoting industrial projects in small and
medium scale.
Constitution
Board of directors-11
Managing director-1
General manager-4
Deputy general manager-7
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Superintendent
Head office – Bangalore
3 zone-Bangalore, Hubli, Mysore
Objectives
1. To develop the small sector industries
2. To formulate policies to direct t support to industries
3. To provide entrepreneurship training
4. Assist in projects
Function of SIDC
1.
2.
3.
4.
5.
It extend financial assistance in the form of rupee loans
It underwriting subscriptions to shares/debentures,
It gives guarantees for loans
Opens letters of credit on behalf of its borrowers.
SIDCs undertake of promotional activities including preparation of feasibility reports,
conducting techno-economic surveys,conducting industrial potentialsurveys
,entrepreneurship training & development programmes and developing industrial
areas/estates.
6. Some SIDCs also offer a package of developmental services that include technical
guidance, assistance in plant location and co‑ordination with other agencies
7. SIDCs are involved in the setting up of industrial growth centres.
8. They also promote joint sector projects in association with private promoters. In such
projects SIDCs take 26% private co-promoter takes 25% of the equity, and the rest is
offered to the investing public.
MUTUAL FUNDS
Definition:
An investment vehicle that is made up of a pool of funds collected from many investors for
the purpose of investing in securities such as stocks, bonds, money market instruments and
similar assets. Mutual funds are operated by money managers, who invest the fund's capital
and attempt to produce capital gains and income for the fund's investors
A mutual fund is an investment security type that enables investors to pool their money
together into one professionally managed investment. Mutual funds can invest in stocks,
20
bonds, cash and/or other assets. These underlying security types,called holdings combine to
form one mutual fund, also called a portfolio.
Features
•
•
•
•
•
A common pool of money into which investors place their contribution.
This money is to be invested according to the objective of the fund.
Ownership of the fund is joint or mutual among investors-according to their
contribution.
Ownership is through the holding of units respectively.
This pooled income is professionally managed on behalf of the unit-holders, and each
investor holds a proportion of the portfolio i.e. entitled not only to profits when the
securities are sold, but also subject to any losses in value as well.
Function
Diversification- allows investors to invest their money in a number of different assets at
once, making multiple investments with one purchase
Investor Choices--Mutual funds vary in the types of assets that they hold. This allows
individual investors to purchase shares in funds that meet their particular needs and
preferences.
Professional Management- The fund manager manages the fund and analysis risk and return
with a mutual fund for all of the fund's shareholders.
Investor Goals
Mutual funds exist to meet a wide range of investor goals. Some mutual funds target steady,
long-term growth, while others focus on more short-term goals.
Types of Funds/ Classification of Mutual funds
21
Different types of Mutual Funds
Mutual Fund schemes may be classified on the basis of their structure and their investment
objective.
•
By structure
Open-ended Funds
An Open-ended Fund is one that is available for subscription all through the year. These do
not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value
(NAV) related prices.
Close-ended Funds
A Close-ended Fund has a stipulated maturity period, which generally ranges from 3 to 15
years. The fund is open for subscription only during a specified period. Investors can invest
in the scheme at the time of the new fund offer and thereafter they can buy or sell the units of
the scheme on the Stock Exchanges, if they are listed. The market price at the stock exchange
22
could vary from the scheme's NAV on account of demand and supply situation, unit holders'
expectations and other market factors.
•
By investment objective
Growth Funds
The aim of Growth Funds is to provide capital appreciation over the medium to long term.
Such schemes normally invest a majority of their corpus in equities. Growth schemes are
ideal for investors who have a long-term outlook and are seeking growth over a period of
time.
Income Funds
The aim of Income Funds is to provide regular and steady income to investors. Such schemes
generally invest in fixed income securities such as bonds, corporate debentures and
Government securities.
Income Funds are ideal for capital stability and regular income. Capital appreciation in such
funds may be limited, though risks are typically lower than that in a growth fund.
Balanced Funds
The aim of Balanced Funds is to provide both growth and regular income. Such schemes
periodically distribute a part of their earning and invest both in equities and fixed income
securities in the proportion indicated in their offer documents. This proportion affects the
risks and the returns associated with the balanced fund - in case equities are allocated a higher
proportion, investors would be exposed to risks similar to that of the equity market.
Balanced funds with equal allocation to equities and fixed income securities are ideal for
investors looking for a combination of income and moderate growth.
Money market Funds
The aim of Money Market Funds is to provide easy liquidity, preservation of capital and
moderate income. These schemes generally invest in safer short-term instruments such as
Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money.
Returns on these schemes may fluctuate depending upon the interest rates prevailing in the
market.
These are ideal for corporate and individual investors as a means to park their surplus funds
for short periods.
•
Other equity related schemes
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Tax saving schemes
These schemes offer tax rebates to the investors under specific provisions of the Indian
Income Tax laws, as the Government offers tax incentives for investment in specified
avenues.
Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are
allowed as deduction under Section 88 of the Indian Income Tax Act, 1961.
Index schemes
Index Funds attempt to replicate the performance of a particular index such as the BSE
Sensex or the NSE S&P CNX 50.
Sectoral schemes
Sectoral Funds are those which invest exclusively in specified sector(s) such as FMCG,
Information Technology, Pharmaceuticals, etc. These schemes carry higher risk as compared
to general equity schemes as the portfolio is less diversified, ie restricted to specific sector(s)
/ industry (ies).
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Unit-3COMMERCIAL BANKS
Banking--As per Sec.5 (b) of the B R Act “Banking' means accepting, for the purpose of
lending or investment, of deposits of money from the public repayable on demand or
otherwise and withdrawable by cheque, draft, order or otherwise."
Role of commercial banks
1.Mobilising Saving for Capital Formation:
The commercial banks help in mobilising savings through network of branch banking and
channelize them into productive investments.
2. Financing Industry:
They provide short-term, medium-term and long-term loans to industry. Besides, they
underwrite the shares and debentures of large scale industries
3. Financing Trade:
The commercial banks help in financing both internal and external trade.. They help in the
movement of goods from one place to another by providing all types of facilities such as
discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc.
4. Financing Agriculture:
The commercial banks help the large agricultural sector in developing countries in a number
of ways. They provide loans to traders in agricultural commodities. animal husbandry, dairy
farming, sheep breeding, poultry farming, pisciculture and horticulture.
5. Financing Consumer Activities:
The commercial banks advance loans to consumers for the purchase of such items as houses,
scooters, fans, refrigerators, etc. In this way, they also help in raising the standard of living of
the people in developing countries by providing loans for consumptive activities.
6. Financing Employment Generating Activities:
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They provide loans for the education of young person’s studying in engineering, medical and
other vocational institutes of higher learning. They advance loans to young entrepreneurs,
medical and engineering graduates, and other technically trained persons in establishing their
own business.
7. Help in Monetary Policy:
The commercial banks help the economic development of a country by faithfully following
the monetary policy of the central bank
Functions of commercial bank
 PRIMARY FUNCTION:
1) Acceptance of deposits – deposits constitute the main source of funds for commercial
banks. Banks receive deposits from the public on various accounts..
Types of deposits are:
i)
Current Deposit A/c
ii)
Fixed deposit A/c
iii)
Savings Deposit A/c
iv)
Recurring deposit A/c
.
2) Lending of funds: Banks earn income in the form of interest through granting
loans and advances of various forms.
 Loans- lump sum amount is given to the customer for a fixed period of time .
customer should repay the amount with interest within fixed time There are two types
of loans:
3) Creation of Credit: A unique function of the bank is to create credit. Banks supply
money to traders and manufacturers. They also create or manufacture money. Bank
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deposits are regarded as money. They are as good as cash. The reason is they can be
used for the purchase of goods and services and also in payment of debts. When a
bank grants a loan to its customer, it does not pay cash. It simply credits the account
of the borrower. He can withdraw the amount whenever he wants by a cheque. In this
case, bank has created a deposit without receiving cash. That is, banks are said to have
created credit. It is said that “banks are not merely sources of money, but also in an
important sense, manufacturers of money.”
4) Remittance of Funds: Commercial banks, on account of their network of branches
throughout the country, also provide facilities to remit funds from one place to
another for their customers by issuing bank drafts, mail transfers or telegraphic
transfers on nominal commission charges. As compared to the postal money orders o
other instruments, bank drafts have proved to be a much cheaper mode of transferring
money and has helped the business community considerably.
 SECONDARY FUNCTIONS
Secondary banking functions of the commercial banks include:
1. Agency Services
2. General Utility Services
These are discussed below.
1. Agency Services: Banks also perform certain agency functions for and on behalf of their
customers. The agency services are of immense value to the people at large. The
various agency services rendered by banks are as follows:
(a) Collection and Payment of Credit Instruments: Banks collect and pay various credit
instruments like cheques, bills of exchange, promissory notes etc., on behalf of
their customers.
(b) Purchase and Sale of Securities: Banks purchase and sell various securities like shares,
stocks, bonds, debentures on behalf of their customers.
(c) Collection of Dividends on Shares: Banks collect dividends and interest on shares and
debentures of their customers and credit them to their accounts.
(d) Acts as Correspondent: Sometimes banks act as representative and correspondents of
their customers. They get passports, traveller’s tickets and even secure air and sea
passages for their customers.
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(f) Execution of Standing Orders: Banks execute the standing instructions of their
customers for making various periodic payments. They pay subscriptions, rents,
insurance premia etc., on behalf of their customers.
(g) Acts as Trustee and Executor: Banks preserve the ‘Wills’ of their customers and
execute them after their death.
2 General Utility Services: In addition to agency services, the modern banks provide
many general utility services for the community as given.
a) Locker Facility: Bank provide locker facility to their customers. The customers can
keep 1.
their valuables, such as gold and silver ornaments, important
documents; shares and debentures in these lockers for safe custody.
b) Traveller’s Cheques and Credit Cards: Banks issue traveller’s cheques to help
their customers to travel without the fear of theft or loss of money. With this facility,
the customers need not take the risk of carrying cash with them during their travels.
c) Letter of Credit: Letters of credit are issued by the banks to their customers
certifying their credit worthiness. Letters of credit are very useful in foreign trade.
d) Collection of Statistics: Banks collect statistics giving important information
relating to trade, commerce, industries, money and banking. They also publish
valuable journals and bulletins containing articles on economic and financial matters.
e) Acting Referee: Banks may act as referees with respect to the financial standing,
business reputation and respectability of customers.
f) Underwriting Securities: Banks underwrite the shares and debentures issued by the
Government, public or private companies.
g) Gift Cheques: Some banks issue cheques of various denominations to be used on
auspicious occasions.
h) Income-tax Consultancy: Banks may also employ income tax experts to prepare income tax
returns for their customers and to help them to get refund of income tax.
i) Merchant Banking: Some commercial banks have opened merchant banking
divisions to provide merchant banking services.
Investment Policy of Commercial Banks:
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:
1. Liquidity:
it is the capacity of the bank to produce cash when demanded. Liquid assets are those which
can be converted into cash without loan and within a short period.e.g treasury bills or
exchange etc
2. Safety:
Banks must excurses the greatest care and vigilance in the matter of investing its funds
received from public in the form of deposits. a bank must estimate the amount of risk
attached to various types of available assets, compare estimated risk, consider both long-run
and short- run consequences and strike a balance.
3. Profitability: The main objective of a bank is to earn income to meet all its expenses and
pay a fair return to its stake holders.
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UNIT -4 REGULATORY AUTHORITY
RBI – Reserve bank of India
Constitution: RBI was originally a shareholders bank with a capital of 5 crores divided into 5
lakh fully paid up shares of 100 each.AfterIndependence RBI was Nationalised and was
acquired by Central government on 1949 1st January.
Management: It consists of 20 members consisting of the following members:
1.
One governor and four deputy Governors appointed by Central government
2.
Four Directors nominated by Central Government one from each of Local Board
3.
Ten Directors nominated by Central Government
4.
One government official nominated by the Central Government.
Functions of the RBI:
1.
Monopoly of Note Issue: RBI has the sole right to issue dates, it has 2 departments
issue department and banking department
i)
Issue department: issue of currency for circulation
ii)
Banking department: withdrawal from circulation
2.
Banker to the government: RBI acts transacts banking business of Central and State
Government, it undertakes to accept money, makes payment and also carries exchange
remittance and other banking business for the Government.
3.
Adviser to the Government: RBI advises Government on various economic issues
and also in framing monetary policies, five year Plans and budget.
4.
Controller of credit: It has the monetary authority of the country. Formulation and
administering monetary policies in terms where money supply is to be expanded sufficiently
to match the growth of real National income.
5.
Custodian of Foreign Exchange Reserve: it is RBI responsibility to maintain the
external value of the rupee, RBI holds most of Nations foreign exchange reserve.
6.
Bankers Bank: RBI has the extensive power of supervising and controlling of
commercial and co operative banks, its function involves establishment of banks, branch
expansion, maintaining and managing liquidity of Assets, Amalgamation, reconstruction and
liquidation.
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7.
Lender of last resort: In the event of emergency banks approach the RBI for
financial accommodation. The scheduled banks can borrow from RBI on the basis of eligible
securities or by rediscounting their bill of exchange.RBI is ready to help banks in distress and
hence it is referred as lender of last resort.
8.
Bank of settlement and clearance: it enables the member banks to adjust their
claims against each other in the books of RBI without paying or receiving cash.
9.
Information and research: RBI undertakes collection and dissemination of
information and conducts research in this field, it issues several periodicals, publications also
attempts the significance of economic and fiscal developments in the country.
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CHAPTER 5 -FINANCIAL SERVICES
Financial services in broader sense means mobilizing and allocating savings, it includes all
activities involved in transformation of savings into investment. It is also called as financial
intermediation, it is a process by which funds are mobilized from a large number of savers
and make them available to all those who are in need of it and particularly to corporate
customers. Financial services are classified into the following categories:
ASSET BASED
FEE BASED
Factoring
Merchant Banking
Leasing
Credit Rating
Venture Capital
Stock Broking
Hire Purchase
Letter Of Credit
Mergers And
Acquisitions
Mutual Funds
Exchange Traded
Funds
Bills Discounting
Consumer Finance
Housing Finace
Factoring
Factoring is a continuing arrangement between the financial institutions (factor) and
business concern (client) which sells goods and services to trade customers whereby, the
factor purchases the clients’ accounts receivables and give payment to client
It is a transaction in which a business sells its accounts receivable, or invoices, to a third party
commercial financial company, known as a “factor.” This is done so that the business can
receive cash more quickly than it would by waiting 30 to 60 days for a customer payment.
Factoring is sometimes called “accounts receivable financing.”
So, a Factor is,
 A Financial Intermediary
 That buys invoices of a manufacturer or a trader, at a discount, and
 Takes responsibility for collection of payments.
Parties involved in factoring
 Factor-financing company
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 Client- seller of goods
 Customer- buyer of goods
Features of factoring
1. There are three parties to factoring one is the company which initiates the process by
selling the receivables, second party is the debtor and the third party is the factor
which is usually bank or financial institution.
2. Some of the basic services provided are: Administration of sales ledger, Collection of
debit purchased, Advisory services relating to expenses and credit and financial
dealings, Covering the credit risk involved.
3. It enables conversion of outstandingreceivables in to cash
4. Factor will not pay full amount of the debts to the client but pay only part amount
which may be between 50 to 80 percent and rest of payment is made after the
collection of money from the debtors.
5. The factor charges fees for providing this service and this fee vary depending on the
type of factoring, market conditions, quality of debt and so on.
Function of factoring/ services provided by factor
1. Financing-Providing finance to client against outstanding debt
2. Debt administration-factor also extend services like maintenance of sales ledger,
preparing and sending monthly statements,
3. Credit risk- sometimes factor will also undertake risk of credit from client
4. Advisory services- provides information and advices to client regarding management
of company
Advantages of factoring :
1. Factoring is a way to finance requirement of working capital of the company in respect of
receivables.
2. It provides a large and quick increase in cash flow of the business.
3. Due to existence of many factoring companies prices are usually competitive.
4. It is a cost effective way of outsourcing your sales ledger at the same time managing your
business.
5. Factoring firms are specialized in their field thus the company might get useful information
about the creditworthiness of its customers.
6. Protection from bad debts if non-recourse factoring is chosen.
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7. Factors check the credibility of company’s customers which help business trade with better
quality customers.
Disadvantages of factoring :
1. Cost: Factoring is a costly mean of financing as the cash price of the invoices is discounted
by the factor company, the upfront cash price being usually 70-90% of the face value,
depending on the credit history of the customers and the nature of selling company’s business
which reduces the profit margin of the selling company.
2. Selling company gets locked in to the relationship with the factor as they rely completely
on the services of a factor because of the cash flow implications of any arrangements.
3. Possible harm to the customer: Selling company fully gives the charge of collecting
invoice to the factoring company and pays more attention on money collection methods
which impairs company’s relationship with their customers.
4. Company image distortion: In the past, factoring was considered a sign on the financial
difficulties of the company. However in recent times this perception has changed and it has
considered a normal way of doing business.
5. Impose constrains the way of doing business: In the case of non-recourse factoring the
factoring company pre-approve the selling company’s customers, which cause delay in
placing new orders. Also the factoring company applies its credit limits to individual
customers and will apply credit limits to individual customers.
6. The selling company may have to pay extra to remove its liability for bad debtors.
7. Some customers might want to deal directly with the selling company instead of dealing
with factor
Mechanism of Factoring
 The Client (Seller) sells goods to the buyer and prepares invoice with a notation that
debt due on account of this invoice is assigned to and must be paid to the Factor
(Financial Intermediary).
 The Client (Seller) submits invoice copy only with Delivery Challan showing receipt
of goods by buyer, to the Factor.
 The Factor, after scrutiny of these papers, allows payment (, usually up to 80% of
invoice value). The balance is retained as Retention Money (Margin Money). This is
also called Factor Reserve.
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 The drawing limit is adjusted on a continuous basis after taking into account the
collection of Factored Debts.
 Once the invoice is honored by the buyer on due date, the Retention Money credited
to the Client’s Account.
 Till the payment of bills, the Factor follows up the payment and sends regular
statements to the Client.
Leasing: It is a contractual arrangementor an agreement between two parties whereby one
party allows the other to use his/her property for a certain period of time in exchange for a
periodic fee. The property covered in a lease is usually real estate or equipment such as an
automobile ,machinery or office equipment
Parties
Lessee: A party who makes use of property owned by another party (the lessor) and pays the
lessor, usually in the form of rentals.
Lessor: Company, Bank or leasing entity that is the owner of the leased equipment .
Features of leasing
Parties in lease must competent to enter in contract
It will not provide transfer of owner ship to the lessee
Agreement is for specific period
Benefits of leasing:
 The most important merit of leasing is flexibility. The leasing company modifies the
arrangements to suit the leases requirements.
 In the leasing deal less documentation is involved, when compared to term loans from
financial institutions.
 It is an alternative source to obtain loan and other facilities from financial institutions.
That is the reason why banking companies and financial institutions are now entering
into leasing business as this method of finance is more acceptable to manufacturing
units.
 The full amount (100%) financing for the cost of equipment may be made available
by a leasing company. Whereas banks and other financial institutions may not provide
for the same.
 The ‘Sale and Lease Bank’ arrangement enables the lessees to borrow in case of any
financial crisis.
 The lessee can avail tax benefits depending upon his tax status.
 Permits alternative use of funds: enables use of asset without the huge capital
expenditure.
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 Protection against obsolescence: it is highly useful in those assets which become
obsolete or outdated at a faster rate.
 Boon to small firms: as acquiring asset with no down payment and utilising the same
fund for other avenues.
Disadvantages of Leasing:
 In leasing the cost of interest is very high.
 The asset reverts back to the owner on the termination of the lease period and the
lesser loses his claim on the residual value.
 Leasing is not useful in setting up new projects as the rentals become payable soon
after the acquisition of assets.
 The lessor generally leases out assets which are purchased by him with the help of
bank credit. In the event of a default made by the lessor in making the payment to the
bank, the asset would be seized by the bank much to the disadvantage of the lessee.
 Termination of contract in the middle of the agreement period becomes difficult
Venture Capital
Money provided by investors to startup firms and small businesses with perceived long-term
growth potential. This is a very important source of funding for startups that do not have
access to capital market
Venture capital is a form of equity financing designed especially for funding high risk,
technology and high reward new projects. It is a capital provided by the firm of professionals
who invest alongside management in young, rapidly growing or changing companies that
have potential for high growth.
Features:
1.
2.
3.
4.
5.
6.
7.
Venture capital investment is made on new companies
it is in the form of an equity formation
Investment is made only on high risk but high growth potential projects.
It involves commercialisation of new ideas or new technology.
It joins the entrepreneurs as co promoter in projects.
Investment is usually made in small or medium scale enterprise.
There is continuous involvement in business even after making an investment by the
investors.
The advantages
 New innovative projects are financed through venture capital which generally offers
high profit­ability in long run.
 In addition to capital, venture capital provides valuable information, resources,
technical assistance, etc., to make a business successful.
 It is easy for the entrepreneurs to get funds from Venture fund by just convincing the
officials than convincing tons of underwriters, investors etc
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 It reduces the time gap between technological innovations and its commercial
exploitation.
 It helps in developing new process and projects.
 It induces the entry of large no of technocrats in industry.
 It acts as an intermediary between the investors and entrepreneurs in search of needed
capital.
Disadvantages
 It is an uncertain form of financing.
 Benefit from such financing can be realized in long run only.
Housing Finance Service:
It refers to providing finance to the individual or group of individuals for the purchase,
construction or related activities of house or flat. It is a type of instalment credit which forms
the largest single source of housing finance. It is availed for construction, extension,
purchase, combined for purchase and construction.
Reasons for increasing popularity of Housing loans:
1. Safety Advances: since it is backed by mortgage of house
2. Refinance facility: as there will not be financial crunch for bankers as they can avail
from NHB
3. Asset liability management: it becomes an easy task
4. Priority sector Advance
5. Low default
6. Reduction in risk weight age
7. Asset Reconstruction company: it enables securitisation of mortgaged housing loans
Vehicle Loans Service: it is given to purchase a new or used vehicle of any made to
individuals, professionals and business people.It is extended for a period from 1 to 5 years
and rate of interest varies from bank to bank.
Consumer Finance: it refers to the raising of finance by individuals for meeting their
personal expenditure or for acquisition of durable consumer goods and for purchase /
creation of an asset. It is an important asset based financial service in India with an
objective of providing finance on easy terms and at door steps of consumer. It is generally
extended for a period from 1 to 5 years.
Various important aspects include:
1. Mode of consumer finance: whether it is Hire purchase, installment system,
overdraft or credit card.
2. Procedure for granting loan: it involves pre sanction stage and post sanction stage.
3. Terms of financing: it involves stipulations regarding amount of credit, period of
credit, margins, security requirements, rate of interest and documentation.
4. Purpose of raising finance: whether loan is availed for housing, educational
purpose, personal reasons, festival expenses etc