Lord Stephen Green, Minister for Trade and Investment, UK, distinguished panelists, distinguished guests, ladies and

gentlemen. First of all my thanks to Mint, Mumbai, and to my good friends Tamal and R Sukumar for inviting me to initiate todays debate Banking & Beyond: New Challenges Before Indian Financial System with a panel of luminaries on the stage. Over the years, Mint, through its Clarity Through Debate trail-blazer series has been flagging topical public policy issues and challenges and acquired a niche of its own in the corporate mindscape as a thought leader in the financial sector. Good work. Kudos and my best wishes for the Mint Team. 2. Winston Churchill once said that in finance, everything that is agreeable is unsound and everything that is sound is disagreeable. I suspect many of my views may spark a strong feeling of disagreement but will hopefully stimulate passionate public debate. I am more convinced than ever that financial markets require a healthy dose of regulation to function efficiently. I am more convinced than ever that too-big-to-fail, or too-big-to-save banks represent veritable systemic risk concerns, which are sure to bring in more unpredictability in the system, need to be credibly and effectively tackled. And I am more convinced than ever that central banks operate most effectively and optimally when insulated from any external interference. 3. Even though it is a bit customary now-a-days to have a discussion on any topic w ith the tag next or beyond, this particular issue holds enormous importance for all of us in India. However, in todays integrated world, what I shall be talking would be very much relevant for other emerging markets also. Hence, I would dwell upon the issues that stare the global economic recovery in the face and the key elements that will shape the emerging new financial architecture. These issues are pretty much similar to what banks in India are / will be struggling with. 4. Although, the recent global financial crisis and the resultant recession had its origin in the developed western world; but its contagion did not spare the emerging economies like India. Once in a life-time crisis warranted a commensurate response in terms of a major overhaul of the financial system involving almost everything from regulation to risk management to mergers / acquisition to capitalization to executive compensation to financial engineering to governance. 5. In this connection, interface between banks and financial markets, has undergone a fundamental shift in the recent times - banks have become intricately linked to financial markets and hence more vulnerable to financial markets stress. At the same time, functioning of markets has become intricately linked to banks which then emerge as the carrier for most of risks within the financial markets. We have seen these correlations at their most devastating during the sharp deepening of recession triggered off by the collapse of the apparently infallible Lehman Brothers which encompassed the whole world in its whirlwind spiral. However, I would restrict myself to sharing my thoughts in terms of next issues and, that too, to the banking system, which are somewhat already visible in the global financial firmament. Financial Inclusion 6. Before I address other individual issues, I shall highlight a very basic and core issue for the Indian banking system and that is the challenge of achieving Financial Inclusion. Without being inclusive, financial and economic stability cannot be sustainable. Financial inclusion is about credible access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low income groups at an affordable cost in a fair and transparent manner from mainstream institutional players. More recently, there has been a strategic shift in sustainable financial inclusion to the adoption of market oriented approach viewing financial inclusion as a viable business proposition. It has been made possible by the availability of Information and Communication Technology required by the formal financial sector for penetrating widespread unbanked areas in a cost effective way and the realization that the Poor is eminently Bankable. Financial inclusion is related to financial stability also through the key of financial education and literacy. In my opinion, financial literacy is an integral part of financial inclusion of the public or users of financial products/services. Financial literacy is instrumental in expanding financial inclusion and financial inclusion is itself helpful in further expanding financial literacy thus mutually reinforcing each other in a positive manner. The knowledge about the risk and return framework holds the

key to prudent participation in the market and welfare maximisation within the given constraints for each market player. As financial literacy involves imparting the required knowledge of risks and returns of financial products to the users and suppliers of these products, it would help in controlling risks in the financial system thus helping in maintaining systemic stability. It would be inappropriate to assume that financial literacy and inclusion are not global challenges. At the present juncture as the global financial system is dealing with the aftereffects of financial crisis, it is not so much a question of access but advanced countries are more in need of financial literacy/education than ever before. In India, it is a question both of access to financial products and services and financial literacy. It implies not just providing access but also to educate all stakeholders about the fairness and other characteristics of the financial products/services, such as their risks and returns. Capital 7. Let me now turn to some other specific issues. First issue staring in the face of banking industry is capital. Even though reasonably well capitalized today, banks will be facing the challenge of growing their business due to capital constraints. Indias financial system is better at capital allocation t han most of the emerging market players. It has some high performing banks, very low stock of gross non-performing loans of about 2.5% and deep and liquid equity markets that efficiently discover price in stocks of globally competitive companies in BPO, IT, R&D, pharmaceuticals, automobiles, telecom and hospitality space. Still one of the challenges will be capital raising by corporate sectors but not at the expense of agriculture, small industries and business. Debate over channeling larger portion of available credit to the most potentially productive sector or to the sectors where the investment efficiency is lower is yet to be fully resolved. In any case, to make banks allocate increased credit to the productive sectors of the economy is strongly predicated on the bank capital strength. To do so, more capital would be required to be infused into banks. With requirements of Basel III looming large, banks would be facing challenges in raising additional capital for meeting the funding needs of Indian economy potentially growing at 9% plus. 8. Post-crisis, regulators worldwide are discussing a macro-prudential framework that would involve a regulatory policy focused on the system as a whole, rather than individual players. Capital buffers are an extremely important component of the new macro-prudential regulatory framework. The new framework aims at improving both quality and quantity of capital. Let us understand that capital is a competitive charge on the resources available for lending with a bank and hence, stepping up counter-cyclical capital requirements and providing capital buffers comes with a cost for the banking system. Capital enhancement, however, is a prudential requirement, as financial products and transactions are becoming increasingly complex and prudent risk management has assumed considerable importance. With higher and modified nature of capital requirements proposed through the new Basel III accord in the aftermath of the financial turmoil, keeping banks well capitalised would be an added challenge. 9. Banks are already suffering from inadequacy of capital as the return on such capital does not encourage new investors. Era of cheap capital is over and investors are also wary of the volatility of returns. Newer instruments and techniques would be required to attract investors. While creation of enabling conditions for capital flow to the sector would continue to remain on the top of the reform agenda, banks would need to grow their balance sheets by raising capital from the markets rather than count on government. Considering the back-to-basics common equity focus of Basel II, growing bank balance sheets will increasingly pose the challenge of balancing interests of shareholder and depositors/ financial stability. Liquidity Management 10. Traditionally, capital adequacy requirements have been imposed to ensure solvency. However, that is not the only issue. Thenext issue that will continue to engage substantial management attention is the management of liquidity. Is liquidity an offshoot of economic crisis or management crisis? I think a bit of both. In short, banks and FIs are destined to be facing the unpredictability they like to believe as nonexistent. Liquidity crises, although recurrent, are yet to be effectively managed. Responses are varied and such crises leave a trail of devastation clearly visible in the post crisis stage. Issue of liquidity

management requires much defter response than what is so far seen. How the banks will graduate from lazy banking (as response to credit market growing more unsecure) to crazy banking (when it became more fashionable to jump onto retail lending bandwagon with some of the banks burning their fingers) to edgy banking is an issue which is yet to find a resolution. The truth is that the liquidity ma nagement requires more sophisticated, comprehensive, nuanced and razor-sharp approach in order to prevent it from being the carrier of contagion. IFRS Implementation 11. The third issue that is going to cast a spell over the financial sector players is the compliance with IFRS or International Financial Reporting Standards. Globalization of financial markets has meant an increased focus on international standards in accounting and has intensified efforts towards a single set of high quality, globally acceptable set of accounting standards. Financial statements prepared in different countries according to different set of rules, mean numerous national sets of standards, each with its own set of interpretation about a similar transaction, making it difficult to compare, analyse and interpret financial statements across nations. 12. In respect of banks and NBFCs, in view of the special issues involved (finalisation of IFRS 9 expected in the middle of 2011), a separate road map was prepared in March 2010 for convergence with IFRS for the banking industry and NBFCs. The convergence process would be from period beginning April 1, 2013, with a phased approach for urban banks and NBFCs. This gives the banking system some time to adapt to the standards in a smooth and non-disruptive manner. It has to be noted, however, that banks will be significantly affected by the IAS 39 replacement project and a number of other accounting developments including those relating to financial instruments, fair value measurement, financial statement presentation and consolidation. Some of the major changes pertain to certain critical areas such as classification and valuation of financial assets, classification and valuation of liabilities, impairment provisions and fair value measurement. One area of concern has been the drawback of the incurred loss model of IAS 39 and the need to introduce more forward looking provisioning. We have seen the how concept of marked to market turned to be useless at the time of real crisis through the potential futility of the idea of marked to model as being divorced from real market and virtually ended up with a situation that can best be described as marked to madness. The IFRS convergence process will involve significant challenges for the banking system in general. Banks would need to upgrade their infrastructure, including IT and human resources, to face the complexities and challenges of IFRS. Some major technical issues arising for Indian banks during the convergence process would be differences between the IFRS and current regulatory guidelines on classification and measurement of financial assets, focus in the standard on the business model followed by banks and the challenges for management in this area, application of fair values for transactions where not much guidance is available in India in terms of market practices or benchmarks, and expected changes in impairment rules. Beyond CBS 13. Today we cannot think of banking services without technology. IT has become the central cog in whatever banks are doing or strategizing to do in future. All of us would agree that technology has no longer remained just a means for automating processes. It has revolutionized every industry in the world by rendering faster and cost effective delivery of products and services to customers, who in the normal course could not have afforded the same. Technology is the surest and most appropriate way of bringing inclusion in respect of any product and/or service. Is technology in banks being leveraged adequately? 14. Technological advancement enables a broader and inclusive banking sector and in the process, is a key driver for the sustained and inclusive growth of the economy. Technology by itself is not a panacea. But technology has evolved to such an extent that it can hold the key to achieving goals if banks are willing to accept the changes that they will need to make to get there. Banks have implemented Core Banking Solutions (CBS) which marked a paradigm shift in more senses than one and branch customers are now bank customers as they can access their accounts from any branch for defined purposes. It was envisaged that the CBS would offer new opportunities for information management, better customer

service and improved risk management. However, banks have not been able to reap the benefits of this technology in terms of reduction in costs of small value transactions, speed with which the transactions are done if both successful and unsuccessful transactions are considered, improved customer services and effective flow of information within the banks as also to the regulator. Banks have not gained in terms of efficiency partly because the much needed business process re-engineering was not done. Further, banks have deployed technology for transaction processing and the same has not been explored extensively for analytical processing like customer relationship management and decision making. Thus, there is a need to take care of what we could not achieve in the first round of technology implementation and think beyond CBS. Supported by the latest technology, banks would need to identify new business niches, to develop customized services, to implement innovative strategies and to capture new market opportunities. 15. Optimum leveraging of technology would critically hinge upon the following: a. b. c. d. Skilled resources Supportive HR policy Appropriate IT governance structure Effective business continuity plan

Banks & FIs would require review of the issues relating to recruit appropriate skill, retain then over a longer time horizon by offering them a clear career growth opportunities and supporting enabling process. However, it is equally important to embed inside the management structure a proper IT Governance structure which will also enable the technology strength of the banks to play a supporting role with a degree of assurance and sustainability. Risk Management 16. Issue of risk management in banks and financial institutions would, however, continue to be at the centre of an ongoing search for the right policy prescription. While newer skill set for managing newer areas and unfamiliar elements of risks would continue to pose questions even to the most savvy of banks. Banks will have to adopt a converged approach to risk where they will reevaluate their risk management acumen in a manner that calls for higher levels of transparency, structural integrity and operational control. To combat internal fraud and protect clients and accounts, behavior and rules-based tools will have to be brought in. Better risk management and surveillance applications that address systemic and customer-oriented risks, potential conflicts of interest, financial valuation, volatility of market movements and regulations will have to be embedded into the operational structure. Future pricing will be dependent on risk minimization even while relationship-based pricing will continue to hold sway. Today banks and FIs are facing with the risks of mis-pricing, adverse selection and mis-selling. On the one hand, banks are operating in the market where only about one-third of the adult population are within the banking fold leaving out the market potential to grow twice the current size and, on the other, banks propensity to take banking services to the silent majority is very slow. While expanding market is a matter of survival, further challenge for the banks would be to ring-fence its operations by establishing a sound risk management system that is not only protective but also inclusive and acts as a business enabler. But for this to happen, analytics have to be developed and data integrity has to be improved. 17. Going forward, more focused approach would have to be given to strict adherence of AML / KYC norms so as to prevent the elements of fragility to come into the system. Strong tracking system for verifying the movement of funds, especially cross border transaction and skillful analytical capabilities will be the prescription of the future. Along with that, the most important issue will be customer protection. When I talk of the customer protection, I mean making banking services or banks economically feasible for the customers and protect them from the bad banking practices. Can we devise a system by which poor subsidizing the rich can be reversed? When banks make huge profit, it is because the customers paying through their nose. When the banks incur loss, again it is the customers who are made to take less for their deposits or pay more the loans. When the banks go out of business, it is the millions of tax payers hard-earned money that goes down the drain. Customer protection also needs to be seen from

protecting customer information and transaction security. The writing on the wall is clear: keep your customers happy and survive. Risks and Rewards 18. Next important issue that warrants a really careful consideration is the issue of executive compensation. How much compensation is too much? Can the industry have a different kind of compensation structure for the same job? Can there be uniform board level accountability? Flawed incentive compensation practices in the financial sector were one of the important factors contributing to the recent global financial crisis. I am aware that booms are propelled by greed and busts are born out of fear. This quirk of human nature will always ignite the euphoria that fuels the ups and exacerbates the downs. Employees were too often rewarded for increasing the short-term profit without adequate recognition of the risks the employees activities posed to the organizations. 19. These perverse incentives amplified the excessive risk taking that severely threatened the global financial system. The compensation issue has, therefore, been at the centre stage of the regulatory reforms. Issue of appropriate compensation commensurate with risk or built-in checks to avoid excessive risk taking would have to be managed through a sound corporate governance framework based on strong corporate ethics principles and with reference the principles laid down by Financial Stability Board (FSB). The principles are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes. The principles call for effective governance of compensation and its alignment with prudent risk taking and effective supervisory oversight and stakeholder engagement. The principles have been endorsed by the G-20 countries and the Basel Committee on Banking Supervision (BCBS) and are under implementation across jurisdictions. However, banks and other financial system players need to appreciate that good governance is more a matter of practice rather than a matter of compliance. 20. Now the question is: with so much of constraints and problems, whether the system will survive? The answer is an emphatic yes because banking is a highly regulated business. But having flagged some of the challenges before the banks, it is incumbent upon me that I flag certain challenges for regulators. We all know that: the financial system is growing to be highly complex and opaque sometimes making it difficult to assess the extent of exposures and potential spillovers. This opacity magnified the shock to confidence as the recent crisis unfolded. the financial system has a propensity to become over-leveraged and heavily interconnected, leading to massive deleveraging and easily available propagation channels, both domestically and globally. liquidity risks, both the funding risks incurred by institutions and the associated market liquidity risks of assets, are often much higher than recognized. financial intermediation has increasingly shifted to the non - or less-regulated shadow banking sector, in large part to avoid the more stringent requirements imposed on banks. there is a critical absence of effective mechanisms to deal with institutions that were deemed too big to fail.

How do regulators meet the above challenges? 21. Central banks must take a long-term view of the economy and craft appropriate policy responses. We must have the latitude to raise interest rates when others want cheap credit and rein in risky financial practices when others want easy profits. There has to be greater societal consensus on taking tough corrective actions.

22. While progress on macro and micro-prudential regulations will be the key for moving forward, some work is still needed from the regulators in providing guidance to the market in instituting a mechanism in the area of managing not only several known unknowns but also a number of unknown unknowns. 23. With the benefit of hindsight, low nominal interest rates, abundant liquidity and a favorable macroeconomic environment encouraged the private sector to take on ever-increasing risks. Financial institutions provided loans with inadequate checks on borrowers ability to pay and developed new and highly complex financial products in an attempt to extract ever higher returns. Meanwhile, many financial regulators and supervisors were lulled into complacency and did not respond to the building up of vulnerabilities. We have to develop more sensitivity in our policy tools to capture and quickly correct our policy stance to control such covert signs of overheating. Conclusion 24. In summing up, I would like to reiterate that though each one of the key challenges facing the Indian financial system begins with the banking system, it does not and should not stop at the banking system. Banks have to look beyond the way banking is traditionally defined in a narrow fashion; they need to look towards the vulnerable and other excluded sections of the population as bankable. Stakeholders other than banking too need to involve themselves in the process of expanding the outreach of the financial services, and thus partner with banks in the process of inclusive economic growth. That is the key challenge. Thank you for your kind attention. Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products. This paper discusses the meaning of finance and Indian Financial System and focus on the financial markets, financial intermediaries and financial instruments. The brief review on various money market instruments are also covered in this study.

The term "finance" in our simple understanding it is perceived as equivalent to 'Money'. We read about Money and banking in Economics, about Monetary Theory and Practice and about "Public Finance". But finance exactly is not money, it is the source of providing funds for a particular activity. Thus public finance does not mean the money with the Government, but it refers to sources of raising revenue for the activities and functions of a Government. Here some of the definitions of the word 'finance', both as a source and as an activity i.e. as a noun and a verb. The American Heritage Dictionary of the English Language, Fourth Edition defines the term as under1:"The science of the management of money and other assets."; 2: "The management of money, banking, investments, and credit. "; 3: "finances Monetary resources; funds, especially those of a government or corporate body" 4: "The supplying of funds or capital." Finance as a function (i.e. verb) is defined by the same dictionary as under1:"To provide or raise the funds or capital for": financed a new car 2: "To supply funds to": financing a daughter through law school. 3: "To furnish credit to". Another English Dictionary, "WordNet 1.6, 1997Princeton University " defines the term as under-

1:"the commercial activity of providing funds and capital" 2: "the branch of economics that studies the management of money and other assets" 3: "the management of money and credit and banking and investments" The same dictionary also defines the term as a function in similar words as under1: "obtain or provide money for;" " Can we finance the addition to our home?" 2:"sell or provide on credit " All definitions listed above refer to finance as a source of funding an activity. In this respect providing or securing finance by itself is a distinct activity or function, which results in Financial Management, Financial Services and Financial Institutions. Finance therefore represents the resources by way funds needed for a particular activity. We thus speak of 'finance' only in relation to a proposed activity. Finance goes with commerce, business, banking etc. Finance is also referred to as "Funds" or "Capital", when referring to the financial needs of a corporate body. When we study finance as a subject for generalising its profile and attributes, we distinguish between 'personal finance" and "corporate finance" i.e. resources needed personally by an individual for his family and individual needs and resources needed by a business organization to carry on its functions intended for the achievement of its corporate goals. INDIAN FINANCIAL SYSTEM The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities. Financial System;

The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below; FINANCIAL MARKETS A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments

represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend. Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions. Capital Market - The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year. Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe. Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and longterm loans to corporate and individuals. Constituents of a Financial System

FINANCIAL INTERMEDIATION Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor in order to garner the requisite amount. When the borrower of funds approaches the financial market to raise funds, mere issue of securities will not suffice. Adequate information of the issue, issuer and the security should be passed on to take place. There should be a proper channel within the financial system to ensure such transfer. To serve this purpose, Financial intermediariescame into existence. Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve Bank of India. In the initial stages, the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower. This service was offered by banks, FIs, brokers, and dealers. However, as the financial system widened along with the developments taking place in the financial markets, the scope of its operations also widened. Some of the important intermediaries operating ink the financial markets include; investment bankers, underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers, satellite dealers, self regulatory organizations, etc. Though the markets are different, there may be a few intermediaries offering their services in move than one market e.g. underwriter. However, the services

offered by them vary from one market to another. Intermediary Stock Exchange Investment Bankers Underwriters Registrars, Depositories, Custodians Primary Dealers Satellite Dealers Forex Dealers FINANCIAL INSTRUMENTS Money Market Instruments The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost. Some of the important money market instruments are briefly discussed below; 1. 2. 3. 4. 5. Call/Notice Money Treasury Bills Term Money Certificate of Deposit Commercial Papers Market Capital Market Capital Market, Capital Market, Market Capital Market Role Secondary Market to securities Corporate advisory services, Credit Market Issue of securities Money Subscribe to unsubscribed portion of securities Issue securities to the investors on behalf of the company and handle share transfer activity Market making in government securities Ensure exchange ink currencies

Money Market Forex Market

1. Call /Notice-Money Market Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions. 2. Inter-Bank Term Money Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days.

3. Treasury Bills. Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction. 4. Certificate of Deposits Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and intercorporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. 5. Commercial Paper CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. (for more details visit www.indianmba.com faculty column) Capital Market Instruments The capital market generally consists of the following long term period i.e., more than one year period, financial instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible preference shares etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc. Hybrid Instruments Hybrid instruments have both the features of equity and debenture. This kind of instruments is called as hybrid instruments. Examples are convertible debentures, warrants etc. Conclusion In India money market is regulated by Reserve bank of India (www.rbi.org.in) and Securities Exchange Board of India (SEBI) [www.sebi.gov.in ] regulates capital market. Capital market consists of primary market and secondary market. All Initial Public Offerings comes under the primary market and all secondary market transactions deals in secondary market. Secondary market refers to a market where

securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Secondary market comprises of equity markets and the debt markets. In the secondary market transactions BSE and NSE plays a great role in exchange of capital market instruments. (visitwww.bseindia.com and www.nseindia.com ). (The author acknowledges Prof. R K Mishra, Director, Institute of Public Enterprise, Osmania University, Hyderabad, for his immense help and encouragement through out this study and Dr. S S S Kumar, Assistant Professor, Finance and Accounting Area, Indian Institute of Management, Kozhikode, for his motivation and inspiration) References 1. Bhole L M, "Financial Institutions and markets", Tata McGraw-Hall, New Delhi, 1999. 2. Khan M Y, "Indian Financial System, Tata Mc Graw-Hill, New Delhi, 2001. 3. S. Gurusamy,Financial markets and Institutions,Thomson publications, First Edition,2004. 4. Pandey I M, Financial Management, Vikas Publications, New Delhi, 2000. 5. Mishra R K, An Overview of financial services, financial services, emerging trends, Delta, Hyderabad, 1997. 6. Mishra R K, "Development of financial services in India some perspectives", Financial services in India Delta, Hyderabad, 1998. 7. Mishra R K, "Global financial services Industry and the specialized financial services institutions in India, Utkal University, 1997. 8. www.bseindia.com 9. www.nseindia.com 10. www.rbi.org.in 11. www.sebi.gov.in 12. www.indiainfoline.com

Financial System is an institutional framework

existing in a country to enable financial transactions.There are three main parts in Indian financial system. They are as follows:

Financial assets comprises of loans, deposits, bonds, equities, etc.

Financial institutions such as banks, mutual funds, insurance companies, etc. Financial markets include money

market, capital market, forex market, etc.Regulation is another aspect of the financial system. The regulatory authorities are

RBI, SEBI, IRDA,and FMC.The economic development of a nation is reflected by the progress of the various economic

units,broadly classified into corporate sector, government and household sector. While performing their activities these units will be

placed in a surplus/deficit/bal anced budgetary situations.

Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

Scope/Elements
1. 2. 3.

Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:

a. b.

Dividend for shareholders- Dividend and the rate of it has to be decided. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be1. 2. 3. 4. 5. To ensure regular and adequate supply of funds to the concern. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise. Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties. Choice of sources of funds: For additional funds to be procured, a company has many choices likea. Issue of shares and debentures b. Loans to be taken from banks and financial institutions c. Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing. 4. 5. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways: a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. b. Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills,

2.

3.

6.

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payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

The financial manager performs the following functions: 1. Finance manager manages the funds in such a way to ensure their optimum utilisation with the available resources. 2. He forecasts the requirement of funds for both short term and long term purposes. 3. He also actively takes part in budgeting, risk management and financial reporting. 4. He makes financial reports, have and eye on profits and losses, etc. 5. He decides how much of the firms profits should be invested, how much should be given to the shareholders in the form of dividends and how much should be kept as reserves. 6. He also monitors the cash flows, prepares accounts and works on financial models. 7. He decides what type of capital structure is required be the company and decides whether to raise funds from loans/borrowing or from share capital. 8. He also ensures that adequate funds at cheap rates are supplied to various parts of the organization at the right time. 9. He constantly reviews the financial performance of various units of the organization. 10. He also ensures that no excess cash is lying idle. Semantic Applications
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Financial Analytics: The New Role of Finance

Print Reprints Email inShare5 In today's ever-changing business environment, financial executives are exploring ways in which the financial function can bring greater value to their organizations. To this end, they are transforming their organizations from focusing primarily on regulatory reporting to most effectively providing the information that internal management needs to more effectively "run" the business. Financial executives must now think beyond the traditional financial information contained in general ledger systems and consider how best to provide for the comprehensive measures and analytical methods needed to drive decisions throughout complex, dynamic companies. To achieve these objectives, accounting, finance, tax and other financial areas are developing data warehouses combined with advanced analytics to serve the needs of the entire enterprise. We refer to this advanced decision support capability for finance as financial analytics. This article examines the evolution of financial analytics and its effect on the state of data warehousing.

Today's Business Environment

The evolution of financial analytics has been driven by the emergence of new business models, the changing role of the traditional finance department, modifications to business processes and advances in technology. This dynamic environment presents the finance function with tremendous opportunities and challenges.

New Business Models

With the introduction of the Internet, three new e-business models emerged: business-to-business (B2B), businessto-consumer (B2C) and business-to-employee (B2E). These new models are shaping the future of financial analytics. These new business models, which I discussed in the August 2000 DM Review column entitled, "E-Analytics The Next Generation of Data Warehousing," require a translucent connection and fluidity of information between departments and partner organizations. Underlying these new business models is a fundamental shift in values, from physical assets to intangible assets such as patents, trademarks, franchises, computer programs, research and development, business intelligence and relationships. Consequently, the value of information is soaring (see Figure 1).

Figure 1: From Bricks-and-Mortar to Clicks-and-Mortar E-Business Changes the Focus of Financial Capital Analysis (Source: PricewaterhouseCoopers, LLP) For instance, let's focus on the B2C model. Many "pure" B2C organizations do not develop the products or services they sell. Instead, these companies outsource their manufacturing and other non-core operations. They focus their resources on developing a brand, managing a network of customers and other differentiated aspects of running the business. That said, these objectives can only be achieved through the more effective use of information. Financial analytics has traditionally focused on how a company utilizes tangible assets such as cash, real estate, machinery, etc. However, many companies competing in the new electronic economy are valued based on their intangible assets. These increasingly important assets are often difficult to measure and manage. As a result, dotcoms are relying on financial analytics to help them:

Understand the overall performance of the organization, Identify ways to measure and maximize the value of intangible assets, Reduce operating costs and effectively manage enterprise-wide investments, Anticipate variations in the marketplace, Optimize the capabilities of information systems, and Improve business processes.

At the same time, the Internet companies that are not leveraging their information assets are struggling for survival.

Changing Role of the Finance Department

As the economy continues to evolve, so does the role of the finance function within an organization. Driven by investments in enterprise resource planning (ERP), shared services and changes in its reporting role, most finance

functions are becoming more efficient requiring fewer resources to manage them and closely aligning with the company's business structure. This is especially true in the area of transaction processing where improved automation of financial transactions has enabled finance staff to expand their role and spend more time supporting decision-making processes, rather than just processing and reconciling transactions. More and more global organizations are integrating and standardizing their business processes and systems, allowing end users with both finance and non-finance functions to update and obtain financial information from any geographic location. This has significantly improved decision support within the organization. Consequently, the role of the finance professional will evolve into a "coaching" role responsible for transferring the appropriate analytical tools and methods to decision-makers (see Figure 2). Some CFOs have gone so far as to predict that, with time, major parts of the finance function will merge into the business as the role of finance employees continues to extend throughout the enterprise.

Figure 2: Reshaping the Finance Function (Source: PricewaterhouseCoopers, LLP) Over time, we anticipate a convergence of the information that is communicated to the financial markets (Wall Street), the information that is used to manage the organization and the information that is reported formally in fiscal-year reports. This type of reporting will require the full integration of financial, strategic and operational analytics.

Business Processes
As business processes evolve and business questions become more complex, the analytics necessary to answer and act on these questions require a higher level of data integration and organizational collaboration. For in-stance, historically, finance departments were oftentimes the only departments with access to accurate information about a company's financial results. However, this information was usually at an aggregated level and wasn't available until several days, sometimes weeks, after the end of the month.

During the past decade, however, companies have been successfully integrating back-office processes and information flows across the enterprise by replacing function-based legacy systems with a single ERP system, reengineering business processes and streamlining business transactions. This has enabled executives and managers to access more accurate and consistent detailed financial, as well as non-financial, information about the organization throughout the month. In the mid-nineties, new software products capable of maximizing the value of the Internet were introduced in the marketplace. Companies began implementing supply chain management (SCM), customer relationship management (CRM) and other sophisticated system solutions to optimize their end-to-end operations. At the same time, organizations each with its own legacy systems began strengthening their relationships with customers and suppliers. All of this contributed to the new challenge organizations are facing today: a complex information environment that forces organizations to adopt a new level of integration across the entire value chain. Additionally, organizations realized there is an overlap in the analytical processes of the organization (see Figure 3).

Figure 3: Analytical Processes Can Overlap (Source: PricewaterhouseCoopers, LLP) Recent developments in financial analytics have been made in these areas of "overlap." For example, by combining traditional financial measures (revenue and cost) with CRM information (customer history) and applying predictive modeling tools and techniques, companies can now project the future profitability associated with an individual customer or household. We refer to this as customer value management (CVM). CVM enables organizations to continuously monitor each customer's value to the business and act accordingly. "Value" may be measured using a weighted customer value index, which combines financial and non-financial measures and considers how many resources are used to maintain a certain type of customer. Managers need to know what value may be lost or gained before making decisions about nurturing specific customers relationships.

Technology
During the nineties, there were major advances in technology including ERP, data warehousing, portals and, of course, the Internet. ERP systems have become more common and the Internet has expanded the sources of financial data to include upto-date information on numerous subjects from market trends to currency fluctuations. ERP vendors are aggressively developing financial analytic extensions to their core applications, each introducing its own version of an integrated financial architecture that covers performance measurement, planning and forecasting, management and statutory reporting, and financial consolidation. The sharing and integration of data is crucial for these ERP systems. With portals, it is envisioned that people with finance roles will have access to critical performance information refreshed on a continuous basis and combined with relevant external sources of information such as competitor comparisons, media comments, economic indicators and benchmarks. Portals will allow the finance professional to receive personalized data through a common user interface and benefit from enhanced communication, search and team-building activities in increasingly fragmented environments. Explosive growth in portal technology is likely to continue, fueled in part by the adoption of the extensible markup language (XML) standard to facilitate more open information sharing within and between enterprises.

The Role of the Data Warehouse

Until recently, data warehousing solutions have been primarily focused on building key analytical infrastructure components such as data stores, data marts and reporting applications. The next generation of data warehousing will leverage these data stores by incorporating rich analytical capabilities. In early initiatives, the business needs driving data warehousing investments were often not clearly defined. It was also difficult for many financial analysts to think beyond traditional financial data. Consequently, it was frustrating for all concerned to define questions to be asked against the data or even define the analytical requirements to be supported. The requirements driving the data warehousing implementation mainly focused on the need for specific data elements and/or necessary predefined reports. Data warehouses and online analytical processing (OLAP) tools were designed to support specific groups within the organization. Each group, including finance, used these incongruent systems to perform their business functions and store and access their own information. This resulted in redundancies and inconsistencies in data as well as a proliferation of data marts. Decision support is most effective when the data and business processes of an organization are integrated across all business functions. Today, the benefits of this approach are easy to appreciate. And as companies come to grips with this need for consistent, integrated information, the finance function is most often at the center of this convergence. This recognizes the fact that financial information is important to help measure and manage every segment of the

business and also recognizes finance's role as being the primary steward of a company's information assets. As such, finance executives can clearly see the benefits of fully integrating financial analytics with the rest of the organization's technology and processes. Data warehousing practitioners will be tasked with the challenge of developing an information architecture that delivers this new level of integration. With integrated financial analytics, organizations will obtain the most value possible from their ERP, data warehousing and CRM investments.

Integrated Analytics
Today's complex information environment is forcing organizations to reach for a new level of integrated financial analytics to stay competitive in the marketplace. With integrated financial analytics, organizations are able to aggregate, analyze and share information from and with sources inside and outside the organization. As the role of the finance function continues to evolve, financial analytics will be actively used throughout the organization. We will see organizations strive for an environment that integrates all analytics, not just financial analytics, in order to thrive in the new economy. A data warehouse is crucial for realizing this powerful new environment