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INDIAN
FINANCIAL
SYSTEM
CONTENTS
Introduction
Features of Financial System
Role of Financial System
Back Drop of Financial System
Indian Financial System from 1950 1980
Indian Financial System Post 1990s
INTRODUCTION
The financial system or the financial sector of any country consists of:(a) specialized & non specialized financial institution
(b) organized &unorganized financial markets and
(c) Financial instruments & services which facilitate transfer of funds.
Procedure & practices adopted in the markets, and financial inter
relationships are also the parts of the system. These parts are not always
mutually exclusive. For example, the financial institution operate in
financial market and are, therefore a part of such market. The word system
in the term financial system implies a set of complex and closely connected
or inters mixed institution, agents practices, markets, transactions, claims, &
liabilities in the economy. The financial system is concerned about money,
credit, & finance the terms intimately related yet some what different from
each other. Money refers to the current medium of exchange or means of
payment. Credit or Loan is a sum of money to be returned normally with
Interest it refers to a debt of economic unit. Finance is a monetary resources
comprising debt & ownership fund of the state, company or person.
Financial Institutions
RBI
SEBI
IRDA
Insurance company
Mutual Fund
Commercial
Banks
NBFC
Venture Capital
Fund
Money Market
Capital Market
LIC &
Other
Primary
Market
Development
Banks
Investment
Banks
Sectoral
Banks
State Level
Financial
Institution
Stock
Exchange
GIC &
Other
Secondary
Market
Government
Security
Market
1947
RRBs setup
1960s
1980s
1970s
Nationalisation of Banks to
ensure credit allocation as per
plan priorities
1990s
intermediation, i.e., a lack of a long term capital market and the relative
neglect of agriculture in particular and rural areas in general.
As India embarked on a process of industrialization and growth, RBI set up
Development Financial Institutions (DFIs) and State Finance Corporations
(SFCs) as providers of long term capital. Agricultures need for credit was
met by cooperative banks. UTI was set up to canalize resources from retail
investors to the capital market.
In essence, the understanding that requirement of financial needs for
accelerated growth and development was best met by specialized financial
Following with the logic of specialization, the 1980s saw other DFIs with
specific remits being set up e.g. The EXIM Bank for export financing, the
Small Industries Development Bank of India (SIDBI) for small scale
industries and the National Housing Bank (NHB) for housing finance.
Long term finance for the private sector came from DFIs and institutional
investors or through the capital market. However both price and quantity of
capital issues was regulated by the Controller of Capital Issues.
Therefore the deepening of financial intermediation had occurred with an
increase in the draft by both the commercial sector and the government on
financial resources mobilized.
At the end of the 1980s then the Indian financial system was characterized
by segmented financial markets with significant restrictions on both the asset
and liability side of the balance sheet of financial intermediaries as well as
the price at which financial products could be offered.
In the Indian context segmentation meant that competition was muted. In a
scenario where price was determined from outside the system and targets
were set in terms of quantities, there was no pressure for non-price
competition as well. As a result the financial system had relatively high
transaction costs and political economy factors meant that asset quality was
not a prime concern. Therefore even though the Indian financial system at
the end of 1980s had achieved substantial expansion in terms of access, this
had come at the cost of asset quality. In addition, was the fact that the draft
of the government on resources of the financial system had increased
significantly. This in itself need necessarily was not a problem but over this
The government security market was particularly important not only because
it was decided the RBI would no longer monetize the fiscal deficit, which
would now be financed by directly borrowing from the market, but also
monetary policy would be conducted through open market operations and a
large liquid bond market would help the RBI sterilise, if necessary, foreign
exchange movements.
Lot many acts were passed during this period for protection of investors in
financial markets. The various acts Companies Act, 1956 ; Capital Issues
Control Act, 1947 ; Securities Contract Regulation Act, 1956 ; Monopolies
and Restrictive Trade Practices Act, 1970 ; Foreign Exchange Regulation
Act, 1973 ; Securities & Exchange Board of India, 1988.
4. Participation in Corporate Management
As participation were made by large companies and financial instruments it
leads to accumulation of voting power in hands of institutional investors in
several big companies financial instruments particularly LIC and UTI were
able to put considerable pressure on management by virtual of their voting
power. The Indian Financial System between 1951 and mid80s was broad
based number of institutions came up. The system was characterized by
diversifying organizations which used to perform number of functions. The
Financial structure with considerable strength and capability of supplying
industrial capital to various enterprises was gradually built up the whole
financial system came under the ownership and control of public authorities
in this manner public sector occupy a commanding position in the industrial
enterprises. Such control was viewed as integral part of the strategy of
planned economy development.
from controlled economy to free market for these changes were made in the
economic policy. The role of government in business was reduced the
measure trust of the government should be on development of infrastructure,
public welfare and equity. The capital market an important role in allocation
of resources. The major development during this phase are:-
FINANCIAL MARKET
Money Market
MONEY MARKET
One of the important function of a well developed money market is to
channelize saving into short term productive investments like working
capital. Call money market, treasury bills market and markets for
commercial paper and certificate of deposit are some of the example of
money market.
call money, and if it exceeds one day (but less than 15 days), is referred as
notice money in this market any amount could be lent or borrowed at a
convenient interest rate . Which is acceptable to both borrower and lender
.these loans are consider as highly liquid as they are repayable on demand at
the option of ether the lender or borrower.
PURPOSE
Call money is borrowed from the market to meet various requirements of
commercial bill market and commercial banks. Commercial bill market
borrower call money for short period to discount commercial bills.
Banks borrower in call market to:
1:- Fill the temporary gaps, or mismatches that banks normally face.
2:- Meet the cash Reserve Ratio requirement.
3: - Meet sudden demand for fund, which may arise due to large payment
and remittance.
Banks usually borrow form the market to avoid the penal interest rate for not
meeting CRR requirement and high cost of refinance from RBI. Call money
helps the banks to maintain short term liquidity position at comfortable
level.
LOCATION
In India call money markets are mainly located in commercial centers and
big industrial centers and industrial center such as Mumbai, Calcutta,
Chennai, Delhi and Ahmedabad. As BSE and NSE and head office of RBI
and many other banks are situated in Mumbai; the volume of funds involved
in call money market in Mumbai is far bigger than other cities.
PARTICIPANTS
Initially, only few large banks were operating in the bank market. however
the market had expanded and now scheduled , non scheduled commercial
banks foreign banks ,state , district, and urban cooperative banks , financial
institution such as LIC,UTI,GIC, and its subsidiaries , IDBI, NABARD,
IRBI, ECGC, EXIM Bank, IFCI, NHB , TFCI, and SIDBI, Mutual fund such
as SBI Mutual fund . LIC Mutual funds. And RBI Intermediaries like DFHI
and STCI are participants in local call money markets. However RBI has
recently introduced restriction on some of the participants to phase them out
of call money market in a time bound manner.
Participant in call money market are split into two categories
1:- BORROWER AND LENDER:This comprises entities those who can both borrower and lend in this market,
such as RBI, intermediaries like DFHI, and STCI and commercial banks.
2:- ONLY LENDER: This category comprises of entities those who can act only as lender, like
financial institution and mutual funds.
CALL RATES
The interest paid on call loan is known as the call rates. Unlike in the case of
other short and long rates. The call rate is expected to freely reflect the day
to day availability and long rates. These rates vary highly from day to day.
Often from hour to hour. While high rates indicate a tightness of liquidity
position in market. The rate is largely subject to be influenced by sources of
supply and demand for funds.
The call money rate had fluctuated from time to time reflecting the seasonal
variation in fund requirements. Call rates climbs high during busy seasons in
relation to those in slack season. These seasonal variations were high due to
a limited number of lender and many borrowers. The entry of financial
institution and money market mutual funds into the call market has reduced
the demand supply gap and these fluctuations gradually came down in recent
years.
Though the seasonal fluctuations were reduced to considerable extent, there
are still variations in the call rates due to the following reason:
1:- large borrower by banks to meet the CRR requirements on certain dates
cause a gate demand for call money. These rates usually go up during the
first week to meet CRR requirements and decline afterwards.
2:- the sanction of loans by banks, in excess of their own resources compel
the bank to rely on the call market. Banks use the call market as a source of
funds for meeting dis-equilibrium of inflow and out flow of fund s.
3:- the withdrawal of funds to pay advance tax by the corporate sector leads
to steep increase in call money rates in the market.
COMMERCIAL PAPER
Commercial paper are short term, unsecured promissory notes issued at a
discount to face value by well- known companies that are financial strong
and carry a high credit rating . They are sold directly by the issuers to
investor, or else placed by borrowers through agents like merchant banks
and security houses the flexible maturity at which they can be issued are one
of the main attraction for borrower and investor since issues can be adapted
to the needs of both. The CP market has the advantage of giving highly rated
corporate borrowers cheaper fund than they could obtain from the banks
while still providing institutional investors with higher interest earning than
they could obtain form the banking system the issue of CP imparts a degree
of financial stability to the systems as the issuing company has an incentive
to remain financially strong.
THE FEATURES OF CP
1. They are negotiable by endorsement and delivery.
2. They are issued in multiple of Rs 5 lakhs.
3. The maturity varies between 15 days to a year.
4. No prior approval of RBI is needed for CP issued.
5. The tangible net worth issuing company should not be less than 4
lakhs
6. The company fund based working capital limit should not less than Rs
10 crore.
7. The issuing company shall have P2 and A2 rating from CRISIL and
ICRA.
CERTIFICATE OF DEPOSIT
Certificate of Deposits,. Instruments such as the Certificates of Deposit
(CDs introduced in 1989), Commercial Paper (CP introduced in 1989),
inter-bank participation certificates (with and without risk) were
introduced to increase the range of instruments. Certificates of Deposit
are basically negotiable money market instruments issued by banks and
financial institutions during tight liquidity conditions. Smaller banks
with relatively smaller branch networks generally mobilise CDs. As CDs
are large size deposits, transaction costs on CDs are lower than retail
deposits
FEATURES OF CD
1. All scheduled bank other than RRB and scheduled cooperative
bank are eligible to issue CDs.
2. CDs can be issued to individuals, corporation, companies, trust,
funds and associations. NRI can subscribe to CDs but only on a
non- repatriation basis.
3. They are issued at a discount rate freely determined by the
issuing bank and market.
4. They issued in the multiple of Rs 5 lakh subject to minimum
size of each issue of Rs is 10 lakh.
5. The bank can issue CDs ranging from 3 month t 1 year ,
whereas financial institution can issue CDs ranging from 1 year
to 3 years.
TREASURY BILLS MARKET:Treasury bills are the main financial instruments of money market. These
bills are issued by the government. The borrowings of the government are
monitored & controlled by the central bank. The bills are issued by the RBI
on behalf of the central government. The RBI is the agent of Union
Government. They are issued by tender or tap. The bills were sold to the
public by tender method up to 1965. These bills were put at weekly auctions.
A treasury bill is a particular kind of finance bill. It is a promissory note
issued by the government. Until 1950 these bills were also issued by the
state government. After 1950 onwards the central government has the
authority to issue such bills. These bills are greater liquidity than any other
kind of bills. They are of two kinds: a) ad hoc, b) regular.
Ad hoc treasury bills are issued to the state governments, semi government
departments & foreign ventral banks. They are not marketable. The ad hoc
bills are not sold to the banks & public. The regular treasury bills are sold to
the general public & banks. They are freely marketable. These bills are sold
by the RBI on behalf of the central government.
The treasury bills can be categorized as follows:1) 14 days treasury bills:The 14 day treasury bills has been introduced from 1996-97. These
bills are non-transferable. They are issued only in book entry system
they would be redeemed at par. Generally the participants in this
market are state government, specific bodies & foreign central banks.
The discount rate on this bill will be decided at the beginning of the
year quarter.
2) 28 days treasury bills:These bills were introduced in 1998. The treasury bills in India issued
on auction basis. The date of issue of these bills will be announced in
advance to the market. The information regarding the notified amount
is announced before each auction. The notified amount in respect of
treasury bills auction is announced in advance for the whole year
separately. A uniform calendar of treasury bills issuance is also
announced.
3) 91 days treasury bills:The 91 days treasury bills were issued from July 1965. These were
issued tap basis at a discount rate. The discount rates vary between 2.5
to 4.6% P.a. from July 1974 the discount rate of 4.6% remained
uncharged the return on these bills were very low. However the RBI
provides rediscounting facility freely for this bill.
4) 182 days treasury bills:The 182 days treasury bills was introduced in November 1986. The
chakravarthy committee made recommendations regarding 182 day
treasury bills instruments. There was a significant development in this
market. These bills were sold through monthly auctions. These bills
were issued without any specified amount. These bills are tailored to
meet the requirements of the holders of short term liquid funds. These
Secondary Market
Primary Market
Listing
Method of
Issue
Public
Issue
Players
Companies (Issuer)
Intermediaries (Merchant
Banks FIIs & Broker)
Investor (Public)
Quantum
of Issue
Right Issue
Trading
Practices of Settlements
& Clearing
Costs of
Issue
Bonus
Issue
Private
Placement
Operation
Instruments
Interest Rates
Procedures
CAPITAL MARKET
Capital market is market for long term securities. It contains financial
instruments of maturity period exceeding one year. It involves in long
term nature of transactions. It is a growing element of the financial
system in the India economy. It differs from the money market in terms
of maturity period & liquidity. It is the financial pillar of industrialized
economy. The development of a nation depends upon the functions &
capabilities of the capital market.
Capital market is the market for long term sources of finance. It refers to
meet the long term requirements of the industry. Generally the business
concerns need two kinds of finance:1. Short term funds for working capital requirements.
2. Long term funds for purchasing fixed assets.
Therefore the requirements of working capital of the industry are met by the
money market. The long term requirements of the funds to the corporate
sector are supplied by the capital market. It refers to the institutional
arrangements which facilitate the lending & borrowing of long term funds.
I.
COMPANIES:
b)
c)
II.
FINANCIAL INTERMEDIARIES:
Financial intermediaries are those who assist in the process of
converting savings into capital formation in the country. A strong
capital formation process is the oxygen to the corporate sector.
Therefore the intermediaries occupy a dominant role in the capital
formation which ultimately leads to the growth of prosperous to the
III.
a)
Brokers.
b)
c)
Merchant bankers
d)
Underwriters
e)
Registrars
f)
Mutual funds
g)
Collecting agents
h)
Depositories
i)
Agents
j)
Advertising agencies
INVESTORS:
The capital market consists many numbers of investors. All types
of investors basic objective is to get good returns on their
investment. Investment means, just parking ones idle fund in a
right parking place for a stipulated period of time. Every parked
vehicle shall be taken away by its owners from parking place after
a specific period. The same process may be applicable to the
investment. Every fund owner may desire to take away the fund
after a specific period. Therefore safety is the most important
factor while considering the investment proposal. The investors
On the basis of issuer the capital market can be classified again two types:a)
b)
On the basis of financial instruments the capital markets are classifieds into
two kinds:a) Equity market
b) Debt market
Recently there has been a substantial development of the India capital
market. It comprises various submarkets.
Equity market is more popular in India. It refers to the market for equity
shares of existing & new companies. Every company shall approach the
market for raising of funds. The equity market can be divided into two
categories (a) primary market (b) secondary market. Debt market represents
the market for long term financial instruments such as debentures, bonds,
etc.
PRIMARY MARKET
To meet the financial requirement of their project company raise their capital
through issue of securities in the company market.
Capital issue of the companies were controlled by the capital issue control
act 1947. Pricing of issue was determined by the controller of capital issue
the main purpose of control on capital issue was to prevent the diversion of
investible resources to non- essential projects. Through the necessity of
retaining some sort of control on issue of capital to meet the above purpose
still exist . The CCI was abolished in 1992 as the practice of government
control over the capital issue as well as the overlapping of issuing has lost
its relevance in the changed circumstances.
INTRODUCTION:
It was set up in 1988 through administrative order it became statutory body
in 1992. SEBI is under the control of Ministry of Finance. Head office is at
Mumbai and regional offices are at Delhi, Calcutta and Chennai. The
creation of SEBI is with the objective to replace multiple regulatory
structures. It is governed by six member board of governors appointed by
government of India and RBI.
OBJECTIVES OF SEBI:
1. To protect the interest of investors in securities.
2. To regulate securities market and the various intermediaries in the
market.
3. To develop securities market over a period of time.
(3) REGULATION OF MUTUAL FUNDS:The mutual funds were placed under the control of SEBI on January
1993. Mutual funds have been restricted from short selling or carrying
forward transactions in securities. Permission has been granted to
invest only in transferable securities in money market and capital
market.
(4) CONTROL ON MERCHANT BANKING:Merchant bankers are to be authorized by SEBI, they have to follow
code of conduct which makes them responsible towards the investors
in respect of pricing, disclosure of/ in the prospectus and issue of
securities, merchant bankers have high degree of accountability in
relation to offer documents and issue of shares.
(6) ISSUE GUIDELINES TO INTERMEDIARIES:SEBI controls unfair practices of intermediaries operating in capital
market, such control helps in winning investors confidence and also
gives protection to investors.
(7) GUIDELINES FOR TAKEOVERS AND MERGERS:SEBI makes guidelines for takeover and merger to ensure
transparency in acquisitions of shares, fair disclosure through public
announcement and also to avoid unfair practices in takeover and
mergers.
TYPES OF ISSUE
A company can raise its capital through issue of share and debenture by
means of :-
PUBLIC ISSUE :Public issue is the most popular method of raising capital and involves
raising capital and involve raising of fund direct from the public .
RIGHT ISSUE :Right issue is the method of raising additional finance from existing
members by offering securities to them on pro rata basis.
A company proposing to issue securities on right basis should send a
letter of offer to the shareholders giving adequate discloser as to how
the additional amount received by the issue is used by the company.
PRIVATE PLACEMENT :private placement market financing is the direct sale by a public limited
company or private limited company of private as well as public sector of
its securities to a limited number of sophisticated investors like UTI , LIC
, GIC state finance corporation and pension and insurance funds the
intermediaries are credit
SECONDRY MARKET
The secondary market is that segment of the capital market where the
outstanding securities are traded from the investors point of view the
secondary market imparts liquidity to the long term securities held by
them by providing an auction market for these securities.
The secondary market operates through the medium of stock exchange
which regulates the trading activity in this market and ensures a measure
of safety and fair dealing to the investors.
India has a long tradition of trading in securities going back to nearly
200 years. The first India stock exchange established at Mumbai in 1875
is the oldest exchange in Asia. The main objective was to protect the
character status and interest of the native share and stock broker.
Over the past 133 years, BSE has facilitated the growth of the Indian
corporate sector by providing it with an efficient access to resources. There
is perhaps no major corporate in India which has not sourced BSE's services
in raising resources from the capital market.
The BSE Index, SENSEX, is India's first stock market index that enjoys an
iconic stature , and is tracked worldwide. It is an index of 30 stocks
representing 12 major sectors. The SENSEX is constructed on a 'free-float'
methodology, and is sensitive to market sentiments and market realities.
Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral
indices. BSE has entered into an index cooperation agreement with Deutsche
Brse. This agreement has made SENSEX and other BSE indices available
to investors in Europe and America. Moreover, Barclays Global Investors
(BGI), the global leader in ETFs through its iShares brand, has created the
'iShares BSE SENSEX India Tracker' which tracks the SENSEX. The ETF
enables investors in Hong Kong to take an exposure to the Indian equity
market.
BSE has tied up with U.S. Futures Exchange (USFE) for U.S. dollardenominated futures trading of SENSEX in the U.S. The tie-up enables
eligible U.S. investors to directly participate in India's equity markets for the
first time, without requiring American Depository Receipt (ADR)
authorization. The first Exchange Traded Fund (ETF) on SENSEX, called
"SPIcE" is listed on BSE. It brings to the investors a trading tool that can be
easily used for the purposes of investment, trading, hedging and arbitrage.
SPIcE allows small investors to take a long-term view of the market.
BSE provides an efficient and transparent market for trading in equity, debt
instruments and derivatives. It has a nation-wide reach with a presence in
more than 450 cities and towns of India. BSE has always been at par with
the international standards. The systems and processes are designed to
safeguard market integrity and enhance transparency in operations. BSE is
the first exchange in India and the second in the world to obtain an ISO
9001:2000 certification. It is also the first exchange in the country and
second in the world to receive Information Security Management System
Standard BS 7799-2-2002 certification for its BSE On-line Trading System
(BOLT).
BSE continues to innovate. In recent times, it has become the first national
level stock exchange to launch its website in Gujarati and Hindi to reach out
to a larger number of investors. It has successfully launched a reporting
platform for corporate bonds in India christened the ICDM or Indian
Corporate Debt Market and a unique ticker-cum-screen aptly named 'BSE
Broadcast' which enables information dissemination to the common man on
the street.
In 2006, BSE launched the Directors Database and ICERS (Indian Corporate
Electronic Reporting System) to facilitate information flow and increase
transparency in the Indian capital market. While the Directors Database
BSE also has a wide range of services to empower investors and facilitate
smooth transactions:
Investor Services: The Department of Investor Services redresses grievances
of investors. BSE was the first exchange in the country to provide an amount
of Rs.1 million towards the investor protection fund; it is an amount higher
than that of any exchange in the country. BSE launched a nationwide
investor awareness programme- 'Safe Investing in the Stock Market' under
which 264 programmes were held in more than 200 cities.
The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates
on-line screen based trading in securities. BOLT is currently operating in
25,000 Trader Workstations located across over 450 cities in India.
BSE Training Institute: BTI imparts capital market training and certification,
in collaboration with reputed management institutes and universities. It
offers over 40 courses on various aspects of the capital market and financial
sector. More than 20,000 people have attended the BTI programmes
Awards
The Annual Reports and Accounts of BSE for the year ended March
31, 2006 and March 31 2007 have been awarded the ICAI awards for
excellence in financial reporting.
The Human Resource Management at BSE has won the Asia - Pacific
HRM awards for its efforts in employer branding through talent
management at work, health management at work and excellence in
HR through technology
Drawing from its rich past and its equally robust performance in the recent
times, BSE will continue to remain an icon in the Indian capital market.
The standards set by NSE in terms of market practices and technology have
become industry benchmarks and are being emulated by other market
participants. NSE is more than a mere market facilitator. It's that force which
is guiding the industry towards new horizons and greater opportunities.
CORPORATE STRUCTURE
NSE is one of the first de-mutualised stock exchanges in the country, where
the ownership and management of the Exchange is completely divorced
from the right to trade on it. Though the impetus for its establishment came
from policy makers in the country, it has been set up as a public limited
company, owned by the leading institutional investors in the country.
From day one, NSE has adopted the form of a demutualised exchange - the
ownership, management and trading is in the hands of three different sets of
people. NSE is owned by a set of leading financial institutions, banks,
insurance companies and other financial intermediaries and is managed by
professionals, who do not directly or indirectly trade on the Exchange. This
has completely eliminated any conflict of interest and helped NSE in
aggressively pursuing policies and practices within a public interest
framework.
The NSE model however, does not preclude, but in fact accommodates
involvement, support and contribution of trading members in a variety of
ways. Its Board comprises of senior executives from promoter institutions,
eminent professionals in the fields of law, economics, accountancy, finance,
taxation, and etc, public representatives, nominees of SEBI and one full time
executive of the Exchange.
While the Board deals with broad policy issues, decisions relating to market
operations are delegated by the Board to various committees constituted by
it. Such committees includes representatives from trading members,
professionals, the public and the management. The day-to-day management
INTERNATIONAL
CAPITAL MARKETS
INTERNATIONAL
BOND MARKET
FOREIGN
BONDS
INTERNATIONAL
EQUITY MARKET
EURO
BOND
FOREIGN
EQUITY
EURO
EQUITY
YANKEE
BONDS
EURO/
DOLLAR
AMERICAN
DEPOSITORY
RECIEPTS
SAMURAI
BONDS
EURO/
YEN
IDR/
EDR
BULLDOG
BONDS
EURO/
POUNDS
GLOBAL
DEPOSITORY
RECIEPTS
was no of
Major changes have occurred since the 70s which have witnessed
expanding and fluctuating trade volumes and patterns with various blocks
experiencing extremes in fortunes in their exports/imports. This was the was
the period which saw the removal of exchange controls by countries like the
UK, franc and Japan which gave a further technology of markets have
played an important role in channelizing the funds from surplus unit to
deficit units across the globe. The international capital markets also become
a major source of external finance for nations with low internal saving. The
markets were classified into euro markets, American Markets and Other
Foreign Markets.
THE PLAYERS
Borrowers/Issuers, Lenders/ Investors and Intermediaries are the major
players of the international market. The role of these players is discussed
below.
BORROWERS/ISSUERS
These primarily are corporates, banks, financial institutions, government and
quasi government bodies and supranational organizations, which need forex
funds for various reasons. The important reasons for corporate borrowings
are, need for foreign currencies for operation in markets abroad,
dull/saturated domestic market and expansion of operations into other
countries.
INTERMEDIARIES
LEAD MANGERS
They undertake due diligence and preparation of offer circular, marketing
the issues and arranger for road shows.
UNDERWRITERS
Underwriters of the issue bear interest rate/market risks moving against them
before they place bonds or Depository Receipts. Usually, the lend managers
and co-managers act as underwriters for the issue.
CUSTODIAN
On behalf of DRs, the custodian holds the underlying shares, and collects
rupee dividends on the underlying shares and repatriates the same to the
depository in US dollars/foreign equity.
Apart from the above, Agents and Trustees, Listing Agents and Depository
Banks also play a role in issuing the securities.
THE INSTRUMENTS
The early eighties witnessed liberalization of many domestic economies and
globalization of the same. Issuers form developing countries, where issue of
dollar/foreign currency denominated equity shares were not permitted, could
access international equity markets through the issue of an intermediate
instrument called Depository Receipt.
A Depository Receipt (DR) is a negotiable certificate issued by a depository
bank which represents the beneficial interest in shares issued by a company.
These shares are deposited with the local custodian appointed by the
depository, which issues receipts against the deposit of shares.
The various instruments used to raise funds abroad include: equity, straight
debt or hybrid instruments. The following figure shows the classification of
international capital markets based on instruments used and market(s)
accessed.
EURO EQUITY
GLOBAL DEPOSITORY RECEIPTS (GDR):
A GDR is a negotiable instrument which represents publicly traded localcurrency equity share. GDR is any instrument in the from of a depository
receipt or certificate created by the Overseas Depository Bank outside India
and issued to non-resident investors against the issue of ordinary shares or
foreign currency convertible bonds of the issuing company. Usually, a
typical GDR is denominated in US dollars whereas the underlying shares
would be denominated in the local currency of the Issuer. GDRs may be at
the request of the investor converted into equity shares by cancellation of
GDRs through the intermediation of the depository and the sale of
underlying shares in the domestic market through the local custodian.
GDRs, per se, are considered as common equity of the issuing company and
are entitled to dividends and voting rights since the date of its issuance. The
company transactions. The voting rights of the shares are exercised by the
Depository as per the understanding between the issuing Company and the
GDR holders.
FOREIGN EQUTIY
AMERICAN DEPOSITORY RECEIPTS (ADR):
ADR is a dollar denominated negotiable certificate, it represents a non-US
companys publicly traded equity. It was devised in the last 1920s to help
Americans invest in overseas securities and assist non-US companies
wishing to have their stock traded in the American Markets. ADRs are
divided into 3 levels based on the regulation and privilege of each
companys issue.
I. ADR LEVEL I:
It is often step of an issuer into the US public equity market. The
issuer can enlarge the market for existing shares and thus
diversify to the investor base. In this instrument only minimum
disclosure is required to the sec and issuer need not comply with
the US GAAP (Generally Accepted Accounting Principles). This
type of instrument is traded in the US OTC Market.
The issuer is not allowed to raise fresh capital or list on any one
of the national stock exchanges.
II. ADR LEVEL II:
Through this level of ADR, the company can enlarge the investor
base for existing shares to a greater extent. However, significant
disclosures have to be made to the SEC. The company is allowed
to List on the American Stock Exchange (AMEX) or New York
Stock Exchange (NYSE) which implies that company must meet
the listing requirements of the particular exchange.
III. ADR LEVEL III:
This level of ADR is used for raising fresh capital through Public
offering in the US Capital with the EC and comply with the
listing requirements of AMEX/NYSE while following the USGAAP.
DEBT INSTRUMENTS
EUROBONDS
The process of lending money by investing in bonds originated during the
19th century when the merchant bankers began their operations in the
international markets. Issuance of Eurobonds became easier with no
exchange controls and no government restrictions on the transfer of funds
in international markets.
THE INSTRUMENTS
EUROBONDS
All Eurobonds, through their features can appeal to any class of issuer or
investor.
The characteristics which make them unique and flexible are:
a) No withholding of taxes of any kind on interests payments
b) They are in bearer form with interest coupon attached
c) They are listed on one or more stock exchanges but issues are
generally traded in the over the counter market.
Typically, a Eurobond is issued outside the country of the currency in
which it is denominated. It is like any other Euro instrument and through
international syndication and underwriting, the paper is sold without any
FOREIGN BONDS
These are relatively lesser known bonds issued by foreign entities for
raising medium to long-term financing from domestic money centers in
their domestic currencies. A brief note on the various instruments in this
category is given below:
a) YANKEE BONDS:
These are US dollar denominated issues by foreign borrowers
(usually foreign governments or entities, supranational and highly
rated corporate borrowers) in the US bond markets.
A bond denominated in U.S. dollars and is publicly issued in the
U.S. by foreign banks and corporations. According to the
Securities Act of 1933, these bonds must first be registered with
the Securities and Exchange Commission (SEC) before they can be
sold. Yankee bonds are often issued in trenches and each offering
can be as large as $1 billion.
Due to the high level of stringent regulations and standards that
must be adhered to, it may take up to 14 weeks (or 3.5 months) for
a Yankee bond to be offered to the public. Part of the process
involves having debt-rating agencies evaluate the creditworthiness
of the Yankee bond's underlying issuer.
d) SHIBOSAI BONDS:
These are the privately placed bonds issued in the Japanese
markets.
EURONOTES
Euronotes as a concept is different from syndicated bank credit and is
different from Eurobonds in terms of its structure and maturity period.
Euronotes command the price of a short-term instrument usually a few
basic points over LIBOR and in many instances at sub LIBOR levels.
The documentation formalities are minimal (unlike in the case of
syndicated credits or bond issues) and cost savings can be achieved on that
score too. The funding instruments in the form of Euronotes possess
flexibility and can be tailored to suit the specific requirements of different
types of borrowers. There are numerous applications of basic concepts of
Euronotes. These may be categorized under the following heads:
a) COMMERCIAL PAPER:
These are short-term unsecured promissory notes which repay a
fixed amount on a certain future date. These are normally issued at a
discount to face value.
b) NOTE ISSUANCE FACILITIES (NIFs):
The currency involved is mostly US dollars. A NIF is a mediumterm legally binding commitment under which a borrower can issue
short-term paper, of up to one year. The underlying currency is
mostly US dollar. Underwriting banks are committed either to
FOREIGN
EXCHANGE AND
MARKETS
FOREIGN
EXCHANGE
OVERVIEW
In todays world no country is self sufficient, so there is a need for exchange
of goods and services amongst the different countries. However, unlike in
the primitive age the exchange of goods and services is no longer carried out
on barter basis. Every sovereign country in the world has a currency which
is a legal tender in its territory and this currency does not act as money
outside its boundaries. So whenever a country buys or sells goods and
services from or to another country, the residents of two countries have to
exchange currencies. So we can imagine that if all countries have the same
currency then there is no need for foreign exchange.
WHO
ARE
THE
PARTICIPANTS
IN
FOREIGN
EXCHANGE MARKETS?
The main players in foreign exchange markets are as follows:
1.
CUSTOMERS
The customers who are engaged in foreign trade participate in foreign
exchange markets by availing of the services of banks. Exporters
require converting the dollars in to rupee and importers require
converting rupee in to the dollars as they have to pay in dollars for the
goods/services they have imported.
2.
COMMERCIAL BANKS
They are most active players in the forex market. Commercial banks
dealing with international transactions offer services for conversion of
in
international
foreign
exchange
markets,
the
3.
CENTRAL BANK
In all countries central banks have been charged with the
responsibility of maintaining the external value of the domestic
currency. Generally this is achieved by the intervention of the bank.
Apart from this central banks deal in the foreign exchange market for
the following purposes:
1) Exchange rate management: It is achieved by the intervention
though sometimes banks have to maintain external rate of the
domestic currency at a level or in a band so fixed.
2)
4.
EXCHANGE BROKERS
Forex brokers play a very important role in the foreign exchange
markets. However the extent to which services of forex brokers are
utilized depends on the tradition and practice prevailing at a particular
forex market center. In India as per FEDAI guidelines the A Ds are
free to deal directly among themselves without going through brokers.
The forex brokers are not allowed to deal on their own account all
over the world and also in India.
.
5.
DERIVATIVES
INTRODUCTION:
The emergence of the market for derivative products, most notably forwards,
futures and options, can be traced back to the willingness of risk-averse
economic agents to guard themselves against uncertainties arising out of
fluctuations in asset prices. By their very nature, the financial markets are
marked by a very high degree of volatility. Through the use of derivative
products, it is possible to partially or fully transfer price risks by locking-in
asset prices.
needs of both the issuers and investors. To keep pace with the global
markets, Indian Securities Market also needs to develop new financial
products in all the dimensions of the economy including commodities,
securities, currency etc.
In recent years, the market for financial derivatives has grown tremendously
both in terms of variety of instruments available, their complexity and also
turnover. In the class of equity derivatives, futures and options on stock
indices have gained more popularity than on individual stocks, especially
among individual investors, who are major users of index-linked derivatives.
Even small investors find this useful due to high correlation of the popular
indices with various portfolios and ease of use. The lower costs associated
with index derivatives vis--vis derivative products based on individual
securities is another reason for their growing use.
DEFINITION OF DERIVATIVES:
Derivative is a product whose value is derived from the value of one or more
basic variables called bases (underling asset, index, or reference rate), in a
contractual manner. The underlying asset can be equity, forex, commodity or
any other asset. For example wheat farmers may wish to sell their harvest at
a future date to eliminate the risk of a change in prices by that date. Such a
transaction is an example of a derivative. The price of this derivative is
driven by the spot price of wheat which is the underlying.
T YPES OF DERIVATIVES
The most commonly used derivatives contracts are forwards, futures and
options and since this project revolves around futures and options, it will be
discussed in greater detail later on. For now we take a brief look at the
various derivatives contracts that have come to be used.
FORWARDS:
A forward contract is a customized contract between two entities, where
settlement takes place on a specific date in the future at todays preagreed price.
FUTURES:
A futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. In simpler words,
futures are forward contracts quoted in an exchange.
OPTIONS:
Options are of two types: - Calls and Puts. Calls give the buyer the right
but not the obligation to buy a given quantity of the underlying asset at a
given price on or before a given future date. Puts give the buyer the right,
but not the obligation to sell a given quantity of the underlying asset at a
given price on or before a given date.
WARRANTS:
Options generally have lives of up to one year, the majority of options
traded on options exchanges having a maximum maturity of nine months.
Longer dated warrants are called warrants and are generally traded over
the counter.
LEAPS:
The acronym LEAPS mean Long-Term Equity Anticipation Securities.
These are options having a maturity of up to three years.
BASKETS:
Basket options are options on portfolios of underlying assets. The
underlying asset is usually a moving average or a basket of assets. Equity
index options are a form of basket options.
SWAPS:
Swaps are private agreements between two parties to exchange cash
flows in the future according to prearranged formula. They can be
regarded as portfolios of forward contracts. The two commonly used
swaps are:
SWAPTIONS:
Swaptions are options to buy or sell a swap that will become operative at
the expiry of the options. Thus a swaption is an option on a forward
swap. Rather than have calls and puts, the swaptions market has receiver
swaptions and payer swaptions. A receiver swaption is an option to
receive fixed and pay floating. A payer swaption is to pay fixed and
receive floating.
FORWARD CONTRACT
INTRODUCTION:
A forward contract, as it occurs in both forward and futures markets, always
involves a contract initiated at one time; performance in accordance with the
terms of the contract occurs at a subsequent time. It is a simple derivative
that involves an agreement to buy/ sell an asset on a certain future date at an
agreed price. This is a contract between two parties, one of which takes a
long position and agrees to buy the underlying asset on a specified future
date for a certain specified price. The other party takes a short position,
agreeing to sell the asset at the same date for the same price.
For example, when one orders a car, which is not in stock, from a dealer, he
is buying a forward contract for the delivery of a car. The price and
description of the car are specified.
The mutually agreed price in a forward contract is known as the delivery
price. The delivery price is chosen in such a way that the value of the
forward contract to both the parties is zero, so that it costs nothing to take
either a long or a short position. On maturity, the contract is settled so that
the holder of the short position delivers the asset to the holder of the long
position, who in turn pays a cash amount equal to the delivery price. The
value of a forward contract is determined, chiefly by the market price of the
underlying asset.
Forward contracts are being used in India on a large scale in the foreign
exchange market to hedge the currency risk. Forward contracts, being
negotiated by the parties on one to one basis, offer them tremendous
flexibility to articulate the contract in terms of price, quantity, quality (in
case of commodities), delivery time and place.
From the simplicity of the contract and its obvious usefulness in resolving
uncertainty about the future, it is not surprising that forward contracts have
had a very long history.
price is so chosen that the value of the contract is nil, it is obvious that when
a forward contract is entered into, the delivery price and forward price are
identical. As time passes the forward price could change but the delivery
price would remain unchanged. Generally, the forward price at any given
time varies with the maturity of the contract so that the forward price of a
contract to buy or sell in one month would be typically different from that of
a contract with time of three months or six months to maturity.
FUTURES CONTRACT
INTRODUCTION
A futures contract is a type of forward contract with highly standardized and
closely specified contract terms. As in all forward contracts, a futures
contract calls for the exchange of some good at a future date for cash, with
the payment for the good to occur at a future date. The purchaser of a futures
contract undertakes to receive delivery of the good and pay for it, while the
seller of a future promises to deliver the good and receive payment. The
price of the good is determined at the initial time of contracting.
In a crude sense, futures markets are an extension of forward markets. These
markets, being organized/ standardized, are very liquid by their own nature.
Therefore, liquidity problem, which persists in the forward market, does not
exist in the futures market. In futures market, clearing corporation/ house
becomes the counter-party to all the trades or provides the unconditional
guarantee for their settlement i.e. assumes the financial integrity of the entire
system. In other words, we may say that in futures market, the credit risk of
OPTIONS
INTRODUCTION TO OPTIONS
We now come to the next derivative product that is traded, namely Options.
Options are fundamentally different from forward and future contracts. An
option gives the holder of the option the right to do something. The holder
need not exercise this right. In contrast, in a forward or futures contract, the
two parties are committed and have to fulfill this commitment. Also it costs
nothing (except margin requirement) to enter into a futures contract whereas
the purchase of the option requires an upfront payment called the option
premium.
POSITION GRAPH:
Intrinsic value
Lines
+
Premium
b
Stock Price
Premium
b
Stock
Price
_
Intrinsic value Lines
An option buyer starts with a loss equivalent to the premium paid. He has to
carry on with the loss till the stock market price equals the exercise price as
shown in (a). The intrinsic value of the option up to this price remains zero,
and thus runs along the X-axis. As the stock price increases further, the loss
starts reducing and gets wiped out as soon as the increase equals the
premium, represented on the graph by point b, also called the break even
point. The profitability line starts climbing up at an inclination of 45 degrees
after crossing the X-axis at b and from thereon moves into the positive side
of the graph. The inclined line beyond the point b indicates that the option
acquires intrinsic value and is, thus referred to as the intrinsic value line.
The position graph (b) represents the profitability status of the writer who
does not own the stock i.e. naked or an uncovered writer. The graph is
logically the inverse of that for the option buyer.
1. PUT OPTION
A put option gives a buyer the right to sell a specified number of
shares of a particular stock to the option of the writer at a specific
price (called exercise price) any time during the currency of the
option. The seller of a put option has the obligation to take delivery
of underlying asset. When put position is opened, the buyer pays
premium to the put seller. If the price of underlying asset rises
above the strike price and stays there, the put will expire worthless.
The seller of put will keep the premium as his profit and the put
buyer will have a cost to purchase right.
Put buyers are bearish, they believe that the price of the underlying asset will
fall and they may not be able to sell the asset at a higher price. Put sellers are
bullish, as they believe that the price of the underlying asset will rise.
Position Graph:
Stock Price
_
Premium
SWAPS
Swap can be defined as a financial transaction in which two counter parties
agree to exchange streams of payments, or cash flows, over time. Two types
of swaps are generally seen i.e. interest rate swaps and currency swaps. Two
more swaps being introduced are commodity swaps and the tax rate swaps,
which are seen to be an extension of the conventional swaps. A swap results
in reducing the borrowing cost of both parties.
FINANCIAL INSTITUTION
ALL INDIA DEVELOPMENT BANK
INVESTMENT INSTITUTIONS
BANKS
Investment Trust
NIDHIS
Merchant Banks
Hire Purchases Finance Company
Lease Finance Company
Housing Finance Companies
National Housing Bank
Venture Capital Funding Companies
diversification
and
modernization
of
existing
industrial
and standing guarantee for loans raised from other institution and form the
general public.
INVESTEMENT INSTITUITONS
LIFE INSURANCE CORPORATION OF INDIA .
The LIC was established in 1956 by amalgamation and nationalization of
245 private insurance companies by an enactment of parliament . the main
business of LIC is to provide life insurance and it has almost a monopoly in
this business. The LIC
MUTUAL FUNDS
Mutual funds serves the purpose of mobilizing of funds from various
categories of investors and channelizing them into productive investment.
Apart form UTI. Mutual fund sponsored by various bank subsidiaries,
insurance organizations private sector financial institutions DFI and FII have
come up . these mutual fund work within the framework of SEBI regulation
which prescribe the mechanism for setting up of a mutual fund , procedure
of registration its constitution and the duties, functions and responsibility of
the various parties involved.
BANK
THE RESERVE BANK OF INDIA
The Reserve Bank of India is the central bank of the country entrusted with
monetary stability, the management of currency and the supervision of the
financial as well as the payments system.
Established in 1935, its functions and focus have evolved in response to the
changing economic environment. Its history is not only intrinsically
interwoven with the economic and financial history of the country, but also
gives insights into the thought processes that have helped shape the country's
economic policies.
The Reserve Bank of India is the central bank of the country. Central banks
are a relatively recent innovation and most central banks, as we know them
today, were established around the early twentieth century.
The Reserve Bank of India was set up on the basis of the recommendations
of the Hilton Young Commission. The Reserve Bank of India Act, 1934 (II
of 1934) provides the statutory basis of the functioning of the Bank, which
commenced operations on April 1, 1935.
The RBI has 22 regional offices, most of them in state capitals like Bhopal,
Hyderabad, Jaipur, Nagpur, Kolkata etc.
With liberalization, the Bank's focus has shifted back to core central banking
functions like Monetary Policy, Bank Supervision and Regulation, and
Overseeing the Payments System and onto developing the financial markets.
The sequences of events leading to the formation of the RBI are summarized
in the figure:
Presidency Bank
Imperial Bank of India
Central Banking Enquiry Committee, 1931
Reserve Bank of India Act, 1934
Constitution of RBI, April 1st 1935
Nationalization of the RBI. 1949
but was dropped. A fresh bill was introduced on September 8th, 1923 and
was received.
Thus the Reserve Bank of India was established by legislation in 1934
through the Reserve Bank of India Act 1934. The Act provides the statutory
basis of functioning of the bank which commenced operations on April 1 st,
1935.
CENTRAL BOARD
The Reserve Bank's affairs are governed by a central board of directors. The
Board is appointed by the Government of India in keeping with the Reserve
Bank of India Act. The Board of Directors is comprised of:
1. A governor and not more that 4 deputy governors appointed by the
Central Government.
2. Four Directors nominated by the Central Government, one from each
of the 4 Local Boards.
3. Ten Directors nominated by the Central Government
4. One government official nominated by the Central Government.
The Governor & Deputy Governor hold office for such periods not
exceeding 4 years as may be fixed by the Central Government at the time of
their appointment and are eligible for reappointment. The Government
official holds office during the pleasure of the Central Government. The
Governor, in his absence, appoints a deputy Governor to be the chairman on
the Central Board. Meetings of the Central Board are required to be held not
less than 6 times in each year & at least once in a quarter.
LOCAL BOARDS
For each of the 4 regional areas of the country, there is a Local Board with
headquarters in Kolkata, Chennai, and Mumbai & New Delhi. Local Boards
consist of 5 members each, appointer by the Central Government for a term
of 4 years. The Local Board members elect from amongst themselves the
chairman of the Board. The Regional Directors of the bank offices in
Kolkata, Chennai, and Mumbai & New Delhi are the ex-officio secretaries
of the Local Boards at the Centers. The functions of Local Boards are
reviewed by the Central Board from time to time.
Its functions include advising the Central Board on local matters and
representing territorial and economic interests of local cooperative and
indigenous banks & to perform such other functions as delegated by Central
Board from time to time.
MAIN FUNCTIONS
The Reserve Bank of India was constituted to:
Regulate the issue of banknotes
Maintain reserves with a view to securing monetary stability
Operate the credit and currency system of the country to its advantage
CORE FUNCTIONS:
Following are the core functions of the Reserve Bank of India:
Operating monetary policy for maintaining price stability and
ensuring adequate financial resources for development process.
Promotion of an efficient financial system.
Meeting currency requirement of the public
RESERVE BANK OF
INDIA
Issue of
Currency
Notes
Banker to
Government
Banker to
Banks
Monetary &
Credit Policy
Foreign
Exchange
Management
Clearing
Hose Agent
Payme
System
Managem
MONETARY AUTHORITY:
The Reserve Bank of India constantly works towards keeping inflation under
check and ensuring adequate supply of liquidity for the productive sector as
also towards financial stability. It also formulates, implements and monitors
the monetary policy.
DEVELOPMENTAL ROLE
Infrastructure financing
ISSUER OF CURRENCY
The Reserve Bank of India ensures good quality coins and currency notes in
adequate quantity by:
Issuing and exchanges or destroys currency and coins not fit for
circulation.
PAYMENT SYSTEMS
Negotiated dealing system for security dealing.
Establishment of clearing corporation of India Ltd. (CCIL) for
settlement of security deals.
Introduction of Real Time Gross Settlement (RTGS)
Electronic payment facilities like Electronic Clearing System (ECS),
Electronic Funds Transfer (EFT), and National Electronic Funds
Transfer (NEFT) and Cheque truncation.
Providing messaging network and encryption facilities for secured
messaging through the Institute for Development and Research in
Banking Technology (IDRBT).
BANKERS' BANK
The Reserve Bank of India acts as a banker to all scheduled banks.
Commercial banks including foreign banks, co-operative banks & regional
rural banks are eligible to be included in the second schedule of the Reserve
Bank of India Act subject to fulfilling conditions laid down under Section 42
(6) of the Reserve Bank of India Act 1934..
OBJECTIVE
Primary objective of BFS is to undertake consolidated supervision of the
financial sector comprising commercial banks, financial institutions and
non-banking finance companies.
The Board is constituted by co-opting four Directors from the Central Board
as members for a term of two years and is chaired by the Governor. The
Deputy Governors of the Reserve Bank are ex-officio members. One Deputy
Governor, usually, the Deputy Governor in charge of banking regulation and
supervision, is nominated as the Vice-Chairman of the Board.
BFS MEETINGS
The Board is required to meet normally once every month. It considers
inspection reports and other supervisory issues placed before it by the
supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of
the statutory audit and internal audit functions in banks and financial
institutions. The audit sub-committee includes Deputy Governor as the
chairman and two Directors of the Central Board as members.
The BFS oversees the functioning of Department of Banking Supervision
(DBS), Department of Non-Banking Supervision (DNBS) and Financial
Institutions Division (FID) and gives directions on the regulatory and
supervisory issues.
ii.
iii.
iv.
COMMERCIAL BANK
Commercial banks ordinarily are simple business or commercial concern
which provides various types of financial services to consumers in return for
payments in one form or another such as interest discount, fees, commission,
and so on . their objective is to make profits. However, what distinguish
them from other business concerns ( financial as well as manufacturing ) is
the degree to which they have to balance the principal of profit
maximization with certain other principal . in India especially . banks are
required to modify the performance in profit making if that clashes with
their obligations in such areas as social welfare , social justice , and
promotion of regional balances in development . bank in general have to pay
much more attention to balancing profitability with liquidity.
SCHEDULED BANKS
Scheduled banks are which are included in the second schedule of The
Banking Regulation Act 1949, other are non schedule bank
(a) must have paid up capital and reserve not less than Rs 5 lakh.
(b) it must also satisfy the RBI that its affairs are not conducted in a manner
detrimental t the interests of its depositors. Scheduled banks are required to
maintain a certain amount of reserves with the RBI they in return , enjoy the
facility of financial accommodation and remittance at concessional rates
from the RBI.
CLASSIFICTION OF NBFC:
The various NBFC can be classified as follows:
Housing Finance Institution (companies)
Venture Capital Funds
Factors or Factoring companies
NIDHIS:
Mutual benefit funds or nidhis, as they are called in India, are joint stock
companies operating mainly in south India, particularly in Tamil Nadu.
The source of their funds are share capital, deposits from their members,
and the public. The deposit are fixed and recurring. Unlike other NBFCS
nidhis also accepts demand deposit to some extent. The loans given by
this institution are mainly for consumption purposes. These loans are
usually secured loans, given against the security of tangible asset such as
house property , gold jewelry, or against share of companies, LIC
policies, and so on. The terms on which loans are given are quite
moderate. The notable points about these institutions are :
a) They offer saving schemes which are linked with the
assurance to make credit available when required by savers
b) They make the credit available to those to whom the
commercial banks may hesitate to give credit or whom
commercial banks have not been able to reach,
MERCHANT BANKS:
It would help in understanding the nature of merchant banking if we
compare it with commercial banking. The MBs offer mainly financial advice
and service for a fee, while commercial banks accepts deposit and lend
money. When MBs do functions essentially as wholesale bankers rather than
retail bankers. It means that they deals with selective large industrial clients
and not with the general public in their fund based activities. The merchant
banks are different from security dealers, trades and brokers also. They deal
mainly in new issues, while the latter deal mainly in existing securities.
The range of activities undertaken by merchant banks can be understood
from recent advertisement of one of the merchant bankers in India which
mentioned the following service offered by it:
Investment
management
including
dictionary
management,
11) Investment service for non- resident Indians,
12) Management of and dealing in commercial papers,
In India the merchant banking service are provided by the commercial banks,
All Indian Financial Institutions, private consultancy firms & technical
consultation organizations.
In March 1991, SEBI granted permission to VMC project technologies to act
as the merchant banker and to undertake public issue management, portfolio
management, lead management, and so on. It may be noted that in India, the
permission of the SEBI is required to do merchant banking business.
contractual obligation. The goods whose purchases are thus financed may be a
consumer goods or producer goods or may be simply services such as air
travel.
Hire-purchase credit may be provided by the seller himself or by any financial
institution.
Hire-purchase credit is available in India for a wide range of services. Product
like automobile, sewing machines, radios, refrigerators, TV sets, bicycles,
machinery and equipment, other capital goods, industrial shades, services like
educational fees, medical fees, and so on are now financed with help of such
credit. However unlike in other countries the emphasis in India is on the
provision of installment credit for productive goods & services rather than for
purely consumer goods.
Other suppliers of hire-purchase finance are retail and wholesale traders,
commercial banks, IDBI, ICICI,NSIC,NSIDC, SFCS,SIDCS, Argo-industries
corporations (AICs), and so on.
In the recent past, banks also have increased their business in his field of
installment credit and loans.
IDBI indirectly participate in financing hire purchase business by way of
rediscounting usance bills/promissory notes arising out of indigenous
machinery on deferred payment basis.
commercial and urban co-operative banks in direct in mortgage loans has been
marginal till recently. LIC has been a major supplier of mortgage loan in
indirect and direct forms. It has been giving loans to the state government,
apex cooperative housing societies, HUDCO and so on. In addition it has been
providing mortgage loan directly to individuals under its various mortgage
schemes.