FINANCIAL SYSTEM AND

BANKING THEORY

FINANCIAL INSTITUTION Participants in financial markets Business organization dealing in financial resources Accepting deposits and lending money. Buying and selling of financial instruments. Some of them are regulatory institutions also, eg. SEBI, RBI. Intermediate Financial Institution are mediator between saver and investor. UTI, LIC , GIC are some NBFC’s.Specialized Financial Institutions are also there.

FINANCIAL MARKETS•They are centre facilitating buying & selling of financial claims, assets, services and securities.•Banking & NBFCs, dealers, borrowers and lenders, investors and savers are the participants on demand and supply side, in these market.

CLASSIFICATION OF FINANCIAL MARKETSUnorganized & organized marketMoney Market, Capital Market & FOREX MarketPrimary & Secondary Market

Characteristics of Money MarketI. Money Market are over the phone market. Transaction are conducted through

oral lectures. In case of capital market, business is largely transacted at formal place.

II. Dealing in money market may be conducted with or without the help of broker.III. Short term here means less than 365 days.

Objectives of Money Marketa) Provides equilibrating mechanism for short term surpluses or deficits.b) Influencing liquidity in economy.c) Reasonable access to users of short term money.

MONEY MARKET

Money Market AND Capital Market1. MM operations for raising and deployment of funds are for short term, whereas,

for capital market its for long term.2. In MM, large sized participants are there, in Capital market, small sized and

large sized participants both are there. 3. MM transactions are over the phone market, whereas, Capital market

transactions may be on phone, through broker etc.4. MM is wholesale market whereas Capital market is both whole sale and retail

market.

CHARACTERSTICS OF INVESTMENT•Liquidity•Security Value•Marketability•Maturity Period•Transaction Cost.•Risk & uncertainty regarding interest/dividend.•Options such as buy-back & call back options

Commercial Bank

Scheduled Bank

Public Sector Bank(28)

Private Sector Bank (70)

Regional Rural Bank(196)

Non-Scheduled Banks

Local Area Bank

Oldest Financial Institution

Public Sector Bank

State Bank Group (8) Nationalized Bank(19) Other Public Sector Bank(IDBI Ltd)

Features of Private Sector Bank:A. Required to maintain the networth of Rs 300 Crores at all times.B. Shareholding or control, in any bank , in excess of 10%, by any single entity, would require prior approval of RBI.C. Other banks (inc foreign banks having branches in India) would not be allowed

to any fresh stake of more than 5% of equity capital of Bank.D. RBI may allow a higher level of shareholding, on its discretion, for restructuring

or for the interest of consolidation in banking sector.E. Aggregate foreign investment in private bank from all sources (FII, FDI, NRI)

cannot exceed 74% of paid up capital.

OBJECTIVE OF LOCAL AREA BANK1. Providing mechanism for promoting rural and semi urban savings.2. Providing credit for viable economic activities in local areas.

CHANGING FACE OF COMMERCIAL BANKSA. Change in ownership pattern of Public Sector bank.B. Banks in Insurance BusinessC. Move towards UNIVERSAL BANKING.D. Banks are now Financial Super Market.E. Automation and computerization of branches and

adoption of new technology.

FUNCTIONS OF DEVELOPMENT BANK

Project Finance

Direct Subscription of Equity

Underwriting

Guarantees for Loans

Guarantees for

Deferred Payments