Fis-1,2 - Units-1

FI&S (FINANCE SPECIALIZATION) HR & FINANCE FINANCE & MARKETING
(17E00308) FINANCIAL INSTITUTIONS AND SERVICES
(Elective II)
Objective: The objective of the course is to provide to students an understanding of Financial Markets, the major
institutions involved and the services offered within this framework.
1. Introduction: The structure of financial system, Elements of financial system and economic development,
Regulatory and Promotional Institutions - Function and Role of RBI, Monetary Policy and techniques of
RBI,
2. The Banking and Non-Banking Institutions: The public and the private sectors – structure and
comparative performance, Bank capital and Banking Innovations, Commercial and Co-operative banks.
The Non-banking financial Institutions - Mutual Funds, Growth of Indian Mutual funds and its Regulation.
The Role of AMFI, Insurance Companies- Role of IRDA.
3. Financial and securities Markets: Primary and Secondary Markets, Structure and functions of Money
Market, -Call call money market, Government Securities Market – T-bills market, Commercial Bills market,
Commercial paper and certificate of deposits. Securities markets: - Organization and structure, listing
trading and settlement of securities market, The role and functions of SEBI
4. Fund based services - Lease and hire purchase consumer credit and Factoring - Definition, Functions,
Advantages, Evaluation, venture capital financing, Housing Finance.
5. Fee-based services - Stock broking, credit rating, Merchant Banking, portfolio services. Underwriting,
Depository services, Challenges faced by investment bankers.
Text Books:
 Financial Institutions and Markets, L. M. Bhole, 4/e Tata McGraw Hill.

 Financial services, Gorden& Natarajan, Himalaya publishers.
References:
 Financial Services and markets, Dr.Punithavathy Pandian, Vikas

 Financial Markets and services, Appannaiah, Reddy and Sharma, HPH
 Indian Financial System, Ramachandra and others, HPH
 Investment Institutions and Markets, Jeff Madura, Cengage, 1 st Edition.
 Financial services, Thirpati, PHI.
 Financial Markets &Services, Vasanthdesai, Himalaya.
 Financial Institutions and Markets, Gupta Agarwal, Kalyani publishers.
 Management of Financial Services ,C.Rama Gopal ,Vikas.
UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

UNIT-1
INTRODUCTION
1. THE STUCTURE OF FINANCIAL SYSTEM
 The economic development of any county depends upon the existence of a well organized financial system.
 It is the financial system which supplies the necessary financial inputs for the production of goods and
services which in turn promote the well being and standard of living of the people in a country.
 The major assets traded in the financial system are money and monetary assets.
 The responsibility of the financial system is to move the savings in the form of money and monetary assets
and invest them to productive ventures.
 Thus the financial system acts as inters mediator between savers and investors for faster economic
development.
 The evaluation of the Indian financial system mainly has three distinct phases.
1. The economic activities which are done up to 1951 i.e. before independence.
2. Between 1951 and the mid 1980’s reelecting the imperatives of planned economic growth and
3. After the early nineties responding to the requirement of liberalizes / deregulated/globalised
economic environment.
PHRASE-1 (PRE-1951)
 A traditional ecocnomy according to R.L.BENNETT is one in which the per capital output is low and
constant.
 The principal features of the pre-independence, industrial finance organizations are in the closed circle.
 The industry had very restricted access to outside savings.
 The fact that the industry had no easy access to the outside savings, in another way of saying that the
financial systems was not responsive to the opportunities for industry investment.
 Such a financial system was clearly incapable of sustaining a high rate of industrial growth, particularly the
growth of new and innovating enterprise.
1.2 PHRASE – 2 (1951-MID 1980’S)
 The ability of the system to supply fiancé and credit to different companies in diverse forms was greatly
strengthened during second phase.
 In this period the government starts different types of plans, introduction of 5 years plans etc.

 The main element of the financial organization in planned economic development could be categorizes into
four broad groups.
1. Public/government ownership of financial institutions.
2. Fortification of the institutional structure.
3. Protection to investors and
4. Participation of financial institutions in corporate management.
PUBLIC OWNERSHIP OF FINANCIAL INSTITUTIONS
One aspect of the evolution of the financial system in India during this phase was this progressive transfer of its
important constituents from private ownership to public control.
Organization of Indian financial system
(I) Public/Govt Ownership (II) Fortification of (III) Investor Protection

of Financial Institutes Institutional Structure
(A) (B) (A) (B) Banks

Nationalization  DFI’s -Diversification (E)Companies
New
 RBI Institutions  IFCI of forms of Act
 SBI  DFI’s  SFCs financing. -Securities
 LIC  UTI  ICICI contract act
 BANKS  IDBI -Enlargement
-Monopolies and
 GIC  SIDBI of functional
restrictive trade
coverage.
practices
-Innovative
-Foreign
banking
exchange
regulation act
A. NATIONALIZATION
 The nationalization of the reserve bank of India (RBI) is done in 1948 marked the beginning of the transfer
of important financial intermediaries to governmental control this was followed by the state bank of India
which was nationalized in 1956.
 In the year 1956,245 life insurance companies were nationalized and merged into the state-owned
monolithic life insurance corporation of India (LIC).
 The year 1969 was a land mark in the history of public control of the private financial institutions, when 14
major commercial banks were brought under the direct ownership of the government of India.

 Yet another measure which deserves mention in this connection was the setting up of the general insurance
corporation (GIC) in 1972
 Six more commercial banks were brought under the public ownership in 1980.
B. NEW INSTITUTIONS
 The government launches new institutions to control the government bodies. (Government Offices)
 In the first place a number of powerful special – purpose financial institutions designated as development
banks/development finance institutions/term landing institutions were set up.
 A wide range of such institutions came into being some of which were national while others were regional /
state level institutions and between them they covered the whole range of industry and provide finance.
 The public sector occupied a commanding position in the industrial financing system in India that is
virtually the entire institutional structure was owned and controlled by the government.
FORTIFICATION (Effectiveness) OF INSTITUTIONAL STRUCTURE.

 The most significant element in the emergence of a fairly well-developed financial system in India
during the second phase was the strengthening of its institutional structure.
 The fortification of the institutional structure of the Indian financial system was partly the result of
modification in the structure and polices of the existing financial institutions.
A. DEVELOPMET BANKS
 The setting up of a variety structure of development banking/finance/term-lending institutions was
the most outstanding development in this sphere.
 These developments banks could be appropriately designated as the back bone of the system of
industrial financing in India.
 The structure of development banking consisted of both all India as well as state-level institutions.
 The setting up of the industrial finance corporation of India (IFCI) in 1948 marked the beginning
of the era of development banking in India.
 State financial organizations (SFCs) were organized.
 National industrial development corporation (NIDC) was launched to provide both finance and
entrepreneurship.
 Industrial credit and Investment Corporation of India (ICICI) Ltd in 1955.
 The government of India as a follow –up set up their Refinance Corporation of industry (RCI) in
1958 to provide refinance to the banks against term loans granted by them to medium/small
enterprises. This facility was later extended to the state financial corporations. The RCI
subsequently merged with the industrial development bank of India (IDBI) in 1964.
 Industrial development in the direction of fortifying the structure of the industrial financing
organization in India during this phase, the beginning of the life insurance corporation (LIC) in
1956 as a result of the amalgamation(mixing) of 245 life insurance companies into a single
monolithic state owned institution.
 UTI the establishment of the unit trust of India in 1964 was to enable to the small investors to
share in industrial prosperity through indirect holding of equity and to mobilize the saving of the
relatively small investors who numerically formed the major section of the saving populace
(Common People).

B. DIVERSIFICATION IN FORMS OF FINANCING

Since the mid-sixties the commercial banks in India were officially encouraged to enter new forms of
financing of which two deserve specific mention are as follow.
(i) Term lending and

(ii) Underwriting of new issues of corporate securities by industrial enterprise.
(i) TERM LENDING

 The introduction of formal term loans by commercial banks in India represented a radical
departure from their traditional role of suppliers of short-term credit.
 Under this scheme the lending banks were provided refinancing facilities against approved term
loans from the refinance corporation of India (RCI) LTD specially created for the purpose.
 The RCI was merged with industrial development bank of India on Sept-1-1964.
(ii) WRITING OF NEW ISSUES OF CORPORATE SESCURITIES UNDER

 The banks also widened their range of financial assistance to the industry partly through direct
subscription of the company shares and debentures of corporate enterprise and partly through their
lending against such securities.
ENLARGEMENT OF FUNCTIONAL COVERAGE
 The commercial banks were further directed to channelize their resources to small - scale
industries and agriculture that is neglected sectors of the Indian economy.
 The flow of credit into these desired channels further symbolized the attempts to secure the
alignment to bank credit with planning priorities the policy and institutional measure stimulate
bank credit to these sectors are described below
(i) Small-scale industries
(ii) Exports
(iii) Agricultural finance
(i) SMALL – SCALE INDUSTRIES
 Three measures were taken in the sphere of channelization of bank fund.
 First place, a systematic study of the problems involved was made and small-scale industrialist and
bankers were brought together at a seminar on financing of small-scale industries organized by the
RBI Hyderabad in 1959 with an aim to finding their solutions.
 Secondly in pursuance of the suggestions made at the Hyderabad seminar the government
formulated a credit guarantee scheme in consultation with the RBI in July 1960 to guarantee the
major part of the advances given by banks to the small scale industries.
 Finally in its credit policy the RBI introduced a policy of granting additional rights to the banks to
borrow from it at concessional rates.
(ii) EXPORTS
 An important measure taken to facilitate credit for exports was the set up of the export risk
insurance corporation in 1957 to offer incurrence to exports against exchange controls or multi
currency practices.
 In 1964 it was renamed as the Export Credit And Guarantee Corporation (ECGC) ltd.
(iii) AGRICULTURAL FINANCE

 The agricultural refinance corporation was set up as a subsidiary of the RBI in 1963 for providing
medium and long term finance to eligible financial institutions, banks for promoting the
development of agriculture and allied activities by way of refinance.
INNOVATING BANKING
 The period after the; mid-sixties to the early nineties may be aptly described as the phase of
innovative banking or evolutionary phase or the beginning of the big change.
 The main features of this phase were,
(i) Social control.

(ii) Nationalization.
(iii) Bank credit to priority sectors.
 Under social control the main changing concepts and goals of banking were drastically modified
and so many rules are brought by government, government of India started programmers like
Agriculture Refinance and projects for irrigation.
 Under nationalization the banking system had taken several measures for achieving the objectives
of social control 14 major banks with individual deposits exceeding Rs 50 crore were nationalized
on 19-july-1969 and in 1980 again 6 banks were nationalized.
 Priority Sector Lending is an important role given by the Reserve Bank of India (RBI) to the banks
for providing a specified portion of the bank lending to few specific sectors like agriculture and
allied activities, micro and small enterprises, poor people for housing, students for education and
other low income groups and weaker sections.. This is essentially meant for an all round
development of the economy as opposed to focusing only on the financial sector.
INVESTOR PROTECTION
 To safeguard the investors who had investment in the companies the government frame some
legislative codes i.e.
(i) Companies act 1956

(ii) Capital issues (control)act 1947
(iii) Securities contracts(regular)act 1956
(iv) Monopolies and restrictive trade practices act
(v) Foreign exchange regulation act.
 Under Companies Act, 1956 represented on important stage in the development of corporate
enterprise in India. The underlying objective was the protection of the interest of prospective share
holders. The law was further amended from time and time.
 Under Capital Issues Act the main element in the scheme is to providing protection to the investing
public. The act was implemented through the controller of capital issues (CCI), which is in the
hands of ministry of finance.
 The Securities Contracts (Regulation) Act, 1956 “Act” was enacted in order to prevent undesirable
transactions in securities and to regulate the working of stock exchanges in the country. The
provision of the Act came into force with effect from 20th February, 1957. The main objective of

this act was to have a healthy and strong investment market in which the public could invest their
savings with full confidence.
 Under Monopolies and Restrictive Trade Practices Act the main objective is to central such
monopolistic and restrictive trade practices that were injurious to the public welfare, this act come
in force from june-1-1970.
 Under Foreign Exchange Regulation Act 1973 regulated foreign investment with the aim of
diluting the equity holding in foreign companies. It was also a step in the direction to creat
confidence among the investing public in industrial securities.
2. ELEMENTS/STRUCTURE OF FINANCIAL SYSTEM

The financial system consists of four elements or components. These are financial institutions
financial markets, financial instruments and financial services.
Financial system
(I) Financial (II) (III) (IV)

Institutions/Interme
diaries Financial Markets Financial Assets / Financial Services
Instruments
1) Regulatory 1) money market 1) primary financial 1) fund-based

Instruments. Services
2) Intermediaries 2) capital market 2) secondary financial 2) fee-based services
Instruments.
3) Non
Intermediaries 3) foreign exchange
Market.
4) Derivative market.
FINANCIAL INSTITUTIONS/INTERMEDIARIES
Financial institutions are business organizations that act as mobilisers and depositories of savings
and as purveyors (someone who supply what is needed) of credit of finance.
Types of financial institutions
(i) REGULATORY:
 Regulatory financial institutions are SEBI, IRDA, and RBI, AMC etc. before investors lend
money, and they need to be reassured that it is safe to exchange securities for funds. These bodies
will go through different markets and frames the rules and regulations.

 For example – the RBI regulates the money market and (SEBI) securities and exchange board of
India regulates capital market.
(ii) INTERMEDIARIES
 Intermediaries supply only short term funds to individuals and corporate customers. They consist
of banking and non bank in intermediaries.
 For example, banks like SBI, PNB will provide finance to other financial institutions and examples
of non-banking intermediaries are LIC, UTI, and GIC etc. will provide financial services that are
vital for creation of firm’s expansion and economic growth.
(iii) NON INTERMEDIARIES

 These non intermediaries mainly provide long term funds to individuals and corporate
customers. They consist of term lending institutions like financial corporations and investment
institutions like NABARD, IDBI, and IFCL etc.
FINANCIAL MARKETS
 Generally speaking, there is no specific place or location to indicate a financial market. Whenever
a financial transaction takes place it is deemed to have taken place in the financial market.
 However financial markets can be referred to as those centers and arrangements which facilitate
buying and selling of financial assets, claims and services.
TYPES OF FINANCIAL MARKETS
(I) The Money Market is where financial instruments with high liquidity and very short maturities
are traded. It is used by participants as a means for borrowing and lending in the short term,
with maturities that usually range from overnight to just under a year.
(II) Capital Market – the term capital market refers to the institutional arrangement for facilitating
the borrowing and lending of long-term funds.
(III) Foreign Exchange Market
 The foreign exchange (currency or FOREX or FX) market refers to the market for currencies.
 Transaction in this market typically involves one party purchasing a quantity of one currency in
exchange for paying a quantity of another.
 The FX market is the largest and most liquid financial market in the world includes trading
between large banks central banks currency speculators, governments and other institutions.
(iv) Derivative Market
 A derivative is a financial security with a value that is reliant upon or derived from an underlying
asset or group of assets ......Its price is determined by fluctuations in the underlying asset. The most
common underlying assets include stocks, bonds, commodities, currencies, interest rates
and market indexes. Example – currency marks i.e. forex markets.

FINANCIAL ASSETS/INSTRUMENTS
 A financial instrument is a claim against a person or an institution for the payment at a future date
a sum of money and / or a periodic payment in the form of interest or dividend.
 Financial instruments play an important role of channelizing funds from lenders to borrowers.
TYPES OF FINANCIL INSTRUMENTS
(i) PRIMARY FINANCIL INSTRUMENT

These instruments are also termed as direct securities as they are directly issued by the ultimate
borrowers of funds to the ultimate savers.
Example- equity shares, debentures etc.
(ii) SECONDARY FINANCIAL INSTRUMENTS

They are also referred to as indirect securities as they are issued by financial intermediaries to the
ultimate savers.
Example – bank deposits, mutual funds units, insurance policies etc.
FINANCIAL SESRVICES
Financial intermediaries provide key financial services such as merchant banking, leasing, hire
purchase, creditor-rating and so on.
These services are of two types
a) Fund based
b) Fee-based services
a) FUND BASED/ASSETS BASED SERVICES
 Fund based financial/services are financial method that is driven by the assets of companies.
 Assets include current assets, such as accounts receivable and inventory and fixed assets such as
plant and machinery. For example- lease consumer credit and hire purchase.
b) FEE-BASED SERVICES
 Fee based financial services do not create immediate funds they enable the creation of funds
through their services for which they charge a fee.
 For example – stock broking, credit rating and mutual funds policies etc.
3. ECONMIC DEVELOPMENT
 The role of financial system in economic development has been a much discussed topic among
economists.
 As economists think, one view of economist holds that finance is not important at all and the
opposite peoples view regards it to be very important.
 Economic development or economic progress has been defined in two ways.
(i) Economic growth means growth of national income of the country.
(ii) Economic growth means the increase in per capita income of the country at constant price.

i) ECONOMIC GROWTH MEANS GROWTH OF NATIONAL INCOME OF THE

COUNTRY
 It implies an increase in the net national product in a given period say a year. Some economists
argue that even if the national income goes up the general standard of living may go down; this can
happen if population of the country is rising more rapidly than the growth of national income.
 If the national income is rising at the rate of 2% and population is increasing at the rate of 3% the
level of living of the people is bound to go down.
 The country will have registered economic growth only if per capital income has gone up and this
will happen only if the national income grows at a higher rate than the growth rate of the
population.
ii) ECONOMIC GROWTH MEANS THE INCREASE IN PER CAPITAL INCOME OF THE
COUNTRY AT CONSTANT PRICES
 The economic growth means the increase in per capital income of the country at constant prices.
A higher per capital income would mean that people are better off and enjoy a higher standard of
living.
 The raise in the standards of people should be there for long term long time but not for the short
term then only there will be economic growth.
ELEMENTS OF THE FINANCIAL SYSTEM IN THE ECONOMIC DEVELOPMENT
Following are some role of financial system which state that it helps in the economic development of
country,
(i) Saving mobilization.

Mobilization of savings: More individuals throughout their lives have a need for savings deposits
services rather than credit. Savings therefore offer significant leverage for economic development
and self-sufficiency and are valuable to both microfinance institutions and their clients or
members.
(ii) Investment.
In finance, an investment is a monetary asset purchased with the idea that the asset will provide
income in the future or will later be sold at a higher price for a profit. Taking an action in the hopes
of raising future revenue can also be considered an investment.
(iii) Banking systems.
A banking system is a group or network of institutions that provide financial services for us and
for organizations. These institutions are responsible for operating a payment system, providing
loans, taking deposits, and helping with investments.
(iv) National growth.
Economic growth is the increase in the inflation-adjusted market value of the goods and services
produced by an economy over time. It is conventionally measured as the percent rate of increase in
real gross domestic product, or real GDP.
(v) Monetary policy.
Monetary policy is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and the government of a country will use to achieve
macroeconomic objectives like inflation, consumption, growth and liquidity.
(vi) Entrepreneurship growth.
The capacity and willingness to develop, organize and manage a business venture along with any
of its risks in order to make a profit. The most obvious example of entrepreneurship is the starting
of new businesses.
STAGES OF ECONOMIC DEVELOPMETN
Prof. ROSTOW an eminent economic historian and a special list in economic development has divided
the historical process of economic growth into three stages,
1. Preparatory stage
2. The take – off period and
3. The period of self-sustained growth
a) PREPARATORY STAGE (STARTING STAGE)

 It covers a long period of a century or more during which the precondition for take-off are
established. These condition mainly comprise fundamental changes in the social political and
economic fields.
EXAMPLE
 A change in society’s attitude towards science, risk-taking and profit caring.

 The adaptability of the labor force.
 Political sovereignty.
 Development of a centralized tax system.
 Construction of certain economic and social overheads like railroads and educational institution.
b) THE TAKE-OFF PERIOD
 This stage covers a relatively brief period of two or three decades in which the economy
transforms itself in such a way that economic growth subsequently takes place more or less
automatically.
 The term takes off implies three things firstly, the proportion of investment to national income
must rise from 12-15% definitely outstripping the likely population increase. Secondly the period
must be relatively short so that it should shoe the characteristics of an economic revelation and
thirdly it must culminate in self- sustaining and self-generation economic growth.
c) PERIOD OF SELF-SUSTAINED GROWTH

 It is a long period of self-generating and self-propelling economic growth. The rates of saving and
investment are of such magnitude that economic development becomes automatic.
 Overall capital per head increases as the economy matures. The structure of the economy changes
increasingly.
 The investments will grow automatically.

4 REGULATORY AND PROMOTIONAL INSTITUTIONS
PROMOTIONAL INSTITUTIONS
These are the institutions which will help the institutions in getting of money or to motivate firms with
new plans.
REGULATORY INSTITUTIONS
 Regulatory institutions are the institutions that will ensure that firms will provide the goods and
services promised and that their behaviors in general conform to established standards in the
country/abroad.
 In India there are two powerful regulatory bodies those are
a) RBI – Which controls the banking and non banking systems in India.
b) SEBI – Securities exchange board of India.
a) RESERVE BANK OF INDIA (RBI)
 RBI commenced its operations on 01-04-1935 in accordance it RBI act 1934.

 The paid up capital of RBI was 5crore.
 The RBI was nationalized on Jan-01-1949.
 The reasons for nationalization of RBI are,
1) There was a trend in the world that all the countries are making their central banks as
nationalization.
2) Even the bank of England was nationalized in 1946.
3) After the Second World War the inflation tendency was also increased throughout the world.
4) The Unorganized sector area collecting huge amount of interest rates from the people.
 The central bank was an independent apex monetary authority which regulates banks and provides
important financial services.
 The functions of central bank vary from countries to countries.
 The reserve bank of India which controls the monetary policy of the Indian rupee.
FUNCTIONS/OBJECTIVES OF RBI
1. To manage the monitory and credit system of the country.
2. To stabilizes internal and external value of rupee.
3. For balanced and systematic development of banking in the country.
4. For the development of organized money market in the country.
5. For proper arrangement of agriculture finance
6. For proper arrangement of industrial finance
7. For proper arrangement of public debts.
8. To establish monetary relations with other countries of the world and international finance
institutions.
9. For centralization of cash reserves of commercial banks.
10. To maintain balance between the demand and supply of currency.
5. ROLE OR FUNCTIONS OF RESAERVE BANK OF INDIA

The performed by the reserve bank can be classified into two categories.
ROLE OF FUNCTIONS OF RESERVE

Bank of India
Monetary functions non-monetary functions
Regulatory functions promotional functions
-Issue of Bank Notes -Provide license -Established the bill

market scheme
-Banker to government -Coverage of bank operations -Development of spcial-
ised finance institutions
-Bankers bank -Liquidation of weak banks -Promote regional rural
banks.
-Lender of the last resort -Branch expansion -establishment of export
import bank of India.
-Custodian of foreign exchange -Issue directions on credit control -Promotes research
Reserves.
-Credit control -Training of bank personals
-Restrict loans & advances
-Collect & supply information
-Spreading banking habits
-KYC norms
-Transparency norms
-Audit and Inspection
-Risk management

A. MONETARY FUNCTIONS
1. ISSUE OF BANK NOTES

 The RBI has the sole of rights to issue bank note of all denominations (except one rupee motes
which are issued only by the government of India)
 This has been done to give the reserve bank the complete and uniform control over the currency
and the credit system of the country.
 The issue department of the reserve bank has its office in 17importat cities of the country.
2. BANKER TO GOVERNMENT
 The RBI acts as the banker to government. It accepts money for the account of union and state
government in India, makes payment on their behalf carries-out their exchange remittance and
other banking operations.
 It makes ways and means advances to the government for 90 days.
3. BANKERS BANK
 The RBI acts as the banker’s bank in the following respects.
 Every bank is under the statutory obligation to keep certain to keep a certain minimum of cash
reserves with the reserve bank.
 The purpose of these reserves is to enable the reserve bank extend financial assistance to the
scheduled banks in times of emergency and thus to act as the lender of the last resort.
 The reserve bank provides financial assistance to the schedules banks by discounting their eligible
bills and through loans and advances against approved securities.
 Under the banking regulations act 1949 and its various amendments, the reserve bank has been
given extensive powers, supervision and control over the banking system.
4. LENDER F THE LAST RESORT
 Central bank helps commercial banks in time of difficulties. A commercial bank may experience
difficulties whenever there is a sum on it (i.e.) when all depositors meant to withdraw their
deposits at the sometimes).
 It can borrow from other commercial bank but other bank may not be prepared to help the bank in
trouble.
 There is one bank which can be approached always i.e. RBI.
5. CUSTODIAN OF FOREIGN EXCHANGE RESERVES

 The RBI has the responsibility of maintaining the external value of the rupee and for this purpose
the bank holds most of the foreign exchange reserves.
 Since India is a member of international monetary fund the RBI has to maintain fixed exchange
rates with all other member countries of the fund.

6. CREDIT CONTROL
 Credit control is an important tool used by the RBI a major weapon f the monetary policy used to
control the demand and supply of money in the country.
 The following are the results when the RBI controls the monetary policy.
(i) To encourage the overall growth of the priority sector i.e. those sectors of the economy which is
recognized by the government as prioritized. (Agriculture and allied sectors and micro
industries etc.)
(ii) To keep a check over the channelization of credit so that credit is not.
B. NON-MONETARY FUNCTIONS
It is divided as
a. Regulatory/supervisory functions and
b. Promotional functions
a. REGULATARY FUNCTIONS
The various powers vested in the RBI are as follows,
1. PROVIDE LICENCE
The RBI after being satisfied that it will be in a position to pay claims of the deposits as and when
they accrue and that its affairs are being conducted in a manner the interest of its depositors will
grant the license to the bank to commence banking business in India.
2. COVERAGE OF BANK OPERATIONS
 The banks should maintain minimum paid-up capital reserves cash reserves and other liquid assets
depending upon the geographical coverage of a bank’s operations.
 The RBI will see the fulfillment of these requirements.
3. LIQUIDATION OF WEAK BANKS
To strengthen the public banks at the time of low liquidation the RBI will infuse the money or
merge the banks in to one. It may also for the suspension of business.
4. BANK EXPANSION
 Every bank in the country is required to obtain permission from the RBI for its brand expansion
programmed.
 The RBI can also direct a bank to open branches in a particular area.
5. ISSUE DIRECTIONS ON CREDIT CONTROL
In order to improve the sartorial distribution of bank credit in favor of the priority sectors such as
agriculture, small scale industry, self-employed persons etc, and make more of its to the small
borrowers. The RBI can issue directions to commercial banks through its credit control.
6. TRAINING OF BANK PERSONNEL
 The RBI gives training to different categories of bank personal by setting up a number of training
institutes in the country.
 The principal training institutions are bankers training college(Mumbai)
 The national institute of bank management (Mumbai)
 The college of agricultural banking (Pune)

 Staff training college (Chennai)

 Zonal training centre for staff at Mumbai, Kolkata, Chennai, and New Delhi.
7. RESTRICT LOANS AND ADVNCES
The RBI has power to restrain control exercised by particular groups of persons over the affairs of
banks and to restrict loans and advances as well as guarantees given by banks to and on behalf of
anyone company, firma and individuals.
8. COLLECT AND SUPPLY INFORMATION
The RBI has power to collect the information from many bank or other financial institutions to
their constituents and supply these banks and institutions such information on applications in a
consolidate form.
9. SPREADING BANKING HABITS
 The RBI has taken huge steps to spread banking habits throughout the country especially to the
remote areas.
 It has introduced so many programmers like financial inclusion zero accounts etc, giving
awareness about the banking systems, steps to improvise internet banking and mobile banking etc.
10. KYC(KNOW YOUR CUSTOMER) NORMS
 The main aim of KYC norms is to crub money laundering and prevents the use of banking system
for financial crimes.
 Every bank should be going through the KYC forms before a person is going to open account.
11. TRANSPARENCY NORMS
This means that every bank has to disclose their charges for providing services and customers have
the right to know these charges.
12. AUDIT AND INSPECTION
 The procedure of audit and inspection controlled by the RBI through off-side and on-site
mentoring system.
 On-site inspection is done by the RBI on the basis of CAMELS (capital adequacy, asset quality,
management, earning, liquidity, system and control)
13. RISK MANAGEMENT
The RBI provides guidelines to banks for taking steps that are necessary to mitigate risk. They do
this through risk management in base norms.
PROMOTIONAL FUNCTIONS
The RBI has a great resposnsibiltiy to develop and promotion the monetary authority. The promotion
steps taken by the RBI are,
1. Established the bill market scheme.

2. Promotion of commercial banking
3. Promotion of co-operative credit
4. Development of specialized financial institutions
5. Promote regional rural banks (RRBs)
6. Promote national housing bank
7. Credit to weaker selections
8. Establishment of export import bank of India
9. Promotes research.
1. ESTABLISHED THE BILL MARKET SCHEME

 This scheme was introduced in the year 1952; it will extend loans to the commercial banks against
their demand promissory notes. This scheme was not based on the genuine trade bills.
 In 1970 RBI introduced new bill market scheme which covered the genuine trade bills related to
sale or dispatch of goods.
2. PROMOTION OF COMMERCIAL BANKING

The RBI plays a vital role in strengthening the banks for good economic development. RBI has
been using these powers.
(i) It improves their operational standards.
(ii) To extend the banking facilities in the semi-urban and rural areas.
(iii) To promote the allocation of credit in favor of priority sectors such as agriculture small-scale
business etc.
3. PROMOTION OF CO-OPERATIVE CREDIT
With the recommendations of the rural credit survey committee the reserve bank has taken a
number of measures to strengthen the structure of co-operative credit institutions throughout the
country.
4. DEVELOPMENT OF SPECIALISED FINANCIAL INSTITUTIONS

 RBI with help of other committees suggestions taken the step to introduce some specialized
financial institutions like IFCI(industrial finance corporation of India, UTI (Unit trust of India)
NABARD (national bank for agriculture and rural development) SFCs (state financial
corporation’s)
 These institutions will provide loans to their priority sectors.
5. PROMOTE REGIONAL RURAL BANKS

It has promoted regional rural banks (RRBs) with the co-operation of the commercial banks to
extend banking facilities to the rural areas.
6. PROMOTE NATIONAL HOUSING BANK

 It was launched in 1988 as it wholly – owned subsidiary to organize and argument resources for
housing.
 The national housing bank will provide loans to the institutions engaged in housing finance and
also extend its full support to industries that supplies the building materials.
7. CREDIT TO WEAKER SECTIONS

The RBI has taken certain measures to support weaker sections in the society. It provides some
different rate of interest scheme for the socially back word persons who engage in productive
activities.

8. ESTABLISHMENT OF EXPORT IMPORT BANK OF INDIA

It helps the exporters who are facing problems in finance. It also helps the commercial banks of
provide financial assistance to the persons who are related to finance problems.
9. PROMOTES RESEARCH
RBI encourages and promotes research in the areas of banking like mobile banking applications
UID based banking system and internet banking etc.
6. MONETARY POLICY
 Monitory policy is an activity by which the central bank of the nation controls the availability of
credit facility to its citizens.
 Monetary policy is a major weapon to control the development of a country.
 There are two types of policies that are pushed to combat the inflationary and deflationary
tendencies in the economy. These are stabilization policies which mainly includes,
1. Monetary policy
2. Fiscal policy
 In this we will discuss about monetary policy. In monetary policy there are two kinds.
a. General/quantitative controls
b. Selective/qualitative controls
MONETARY POLICY TECHNIQUES
1. General / quantitative controls 2.selective/qualitative controls
-Bank rate -Credit rationing

-Open market operations -Margin requirement
-Variations in the reserve requirements -Variable interest rate
-Repo rate and reverse repo rate -Regulation of consumer credit
-Liquidity adjustment facility licensing
1. GENERAL OR QUANTITATIVE CONTROLS

1. BANK RATE
 A bank rate is the interest rate of which a nations central bank lends money to domestic banks
which in turn impacts economic.
 Lower bank rates can help to expand the economy by lowering the cost of funds for barrowers, and
higher inflation is higher than desired.

 If the bank rate increases by RBI then on other hand commercial banks raise their lending rate.
This reduces the money supply in the economy. Reduction in money supply reduces demand for
goods and services in the economy resulting in the check on price rise.
2. OPEN MARKET OPERATIONS

Open market operations refer to the sale and purchase of securities by the central bank. When the
central bank aims to control inflation it sells securities in the open market, thereby reducing
reserves of commercial banks. This reduces credit in the market.
3. VARIATIONS IN RESERVE RECRUITMENT
 Changes in reserve ratio can help combat inflation. The portion of deposits with a commercial
bank has statutorily to keep with the central bank s deposit is called the reserve fund.
 In order to reduce credit by the commercial banks many a time the central bank increases the
percentage of such deposits.
 Increase in reserve ratio reduces the bank advances, thereby reducing demand for goods and
services and checks price rise.
4. REPO RATE AND REVERSE REPO RATE
 Repo rate is the rate that refers to the rate at which commercial banks borrow money from the
reserve bank of India is case of shortage of funds. It is basically used by RBI to keep inflation
under control.
 Reverse repo rate is the rate at which the central bank of a country borrows money from
commercial banks with in the country.
5. LIQUIDITY ADJUSTMENT FACILITY
 It is a tool used in monetary policy that allows bank to barrows money through reo purchase
agreements.
 This arrangement allows banks to respond to liquidity pressures and is used by government to
assure basic stability in financial markets.
2. SELECTIVE / QUALITATIVE CONTROLS

Selective credit controls are used to encourage or discourage specific types of credit for particular
purposes,
1. CREDTIT RATIONING
Credit rationing is the limiting by lenders of the supply of additional credit to borrowers by lenders
of the supply of additional credit to borrowers who demand funds; it generally provides three
things,
(i) An overall ceiling on loans and advances for every commercial bank.
(ii) Fixing the ratio which the capital of a commercial bank should have.
(iii) Fixing ceilings for specific categories of loans and advances.

FI&S (FINANCE PAPER) HR &FINANCE FINANCE & MARKETING SPECIALIZATION
2. MARGIN REQUIREMENT
 The difference between the value of security and the amount borrowed against this security is
known as margin.
 The RBI will fix the margin limits for various uses of credit which the commercial banks must
observe.
3. VARIABLE INTEREST RATES
Variable interest rates charged selectively for different uses places or borrowers can be
considered as selective as against a general dear or cheap money policy pursued through changes
in the bank.
4. REGULATION OF CONSUMER CREDIT
This regulation includes permitting or banning credit for the purchase of certain consumer
articles extending or limiting the time for repayment or by lowering or raising the limit of down
payment to meet the situation of depressing on recession on the one hand and inflation on the
other.
5. LICENCING
The RBI ensures proper regional coverage through licensing. Through this incidentally is
served the cause of selectivity in regional development.
The present monetary policy which is framed by RBI Governor at AUGUST 2018 is:
Bank Rate : 6.75%

CRR: 4% Repo Rate : 6.50%
SLR: 19.5% Reverse Repo
: 6.25%
Rate
UNIT 2 THE BANKING & NON BANKING DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT
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(17E00308) FINANCIAL INSTITUTIONS AND SERVICES
(Elective II)
Objective: The objective of the course is to provide to students an understanding of Financial Markets, the
major institutions involved and the services offered within this framework.
1. Introduction: The structure of financial system, Elements of financial system and economic
development, Regulatory and Promotional Institutions - Function and Role of RBI, Monetary Policy
and techniques of RBI,
2. The Banking and Non-Banking Institutions: The public and the private sectors – structure and
comparative performance, Bank capital and Banking Innovations, Commercial and Co-operative
banks. The Non-banking financial Institutions - Mutual Funds, Growth of Indian Mutual funds and its
Regulation. The Role of AMFI, Insurance Companies- Role of IRDA.
3. Financial and securities Markets: Primary and Secondary Markets, Structure and functions of Money
Market, -Call call money market, Government Securities Market – T-bills market, Commercial Bills
market, Commercial paper and certificate of deposits. Securities markets: - Organization and
structure, listing trading and settlement of securities market, The role and functions of SEBI
4. Fund based services - Lease and hire purchase consumer credit and Factoring - Definition, Functions,
Advantages, Evaluation, venture capital financing, Housing Finance.
5. Fee-based services - Stock broking, credit rating, Merchant Banking, portfolio services.
Underwriting, Depository services, Challenges faced by investment bankers.
Text Books:
 Financial Institutions and Markets, L. M. Bhole, 4/e Tata McGraw Hill.

 Financial services, Gorden& Natarajan, Himalaya publishers.
References:
 Financial Services and markets, Dr.Punithavathy Pandian, Vikas

 Financial Markets and services, Appannaiah, Reddy and Sharma, HPH
 Indian Financial System, Ramachandra and others, HPH
 Investment Institutions and Markets, Jeff Madura, Cengage, 1 st Edition.
 Financial services, Thirpati, PHI.
 Financial Markets &Services, Vasanthdesai, Himalaya.
 Financial Institutions and Markets, Gupta Agarwal, Kalyani publishers.
 Management of Financial Services ,C.Rama Gopal ,Vikas.
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UNIT-2
THE BANIKING AND NON-BANKING INSTITUTIONS

1.THE PUBLIC AND PRIVATE SECTORS
 Banking financial institutions are based on service. They create the money or finance. They are the
creators of wonderful sculptor of a new economy.
 They create wealth of the nation. They comprise of the commercial banks and co-operative banks.
BANK
 A bank is an institution which deals with money and credit. It accepts deposits from the public,
make the funds available to those who need them and helps in the remittance of money from one
place to another.
 According to the Indian banking regulations act 1949, banking means the accepting for the purpose
of lending or investment of deposits of money from the public repayable a demand or otherwise and
with draw able by cheque, draft or otherwise.
FEATURES OF BANKING
1. The borrowing raising or taking up of money

2. The lending or advancing of money either with or without security.
3. The granting and issuing of letters of credit, travelers cheques and circular notes.
4. The buying and selling of foreign exchange including bank note.
5. The acquiring, holding, issuing on commission underwriting and dealing in stocks, funds, shares,
debentures, bonds, securities, and investment of all kinds.
2. BANKING STRUCTURE IN INDIA
Banking structure in India
A) Scheduled banks B) non – scheduled banks
A1) Co-operative banks A2) commercial banks
State co-operative central co-operative primary agricultural public sector private regional foreign
Banks banks credit banks bank bank rural banks bank
State bank of India nationalized banks
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SCHEDULED BANKS
Those banks which area included in the second schedule of the reserve of the reserve bank f india
act 1934 are known as scheduled banks.
 These banks should fulfill the following two conditions
a. Should have at least 5 lacks as paid-up capital
b. Any activity undertaken should been the interest of the depositors.
A1) Cooperative banks

Cooperative banks are owned by their customers and follow the cooperative principle of one person,
one vote. Co-operative banks are often regulated under both banking and cooperative legislation.
They provide services such as savings and loans to non-members as well as to members and some
participate in the wholesale markets for bonds, money and even equities.
Many cooperative banks are traded on public stock markets, with the result that they are partly owned
by non-members. Member control is diluted by these outside stakes, so they may be regarded as semi-
cooperative.
Cooperative banking systems are also usually more integrated than credit union systems. Local branches
of co-operative banks select their own boards of directors and manage their own operations, but most strategic
decisions require approval from a central office.
Credit unions usually retain strategic decision-making at a local level, though they share back-office
functions, such as access to the global payments system, by federating.
There are three cooperative banks that operate in India
a) State cooperative bank.
b) Central cooperative bank.
c) Primary agriculture banks.
A2) COMMERCIAL BANKS
 The banks which perform all kinds of banking business and generally finance, trade and commerce are
called commercial banks.
 Commercial banks are also known as joint stock banks,
Structure of commercial banks
Public sector banks private sector banks regional rural banks foreign
banks
State bank of India nationalized bank
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PUBLIC SECTOR BANKS
Public sector banks are those which are owned and controlled by the government. In India the
nationalized banks and regional rural banks come under this category.
These public sector banks are developed in 4 phases,
 First the imperial bank of India was nationalized and it was named as the state bank of India in 1955.
 Letter on 8 former state associated banks were re-constituted into 7subsidieary banks of SBI. These
banks are now called associated banks of SBI. Recently these banks are merged with SBI.
 On 19th-july-1969 14 major commercial banks were nationalized. Again on 15-april-1980 6 more
commercial banks were nationalized.
 Another important development in public sector was the establishment of regional rural banks in
1974.
Public sector banks have either the government of India or reserve bank of India as the majority shareholder.
The government/public banks are,
1. Allahabad bank
2. Andhra bank
3. Bank of Baroda
4. Bank of Maharashtra
5. Canada bank
6. central bank of India
7. Corporation bank
8. Dena bank
9. Indian bank
10. Indian overseas bank
11. Oriental bank of commerce
12. Bank of India
13. Punjab and Sind bank
14. Punjab national bank
15. Syndicate bank
16. UCO bank
17. United bank of India
18. Union bank
19. Vijaya bank
20. IDBI
STATE BANK OF INDIA AND ASSOCIATE BANKS
1. State bank of India

2. State bank of Hyderabad
3. State bank of Indore
4. State bank of Mysore
5. State bank of Patiala
6. State bank of Travancore
7. Barathiya Mahila Bank
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PRIVATE SECTOR BANKS
 These banks are owned by the private individuals or corporations and not by the government or co-
operative societies.
 The Narasimhan committee in its first report recommended the freedom of entry into the financial
system. It started that the reserve bank of India should permit the establishment of new banks in the
private sector provided they conform to the minimum start-up capital and other requirements.
 At present there are 20 private sector banks in India,
1. City union bank ltd
2. Dhanalakshmi bank ltd
3. Federal bank ltd
4. catholic Syrian bank ltd
5. Karnataka bank ltd
6. Karur vysya bank ltd
7. Lakshmi vilas bank ltd
8. Nainital bank ltd
9. South Indian bank ltd
10. Tamilnadu mercantile bank ltd
11. YES bank ltd
12. Axis bank ltd
13. Kotak bank ltd
14. ICICI bank ltd
15. HDFC bank ltd
16. IndusInd bank ltd
17. DCB bank ltd
18. Bhandan bank ltd
19. RBL bank ltd
20. United western bank ltd.
FUNCTIONS OF COMMERCIAL BANKS
The functions of bank are divided into three types,
1. Primary functions
2. Agency functions
3. Miscellaneous functions
1. PRIMARY FUNCTIONS
 This can be divided into two kinds i.e.
a. Deposits
b. Advancing of loans
A. DEPOSITS
 Accepting of deposits is the basic function of a bank. They collect surplus money from the public.
The depositor’s area benefited into two ways.
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 At first their amount is 100% safe and they will get interest also on the other and, the bank can earn a
sum of money on the amount mobilized from the public. The higher the amount of deposits the
higher the capacity to create credits. The bank has different types of deposits credits. The bank has
different types of deposits.
B. ADVANCING OF LOANS
The bank can make advances in the form of loans. The loans are sanctioned to he borrowers in
different kinds.
Example – overdraft, cash credits, bills disconnecting etc.
2. AGENCY FUNCTIONS
 The banks provide so many functions by discharging their agency functions. The banks acts as gents,
trustee’s attorneys, administrators of their customers.
 The banks will provide the following services to the customers.
a. Buying and selling of shares on behalf of the customers.
b. They collect and pay dues.
c. They act as under writer etc.
3. MESCELLANEOUS FUNCTIONS
 These are performed by banks to provide facilities to the customers.
 The following are the examples.
 Locker facility, ATM, online banking, internet backing, issue of travelers cheque and issue of credit
corals.
PRESENT POSITION
 At present there are 22 public sectors banks 67RRBs, 25 private sector banks and 45 foreign banks
 The disadvantages of commercial banks area
1. Insufficient growth.
2. Regional imbalance.
3. Increasing over-dues.
4. Lower efficiency.
5. Declining trends in profitability.
6. Lack of expert.
3. BANK CAPITAL
INTRODUCTION
 Bank capital represents the values of a bank’s equity instruments that can absorb losses. While bank
capital can be defined as the different a bank’s assets and liabilities.
 The main banking regulatory frame work consists of international standards enacted by the Basel
committee on banking supervision.
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BASEL NORMS
 Basel norms area actually a set of norms for the banks aimed at mitigating the risk and strengthening
the capital structure of the banks of member countries.
 Basel is a city in Switzerland. It is the nead quarters of bureau of international settlement (BIS), which
faster’s co-operation among central banks of the world.
BASEL NORMS
1. Base-1
2. Base-2
3. Basae-3
1. BASEL-1
 Basel-1 is a set of international banking regulations put forth by the Basel buy the Basel committee on
bank supervision (BCBS) that sets out the minimum capital requirements of financial institutions with
the goal minimizing credit risk.
 Basel-1 is started in 1988 but in India it is adopted in 1991.
 It is focused almost entirely on credit risk. Minimum capital requirement was fixed at 8% of risk
weighted assets(RWA)
2. BASEL-2
 Basel-2 is an international business standard that requires financial institutions to maintain enough
cash reserves to cover risks incurred by operations.
 Basel-2 accords are a series of recommendations on banking laws and regulations issued by the Basel
committee on banking supervision.
 The basel-2 was introduced in 2004, laid down guidelines for capital adequacy, risk management and
disclosure requirements.
The Basel -2 mainly has 3 pillars,
a. Minimum capital requirements.

b. Supervisory review
c. Market discipline.
It was implemented in 2004, but in India it was started in 2009.
PILLAR-1
Minimum capital requirement
In this pillar it deals with,
(i) Credit risk

(ii) Operational risk
(iii) Mark risk
PILLAR-2
 This is a regulatory response of the first pillar, giving regulators better tools over those previously
available.
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 It also provides a frame for dealing with systemic risk, pension risk, concentration risk, liquidity risk,
etc.
PILLAR-3
 This pillar aims to complement the minimum capital requirement and supervisory reviews process by
developing a set of disclosure requirement which will allow the market participants to gauge the capital
adequacy of institutions.
 Market discipline supplements regulations as sharing of information facilitates assessment of the bank
by others including investors, analysis, customers, other banks and rating agencies, which leads of
good corporate governance.
BASEL-3
 Basel-3 is an international regulatory accord that introduced a set of reforms designated of improves
the regulations, supervision and risk management with in the banking sector.
 It was introduced in 2010, but India will implement it by 2019/march/31st.
The main measures of this basel-3 are,

 Improve the making sectors ability to absorb shocks arising from financial and economic stress.
 To improve risk management and governance.
 To strengthen banks transparency and disclosures.
 The governments of India estimates that state run lenders world require 1.8 lakes crores over the next
four years.
For this the government of India launches a scheme called INDHRA DHANUSH according of this the
government will infuse 70.000 crores with in four years.
2015-16 - 25.000 crores
2016-17 - 25.000 crores
2017-18 - 10.000 crores
2018-19 - 10.000 crores
Total - 70.000 crores

The remaining fund should be gathered by bank itself.
CAPITAL ADEQUACY RATIO (CAR)
 CAR is an international standard that measures banks risk of insolvency from excessive losses.
 Currently the minimum acceptable ratio is 8% maintaining an acceptable CAR protects bank
depositors and the financial system.
 CAR is also called as CRAR the formula for CAR is,
Tier one capital + tier two capital

CAR=
Risk weighted assets
 Tier one capital is considered the most permanent and readily available support against unexpected
losses, includes paid-up capital, statutory reserves, share premium and capital reserves.
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 Tier two capital consisting of un disclosed reserves, fully paid-up formularize perpetual preference
shares revaluation reserves, general provisions and loss reserves etc.
 It was also prescribing that tier-2 capital should not be more than 100% of tier-1 capital.
RISK WEIGHTED ASSETS
 It is a risk for banks i.e. the bank gives loans for different people for different purpose. If at all the
person cannot fully completes or clear the loan, then the percentage of the loan which is not cleared
will be calculated.
 For government bonds the risk weighted assets is 0%.
 For house loan the risk weighted asset will be 50%.
 Like for every loan the risk weighted asset will be calculated.
BANKING INNOVATIONS
More recently the banks in India have introduced a number of innovations and diversifications in their
operations to improve their performance.
Need of Financial Innovations

Taxes, regulation, irrelevance information, transaction costs, and moral hazard exist in the real world
making the market imperfect. This affects the financial instruments and makes them obsolete as the new
requirements arise. Without Financial innovations new financial process and products will not emerge in the
market. These imperfections prevent participants in the economy from efficiently obtaining the functions they
need from the financial system. To remove all these imperfections, Indian Banking system has taken some
innovative activities and function.
 Adopting participatory approach
 Introducing credit card facility
 Introducing new technology and computerization in lending operations
 Paying more attention to sophistication better consumer service and great profitability.
 Internet banking
 Mobile banking etc.
 Mutual Banking
 Factoring
 Venture Capital
 Microfinance
 Anywhere Banking
 Islamic Banking
 Electronic Banking
With all these, banks are giving satisfactory and disciplined service to the customers. The Indian Banking
system is passing through a phase of customer’s market presently.
With stiff competition and advancement of technology, the services provided by bank s have become more
easy and convenient. With reformation and innovation, the Indian Banking deals with the latest discovery in
the banking instruments along with the polished version of their old systems.
4. NON-BANKING FINANCIAL INSTITUTIONS

 A part from the above banking financial institutions a lot of capital market activities are performed by
the other financial institutions which are non-banking in nature.
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 They achieve participate in capital transformation process from savers to investors in economy. They
collect funds by accepting deposits from individuals and lend them to trade industries government etc.
they buy and sell instruments and also create new instruments as per different needs of the savers.
Non-banking financial institutions (NBFLs)
Organized UN organized
TYPES OF NBFIs IN INDIA
Broadly NBFIs in India are classified into two groups i.e. organized and unorganized.
ORGANISED NBFIs
 The organized NBFIs include development banks and other specialized institutions
 Development banks are those financial institutions which perform twin functions of providing medium
and long-term loans of the private entrepreneurs and of performing various promotional roles
conductive to economic development.
 Development banks are further divided into industrial development banks such as IDBI, ICICI, SIDC
etc and agricultural development banks such as NABARD, and development hanks. Some more
NBFLs operating in the organized sector are LIC, GIC and UTI etc.
UNORGANISED NBFIs
A number of un-organized NBFIs also operating in the country. They are known as loan company’s hire-
purchase companies, chit funds, nidhis etc.
The following are the list of all India financial institutions,
 Industrial development bank of India(IDBI)

 Industrial finance corporation of India (IFCI)
 Export-import bank of India (EXIM)
 Industrial reconstruction bank of India (IRBI)
 National bank for agriculture and rural development(NABARD)
 Small industries development bank of India (SIDBI)
 National housing bank(NHB)
 Unit trust of India (UTI)
 Life insurance corporation of India(LIC)
 General insurance corporation of India(GIC)
 Risk capital and technology finance corporation ltd (RCTC)
 Tourism finance corporation of India(TFCI)
 Power finance corporation ltd
 Indian railways finance corporation ltd
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THE MAIN FUNCTIONS OF NBFIs are
1. FINANCIAL INTERMEDIATION
The main function of the financial institutions is the transfer of funds from the savers to the
investors.
2. INVESTMENT OF FUNDS
The main objectives of NBFIs is to earn profits by investing the mobilizes savings. For this purpose
they will invest in different companies or different investment policies.
3. ECONOMIC BASIS OF FINANCIAL INTERMEDIATION
Handling of funds by financial intermediaries is more economical and more efficient than that by the
individual wealth owners because of the fact that financial intermediation is based on,
(I) LAW OF LARGE NUMBERS
According to this law if there are a large number of people related to the NBFIs then that
company will get a large amounts of money fractions and companies will lend or invert the
amount in different sectors or portfolios.
5. MUTUAL FUNDS
 A mutual fund collects the savings from small investors, invest them in government and other
corporate securities and earn income through interest and dividends besides capital gains.
 It works on the principle of small drops of water make a big ocean.
 For instance, if one has Rs.1000 to invest it may not fetch very much on its own. But when it is pooled
with Rs.1000 each from a lot of other people the one could Crete a big fund large enough to invest in
wide varieties of shares and debentures.
 Hence a mutual fund is nothing but a form of collective investment.
 Kit is formed by the coming together of a number of investors who transfer their surplus funds to a
professionally qualified organization to manage it.
 Each investor is allocated with units in proportion to the size of his investment.
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TYPES OF MUTUAL FUNDS
TYPES OF MUTUAL FUNDS
On the basis of execution & operations on the basis of yield & investment pattern
Close –ended income fund
Open- ended growth fund
Balanced fund
Specialized fund
Money market fund
Taxation fund
On the basis of execution and operation
1. CLOSE-ENDED FUND
 Under this scheme the corpus of the fund and its duration are prefixed. In other words, the corpus of
the fund and the number of units are determined in advance.
 Once the subscription reaches the pre-determined the entry of inventors is closed. After the expertly
of the fixed period the entire course is disinvested and the proceeds are distributed to various unit’s
holders in proportion to their holdings.
2. OPEN-ENDED FUND
 It is just opposite of close-ended funs. Under this scheme the size of the fund and the period of the
fund is not pre-determined.
 The investment is free to buy and sell any number of units at any point of time. For instance the unit
scheme f the UTI is an open ended one, both in terms of period and target amounts.
 Anybody can buy this unit at any time and sell it also at any time at his interest.
ON THE BASIS OF YIELD AND INVESTMENT PATTERN
1. INCOME FUND
 As the very name suggests, this fund aims at generating and distributing regular income to the members
on a periodical basis.
 It concentrates more on the distribution of regular income and it’s also seen that the average return is
higher than that of the income farm bank deposits.
2. GROWTH ARIENTED FUNDS
 Unlike the income funds growth funds concentrate mainly on long-run gains, capital appreciation.
INSTITUTIONS
 They do not offer regular income and they aim at capital appreciation in the long-run. Hence they
have been described as nest eggs investment.
3. BALANCED FUNDS
 This is other wises called income cum-growth fund
 It is nothing but a combination of both income and growth funds. It aims at distributing regular income
as well as capital appreciation.
 This is achieved by balancing the investments between the high growth equity shares and also the fixed
income earning securities.
4. SPECIALISED FUNDS
 Besides the above, a large number of specialized funds are in existence abroad. They offer special
schemes so as to meet the specific needs of specific categories of people like pensioners, windows etc.
 There are also funds for investments in securities of specified areas. Infact these funs open the door
for foreign investors to invest on the domestic securities of these countries.
5. MONEY-MARKET MUTUAL FUNDS
 These funds are basically open ended funds and as such they have all the features of the open ended
fund. But, they invest in highly liquid and safe securities like commercial paper, certificates of
deposits, treasures bills etc.
 These instruments are called money market instruments.
6. TAXATION FUNDS
 A taxation fund is basically a growth oriented fund. But it offers tax rebates to the investors either in
the domestic or foreign capital market.
 It is suitable to salaried people who want to enjoy tax rebates particularly during the month of February
and March.
ORGANISATION OF THE MUTUAL FUND
The structure mutual fund operations in India assumes a three tier establishment namely,
(i) A sponsor institution to promote the fund

(ii) A team of trustees to oversee the operations and to provide checks for the efficient, profitable and
transparent operations of the fund
(iii) An asset management company (AMC) to actually deal with funds.
SPONSORS
TRUSTED AMC
A. SPONSORS/SPONSORING INSTITUTION
 The company which sets-up the mutual fund is called the sponsor.
 The SEBI has laid down certain criteria to be met by the sponsor.
 These criteria mainly deal with adequate experience and good track record.
B. TRUSTEES
 Trustees are people with long experience and good integrity in their respective fields.
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 They carry the crucial responsibility of safe guarding the interest of investors.
 For this purpose, thy monitor the operations of the different schemes. They have wide ranging powers
and they can even dismiss asset management companies with the approval of the SEBI
C. ASSET MANAGEMENT COMPANY(AMC)
 The AMC actually manages the funds of the various schemes.
 The AMC employs a large number of professionals to make investments, carry out research and to do
agent and investor servicing.
 Infect the success of any usual fund depends upon the efficiency of this AMC.
 This AMC submits a quarterly report on the functioning of the mutual fund to the trusted who will
guide and control the AMC
OPERATION OF THE MUTUAL FUND
 A mutual fund invites the investors to join the mutual fund schema by offering various schemes that
suits for different investors.
 The resources of individual investors are pooled (gathered) together and the investor area issued by
shared/units for the money invested.
 For managing this fund a mutual fund gets an annual fee of 1.25% funds managed as the maximum as
fixed by the SEBI regulations 1993and if fund exceed Rs.100 crores , it is only 1%. It cannot be taken
more than that.
Role of AMFI
 AMC are also under an organization called the AMFI, which is a body that has been created to promote
the interests of the mutual funds like CII is there for Indian industries or NASSCOM for the IT
industries.
 They define the standards for the mutual funds working
 They frame the code of conduct and promote best business practices.
 To interact with SEBI for all related matters with the mutual funds.
 To represent the mutual fund industry in front of the government, RBI and other bodies which have a
link with the mutual fund industry.
THE ADVANTAGES OF INVESTING IN MUTUAL FUNDS
A. PROFESSIONAL MANAGEMENT
In mutual funds there will be experienced and skilled professionals who are backed by a dedicated
investment research team who analyze the performance companies and selects suitable investments to
achieve the objects of the scheme.
B. DIVERSIFICATION
 Mutual funds invest in a N number of companies across a broad cross-section of industries and sectors.
 This diversification reduces the risk because if one company gets loses the other company or sector
will increase them the risk on the investment will definitely reduce and investor will get good returns.
C. CONVENIENT ADMINISTARATION
 Investing in mutual fund reduces paperwork helps you to avoid many problems such as bad deliveries
delayed payments and unnecessary follow up with broker.
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D. RETURN POTENTIAL
Over a medium to long-term mutual funds have the potential to provide a higher return as they invest
in a diversified basket of selected securities.
E. LOW COSTS
 Mutual funds are a relatively less expensive way to invest when compared to invest directly in the
capital markets.
 The risk in choosing the companies where to invest and what area the technical analysis of the
companies’ shares such problems will be calculated by fund angers in mutual funds.
F. LIQUIDITY
 In open-ended schemes you can get your net asset value (money) at any time.
 In closed-ended schemes there will be some period (maturity date) after completing the data one can
get their amount easily to their bank accounts.
G. TRANSPARENCY
You will get regular information on the value of your investment through e-mails or SMS etc.
H. WELL REGULATED
All mutual funds are registered with SEBI and they function within the strict regulations designed and
monitored by SEBI and AMFC (association of mutual funds companies.)
6. INDIAN INSURANCE INSUSTRY
INTRODUCTION
 Insurance may be described as a social device to reduce or eliminate risk of life and property. Under
the plan of insurance, a large number of people associated themselves by sharing risk attached to
individual.
 Insurance is actually a contract between two parties where by one party called insurer undertakes in
exchange for a fixed sum called premium to pay the other party happening of an event.
OR
 It is a legal contract between two parties whereby one party called insurer undertakes to pay a fixed
amount of money on the happening of a particular event which may be certain or uncertain. The other
pary called ensured pays in exchange a fixed sum known as premium.
 The document which embodies the contract is called the policy.
HISTORY OF INSURANCE SECTORS
 The business of life insurance in India starts in the year 1818 with the establishment of the oriental life
insurance company in Calcutta (it is started by Europeans)
 In 1850 the first general insurance company was started in Calcutta by British.
 In 1870 Bombay mutual life assurance society becomes the first Indian insurer.
 In; the year 1912 the life insurance company’s act and the provident fund act were passed to regulate
the insurance business.
 In 1956 a list of 245 Indian and foreign companies are merged in to one i.e. LIC.
INSTITUTIONS
The Indian insurance industry is divided into two distinct markets.
1. LIC
2. Non-life or general insurance market.
Indian insurance industry
(LIC) Life insurance Non-life or general

corporation insurance
LIFE INSURANCE CORPORATION
 The life insurance corporation business in India was started back form 1818
 In 1956 the life insurance business of all companies are merged together and forms as a single company
that is life insurance corporation of India.
OBJECTIVES OF LIC
The objectives of LIC are,
1. To spread life insurance and provide life insurance protection to the masses at reasonable cost.
2. To mobilize people savings through insurance linked savings schemes.
3. To act as trustees of the policy holders and protect their individual and collective interest.
4. To provide financial assistance to boost the industrial growth.
5. To conduct business with maximum economy always remembering that the money belongs tol the
policy holders.
FUNCTIONS OF LIC
The main functions of LIC are,
1. TO MOBILSE SAVINGS.
The LIC mobilizes the public savings and makes them available to industrial uses for both public and
private sectors.
2. DEPLOYMENT OF FUNDS IN MONEY MARKET INSTRUMENS
The funds which area collected are temporarily deployed in short term money market instruments like
call/notice money, certificates deposits, government treasury bills and commercial papers issued by
corporate.
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3. INVESTMENT IN SMALL AND MEDIUM SCALE INDUSTRIES

The LIC indirectly helps small scale and medium scale industries by subscribing to the shares and
bonds of state financial corporations.
4. RESOURCES SUPPORT TO FINANCIAL INSTITUTIONS.
 LIC also assists the industrial corporate sector indirectly by extending resources support to various
financial institutions (SFCs, IFCI) by way of tem loans.
 The only public sector company that is under life insurance business is LIC.
There are so many private sector life insurance companies,
Example,
1. Bajaj Allianz life insurance.
2. Tata AIG life.
3. Birla sun life insurance.
4. SBI life.
5. Max New York life.
6. Kotak life insurance.
7. HDFC standard life insurance company limited.
8. Reliance life.
9. Aviva life insurance company limited.
10. ICICI prudential life insurance company limited.
GENERAL INSURANCE
 It is having a history back to the 1850 where the first general insurance company was established in
Calcutta by British India.
 In 1972 the general insurance business was nationalized by the government of India
 There are only 4 public general insurance companies that are,
1. National insurance company ltd
2. New India assurance company ltd
3. Oriental insurance company ltd
4. United India insurance company ltd
There are so many private sector companies in general insurance in India for example,
1. ICICI Lombard general insurance, company ltd.
2. TATA AIG general insurance company ltd.
3. IFFCO tokio general insurance
4. Reliance general insurance company ltd
5. Choromandalam MS general insurance company ltd
6. HDFC ERGO general insurance
7. Royal sundaram LLIANCE-insurance company ltd
8. Bharati AXA general insurance company.
9. Sri ram general insurance company ltd.
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TYPES OF INSURANCE
1) MOTOR INSURANCE
 This includes automobile truck, motorcycle, aircraft, boat or any other form of motorized
transportation.
 It is perhaps the most common type of insurance and covers the financial loss for insurer.
2) HEALTH INSURANCE
 Most of the countries are moving with this health insurance in some countries the government-funded
health care, which means that most of all citizens have access to medical facilities and treatment with
minimum amount of policies.
 Now-a-days there are a different types of health insurance like different body parts will get different
health according to that the insurer will go far that policy.
3) DISABILITY INSURANCE
 This form of insurance protects workers from injuries and illness which prevent them from doing their
jobs.
 Workers compensations are common in the US and pays a worker his wages and medical expenses in
the event of an injury on the job.
 Permanent disability which prevents a worker from ever working again is covered by total permanent
disability insurance. This provides the disabled employee with benefits for the rest of his/her life.
4) PROPERTY INSURANCE
Type of insurance typically covers things like homes, machinery, crops, valuable goods, shipped cargo,
rented property and more.
5) CREDIT INSURANCE
This is taken by lenders who need coverage against the people that have credit with them (borrow
money). In the event of their inability to pay off back (usually due to disability or death) this type of
insurance policy will protect the lender
ROLE OF IRDA
Section 14 of IRDA act, 1999 lays down the ditties powers and functions of IRDA
1. Subject of the provisions of this act and any other law for the time being in force, the authority shall
have the duty to regulate promotes and ensure orderly growth of the insurance business.
2. The powers and functions of the IRDA includes,
a. To issue the certificate of registration renew, modify, withdraw, suspend or caned such registration.
b. Protection of the interests of the policy holders in matters concerning assigning of policy nomination
by policy holder’s settlement of insurance claim other terms and conditions of contracts of insurance.
INSTITUTIONS
c. Specifying qualifications code of conduct and practical training for intermediary or insurance
intermediaries and agents
d. Specifying the code of conduct for surveyors and loss assessors.
e. Promoting efficiency in the conduct of insurance business
f. Levying fees and other charges for carrying out the purposes of this act.
g. It can go far inspection enquires and investigations including audit of the insurers and other
organizations connected with the insurance business.
h. Control and regulate the rates terms and conditions that may be offered by insurers in respect of general
insurance business
i. Specifying the form and manners in which books of account shall be maintained and statement of
account shall be rendered by insurers and other insurance intermediaries.
j. Regulating maintenance of margin of slovenly.
k. Regulating investment of funds by insurance companies
l. Adjudication of disputes between insurers and intermediaries.
m. Supervising the functioning of the tariff advisory committee.
n. Specifying the percentage of life insurance business and general insurance business to be undertaken
by the insurer in the rural or social sector.
INSTITUTIONS

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FI&S (FINANCE SPECIALIZATION) HR & FINANCE FINANCE & MARKETING

(17E00308) FINANCIAL INSTITUTIONS AND SERVICES

 Financial Institutions and Markets, L. M. Bhole, 4/e Tata McGraw Hill.

 Financial Services and markets, Dr.Punithavathy Pandian, Vikas

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

1. THE STUCTURE OF FINANCIAL SYSTEM

1.2 PHRASE – 2 (1951-MID 1980’S)

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

PUBLIC OWNERSHIP OF FINANCIAL INSTITUTIONS

Organization of Indian financial system

(I) Public/Govt Ownership (II) Fortification of (III) Investor Protection

(A) (B) (A) (B) Banks

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

FORTIFICATION (Effectiveness) OF INSTITUTIONAL STRUCTURE.

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

(i) Term lending and

(i) TERM LENDING

(ii) WRITING OF NEW ISSUES OF CORPORATE SESCURITIES UNDER

ENLARGEMENT OF FUNCTIONAL COVERAGE

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

(i) Social control.

(i) Companies act 1956

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

2. ELEMENTS/STRUCTURE OF FINANCIAL SYSTEM

(I) Financial (II) (III) (IV)

1) Regulatory 1) money market 1) primary financial 1) fund-based

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

(iii) NON INTERMEDIARIES

TYPES OF FINANCIAL MARKETS

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

TYPES OF FINANCIL INSTRUMENTS

(i) PRIMARY FINANCIL INSTRUMENT

(ii) SECONDARY FINANCIAL INSTRUMENTS

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

i) ECONOMIC GROWTH MEANS GROWTH OF NATIONAL INCOME OF THE

ELEMENTS OF THE FINANCIAL SYSTEM IN THE ECONOMIC DEVELOPMENT

(i) Saving mobilization.

STAGES OF ECONOMIC DEVELOPMETN

a) PREPARATORY STAGE (STARTING STAGE)

 A change in society’s attitude towards science, risk-taking and profit caring.

b) THE TAKE-OFF PERIOD

c) PERIOD OF SELF-SUSTAINED GROWTH

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

4 REGULATORY AND PROMOTIONAL INSTITUTIONS

a) RESERVE BANK OF INDIA (RBI)

 RBI commenced its operations on 01-04-1935 in accordance it RBI act 1934.

10. To maintain balance between the demand and supply of currency.

5. ROLE OR FUNCTIONS OF RESAERVE BANK OF INDIA

ROLE OF FUNCTIONS OF RESERVE

Monetary functions non-monetary functions

Regulatory functions promotional functions

-Issue of Bank Notes -Provide license -Established the bill

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

1. ISSUE OF BANK NOTES

4. LENDER F THE LAST RESORT

5. CUSTODIAN OF FOREIGN EXCHANGE RESERVES

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

UNIT 1 INTRODUCTION DR K V SUBBAREDDY SCHOOL OF BUSINESS MANAGEMENT

 Staff training college (Chennai)