Transcript Document

“In today’s fast-changing environment knowledge
was power and power be it regulatory or supervisory
– without knowledge was a subject of ridicule.”
Dr.Y.V.Reddy
Financial System in Indiaa Brief Overview
Dr. Ajit Kumar, AGM & MoF, CAB,
PUNE
Financial System?
 Financial System encompasses a group of
intermediaries which facilitates the flow of funds
from the areas of surplus to the areas of deficit. It
is a composition of various institutions, markets
and laws, practices, money managers, analysts,
transactions and claims and liabilities. This
facilitates the exchange of financial instruments
like deposits and loans, corporate stocks and
bonds, government bonds etc.
Financial System
Financial System
Financial Market
A financial market can be defined as the
market in which financial assets are created
or transferred. As against a real transaction
that involves exchange of money for real
goods or services, a financial transaction
involves creation or transfer of a financial
asset.
Financial Market
The place where people and organisations
wanting to borrow money are brought
together with those having surplus funds is
called financial market. It may or may not
have a particular physical existence.
Major Intermediaries of Financial
System
Financial Stability Development Council
A sub committee headed by RBI Governor
Reserve Bank of India
Financial Institutions
(IFCI,SIDBI,IIBI)
(IVCF,ICICI Ven,TFCI)
Banks
Major Players
NABARD, SIDBI,NHB
EXIM Bank, etc.
Next Slide...
NBFCs
(12,385)
Deposit
Taking
Non-Deposit
Taking
(271)
Primary
Market
SEBI
IRDA
Capital Market
Insurance Companies
Secondary
Market
Life
Insurance
General
Insurance
Intermediaries of Indian
Financial System contd...
Banks
Comercial Banks
Public Sector Private Sector Foreign Banks Regional Rural
Banks
Banks
(41)
Banks
(26)
(7+13)
(86)
Cooperative Credit
Institutions
LAB
(4)
Next Slide...
Intermediaries of Indian
Financial System contd...
Cooperative Credit Institution
(96,419)
Rural Cooperative
Credit Institution
(94,531)
Short Term Structure
(94,531)
State
Cooperative
Banks
(31)
Disrtict
Central
Cooperative
Banks (370)
Urban Cooperative Banks
(1618)
(52+1566)
Long Term Structure
(717)
Primary
Agricultural
Credit Societies
(93,413)
State Cooperative
Agriculture
and Rural
Developmant Banks(20)
Primary Cooperative
Agriculture and
Rural Development
Banks (697)
Segments of Financial Market
 Money Market: A market where short term funds
are borrowed and lent is called money market.
Funds are traded for a maximum period of one
year e.g. bills rediscounting, commercial papers,
treasury bills etc. It is liquid and provides an
avenue for equilibrating the short-term surplus
funds of lenders and the requirements of
borrowers.
 Short term Money market is the focal point of
monetary policy actions.
Bill Market
Bill
Market: A commercial bill of
exchange is drawn to evidence the
commercial transactions between two
parties, the buyer and the seller, the seller
drawing the bill and the buyer accepting to
make payment of the bill on or before the
date of maturity. The seller may get the bill
discounted with his banker.
Comercial Paper Market
Commercial Paper Market: CP is an
unsecured money market instrument issued
in the form of promissory notes. Corporates,
PDs and select FIs are eligible to issue CP.
It was introduced in 1990.
Corporates issuing CP should have (a) a
minimum tangible net worth to the extent of
Rs.4.00 cr.
Commercial Paper…
(b) company has been sanctioned working
capital limit by bank/s or all-India FI/s; and
(c) the borrowal account of the company is
classified as Standard Asset.
This is issued at a discount to face value in
multiples of Rs.5.00 lakh.The CPs can be
issued for a maturity period ranging from 7
days to one year.
Commercial Paper
 All eligible participants are required to obtain the
credit rating from either CRISIL or ICRA or
CARE or the FITCH Ratings India Pvt. Ltd. and
must have the prescribed minimum credit rating.
 An FI can issue CP within the overall umbrella
limit fixed by the RBI, i.e. issue of CP together
with other instruments (term money borrowing,
term deposit, CDs, ICDs) should not exceed
100% of its net owned funds as per the latest B/S.
Certificate of Deposit
 It is a negotiable money market instrument and
issued in dematerialised form or as a Usance
Promissory Note, for funds deposited at a bank or
other eligible financial institution for a specified
time period.
 CDs can be issued by (i) SCBs excluding RRBs
and LABs(ii) Select all-India Fis to raise short
term resources.
 Banks- Any amount
 FIs-within the overall umbrella limit fixed by…
Certificate of Deposit
..RBI (not to exceed 100% of its NOF).
Minimum amt of CD- Rs.1.00 lakh.
Maturity- not < 7 days, not >one year.
Issued on a discount on face value.
Banks req. to maintain CRR/SLR on CDs.
Bank’s can not buy back their own CD
before maturity and can not grant loans
against CD.
Treasury Bills
Treasury Bills: These are a kind of finance
bills (do not reflect any trade transaction),
which are in the nature of promissory
notes, issued by the government under
discount for a fixed period, not exceeding
one year. TBs were first issued in India in
October 1917 aimed at raising resources
for financing the First World War.
Call & Notice Money Market
 Call Money Market: This market deals with
extremely short-period uncollateralised loans.
Funds are borrowed or lent for a day (overnight).
 Notice Money: When money is borrowed for
more than a day and up to 14 days, it is called as
“Notice Money” market.
 Transactions on a call money market are
generally conducted over the telephone. Lenders
issue RBI cheque in favour of the borrowing
bank.
Limit on Call lending/
borrowing
Partcipant
Borrowing
Lending
SCBs
Not to exceed 100%
Not to exceed 25% of
Of capital fund on a fortnightly their capital fund on ½
mnly basis (50%)
basis.(125%)
Co-op Bk.
Not to exceed 2% of the
deposit on day-to day basis.
PDs
Not to exceed 200% of NOF on Not to exceed 25% of
fortnightly basis
NOF
FI/MF/Ins
Not permitted
No Limit
Completely phased out
w.e.f. Aug 6,2005
Forex Market
 A market for the purchase and sale of foreign
currencies is called a ‘foreign exchange market’.
It is the largest market in the world and is a 24
hour market. The daily turnover of the market
stands at about 2 trillion dollars, with at least
80% of all the deals being represented by
transactions for the purpose of earning profit
from gambling on the exchange rate differences.
 The forex market is an over the counter market
and there is no single market place.
Forex Market- Types of
transactions
 Spot Transactions: An inter-bank transactions
whereby the purchase of foreign exchange, and
delivery and payment for the same takes place
between banks on the following second business
day is referred to as ‘spot transaction’ and the
rate quoted in such transaction is called ‘spot
rate’. The date of settlement is known as value
date.
 Forward Transaction: Where a specified amount
of one currency is exchanged for a specified
amount of another currency at a future value …
Forex Market- Types of
transactions
 …date is known as‘forward transaction’.Under
this transaction exchange rate is determined at the
time of agreement.The rate quoted is called as
‘forward rate’, normally quoted for value dates of
one, two,three, six and twelve months.
 Swap Transaction: The simultaneous sale and
purchase of a given amount of foreign exchange
for different value dates is referred to as ‘swap
transactions’.
Derivatives
 Derivatives are fundamentally contingent
contracts/ instruments whose values are derived
from some underlying instruments like currency,
bonds, stock indices, interest rates, commodities
etc. There are generally three main players
involved in a derivative transaction: Hedgers,
Traders and Speculators.
 Derivatives perform an important economic
function of price discovery.
Types of Derivatives
Foreign exchange derivatives (forward,
foreign exchange swap, currency swap,
currency options)
 Interest rate derivatives (forward rate
agreement, interest rate swap, interest rate
options, interest rate caps/ floor/ collar)
Equity and stock index derivatives
Types of Derivatives
Commodity derivatives
Credit derivatives (credit default swap,
credit linked notes)
 What are futures?
What is option?
Types of Option:
Types of Option
European Option: The option which can be
exercised by the buyer only on the date of
maturity is called European option.
American Option: This can be exercised on
any working day before the maturity date.
The price agreed to by the buyer with the
seller is known as strike price.
Derivatives
For a buy option:
If S.P.=Current Price,It is at the money call
If Strike Price< C.P., It is in the money call
If S.P.>C.P., It is out of the money call
THE REVERSE WILL APPLY FOR PUT
OPTION.
Thank
You
for your kind attention.