MBA 3 Sem Finance Notes (Bangalore University)

Financial Markets and
Intermediaries
Finance specialization paper 2
Bangalore university
Financial Markets and Intermediaries-

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Dr.Triveni P.
Session topics
• The nature and role of financial system
• Structure of a financial system
• Functions of financial system
• Financial system and economic development
• Indian financial system
• SEBI
• Reserve Bank of India-Organisation and management,
Role and functions, Monetary Policy of RBI,Recent
policy development
• Financial sector reforms

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Financial System
• Existence of a well organized financial system
• Promotes the well being and standard of living
of the people of a country
• Money and monetary assets
• Mobilize the saving
• Promotes investment

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Financial System
Prasanna chandra:The financial system consists of a

variety of institutions, markets and instruments
related in a systematic manner and provide the
principal means by which savings are transformed
into investment.
S.B.Gupta:The financial system is a set of
institutional arrangements through which financial
surpluses available in the economy are mobilised

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Financial System
• An institutional framework existing in a country to enable
financial transactions
• Three main parts
– Financial assets (loans, deposits, bonds, equities, etc.)
– Financial institutions (banks, mutual funds, insurance
companies, etc.)
– Financial markets (money market, capital market, forex market,
etc.)
• Regulation is another aspect of the financial system (RBI,
SEBI, IRDA, FEMA)

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Financial assets/instruments
• Enable channelising funds from surplus units to deficit
units
• There are instruments for savers such as deposits,
equities, mutual fund units, etc.
• There are instruments for borrowers such as loans,
overdrafts, etc.
• Like businesses, governments too raise funds through
issuing of bonds, Treasury bills, etc.
• Instruments like PPF, KVP, etc. are available to savers
who wish to lend money to the government
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Financial Institutions
• Includes institutions and mechanisms which
– Affect generation of savings by the community
– Mobilisation of savings
– Effective distribution of savings
• Institutions are banks, insurance companies,
mutual funds- promote/mobilize savings
• Individual investors, industrial and trading
companies- borrowers
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Financial Markets
• Money Market- for short-term funds (less than
a year)
– Organized (Banks)
– Unorganized (indeginous banker,money lenders,
chit funds, etc.)
• Capital Market- for long-term funds

– Primary Issues Market
– Stock Market
– Bond Market
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Financial System of any country consists
of financial markets, financial
intermediation and financial instruments
or financial products
Flow of funds
Seekers of funds (savings)
Suppliers of funds
(Mainly business firms
(Mainly households)
and government) Flow of financial services
Incomes , and financial
claims
Financial System
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Functions of financial sector
Basic functions
• Provide citizen with means of payment
• Spread and put a price on financial risk
• Channel capital further so that savings can be used
for investments

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General functions
• Facility for distribution or exchange of goods and services.
• Mobilisation of funds for better transferred into capital
accumulation and allocation
• Mechanism or arrangement for transfer of resources
• Fining out ways and means of managing uncertainity and
controlling risk
• Generating and disseminating information for co-ordination
• Contributing to the activities of promotion of the economy

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Regulatory functions
• Banker’s bank
• Supervision of financial management
• Regulation of all fraudulent and unfair trade practice
• Regulation of stock exchanges
• Implementing monetary controls
• Controlling foreign exchange
• Directing investment
• Licensing,inspection and control

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Functions of financial system
• RBI
• Commercial banks
• Mutual funds
• Insurance companies
• Development banks

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Indian Financial System
Non- Organized
Organized
Money lenders
Regulators
Local bankers
Traders
Financial Markets
Landlords
Financial services
Pawn brokers
Chit Funds

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Evolution of Financial System
Barter
Money Lender
Nidhi's/Chit Funds
Indigenous Banking
Cooperative Movement
Societies Banks
FinancialJoint-Stock Banks
Markets and Intermediaries-
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Consolidation
Commercial Banks
Nationalization
Investment Banks
Development Financial Institutions
Investment/Insurance Companies
Stock Exchanges
Market Operations
Specialized Financial Institutions
Merchant Banking
Universal
Financial Markets Banking
and Intermediaries-
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Interrelation--Financial system & Economy
Financial System
Savers Lenders Households Foreign

Sectors
Corporate Sector Un-organized Sector

Investors Borrowers
Govt.Sector
Economy
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Organized Indian Financial System
Regulators Financial Financial Financial

Instruments Markets Intermediaries
Forex Capital Money Credit

Market Market Market Market
Primary Market
Secondary Market
Money Market Capital Market

Instrument Instrument
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Financial Markets
• Mechanism which allows people to trade
• Affected by forces of supply and demand
• Process used
• In Finance, Financial markets facilitates

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Segment Issuer Instruments
Govern Central Zero Coupon Bonds, Coupon Bearing Bonds,

ment Government Capital Index Bonds, Treasury Bills.
Government
Public Agencies /
Govt. Guaranteed Bonds, Debentures
Sector Statutory
Bodies
Public Sector
PSU Bonds, Debenture, Commercial Paper
Units
Debentures, Bonds, Commercial Paper, Floating
Private Corporate Rate Bonds, Zero Coupon Bonds, Inter-
Corporate Deposits
Banks Certificate of Deposits, Bonds
Financial Financial Markets and Intermediaries-
Certificate of Deposits, Bonds
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Institutions
Financial Regulators

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Financial Regulators
• Securities and Exchange Board of India

(SEBI)
• Reserve Bank of India
• Ministry of Finance

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Security Exchange Board of India
(SEBI)
• Securities and Exchange Board of India
(SEBI) was first established in the year 1988
• Its a non-statutory body for regulating the
securities market
• It became an autonomous body in 1992

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Functions Of SEBI
• It enhances investor's knowledge on market by
providing education.
• It regulates the stockbrokers and sub-brokers.
• To promote Research and Investigation

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Objectives of SEBI
• It tries to develop the securities market.
• Promotes Investors Interest.
• Makes rules and regulations for the securities

market.

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The Recent Initiatives
Undertaken
• Sole Control on Brokers
• For Underwriters
• For Share Prices
• For Mutual Funds

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Reserve Bank of India
• Established on April 1, 1935 in accordance
with the provisions of the RBI Act, 1934.
• The Central Office of the Reserve Bank has

been in Mumbai.
• It acts as the apex monetary authority of the

country.

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Functions Of RBI
Monetary Authority:
• Formulation and Implementation of monetary policies.
• Maintaining price stability and ensuring adequate flow of
credit to the Productive sectors.
Issuer of currency:
• Issues and exchanges or destroys currency and coins.
• Provide the public adequate quantity of supplies of currency
notes and coins.

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Functions of RBI
Regulator and supervisor of the financial system:
• Prescribes broad parameters of banking operations

• Maintain public confidence, protect depositors' interest and
provide cost-effective banking services.
Authority On Foreign Exchange:
• Manages the Foreign Exchange Management Act, 1999.

• Facilitate external trade, payment, promote orderly
development and maintenance of foreign exchange market.

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Functions of RBI
Developmental role:
• Performs a wide range of promotional functions to support
national objectives.
Related Functions:
• Banker to the Government: performs merchant banking
function for the central and the state governments.
• Maintains banking accounts of all scheduled banks.

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Indigenous bankers
• Individual bankers like Shroffs, Seths, Sahukars,
Mahajans, etc. combine trading and other business with
money lending.
• Vary in size from petty lenders to substantial shroffs
• Act as money changers and finance internal trade through
hundis (internal bills of exchange)
• Indigenous banking is usually family owned business
employing own working capital
• At one point it was estimated that IBs met about 90% of
the financial requirements of rural India
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RBI and Indigenous bankers (1)
• Methods employed by the indigenous bankers are

traditional with vernacular system of accounting.
• RBI suggested that bankers give up their trading and
commission business and switch over to the western
system of accounting.
• It also suggested that these bankers should develop the
deposit side of their business
• Ambiguous character of the hundi should stop
• Some of them should play the role of discount houses
(buy and sell bills of exchange)
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RBI and Indigenous bankers (2)
• IB should have their accounts audited by certified

chartered accountants
• Submit their accounts to RBI periodically
• As against these obligations the RBI promised to provide
them with privileges offered to commercial banks
including
– Being entitled to borrow from and rediscount bills with RBI
• The IBs declined to accept the restrictions as well as
compensation from the RBI
• Therefore, the IBs remain out of RBI’s purview
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Reforms in the Financial System
Pre-reforms period
Steps taken
Objectives
Conclusion

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Pre-Reforms Period
• The period from the mid 1960s to the early 1990s.
• Characterized by:
– Administered interest rates

– Industrial licensing and controls
– Dominant public sector
– Limited competition
– High capital-output ratio

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Steps Taken
• Economic reforms initiated in June 1991.
• The committee appointed under the
chairmanship of M Narasimham.
• He submitted report with all the
recommendations
• Government liberalized the various sectors in
the economy.
• Reform of the public sector and tax system.
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Objectives
• Reorientation of the economy
• Macro economic stability

• To Increase competitive efficiency in the operations
• To remove structural rigidities and inefficiencies
• To attain a balance between the goals of financial stability

& integrated & efficient markets

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Recommendations
• Reduce the level of state ownership in banking
• Lift restrictions on foreign ownership of banks
• Spur the development of the corporate-bond
market
• Strengthen legal protections

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Recommendations
• Deregulate the insurance industry
• Drop proposed limits on pension reforms

• Increase consumer ownership of mutual-fund
products
• Introduce a gold deposit scheme

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Recommendations
• Speed up the development of electronic
payments.
• Separate the RBI's regulatory and central-bank
functions
• Lift the remaining capital account controls
• Phase out statutory priority lending and
restrictions on asset allocation
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Conclusion
• The financial system is fairly integrated, stable, efficient.
• Weaknesses need to be addressed.
• The reforms have been more capital centric in nature.
• Foreign capital flows and foreign exchange reserves have
increased but absorption of foreign capital is low.

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Why Capital Markets Exist
• Capital markets facilitate the transfer of capital
(i.e. financial) assets from one owner to
another.
• They provide liquidity.
– Liquidity refers to how easily an asset can be
transferred without loss of value.
• A side benefit of capital markets is that the
transaction price provides a measure of the
value of the asset.

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Role of Capital Markets
• Mobilization of Savings & acceleration of
Capital Formation
• Promotion of Industrial Growth
• Raising of long term Capital
• Ready & Continuous Markets
• Proper Channelisation of Funds
• Provision of a variety of Services

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Indian Capital Market - Historical
perspective
Stock Market was for a privileged few
Archaic systems - Out cry method
Lack of Transparency - High tones costs
No use of Technology
Outdated banking system
Volumes - less than Rs. 300 cr per day
No settlement guarantee mechanism - High risks

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Indian Capital markets - Chronology
• 1994-Equity Trading commences on NSE
• 1995-All Trading goes Electronic
• 1996- Depository comes in to existence
• 1999- FIIs Participation- Globalisation
• 2000- over 80% trades in Demat form
• 2001- Major Stocks move to Rolling Sett
• 2003- T+2 settlements in all stocks
• 2003 - Demutualisation of Exchanges
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Capital Markets - Reforms
• Each scam has brought in reforms - 1992 / 2001
• Screen based Trading through NSE
• Capital adequacy norms stipulated
• Dematerialization of Shares - risks of fraudulent
paper eliminated
• Entry of Foreign Investors
• Investor awareness programs
• Rolling settlements
• Inter-action between banking and exchanges
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Reforms / Initiatives post 2000
• Corporatisation of exchange memberships
• Banning of Badla / ALBM
• Introduction of Derivative products - Index /
Stock Futures & Options
• Reforms/Changes in the margining system
• STP - electronic contracts
• Margin Lending
• Securities Lending

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MARKET STRUCTURE
(JULY 31, 2005)
• 22 Stock Exchanges,
• Over 10000 Electronic Terminals at over 400 locations all over India.
• 9108 Stock Brokers and 14582 Sub brokers
• 9644 Listed Companies
• 2 Depositories and 483 Depository Participants
• 128 Merchant Bankers, 59 Underwriters
• 34 Debenture Trustees, 96 Portfolio Managers
• 83 Registrars & Transfer Agents, 59 Bankers to Issue
• 4 Credit Rating Agencies

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Indian Capital Market
Market Instruments Intermediaries Regulator
SEBI
•Brokers
•Investment Bankers
Primary Secondary •Stock Exchanges
•Underwriters
Equity Hybrid Debt

Players
CRA Corporate Intermediaries Individual Banks/FI FDI /FII

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Stock Exchanges in INDIA
 Mangalore Stock Exchange  Bombay Stock Exchange
 Hyderabad Stock Exchange  Madhya Pradesh Stock Exchange
 Uttar Pradesh Stock Exchange
 Coimbatore Stock Exchange  Vadodara Stock Exchange
 Cochin Stock Exchange  The Ahmedabad Stock Exchange
 Bangalore Stock Exchange  Magadh Stock Exchange
 Saurashtra Kutch Stock Exchange  Gauhati Stock Exchange
 Pune Stock Exchange  Bhubaneswar Stock Exchange
 National Stock Exchange
 OTC Exchange of India  Jaipur Stock Exchange
 Calcutta Stock Exchange  Delhi Stock Exchange Assoc
 Inter-connected Stock Exchange  Ludhiana Stock Exchange
(NEW)
 Madras Stock Exchange

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The role of the stock exchange
• Raising capital for businesses
• Mobilizing savings for investment
• Facilitate company growth
• Redistribution of wealth

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The role of the stock exchange
• Corporate governance
• Creates investment opportunities for small investors
• Government raises capital for development projects
• Barometer of the economy

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Growth Pattern of the Indian Stock Market
Sl.N As on 31st 1946 1961 1971 1975 1980 1985 1991 1995
o. December
No. of 7 7 8 8 9 14 20 22
1
Stock Exchanges
No. of 1125 1203 1599 1552 2265 4344 6229 8593
2
Listed Cos.
No. of Stock 1506 2111 2838 3230 3697 6174 8967 11784
3 Issues of
Listed Cos.
Capital of Listed 270 753 1812 2614 3973 9723 32041 59583
4
Cos. (Cr. Rs.)
Market value of 971 1292 2675 3273 6750 25302 11027 47812
5 Capital of Listed 9 1
Cos. (Cr. Rs.)
Capital per 24 63 113 168 175 224 514 693
6 Listed Cos. (4/2)
(Lakh Rs.)
Market Value of 86 107 167 211 298 582 1770 5564
Capital per Listed
7
Cos. (Lakh Rs.)
(5/2)
Appreciated value 358Financial
170 148 126
Markets and Intermediaries-
170 260 344 803
of Capital per 54
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Capital Market Instruments
Equity Hybrid Debt
Deep
Equity Preference ADR / GDR Debentures Zero coupon
Shares bonds Discount
Shares
Bonds

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Factors contributing to growth of
Indian Capital Market
• Establishment of Development banks &
Industrial financial institution.
• Legislative measures
• Growing public confidence
• Increasing awareness of investment
opportunities

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Indian Capital Market deficiencies
• Lack of transparency
• Physical settlement
• Variety of manipulative practices
• Institutional deficiencies
• Insider trading

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Money Market
• Market for short-term money and financial
assets that are near substitutes for money.
• Short-Term means generally period upto one

year and near substitutes to money is used to
denote any financial asset which can be
quickly converted into money with minimum
transaction cost

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Money Market
• It is a place for Large Institutions and government

to manage their short-term cash needs.
• It is a subsection of the Fixed Income Market.
• It specializes in very short-term debt securities.
• They are also called as Cash Investments.

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Defects of Money Market
• Lack of Integration
• Lack of Rational Interest Rates structure
• Absence of an organized bill market
• Shortage of funds in the Money Market
• Seasonal Stringency of funds and fluctuations in
Interest rates
• Inadequate banking facilities
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Money Market Instruments
• Treasury Bills
• Commercial Paper
• Certificate of Deposit
• Money Market Mutual Funds
• Repo Market

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Monetary Measures
(a) Bank Rate:
The Bank Rate was kept unchanged at 6.0 per cent.
(b) Reverse Repo Rate:
The Repo rate is around 7 per cent and Reverse repo
rate is around 6.10 per cent.
(c) Cash Reserve Ratio:
The cash reserve ratio (CRR) of scheduled banks is
currently at 5.0 per cent.

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Module 2:Banking and Institution
Finance specialization paper 2
Bangalore university
Financial Institutions and Banking

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Session topics
• Structure of Financial Institutions
• Functions of Financial Institutions
• Categories of Financial Institutions
• Theoretical basis of banking operations- Special role
of banks
• Banking in India
• Phases in Banking

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Introduction
• Financial institutions are those organizations,
that are involved in providing various types of
financial services to their customers. The
financial institutions are controlled and
supervised by the rules and regulations
delineated by government authorities.

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Examples of financial institutions
• Banks
• Stock Brokerage Firms
• Non Banking Financial Institutions
• Building Societies
• Asset Management Firms
• Credit Unions
• Insurance Companies

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• Central Bank (Reserve Bank of India)

• Commercial banks,
• Credit rating agencies,
• Insurance companies
• Specialized financial institutions

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Function of Financial Institutions
• Function of financial institutions is to collect
funds from the investors and direct the funds
to various financial services providers in
search for those funds.
• Financial institutions also function as
mediators in share markets and debt security
markets.

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Various activities
• Bonds • Hedging
• Debentures • Retirement planning
• Stocks • Investment
• Loans • Portfolio management
• Risk Diversification • Many other types of
• Insurance related functions

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Services of Financial Institutions
• Business finance company
• Mortgage finance company
• Car finance company
• Personal finance company
• Personal loan finance company
• Home finance company
• Corporate finance company

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Important Financial Institutions
• EXIM Bank • National Stock Exchange

• IDBI • S.T.C.I (Securities
• SIDBI Trading Corporation of
• NABARD India), 1994
• Discount of Finance House • National Housing Bank,
of India 1988
• Stock Holding Corporation • Indian Bank’s
Of India Association
• Joint Publicity Committee
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Banking in India
• Prior to introduction of banking people used to
keep their money in post offices or in piggy
bank and lend money from sahukars.
• In year 1930, government started direct
intervention and led to the birth of banking
system in India

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Banking in India
• Banking is "accepting, for the purpose of
lending or investment of deposits of money
from the public, repayable on demand or
otherwise and withdraw-able by cheques,
draft, order or otherwise."

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Phases in Banking
Banking in India has evolved through four
distinct phases:
• Foundation phase
• Expansion phase
• Consolidation phase
• Reforms phase

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Foundation Phase
• Foundation phase can be considered to cover
1950s and 1960s till the nationalization of
banks in 1969. The focus during this period
was to lay the foundation for a sound banking
system in the country.

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Foundation Phase
• As a result the phase witnessed the development of
necessary legislative framework for facilitating re-
organization and consolidation of the banking system,
for meeting the requirement of Indian economy. A
major development was transformation of Imperial
Bank of India into State Bank of India in 1955 and
nationalization of 14 major private banks during
1969.

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Expansion Phase
• Expansion phase had begun in mid-60s but gained
momentum after nationalization of banks and
continued till 1984. A determined effort was made to
make banking facilities available to the masses.
Branch network of the banks was widened at a very
fast pace covering the rural and semi-urban
population, which had no access to banking hitherto.

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Expansion Phase
• Most importantly, credit flows were guided
towards the priority sectors. However this
weakened the lines of supervision and affected
the quality of assets of banks and pressurized
their profitability and brought competitive
efficiency of the system at low ebb.

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Consolidation Phase
• Consolidation phase: The phase started in 1985 when
a series of policy initiatives were taken by RBI which
saw marked slowdown in the branch expansion.
Attention was paid to improving house-keeping,
customer service, credit management, staff
productivity and profitability of banks. Measures
were also taken to reduce the structural constraints
that obstructed the growth of money market.

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Reforms Phase
• Reforms phase the macro-economic crisis
faced by the country in 1991 paved the way
for extensive financial sector reforms which
brought deregulation of interest rates, more
competition, and technological changes,
prudential guidelines on asset classification
and income recognition, capital adequacy,
autonomy packages.

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Reforms Phase
• The Narsimham Committee report suggested
wide ranging reforms for the banking sector in
1992 to introduce internationally accepted
banking practices. The amendment of Banking
Regulation Act in 1993 saw the entry of new
private sector banks.

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Liberalization
• It covered the areas of interest rates
deregulation and directed credit rules.
Statutory preemption and entry deregulation
for both domestic and foreign banks, Lowering
CRR and SRR Interest rate liberalization. Do
away with entry barriers

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Banking Consists of
• Banking Segment in India functions under the
umbrella of Reserve Bank of India - the
regulatory, central bank.
This segment broadly consists of:
• Co-operative Banks
• Commercial Banks

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Co-operative Banks
• Role in rural financing continues to be
important even today, and their business in the
urban areas also has increased phenomenally
in recent years mainly due to the sharp
increase in the number of primary co-operative
banks.

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Co-operative Banks
While the co-operative banks in rural areas mainly
finance agricultural based activities including:
• Farming
• Cattle
• Milk
• Hatchery
• Personal finance etc.
• small scale industries
• self-employment driven activities

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Co-operative Banks
• Co-operative banks in urban areas mainly finance
various categories of people for self-employment,
industries, small scale units, home finance, consumer
finance, personal finance, etc
• Example of co-operative banks - Saraswat Co-
operative Bank , Jankalyan Sahakari Bank,Shamrao
Vittala co-operative Bank,etc .

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Categories of Co-operative Banks
There are two main categories of the co-operative
banks:
• Short term lending oriented co-operative Banks :
within this category there are three sub categories
of banks viz. state co-operative banks, District co-
operative banks and Primary Agricultural co-
operative societies.

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Commercial Banks
• An institution which accepts deposits, makes
business loans, and offers related services.
• Commercial banks also allow for a variety of
deposit accounts, such as checking, savings,
and time deposit.

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Commercial Bank
• These institutions are run to make a profit and
owned by a group of individuals, yet some
may be members of the Federal Reserve
System.
• While commercial banks offer services to
individuals, they are primarily concerned with
receiving deposits and lending to businesses.

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Commercial Banks
The commercial banking structure in India
consists of:
• Scheduled Commercial Banks – Scheduled
commercial Banks constitute those banks which have been
included in the Second Schedule of Reserve Bank of India
(RBI) Act, 1934.
• Unscheduled Banks - Unscheduled banks are those
banks which are not defined in the schedule of the RBI act
1934.

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Scheduled Commercial Banks in India
• Scheduled Banks in India constitute those
banks which have been included in the Second
Schedule of Reserve bank of India (RBI) Act,
1934. RBI in turn includes only those banks in
this schedule which satisfy the criteria laid
down vide section 42 (6) (a) of the Act.

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Scheduled Banks in India
"Scheduled banks in India" means the State Bank of
India constituted under the State Bank of India Act,
1955 (23 of 1955), a subsidiary bank as defined in the
State Bank of India (Subsidiary Banks) Act, 1959 (38
of 1959), a corresponding new bank constituted under
section 3 of the Banking Companies ( Acquisitions
and Transfer of Undertakings) Act, 1970 (5 of 1970),

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Scheduled Banks in India
or under section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings)
Act, 1980 (40 of 1980), or any other bank
being a bank included in the Second Schedule
to the Reserve Bank of India Act, 1934 (2 of
1934), but does not include a co-operative
bank".

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Statistics as on 30 June 1999 th
There are 300 scheduled banks having

network of 64918 branches.
SB group 8
Nationalized banks 19
Foreign banks 45
Private sector banks 32
Co-op Banks & RRB’s

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Unscheduled Banks in India
"Non-scheduled bank in India" means a
banking company as defined in clause (c) of
section 5 of the Banking Regulation Act, 1949
(10 of 1949), which is not a scheduled bank".

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Classification of Commercial Banks
Commercial bank sector can broadly be
classified into:
• Public sector
• Private sector
• Foreign banks

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The following are the Scheduled
Banks in India (Public Sector)
• State Bank of India • State Bank of Travancore
• State Bank of Bikaner and • State Bank of Patiala
Jaipur • Andhra Bank
• State Bank of Hyderabad • Allahabad Bank
• State Bank of Indore • Bank of Baroda
• State Bank of Mysore • Bank of India
• State Bank of Saurashtra
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Banks in India (Public Sector)
• Bank of Maharashtra • Oriental Bank of Commerce
• Canara Bank • Punjab National Bank
• Central Bank of India • Punjab and Sind Bank
• Corporation Bank • Syndicate Bank
• Dena Bank • Union Bank of India
• Indian Overseas Bank • United Bank of India
• Indian Bank
• UCO Bank
• Oriental Bank of
Commerce • Vijaya Bank

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Banks in India (Private Sector)
• ING Vysya Bank Ltd • HDFC Bank Ltd

• Axis Bank Ltd • Centurion Bank Ltd
• IndusInd Bank Ltd • Bank of Punjab Ltd
• ICICI Bank Ltd • IDBI Bank Ltd
• South Indian Bank • Jammu & Kashmir Bank Ltd.

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Foreign Banks in India
There are 46 foreign banks as per April 2008

• American Express Bank Ltd.
• ANZ Gridlays Bank Plc.
• Bank of American
• Bank of Tokyo Ltd.
• Banque Nationale de Paris
• Barclays Bank Plc
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Foreign Banks in India
• Citi Bank
• Deutsche Bank
• Hongkong and Shanghai Banking
Corporation
• Standard Chartered Bank.
• The Chase Manhattan Bank Ltd.
• Dresdner Bank
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Risk in Banking Sector
Equity Risk Trading Risk
Market Risk
Interest Rate Risk
Gap Risk
Currency Risk
Commodity Risk
Transaction Risk Counterparty Risk
Credit Risk
Financial Portfolio Issuer Risk
Concentration Risk
Risks Liquidity Risk
Operational Risk
Regulatory Risk
Human Factor
Risk
Financial Markets and Intermediaries- 102
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• The Central Bank is the Head of the banking
system in the country. It has the power of
supervision and control over all other banks. It
is the symbol of financial power and stability
of the country.
• In India, Central bank is known as RESERVE

BANK OF INDIA

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The Reserve Bank of India
History :
• RBI was established on April 1, 1935.
• RBI Nationalised in year 1949.

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Objective of RBI
• The Preamble prescribes the objective as:

• "…to regulate the issue of Bank Notes and
keeping of reserves with
a view to securing monetary stability in
India and generally to operate the currency
and credit system of the country to its
advantage."

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Objectives of RBI
• Regulate the issue of the bank note
• Maintain the reserves with a view to securing
monetary security
• To operate the credit and currency of the
country to its advantage

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Functions of Reserve Bank of India
1. Monetary functions
2. Supervisory function
3. Promotional function

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Monetary Functions of Reserve Bank of
India
1. Bank of Issue
2. Banker to Government
3. Bankers' Bank and Lender of the Last Resort
4. Controller of Credit
5. Control of foreign exchange operations
6. Monetary data and publication

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Bank of Issue
• Under Section 22 of the Reserve Bank of India
Act, the Bank has the sole right to issue bank
notes of all denominations. The distribution of
one rupee notes and coins and small coins all
over the country is undertaken by the Reserve
Bank as agent of the Government. The
Reserve Bank has a separate Issue Department
which is entrusted with the issue of currency
notes.

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Bank of Issue
• Since 1957, the Reserve Bank of India is
required to maintain gold and foreign
exchange
• Reserves of Rs. 200 crores, of which at least
Rs. 115 crores should be in gold. The system
as it exists today is known as the minimum
reserve system.

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Banker to Government
• The second important function of the Reserve Bank
of India is to act as Government banker, agent and
adviser.
• The Reserve Bank is agent of Central Government
and of all State Governments in India excepting that
of Jammu and Kashmir.
• The Reserve Bank has the obligation to transact
Government business, viz. to keep the cash balances
as deposits free of interest, to receive and to make
payments on behalf of the Government and to carry
out their exchange remittances and other banking
operations.
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Banker to Government
• It makes loans and advances to the States and
local authorities.
• It acts as adviser to the Government on all
monetary and banking matters.

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Bankers' Bank and Lender of the Last
Resort
• The Reserve Bank of India acts as the bankers' bank.
According to the provisions of the Banking Companies Act of
1949, every scheduled bank was required to maintain with the
Reserve Bank a cash balance equivalent to 5% of its demand
liabilities and 2 per cent of its time liabilities in India. By an
amendment of 1962, the distinction between demand and time
liabilities was abolished and banks have been asked to keep
cash reserves equal to 3 percent of their aggregate deposit
liabilities. The minimum cash requirements can be changed by
the Reserve Bank of India.

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Bankers' Bank and Lender of the Last
Resort
• The scheduled banks can borrow from the Reserve
Bank of India on the basis of eligible securities or get
financial accommodation in times of need or
stringency by rediscounting bills of exchange. Since
commercial banks can always expect the Reserve
Bank of India to come to their help in times of
banking crisis the Reserve Bank becomes not only the
banker's bank but also the lender of the last resort.

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Controller of Credit
• Central Bank may directly affect the money supply to control
its growth or it might act indirectly to affect cost and
availability of credit in the economy.
• In modern times the bulk of money in developed economies
consists of bank deposits rather than currencies and coins.
• So central banks today guide monetary developments with
instruments that control over deposit creation and influence
general financial conditions.
• Credit policy is concerned with changes in the supply of
credit.
• Central Bank administers both the Credit and Monetary policy

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• The Reserve Bank of India is the controller of credit i.e. it has
the power to influence the volume of credit created by banks
in India. It can do so through changing the Bank rate or
through open market operations. According to the Banking
Regulation Act of 1949, the Reserve Bank of India can ask
any particular bank or the whole banking system not to lend to
particular groups or persons on the basis of certain types of
securities. Since 1956, selective controls of credit are
increasingly being used by the Reserve Bank.

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• The Reserve Bank of India is armed with many more
powers to control the Indian money market. Every
bank has to get a licence from the Reserve Bank of
India to do banking business within India, the licence
can be cancelled by the Reserve Bank of certain
stipulated conditions are not fulfilled. Every bank
will have to get the permission of the Reserve Bank
before it can open a new branch.

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• Each scheduled bank must send a weekly
return to the Reserve Bank showing, in detail,
its assets and liabilities. This power of the
Bank to call for information is also intended to
give it effective control of the credit system.
The Reserve Bank has also the power to
inspect the accounts of any commercial bank.

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• As supreme banking authority in the country, the Reserve
Bank of India, therefore, has the following powers:
(a) It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through
quantitative and qualitative controls.
(c) It controls the banking system through the system of
licensing, inspection and calling for information.
(d) It acts as the lender of the last resort by providing
rediscount facilities to scheduled banks.

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Supervisory functions
• The Reserve Bank Act, 1934, and the Banking Regulation
Act, 1949 have given the RBI wide powers of supervision
and control over commercial and co-operative banks,
– Licensing and establishments
– Branch expansion
– Liquidity of their assets, management and methods of
working
– Amalgamation, reconstruction, and liquidation.
– Audit of banks,inspection of branch
– Credit information services
– Training and bank education to the personnel
• The RBI is authorised to carry out periodical inspections
of the banks and to call for returns and necessary
information from them.
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Promotional functions
• The Reserve Bank was asked to promote
banking habit, extend banking facilities to
rural and semi-urban areas, and establish and
promote new specialised financing agencies
apart from these, RBI also promote special
financial institutions for industrial finance.
• RBI also collects and publish the statistics on
financial and economic matters.

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Promotional functions
• Accordingly, the Reserve Bank has helped in the
setting up of the IFCI and the SFC; it set up the
Deposit Insurance Corporation in 1962, the Unit
Trust of India in 1964, the Industrial Development
Bank of India also in 1964, the Agricultural
Refinance Corporation of India in 1963 and the
Industrial Reconstruction Corporation of India in
1972. These institutions were set up directly or
indirectly by the Reserve Bank to promote saving
habit and to mobilise savings, and to provide
industrial finance as well as agricultural finance.

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Credit Control of Central Bank
1. Price Stability
2. Attainment of full employment
3. Growth with stability
4. Stability in the foreign exchange rate
5. It safeguards the country’s gold reserve
against external drain

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Organisation and Management of RBI
The general supervision and direction of the
affairs of the RBI is vested in the Central Board of
Directors. The Central Board of Directors consists
of 20 members viz. one Governor appointed by
the central government and four Deputy
Governors appointed by the central government.
Four directors nominated by the central
government. Ten directors nominated by the
central government. One Government Official by
the central government.

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• Governor is the chairman of the Central Board
of Directors.
• He is the chief executive authority of the RBI.
• He is a full time officer, who exercises all the
powers and is appointed for a term of 5 years
and eligible for re-appointment.

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• Deputy Governors are also full time officers,
assisting the Governor.
• Each deputy is allotted a particular job and is
fully responsible for proper execution of that
job.
• They are appointed for a term of 5 years and
are eligible for re-appointment.

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• Four directors hold office for 4 years and are
eligible for re-appointment.
• Ten directors hold office for 4 years, two
directors retire every year and are eligible for
re-appointment.
• Government official continues till the
government wants, can attend meeting of
Central Board of Directors but cannot enjoy
right to vote.
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• The structure also consists of Executive
Director, Principal Chief General Manager,
Chief General Manager, General Manager,
Deputy General Manager, Assistant General
Manager, Managers, Assistant Manager and
Support Staff.

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Various Departments at RBI
• Issue department
• Banking department
• Department of banking development
• Department of banking operations
• Non-banking companies department
• Agriculture credit department
• Industrial finance department
• Exchange control department
• Legal affairs department
• Department of economics

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Various Departments at RBI
• Inspection department
• Planning and re-organisation department
• Department of accounts and expenditure
• Supervision department
• Services board of RBI
• Control department
• Industrial and export department
• Press relation department
• Department of research and statistics
• External investments and operations department

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Methods of Credit Control
• Cash Reserve Ratio (CRR)
• Repo Rate
• Reverse Repo Rate
• Bank Rate
• Statutory Liquidity Ratio (SLR)

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Cash Reserve Ratio (CRR)
• Cash Reserve Ratio is the amount of funds that
the bank have to keep with RBI. If RBI
decides to increase the percent of this, the
available amount with the bank comes down.
RBI uses this method to drain out excessive
money from the banks.

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• Chapter 3

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Non Banking Financial Institutions
• NBFCs are important financial intermediaries

and an integral part of the Indian financial
system.
• They have the advantage of lower transaction
costs, quick decision making , customer
orientation and prompt provision of services.
• NBFCs attract a large no. of small investors
since the rate of return on deposits with them
is relatively high.
NBFC
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Dr.Triveni P.
Non Banking Financial Institutions
• NBFCs are important financial intermediaries

and an integral part of the Indian financial
system.
• They have the advantage of lower transaction
costs, quick decision making , customer
orientation and prompt provision of services.
• NBFCs attract a large no. of small investors
since the rate of return on deposits with them
is relatively high.
NBFC
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NBFC’s
• Increase in no. of NBFCs because as there exists ease
of entry, limited fixed assets and absence of any need
to hold inventories. Egs. Fullerton India, Muthoot
finance , GE group, Citi Financials…etc.
• While their functions & services are different , the

common feature is acceptance of deposits from the
public, borrowing from banks and if registered as
public limited cos. Accessing the capital market.
NBFC
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Introduction to NBFC’s
As per RBI (Amendment act)1997, a Non banking
finance company means :
1. A financial institution which is a company.
2. A non banking institution which is a company
and which has as its principal business the
receiving of deposits under any scheme or in
any other manner or lending in any
manner.
3. Such other non banking institution as the bank
may specify with the previous approval of the
Central Government.
NBFC
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Why NBFCs ?
• Flexible
• Lower transaction costs
• Quick decision making
• Customer orientation
• Prompt provision of Services
NBFC
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Categories of NBFCs
1. An equipment leasing company (EL)
2. A hire purchase company (HP)
3. A housing finance company (HFC)
4. An investment company (IC)
5. A loan company (LC)
6. A mutual benefit financial company (MBFC) (i.e. nidhi
cos.)
7. A miscellaneous non banking company .i.e. chit fund
companies etc.
NBFC
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Financial Institutions…
• Any NBFC is a ‘Financial Institution’ that is a
company whose principal business is the
receiving of deposits or lending. (except
insurance, stock broking, agriculture
financing).
NBFC
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Restrictions on NBFC’s
• Minimum credit rating:
• NBFCs must obtain minimum credit rating for their
fixed deposits for accepting deposits, at least once a
year.
• Copy of rating to RBI. RBI to be informed about all
upgrading/downgrading.
• This rule does not apply to an equipment leasing or
hire purchase company.
NBFC
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Restrictions on NBFC’s
• Period of Deposits :
• NBFCs cannot accept demand deposits.
• They can accept/renew deposits for a min.
period of 12 months to a max. of 60 mths.
NBFC
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Loan Companies
• Major part of NBFCs
• High interest rates on deposits with higher risk
• Loans sanctioned by LCs are mostly short-term
• Over emphasis of LCs can create danger for effective
Monetary Policy
• Other Services Includes
• Discounting post-dated Cheques
• Collecting dividends on behalf of customers
• Purchasing & Discounting Hundis
NBFC
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Investment Companies
• Loans for consumption, commerce and trading
purposes
• Accepts mostly time deposits rather demand
deposits
• Policy Implications
 Dishonest Managerial practice with risk to
depositors interest
 Loans may be issued for the purpose of
speculation and hoarding
 Undermine the monetary policy objectives
NBFC
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Lease Finance
• New emerging market in India for equipment finance in
heavy industries and infrastructure Industry
• Types of Lease:
 Operating Lease
 Financial Lease
 Sale and Lease Back
 Direct Lease
 Leveraged Lease
• Lease Vs. Hire purchase
NBFC
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Leasing
• A lease is an agreement whereby the lessor conveys
to the lessee , in return for rent, the right to use an
asset for an agreed period of time.
• A financing arrangement that provides a firm with an

advantage of using an asset, without owning it, may
be termed as ‘leasing’.
NBFC
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Characteristics of Leasing
• The Parties
• The Asset
• The Term
• The Lease Rentals
NBFC
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Types of Lease
• Financial Lease • Balloon Lease

• Operating Lease • Close end leasing
• Conveyance Type lease • Swap Leasing
• Leveraged Lease • Wrap Leasing
• Sale and Leaseback • Import Leasing
• Partial Pay-Out Lease • Cross Border leasing
• Consumer Leasing • International Leasing
NBFC
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Financial Lease
• Also called ‘Capital Lease’
• A contract involving payment over an obligatory
period, of specified sums sufficient in total to
amortize the capital outlay , besides giving some
profit to the lessor.
• ICAI defines it as : financial lease is a lease under
which the present value of the minimum lease
payments at the inception of the lease exceeds or is
equal to substantially the whole of the fair value of
the leased asset.”
NBFC
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Financial Lease
• It is non-cancelable in nature.
• The lessee is responsible for the maintenance
of the asset leased.
• The lease generally provides for the renewal of
the lease on expiry of the lease contract.
• Variants : Full payout lease , True Lease
NBFC
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Operating Lease
• An operating lease is a type of lease whereby
the asset is not fully amortized during the non-
cancelable period of the lease , and where the
lessor does not rely on the lease rentals for
profits.
• Short term lease on a period to period basis.
• Period of the lease is less than useful life of the
asset.
NBFC
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Operating Lease
• The lease is cancelable at short notice by the
lessee.
• The lessee has the option of renewing the lease
after the expiry of the lease period
• Asset maintenance and insurance etc. is the
responsibility of the lessor and he charges for the
same.
• It is a high risk lease to the lessor, as any time it
may be cancelled by the lessee.
NBFC
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Types of Lease
Net Lease :
• A variant of operating lease, where the lessor is not
concerned with the repairs and maintenance of the
leased asset.
• Lessor does not provide:

- repairs, maintenance, servicing of lease property
- purchasing parts and accessories.
- loan of a replacement/substitute
- purchase of insurance for the lessee.
NBFC
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Types of Lease
Conveyance Type Lease :
• Very long type of lease applicable to immovable property.
• Objective to convey the title in property.
• Lease periods as long as 99 to 999 years.
Leveraged Lease
• Where a financier is involved for the whole or a part of the
financial requirement.
• Used for high value asset.
• The financier will have charge over the leased asset, over and
above the lease rentals
NBFC
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Types of Lease
Sale and Leaseback:
• Owner of the asset sells it to the lessor, and
gets the asset back under the lease agreement.
• Ownership transfer from the original owner to
the lessor, who again leases out the asset.
• Immediate financing to the seller company,
whose funds are tied up in the asset.
NBFC
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Types of Lease
• Partial pay out lease: Full payment of the lease in several
leases.
• Consumer Leasing :Leasing of consumer durables like
Refrigerator, televisions, etc.
• Balloon Lease : a lease which has zero residual value at the
end of the lease period. i.e. low lease rentals at the inception,
high in the mid years, and low again at the end of the lease.
• Close end leasing : the asset is reverted to the lessor at the end
of the lease.
• Open end leasing : the lessee guarantees a minimum value to
the lessor , from the sale of the asset at the end of the lease
term. If on sale of the asset, the residual value is less , then
lessee pays to the lessor the difference amount.
NBFC
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Types of Lease
• Import Leasing :
- leasing of imported capital goods.
- beneficial to the lessee, because arranging other
sources of funds takes long. Lenders do not usually
finance the import duty which forms sizable portion
of the cost.
- during which the prices of imported goods may rise +
fluctuation in exchange rates may happen.
NBFC
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Regulatory Framework of Leasing
• Provisions under Contract Act relating to Bailment:
• two parties - lessor - bailor, lessee-bailee.
• Transfer of possession of goods from bailor(lessor) to
bailee(lessee), for a specific purpose.
• As under bailment, on accomplishment of purpose the
goods transferred from lessee to lessor.
NBFC
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• Liabilities of Lessee (Bailee)..
• Reasonable Care :
• The lessee to take reasonable care of the asset. If he
fails he is liable to for loss or damage to the goods
that he has caused.
• If goods damaged despite of reasonable care, (floods,
riots etc), then the lessee is not responsible.
• Generally lease agreements make the lessee
responsible , irrespective of lessee’s negligence.
NBFC
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Unauthorized Use not Permitted to the Lessee:
• The lessee is not allowed to use the leased asset , for any
purpose other than one specified in the lease agreement.
• If he does so , then the lease agreement is terminated, and
lessor recovers the possession of the goods.
Return of Goods :
• The lessee has to return the goods :
• on completion of the lease term; or
• the lease agreement has been terminated by the lessee or
lessor/or automatic termination of the agreement because of
breach of conditions.
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• Not to set up an Adverse Title: must inform
the lessor of any adverse claim.
• Payment of Lease Rental:
• Insure and Repair the Goods:
• Liabilities of the Lessor (Bailor):
NBFC
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Hire-Purchase Finance
• A financing system under which term loans for
purchase of goods and services are advanced to be
fractionally liquidated through a contractual obligation

• Hire-purchase credit Vs. Instalment Credit and
consumer credit
• Two broad category of Finance:
 By cash instalment credit

 By commodity instalment credit
NBFC
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Hire Purchase
• Payment of Periodic installments
• Immediate possession of goods by the buyer
• Ownership of goods with vendor until full and
final payment
• Vendor’s right to repossess the goods in case
of default by buyer
• Treatment of installment as a hire charge till
the payment of last installment
NBFC
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Defining Hire Purchase
• An agreement under which goods are let on
hire and under which the hirer has an option
to purchase them in accordance with the
terms of the agreement
NBFC
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Process of Hire Purchase
• The Dealer, contracts with finance co. for financing his hire
purchase deals.
• The customer selects the goods for HP, and dealer arranges for the
complete set of documents.
• Down payment by customer on completion of proposal form.
• Dealer sends documents to finance co. with request to purchase the
goods, and accept the HP transaction.
• The finance co. signs the agreement and sends copy along with EMI
details to dealer.
• Dealer delivers the goods to the customer, property passes on to the
finance co..
• Hirer pays EMIs, and on last payment , the ownership passes on to
him, with loan completion certificate by the finance co.
NBFC
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Legal Framework
• HP act 1972.
• Two aspects of HPA – Bailment of goods , element
of sale.
• Essential Ingredients of Sale : Two parties, Goods,
Money Consideration, Transfer of Ownership,
Essentials of a valid contract.
• Sale Vs Bailment : Sales – conveyance of property
from seller to buyer for a price. Bailment : mere
transfer of possession of goods to bailee, with no
conveyance intended.
NBFC
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Legal Framework
• Sale vs Hire Purchase : Differences :
• In HP the possession of the goods with hirer, while ownership
with original owner.
• No agreement to buy, but only option to buy under certain
conditions.
• Ownership to hirer, only when he exercises his option by
making full payment.
• Destruction of goods before making the contract :
destruction/damage, without the knowledge of the seller, such
that goods do not match the description in Contract, then
contract null and void.
NBFC
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Legal Framework
• Destruction of goods, after Agreement to Sell but before Sale : damage
without fault of buyer/seller, agreement is void, provided ownership is not
passed on.
• Document of Title to Goods : document which enables to deal with goods
as owner. Eg. Cash Memo, bill of lading , dock warrant, lorry receipt,
Railway receipt, Delivery order.
• Earnest Money/Security Deposit : payment by buyer in advance, for due
performance of contract. In case of default, liable to be forfeited, and
contract goes off.
• Conditions and Warranties : relating to nature and quality of goods and
their fitness for the buyer’s purpose. Condition – stipulation which forms
the basis of the contract. Warranty – stipulation which is subsidiary to the
main purpose of the contract. Legal implications different for both.
NBFC
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Legal Framework
• Implied Conditions :
- Condition as to Title in case of Sale/Agreement to
sell.
- Condition as to Description
- Condition as to Merchantability
- Condition as to Wholesomeness .
• Implied Warranties : any of the above plus Quite
Possession , Freedom from Encumbrances.
NBFC
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Legal Framework
• Doctrine of Caveat Emptor (let the buyer beware):
applicable to all sale contracts when buyer relies on his own
skill & judgement for suitability of the goods for his purpose.
• Then seller cannot be held responsible if there are defects in
the goods., except where
• buyers purpose informed to the seller
• goods sold by description by a manufacturer/seller.
• Seller fraudulently misrepresents the latent defects.
NBFC
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Legal Framework
• Transfer of Property in Goods :
• Two essential requirements :
• - Goods must be ascertained & The parties must intend to
pass the property in the goods.
• Rules for Transfer of Property
• Specific goods in Deliverable State : Property in the goods
passes to the buyer when the contract is made, irrespective of
whether , the time of payment of the price or time of delivery
of the goods is postponed.
• Specific goods to be Put in Deliverable State : property in
goods does not pass till the seller converts the goods to a
deliverable state.
NBFC
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Legal Framework
• Specific goods to be Weighed or Measured :
• if seller required to weigh , measure, test the goods for
ascertaining the price, then Property does not pass till the same
is done, and buyer has notice thereof.
• Goods sent on approval (sale or return basis): property in
goods passes on to the buyer, after he has signified his
approval, or if he does not signify the approval, but does not
reject it either till the valid date, then property passes to the
buyer.
• Reservation of Rights of Disposal :
• if seller reserves the rights of disposal of goods until certain
conditions are fulfilled, then property does not pass on to the
buyer till those conditions are complied with.
NBFC
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Legal Framework
Delivery of Goods : it may be actual, symbolic or constructive.
Rules of Delivery :
Part Delivery : a delivery of part of the goods, in progress of the whole
delivery, is delivery of the whole. But intentional part delivery is not
whole delivery.
Buyer to Apply for Delivery : seller not bound to deliver, unless buyer
applies for delivery.
Seller’s Duty to Deliver: he is duty bound to deliver goods on
application by buyer , in accordance with the terms of the contract.
Place & Time of Delivery : place & time of delivery as per contract.
Otherwise delivery at the place of the goods, at the time of
agreement.
Other rules regarding Cost, quantity, delivery in instalments.
NBFC
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Dr.Triveni P.
Legal Framework
• Rights of the Unpaid Seller :
• Against Goods and Against the Buyer.
• Right to Lien : an unpaid seller with possession of goods will retain them
where The goods are no sold under credit, sold on credit but credit has
expired or the buyer becomes insolvent.
• Right to Stoppage in Transit : if the buyer is insolvent, then unpaid seller

has the right to repossess in transit.
• Right of Resale: allowed under limited situations, where the goods are of
perishable nature – resale possible without notice to buyer/ or after notice
of resale buyer does not pay up/ or when the seller has under the contract
right for resale without any prior notice.
NBFC
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Dr.Triveni P.
Legal Framework
• Buyer’s Remedies Against the Seller :
• Suit for Damages for Non Delivery : where there is wrongful
neglection or seller refuses to deliver the goods.
• Suit for price – non delivery after payment.
• Suit for Specific performance – where the contract is for
specific goods, suit for delivery of the same goods.
• Suit for Repudiation of Contract before due date – where the
seller repudiates the contract before the date of delivery,
buyer would sue the seller for anticipatory breach.
NBFC
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Dr.Triveni P.
Financial Evaluation
For the Hirer
• Cost of Hire Purchase Vs Cost of Leasing
• Cost of Hire Purchase is
- Down payment + service charges + PV of hire
purchase payments (Kd) – PV of depreciation tax
shield (Kc) – PV of net salvage value (Kc).
Cost of Leasing is
- Lease management fee + PV of lease payments (Kd) –
PV of tax shield on lease payments (Kc) + PV of
interest tax shield on hire purchase
NBFC
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Dr.Triveni P.
Financial Evaluation
From the viewpoint of the Vendor :
• NPV of Hire Purchase Plan:
• - PV of the Hire purchase installments
• +Documentation and service fee
• +PV of tax shield on initial direct cost.
• - Loan amount
• - PV of Interest tax of financial income
• - PV of Income tax of financial income
• - PV of income tax on documentation
NBFC
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Dr.Triveni P.
Consumer Credit
• Includes all asset based financing plans offered
to individuals. (eg. Cars, scooters,VCRs, TVs,
Refrigerators, washing machines etc., personal
computers.).
• Main supplier of consumer credit are
Multinational Banks, commercial banks,
Finance cos..etc
NBFC
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Consumer Credit
Salient Features :
• Parties to the transaction : Bipartite arrangement - two parties
viz borrower/consumer and dealer/financier. Tripartite
Transaction - dealer, financier, and customer. The dealer
arranges the credit from the financier.
Structure of the transaction :
• Hire-Purchase , Conditional Sale , Credit Sale .
• Hire Purchase - Most tripartite consumer credit transactions
are of this type. Customer option to purchase the asset on
completion of the pay back period
NBFC
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Consumer Credit
• Conditional Sale : Ownership not transferred until full
payment of purchase price, including the credit charge. The
customer cannot terminate the agreement.
• Credit Sale : Ownership transferred to the customer on first
installment payment. But the agreement cannot be cancelled.
Payment Period and ROI :
• Payment period - 12 -60 months.
• ROI - generally flat rate. Effective Rates generally not
disclosed. Sometimes in place of ROI, the EMI for different
payment periods is mentioned.
NBFC
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Dr.Triveni P.
Consumer Credit
Security :
– First charge on assets. The consumer cannot sell
the hypothecated asset.
Evaluation
– Can be made with Effective Rate of Interest and
rebates for early repayments.
NBFC
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Housing Finance
• National Housing Bank (1988) is the apex institution for regulation
and supervision
• Liberalisation of guidelines by RBI for housing finance by
commercial banks & the entry of LIC (1991) & GIC (1990) as a
serious market player
• Suppliers of Housing Mortgage Loans
 Housing and Urban Development Corporation (HUDCO)
 State Housing Finance Societies (SHFSs)
 Housing Development Finance Corporation Ltd. (HDFC)
 Commercial Banks (ex. Canfin Homes Ltd.)
NBFC
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Dr.Triveni P.
contd.
Policy Issues for the development of Housing
Finance System/Housing Finance
 Housing Finance institutions must be self–

sustaining bodies
 Housing Finance companies should mobilise
household savings at market rate of interest
 Housing Finance companies should stress both
supply and demand for dwelling units
 Policy initiative for the development of secondary
market for mortgages
NBFC
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Dr.Triveni P.
Mutual Benefit Financial Companies
• MBFCs (nidhis) are public limited joint stock companies regulated
by the directives of RBI. Nidhi is a company formed with the
objective of cultivating the habit of saving and functioning for the
mutual benefit of the members by receiving deposits only from
individuals enrolled as members and by lending only to individuals
enrolled as members.
• Features :
 They offer savings schemes which are linked with assurance to make
credit available when required
 Local in nature, easy documentation and familiarity
 Comparative advantage with the commercial bank interest structure
NBFC
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Dr.Triveni P.
Residuary Non-Banking Companies
• RNBCs are able to mobilise household small

savings from the very unorganised segment
• The investment pattern of RNBCs is regulated
by Residuary Non-Banking (Reserve Bank)
directions, 1987
• They are prone to mismanagement
NBFC
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Dr.Triveni P.
Venture Capital Funds (VCFs)
• Provide equity finance or risk capital to highly risky
and new business venture
• Venture capital Vs. Development Capital
• High risk-high return business
• Scope of Activities:
 Seed capital for industrial start-ups
 Additional Capital to new business at various stages of their growth
 Bridge Finance
 Equity financing or leverage buy-out financing
 Seed Capital for new entrepreneurs
 Capital for mature enterprises for expansion, diversification and
restructuring
NBFC
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Dr.Triveni P.
contd.
Types of Venture Capital Funds

 Subsidiaries of large financial corporations and banks
 Private independent specialised firms
 Publicly funded small business investment corporations
 Subsidiaries or divisions of large manufacturing corporations
• Major Market Players:

 VCF of IDBI
 VCFs of UTI
 Technology Development and Information Company (TDICI)
 Risk Capital and Technology Finance Corporation Ltd. (RCTFC)
 VCFs of commercial Banks
 Credit Capital Venture Fund (India) Ltd. (CCVF)
NBFC
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Dr.Triveni P.
Factors
• A financial institution which manages the collection of
accounts receivables for the companies on their behalf
and bears the credit risk associated with those accounts
• Three major parties in a Factoring arrangements: the
factor, the client (seller),the buyer

Minimises credit risk and exist only for credit
transactions

Major market player: SBI commercial and Factoring
Services Ltd.
NBFC
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Dr.Triveni P.
Credit Rating
• An Act of assigning values/grades to credit instruments
by estimating or assessing the solvency position of the
borrower
• It does not create fiduciary relationship between the credit
rating agency (CRA) and the rating user or investor
• Major Market Players

 Credit Rating Information Services of India Ltd. (CRISIL)
 Investment Information and Credit Rating Agency of India Ltd.
(ICRA)
 Credit Analysis and Research Ltd. (CARE)
 Onida Individual Credit Rating Agency of India Ltd. (ONICRA)
NBFC
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Dr.Triveni P.
contd.
Objectives of credit rating
 It imposes a healthy discipline on borrowers

 It lends greater credence to financial and other
representations
 It helps formulation of public guidelines on
institutional investment
 It helps merchant bankers, brokers and regulatory
authorities
 It encourages greater information disclosure
 Reduces interest costs for highly rated companies
 As a marketing tool for the issuer
NBFC
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Dr.Triveni P.
Depository and Custodial Services
• Requisite:
 The phenomenal growth of both primary and secondary
market and debenture market
 Increase in systematic risks – counterparty risk, credit risk,
bad deliveries, counterfeit scrips, forged certificates etc.
• Major Institutional Set-up

 Stock Holding Corporation of India Ltd. (SHCIL)
 National Clearance and Depository System (NCDS)
 National Stock Depository Ltd. (NSDL)
NBFC
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• chapter4

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Merchant Banking
Companies raise capital by issuing securities
in the market. Merchant bankers act as
intermediaries between the issuers of capital
and the ultimate investors who purchase these
securities.
MERCHANT BANKING
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Merchant Banking-An Overview
• Merchant banking… is the financial intermediation that matches
the entities that need capital and those that have capital. It is a
function that facilitates the flow of capital in the market.
• Ministry of Finance: “Any person who is engaged in the business

of issue management either by making arrangements regarding
selling, buying or subscribing to securities as manager, consultant,
advisor or rendering corporate advisory service in relation to such
issue management”
Http://topics2c.blogspot.com 195
Merchant banking
• Merchant banking may be defined as an ‘institution which
covers a wide range of activities such as underwriting of
shares, portfolio management, project counseling, insurance
etc…They render all these services for a fee
• ORIGIN :
• The term merchant banking originated from the London who
started financing foreign trade through acceptance of bills
• Later they helped government of under developed countries to
raise long term funds
• Later these merchants formed an association which is now
called ”Merchant Banking and Securities House Association”
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Merchant Banking-An Overview
• Banking commission Report-1972
a) Necessity
b) Distinct from commercial Banks
c) Investment Management and Advisory services
d) Medium and small savers
e) Manage
MERCHANT BANKING
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Merchant Banking in India
• Grindlays Banks-1967
Management of capital issue
Production planning, system design to market
research
Management consultancy
• Citibank-1970
• SBI-1972
MERCHANT BANKING
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Services Rendered
• Organising finance for investment in projects
• Assistance in financial management
• Acceptance of house business
• Raising Eurodollar loans and issue of foreign
currency bonds
• Financing export of capital goods, hydropower
• Financing of hire-purchase transaction, leasing
• Mergers, takeovers, valuation of assets
MERCHANT BANKING
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Regulation
• Merchant Bankers Regulations of Securities and
Exchange Board of India
• Company Act 1956
• Listing guidelines of Stock Exchanges
• Securities Contracts (Regulation) Act, 1956
• Formation of divisions
• Subsidiaries companies
MERCHANT BANKING
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Structure
• Category-I
 to carry on any activity of the issue management, which
will inter-alia consist of preparation of prospectus and
other information relating to the issue, determining
financial structure, tie-up of financiers and final allotment
and refund of the subscription; and
 to act as adviser, consultant, manager, underwriter,

portfolio manager.
MERCHANT BANKING
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Structure
• Category II
that is, to act as adviser, consultant, co-
manager, underwriter, portfolio manager;
• Category III
 that is to act as underwriter, adviser, consultant
to an issue;
• Category IV
 that is to act only as adviser or consultant to an
issue.
MERCHANT BANKING
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Registration with SEBI
• Around 250 Merchant Bankers
• Abolished all categories and maintained
Category-I
• Separate registration for underwriters and
portfolio manager
• Segregation between fee based and Fund
based activities
MERCHANT BANKING
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Registration with SEBI
• Registration with SEBI is mandatory to carry out the business of merchant
banking in India. An applicant should comply with the following norms:
 The applicant should be a body corporate

 The applicant should not carry on any business other than those connected
with the securities market
 The applicant should have necessary infrastructure like office space,
equipment, manpower etc.
 The applicant must have at least two employees with prior experience in
merchant banking
 Any associate company, group company, subsidiary or interconnected
company of the applicant should not have been a registered merchant
banker
 The applicant should not have been involved in any securities scam or
proved guilt for any offence
 The applicant should have a minimum net worth of Rs.5 crores
MERCHANT BANKING
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Authorized Activities
• Issue Management
Preparation of prospectus
Information relating to the issue
• Determining financing structure
• Tie-up of finances and final allotment and/or refund
of subscription
• Corporate advisors to the issue
• Consultants or advisors to issue and underwriting
MERCHANT BANKING
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Main Functions of MB’s
• Management of debt and equity offerings- This forms the main
function of the merchant banker. He assists the companies in raising funds
from the market. The main areas of work in this regard include:
instrument designing, pricing the issue, registration of the offer document,
underwriting support, marketing of the issue, allotment and refund, listing
on stock exchanges.
• Placement and distribution- The merchant banker helps in

distributing various securities like equity shares, debt instruments, mutual
fund products, fixed deposits, insurance products, commercial paper to
name a few. The distribution network of the merchant banker can be
classified as institutional and retail in nature.
MERCHANT BANKING
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Functions
• Corporate advisory services-
• Merchant bankers offer customized solutions to their
clients financial problems. The following are the main
areas in which their advice is sought:
• Financial structuring includes determining the right

debt-equity ratio and gearing ratio for the client, the
appropriate capital structure theory is also framed.
• Merchant bankers also explore the refinancing

alternatives of the client, and evaluate cheaper sources
of funds.
MERCHANT BANKING
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Dr.Triveni P
Functions
• Another area of advice is rehabilitation and turnaround

management. In case of sick units, merchant bankers may
design a revival package in coordination with banks and
financial institutions.
• Risk management is another area where advice from a

merchant banker is sought. He advises the client on
different hedging strategies and suggests the appropriate
strategy.
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FUNCTIONS
• Project advisory services-
conceptualizing the project idea
feasibility studies
Preparing different documents like the detailed
project report.
MERCHANT BANKING
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FUNCTIONS
• Loan syndication-
Tie up loans for their clients
 Analyze the pattern of the client’s cash flows
 Prepares a detailed loan memorandum This takes place in
a series of steps. Firstly they, based on which the terms of
borrowings can be defined. Then the merchant banker,
which is circulated to various banks and financial
institutions and they are invited to participate in the
syndicate.
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Services of Merchant Bankers
• PROJECT COUNSELLING :
• It includes preparation of project
reports,deciding upon the financing pattern,
appraising the project relating to its technical,
commercial and financial viability. It includes
filling up of application forms for obtaining
funds from financial institutions.
MERCHANT BANKING
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• LOAN SYNDICATION :
• Assistance is rendered to raise loans for
projects after determining promoter’s
contribution. These loans can be obtained
from a single institution or a consortium.
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• ISSUE MANAGEMENT :
• Management of issues involves marketing of corporate
securities ie…equity shares, preference shares and
debentures by offering them to public.
 Pre-issue activities:
• They prepare copies of prospectus and send it to to SEBI
and then file them to Registrar of Companies
• They conduct meetings with company representatives and
advertising agencies to decide upon the date of opening of
issue, closing of issue, launching & publicity campaign
etc..
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• They help the companies in fixing up the
prices for their issues
 Post-issue activities:
• It includes collection of application forms,
screening of applications, deciding allotment
procedure, mailing of allotment letters, and
refund orders
MERCHANT BANKING
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• UNDERWRITING OF PUBLIC ISSUES :
• Underwriting is an insurance to the company which makes
public issues. Raising of external resources is easy for the
issues backed by well known underwriters.
• MANAGERS,CONSULTANTS OR ADVISERS TO
THE ISSUE :
• SEBI insist that all issues should be managed by atleast
one authorised merchant banker but not more than two.
For an issue of 100 crores, upto a maximum of four
merchant bankers shall be appointed. They help in listing
of shares in stock exchange, completion of formalities
under Companies Act etc..
MERCHANT BANKING
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PORTFOLIO MANAGEMENT :
• Portfolio refers to investment in different kinds of securities such as

shares, debenture issued by different companies. It is a combination of
assets but a carefully blended asset combination.
• Portfolio management refers to maintaining proper combination of

securities in a manner that they give maximum return
• Investors are interested in safety, liquidity and profitability of his

investment but they cant choose the appropriate securities. So
merchant bankers help their investors in choosing the shares. They
conduct regular market and economic surveys.
MERCHANT BANKING
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• NRI INVESTMENT :
• NRIs has to follow lots of complicated rules for investing in the shares
in India. Merchant bankers help them in choosing the shares and offer
expert advice fulfilling government regulations thus mobilising more
resources for corporate sector.
• ADVISORY SERVICE RELATING TO MERGERS AND
TAKEOVERS :
• Merger is a combination of two or more companies into a singe
company where one survives and other loses its existence
• Takeover is the purchase by one company acquiring controlling
interest in the share capital of another company
• Merchant banker acts as middlemen between offeror and offeree,
negotiates mode of payment and gets approval from government.
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• OFF SHORE FINANCE :
Merchant bankers help their clients in :
 Long term foreign currency loan
 Joint venture abroad
 Financing exports and imports
 Foreign collaboration arrangement
MERCHANT BANKING
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• BANKS PROVIDING MERCHANT BANKING
SERVICES IN INDIA
 Commercial banks
 Foreign banks like National Grindlays Bank, Citibank,
HSBC bank etc..
 Development banks like ICICI,IFCI,IDBI etc..
 SFC , SIDCs
 Private firms like JM Financial and Investment service ,
DSP Financial Consultants, Ceat Financial Services, Kotak
Mahindra, VMC Project Technologies, Morgan Stanley,
Jardie Fleming, Klienwort Benson etc…
MERCHANT BANKING
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• SOME PROBLEMS OF MERCHANT BANKERS
 SEBI stipulates high capital adequacy norms for

authorisation which prevents young, specialised
professionals into merchant banking business
 Non co-operation of the issuing companies in timely
allotment of securities and refund of application of money
etc.. is another problem
 Yet merchant banking is vast but should develop adequate
expertise to provide a full range of merchant banking
services
MERCHANT BANKING
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• Chapter 5

221
Dr.Triveni P.
Mutual Funds
WHAT IS A MUTUAL FUND?
A Mutual Fund is a trust that pools the savings

of a number of investors who share a common
investment objective in turn buy assets.
222
Mutual Funds
Modern mutual fund was first introduced in
Belgium in 1822.This form of investment soon
spread to Great Britain and France. Mutual
funds became popular in the united states in
the 1920s and continue to be popular since
1930s,especially open end mutual funds
mutual funds experienced a period of
tremendous growth after world war II, and in
1980s and 1990s
223
Mutual Fund in India
The origin of mutual fund industry in India is with the
introduction of the concept by UTI in the year 1963.
Though the growth was slow, but it accelerated from
the year 1987 when non-UTI players entered in
industry. The mutual fund industry goes through four
phases:- First phase 1964-87 (Establishment of UTI).
Second phase 1987-93 (Entry of public sector funds).
Third phase 1993-2003 (Entry of a private sector
funds). Fourth phase since Feb.2003 (Bifurcation of
UTI).
•
224
First Phase - 1964-87
Unit Trust of India (UTI) was established on 1963
by an Act of Parliament. The first scheme
launched by UTI was Unit Scheme 1964. In 1978
UTI was de-linked from the RBI and the
Industrial Development Bank of India (IDBI) took
over the regulatory and administrative control in
place of RBI. At the end of 1988 UTI had
Rs.6,700 crores of assets under management.

225
Second Phase - 1987-1993 (Entry of
Public Sector Funds)
SBI Mutual Fund was the first followed by
Canbank Mutual Fund (Dec 1987) Punjab
National Bank Mutual Fund (Aug 1989),
Indian Bank Mutual Fund (Nov1989). Bank of
India (Jun 1990), LIC in 1989 and GIC in
1990. Bank of Baroda Mutual Fund (Oct
1992). The end of 1993 marked Rs.47,004 as
assets under management.
226
Third Phase - 1993-2003 (Entry of
Private Sector Funds)
A new era started in the Indian mutual fund
industry, With the entry of private sector funds in
1993 The erstwhile Kothari Pioneer (now merged
with Franklin Templeton) was the first private
sector mutual fund registered in July 1993. The
1993 SEBI (Mutual Fund) Regulations were
substituted by a more comprehensive and revised
Mutual Fund Regulations in 1996 At the end of
January 2003, there were 33 mutual funds with
total assets of Rs. 1,21,805 crore. The Unit Trust
of India with Rs.44,541 crore (Asset value)
227
Fourth Phase - since February
2003
This phase had bitter experience for UTI. It was
bifurcated into two separate entities. One is the
Specified Undertaking of the Unit Trust of India with
AUM of Rs.29,835 crores (as on January 2003). The
second is the UTI Mutual Fund Ltd, sponsored by SBI,
PNB, BOB and LIC. It is registered with SEBI and
functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March
2000 more than Rs.76,000 crores of AUM and with the
setting up of a UTI Mutual Fund,
•
228
Mutual Funds in India-Introduction
• The Unit Trust or Mutual Fund is a trust at Law
(Indian Trust Act, 1882)
• A special type of managed, financial company
that sells units in itself, to the investors as a
pooled source of large, diversified assets
portfolio
• Allows a group of investors to pool their money
together with a predetermined investment
objective
• Enable investors to obtain high return-low risk
combination of financial assets
229
contd.
Mutual Funds in India

• Mutual Funds help Capital Market stability by
providing Structure, Clarity and Transparency
• Not just a vehicle to invest, but a vehicle to invest
wisely
• Performance Evaluation includes :
 Risk adjusted return of the Scheme’s NPV
 Portfolio Diversification
 Liquidity and Asset Size
• First Mutual Fund : UTI in 1964 (UTI Act, 1963)
230
Mutual Funds in India
• The Association of Mutual Funds in India
(AMFI)
is engaged in upgrading professional standards
and in promoting best industry practices in
diverse areas such as valuation, disclosure,
transparency
• SEBI is the principal regulator for all types of
Mutual Funds
• Mutual Fund portfolios are diversified, the
Investors take only the average Risk, and
therefore average return
231
Valuation of Units
• Net Asset Value (NAV) & Expected Rate of
Return (RRU)
• NAV =
Total Market Value of the Asset of the Fund –
Liabilities
Number of Fund’s Outstanding Units
• RRU =
(NAV t – NAV t-1 ) + Dividends + Capital Gain
NAV t-1
Where, t = Current Year t-1 = Previous Year
232
Organisation
• Five key Players in a Mutual Fund Company
 The sponsor(s)/The Board of Trustees (BOT)/Trust
Company
 The Asset Management Company (AMC)
 The Unit Holders or Investors
 The Custodian
233
Organisation
234
Advantages of Investing Mutual Funds
1. Professional Management
2. Diversification
3. Economies of Scale
4. Spread of Risk
5. Liquidity & Flexibility
6. Simplicity
7. Low transaction Costs
8. Taxes Benefit
9. Wide Choice of Schemes
235
Structure of Mutual Fund Industry
236
Types of Mutual Fund Schemes
I. By Structure
 Open - Ended Schemes
 Close - Ended Schemes
II. By Nature
2. Debt funds:
1. Equity fund:  Gilt Funds
 Diversified Equity Funds
 Income Funds
 Mid-Cap Funds  MIPs:
 Short Term Plans (STPs)
 Sector Specific Funds  Liquid Funds
 Tax Savings Funds 3. Balanced funds
237
contd.
III. By investment objective:
 Growth Schemes
 Income Schemes
 Balanced Schemes
 Money Market Schemes
 Sector Specific Schemes
 Other schemes
 Tax Saving Schemes
 Index Schemes
238
Determinants of Mutual Fund Performance
• General Determinants:
• Investor Confidence
• Business Cycle
• Macro economic conditions
• Liquidity and Efficiency in Stock Market
• Pre-tax Factors:
 Expenses & Risk
 Investment style
 Past pre-tax performance
 Turnover
239
contd.
Determinants of Mutual Fund Performance

• Post-tax Factors:
 Past pre-tax performance
 Expenses & risk
 Investment style
 Past tax efficiency
 Recent occurrence of large net redemption
• Working of Mutual Funds is Governed by:
 Indian Trust Act, 1982
 SEBI (Mutual Fund) Regulation, 1996
 UTI Act, 1963
 Provisions of Companies Act, 1956
 Guidelines of Ministry of Finance Govt. India & RBI
240
Growth & Performance
• As compared to gross savings mobilisation by MFs during the
period 2001-02 & 03 redemption rate is also high
• Foreign players are ventured in to India since 1994
• There is a mix picture of MFs developments in India with a
still underdeveloped structure
• Reason for underdevelopment includes low rate of return, lack
of product innovation, volatility in stock market, under
developed debt market, low investor confidence since UTI
failure, Political Interference in reform initiative
• No of MF schemes: 1 in 1964 to 755 in 2007
• AUM stands for Assets Under Management - This refers to the
total amount of money that is being managed by that fund
house.
241
Growth and Composition of Net Resources
Mobilized by mutual Funds (2003-04 to 2005-06) (Rs. Crore)
Years Subsidiaries of Banks Subsidiaries of UTI Private Sector Grand

(in Crore) FIs(in Crore) (in Crore) (in Crore) Total
(in Crore)
1989-90 888 315 5491 -------- 6,694
1990-91 2352 603 3199 -------- 6,154
1991-92 2140 427 8685 -------- 11,253
1992-93 1204 760 11,057 -------- 13,021
1993-94 148 239 9297 1,559 11,243
1994-95 761 576 8611 1,327 11,275
1995-96 111 221 -6314 240 -5.742
1996-97 -------- ------- -3,043 556 -2,313
1999-2000 336 295 4548 16,937 22,117
2000-01 518 1273 322 9869 11,982
2001-02 862 613 -7284 12,948 7138
2002-03 1074 914 -9434 12,026 4580
2003-04 4526 787 1050 41,510 47,873
2004-05 707 -384 -2467 7933 2789
2005-06 4278 2112 3473 40,811 242
50,674
National Institute of Securities
Markets
• National Institute of Securities Markets (NISM) is
a public trust, established by the Securities and
Exchange Board of India (SEBI), the regulator for
securities markets in India. It is located in Navi
Mumbai, India.
• NISM seeks to add to market quality through
educational initiatives. It is an autonomous body
governed by its Board of Governors. An
international Advisory Council provides strategic
guidance to NISM.
243
National Institute of Securities
Markets
• NISM consists of six different schools as follows:
• School for Investor Education and Financial
Literacy (SIEFL)
• School for Certification of Intermediaries (SCI)
• School for Securities Information and Research
(SSIR)
• School for Regulatory Studies and Supervision
(SRSS)
• School for Corporate Governance (SCG)
• School for Securities Education (SSE)
244
Other topics

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Dr.Triveni P.
Universal banking
Definition
• In universal banking, large banks operate
extensive network of branches, provide many
different services, hold several claims on
firms(including equity and debt) and
participate directly in the Corporate
Governance of firms that rely on the banks for
funding or as insurance underwriters.
Universal banking
• Universal banking is a superstore for financial
products under one roof.
• Universal banking refers to those banks that
offer a wide range of financial services,
beyond the commercial banking functions like,
Mutual funds, merchant banking, factoring,
credit cards, retail loans, housing finance,auto
loans,investment banking, insurance etc.
Universal banking
• The phenomenon of Universal Banking as a
distinct concept, as different from narrow
banking came to the forefront in the Indian
context with the Narasimhan Committee
(1998) and later the Khan Committee (1998)
reports recommending consolidation of the
banking industry through mergers and
integration of financial activities.
Advantages of Universal banking
• Economies of scale
• Profitable diversions
• Resource utilization
• Easy marketing on the foundation of a brand
name
• One-stop shopping
• Investor friendly activities
Disadvantages of Universal banking
• Grey area of universal bank
• No experience in long term lending
• NPA problem remained intact
Issues relating to conversion of financial
institutions into a Universal banking
Innovations in Banking and Financial
Services
Overview of NABARD
• NABARD is set up by the Government of India as a
development bank with the mandate of facilitating credit
flow for promotion and development of agriculture and
integrated rural development. The mandate also covers
supporting all other allied economic activities in rural
areas, promoting sustainable rural development and
ushering in prosperity in the rural areas.
• With a capital base of Rs 2,000 crore provided by the
Government of India and Reserve Bank of India , it
operates through its head office at Mumbai, 28 regional
offices situated in state capitals and 391 district offices at
districts.
NABARD
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Dr.Triveni P.
NABARD
• It is an apex institution handling matters
concerning policy, planning and operations in
the field of credit for agriculture and for other
economic and developmental activities in rural
areas. Essentially, it is a refinancing agency
for financial institutions offering production
credit and investment credit for promoting
agriculture and developmental activities in
rural areas.
NABARD
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Dr.Triveni P.
NABARD
• NABARD is set up as an apex Development Bank with a mandate for
facilitating credit flow for promotion and development of agriculture,
small-scale industries, cottage and village industries, handicrafts and
other rural crafts. It also has the mandate to support all other allied
economic activities in rural areas, promote integrated and sustainable
rural development and secure prosperity of rural areas. In discharging
its role as a facilitator for rural prosperity NABARD is entrusted with
1. Providing refinance to lending institutions in rural areas
2. Bringing about or promoting institutional development and
3. Evaluating, monitoring and inspecting the client banks

NABARD
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Dr.Triveni P.
NABARD
Besides this pivotal role, NABARD also:
• Acts as a coordinator in the operations of rural credit
institutions
• Extends assistance to the government, the RBI and other
organizations in matters relating to rural development
• Offers training and research facilities for banks,
cooperatives and organizations working in the field of rural
development
• Helps the state governments in reaching their targets of
providing assistance to eligible institutions in agriculture
and rural development
• Acts as regulator for cooperative banks and RRBs
NABARD
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Dr.Triveni P.
Some of the milestones in NABARD's
activities
• Refinance disbursement under ST-Agri & Others and MT-Conversion/
Liquidity support aggregated Rs.16952.83 crore during 2007-08.
• Refinance disbursement under Investment Credit to commercial banks,
state cooperative banks, state cooperative agriculture and rural
development banks, RRBs and other eligible financial institutions
during 2007-08 aggregated Rs.9046.27 crore.
• Through the Rural Infrastructure Development Fund (RIDF) Rs.8034.93
crores were disbursed during 2007-08. With this, a cumulative amount
of Rs.74073.41 crore has been sanctioned for 280227 projects as on 31
March 2008 covering irrigation, rural roads and bridges, health and
education, soil conservation, drinking water schemes, flood protection,
forest management etc.

NABARD
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Dr.Triveni P.
Some of the milestones in
NABARD's activities
Under Watershed Development Fund with a corpus of
Rs.613.71 crore as on 31 March 2008, 416 projects in
94 districts of 14 states have benefited.
• Farmers now enjoy hassle free access to credit and
security through 714.68 lakh Kisan Credit Cards that
have been issued through a vast rural banking network.

• Under the Farmers' Club Programme, a total of 28226
clubs covering 61789 villages in 555 districts have
been formed, helping farmers get access to credit,
technology and extension services.
NABARD
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Dr.Triveni P.
NABARD's Roles and Functions are
summarized below:
• Credit functions
• Development and promotional function
• Supervisory function
• Institutional and capacity building function
• Role in training
NABARD
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Dr.Triveni P.
Credit functions
NABARD's credit functions cover planning, dispensation
and monitoring of credit.
This activity involves:
• Framing policy and guidelines for rural financial
institutions
• Providing credit facilities to issuing organizations
• Preparation of potential-linked credit plans annually for
all districts for identification of credit potential
• Monitoring the flow of ground level rural credit
NABARD
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Dr.Triveni P.
Development and promotional
function
• Help cooperative banks and Regional Rural Banks to prepare
development action plans for themselves
• Enter into MoU with state governments and cooperative banks
specifying their respective obligations to improve the affairs of the
banks in a stipulated timeframe
• Help Regional Rural Banks and the sponsor banks to enter into
MoUs specifying their respective obligations to improve the affairs
of the Regional Rural Banks in a stipulated timeframe
• Monitor implementation of development action plans of banks and
fulfillment of obligations under MoUs
• Provide financial assistance to cooperatives and Regional Rural
Banks for establishment of technical, monitoring and evaluations
cells
NABARD
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Dr.Triveni P.
Development and promotional
function
• Provide organisation development intervention (ODI) through
reputed training institutes like Bankers Institute of Rural
Development (BIRD), Lucknow, National Bank Staff College,
Lucknow and College of Agriculture Banking, Pune, etc.
• Provide financial support for the training institutes of cooperative
bank
• Provide training for senior and middle level executives of
commercial banks, Regional Rural Banks and cooperative banks
• Create awareness among the borrowers on ethics of repayment
through Vikas Volunteer Vahini and Farmer’s clubs
• Provide financial assistance to cooperative banks for building
improved management information system, computerisation of
operations and development of human resources

NABARD
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Dr.Triveni P.
Supervisory function
• Giving directions and guidance in respect of policies and on matters
relating to supervision and inspection, reviewing the inspection
findings, suggesting appropriate measures
• Reviewing the follow-up action taken by Department of Supervision
(DoS) on matters of frauds and internal checks and control
• Identifying the emerging supervisory issues in the functioning of
cooperative banks/RRBs such as NPAs recovery, investment
portfolio, credit monitoring system, management practices, frauds,
etc.
• Suggesting necessary follow-up measures
• Recommending appropriate training for Inspecting Officers of
NABARD for imparting necessary skills and knowledge
NABARD
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Dr.Triveni P.
Supervisory function
• Suggest measures for strengthening of DoS
• Recommend issue of directions by RBI
• Oversee the quality of inspections carried out and
the reports issued
• Review the information generated through off-
site surveillance and other supplementary
vehicles, action taken thereon
• Undertake any other functions entrusted from
time to time by the Board of Directors of
NABARD
NABARD
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Dr.Triveni P.
Institutional and capacity building
function
• Help cooperative banks and RRBs to prepare development
actions plans for themselves
• Enter into MoU with state governments and cooperative
banks specifying their respective obligations to improve the
affairs of the banks in a stipulated timeframe
• Help RRBs and the sponsor banks to enter into MoUs
specifying their respective obligations to improve the affairs
of the RRBs in a stipulated timeframe
• Monitor implementation of development action plans of
banks and fulfillment of obligations under MoUs.
• Provide financial assistance to cooperatives and RRBs for
establishment of technical, monitoring and evaluations cells.
NABARD
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Dr.Triveni P.
Institutional and capacity building
function
• Provide organisation development intervention (ODI) through
reputed training institutes like Bankers Institute of Rural
Development (BIRD), Lucknow, National Bank Staff College,
Lucknow, College of Agriculture Banking, Pune, etc.
• Provide financial support for the training institutes of
cooperative banks
• Provide training for senior and middle level executives of
commercial banks, RRBs and cooperative banks
• Create awareness among the borrowers on ethics of
repayment through Vikas Volunteer Vahini/farmer's clubs
• Provide financial assistance to cooperative banks for building
improved management information system, computerisation of
operations, development of human resources, etc.
NABARD
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Dr.Triveni P.
Role of training
• National Bank Staff College, Lucknow
• National Bank Training Centre, Lucknow
• Zonal Training Centre, Hyderabad
• Regional Training Centre, Mangalore
• Regional Training Centre, Bolpur
• Bankers Institute of Rural Development
(BIRD), Lucknow
NABARD
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Dr.Triveni P.
MONETARY POLICY
• MONETARY POLICY Monetary policy refers to
the credit control measures adopted by the central
bank of a country to influence the level of
aggregate demand for goods and services or to
influence the trends in certain sectors of the
economy. Monetary policy operates through
varying the cost availability of credit. There
variations affect the demand for . And the supply
of credit in the economy, and the nature of
economic activities.
Monetary policy
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Dr.Triveni P.
OBJECTIVE OR GOALS OF
MONETARY POLICY
• Full Employment:- one of the objectives
of monetary policy is attain full
employment. It is not only because
unemployment leads to wastage of
potential output. But also because of the
loss of social standing and self- respect. It
also breeds poverty.
Monetary policy
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Dr.Triveni P.
MONETARY POLICY
• Price stability :- Another objective of
monetary policy is to stabilize the price level.
Both , rising and falling prices are bad as the
bring unnecessary loss to some and undue
advantage to others. They are associated with
business cycles. So a policy of price stability
keeps the value of money stable, eliminates
cyclical fluctuations. Brings economic
stability, helps in reducing inequalities of
income and wealth, secures social justice and
promotes economic welfare
Monetary policy
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Dr.Triveni P.
MONETARY POLICY
• Economic growth :-monetary policy can be imposed to
influence the rapid economic growth. Economic growth
is defined as “the process whereby the real per capita
income of a country increases over a long period of
time “it is measured by the increase in the amount of
goods and services produced in a country. A growing
economy produces more goods and services in each
successive time period. Thus, growth occurs when an
economy’s thus, economic growth implies raising the
standard of living of the people, and reducing
inequalities of inequalities of income distribution.
Monetary policy
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Dr.Triveni P.
MONETARY POLICY
• Balance of payments:- another objective of
monetary policy since the 1950s has been to
maintain equilibrium in the balance of
payments. It is also recognized that deficit in
the balance of payments will retard the
attainment of other objectives. This is because
a deficit in the balance of payment leads to a
sizeable outflow of gold.
Monetary policy
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Dr.Triveni P.
Role of monetary policy in a developing
economy
• Monetary policy plays an important role in increasing
the growth rate of the economy by influencing the cost
and availability of credit by controlling inflation and
maintaining equilibrium in the balance of payments.
• To control inflationary pressures To control
inflationary pressures, monetary policy requires the use
of both quantitative and qualitative methods of credit
control. The open market operations are not successful
in controlling inflation in underdeveloped countries as
the bill market is small and undeveloped.
Monetary policy
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Dr.Triveni P.
Role of monetary policy in a
developing economy
• The use of variable reserve ratio is more effective
than open market operations and bank rate policy
in LDCs. Since the market for securities is very
small, open market operations are not successful.
but a rise or fall in the variable reserve ratio by
the central bank reduces or increases the cash
available with the commercial banks without
affecting adversely the prices of securities.
•
Monetary policy
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Dr.Triveni P.
economy
• To achieve price stability Monetary policy is important for
achieving price stability. It brings a proper adjustment
between the demand for and supply of money. An
imbalance between the two will be reflected in the price
level. A shortage of money supply will hamper the growth
while an excess will lead to inflation. As the economy
develops the demand for money increases due to the gradual
monetization of the non-monetized sector, and the increase
in agricultural and industrial production. This will increase
the demand for transactions and speculative motives. So the
money supply will have to be raised more than
proportionate to the demand for money, to avoid inflation.
Monetary policy
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Dr.Triveni P.
economy
• To bridge BOP deficit Interest rate policy plays an
important role in bridging the BOP deficit.
Underdeveloped countries develop serious
balance of payments. To establish infrastructure
like power, irrigation, transport etc… and directly
productive activities like iron and steel, chemical,
electricals, fertilizers , etc, underdeveloped
countries have to import capital equipment,
machinery, raw materials, spares and components
thereby raising their imports,
Monetary policy
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Dr.Triveni P.
developing economy
• Interest rate policy High interest rate in an

underdeveloped country acts as an incentive to
higher savings develops banking habits and
speeds up the monetization of the economy which
are essential for capital formation and economic
growth. a high interest rate policy is anti
inflationary in nature, for it discourages
borrowing and investment for speculative
purpose, and in foreign currencies
Monetary policy
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Dr.Triveni P.
developing economy
• To create banking and financial institution
One of the monetary policies in an
underdeveloped country is to create and
develop banking and financial institution to
mobilize and channelize saving for capital
formation. establishment of branch banking in
rural areas and urban areas should be
encouraged. It will help in monetizing the non-
monetised sector and encourage saving and
investment for capital formation.
Monetary policy
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Dr.Triveni P.
economy
• Debt management It is one of the important
function of monetary policy in an under
developed country it aims at proper timing and
issuing of government bonds, stabilizing their
prices and minimizing the cost of servicing the
public debt. The primary aim of debt management
is to create conditions in which public borrowing
can increase from year to year borrowing is
essential in order to finance development program
and to control the money supply.
Monetary policy
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Dr.Triveni P.
Quantitative measures
• Open Market operations: Here, the RBI enters into sale and purchase of
government securities and treasury bills. So the RBI can pump money into
circulation by buying back the securities and vice versa. In absence of an
independent security market (all Banks are state owned), this is not really
effective in India.
• Bank rate policy: Popularly known as repo rate and reverse repo rate, it is
the rate at which the RBI and the Banks buy or exchange money. This
results into the flow of bank credit and thus effects the money supply.
• Cash Reserve ratio (CRR): This is the percentage of total deposits that the
banks have to keep with RBI. And this instrument can change the money
supply overnight.
• Statutory Liquidity Requirement (SLR): This is the proportion of deposits
which Banks have to keep liquid in addition to CRR. This also has a bearing
on money supply.
Monetary policy
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Dr.Triveni P.
Qualitative measures
• Credit rationing: Imposing limits and charging
higher/lower rates of interests in selective
sectors is what you see is being done by RBI.
• Change in lending margins: Or is the risk
weightage assigned for the various lendings.??
• Moral suasion: We hear of RBI's directive of
priority lending in Agriculture sector. Seems
more of a directive rather than persuasion!!
Monetary policy
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Dr.Triveni P.
Basic Understanding of BASEL
Norms
By,
Madhuri M
Background
• The Committee was formed in response to the messy liquidation of
a Bank(Herstatt) in 1974. On 26 June 1974, a number of banks had
released Deutsche Mark (German Mark) to the Bank Herstatt in
exchange for dollar payments deliverable in New York. On account
of differences in the time zones, there was a lag in the dollar
payment to the counter-party banks, and during this gap, and
before the dollar payments could be effected in New York, the Bank
Herstatt was liquidated by German regulators.
• This incident prompted the G-10 nations to form towards the end
of 1974, the Basel Committee on Banking Supervision, under the
auspices of the Bank of International Settlements (BIS) located in
Basel, Switzerland.
Basel I
• Basel I, that is, the 1988 Basel Accord, primarily
focused on credit risk. Assets of banks were classified
and grouped in five categories according to credit risk,
carrying risk weights of zero, ten, twenty, fifty, and up
to one hundred percent (this category has, as an
example, most corporate debt). Banks with
international presence are required to hold capital
equal to 8 % of the risk-weighted assets.
• Since 1988, this framework has been progressively
introduced in member countries of G-10, currently
comprising 13 countries, Most other countries,
currently numbering over 100, have also adopted.
Basel II
• . The purpose of Basel II, which was initially published in
June 2004, is to create an international standard that
banking regulators can use when creating regulations about
how much capital banks need to put aside to guard against
the types of financial and operational risks banks face.
• Basel II attempts to accomplish this by setting up rigorous
risk and capital management requirements designed to
ensure that a bank holds capital reserves appropriate to
the risk the bank exposes itself to through its lending and
investment practices
• . Generally speaking, these rules mean that the greater risk
to which the bank is exposed, the greater the amount of
capital the bank needs to hold to safeguard its solvency and
overall economic stability.
Basel III
• BASEL III: The new bank capital rules agreed
by global regulators on sep 13th 2010 brought
relief to worlds banks.
• The new requirement known as Basel III will
demand banks hold top quality capital totaling
7% of their risk bearing assets. The new
capital ratio represents a substantial increase
from the current requirement of 2%.
Highlights
• The predominant component of capital is common equity and
retained earnings.
• The Tier I capital that includes common equity and preferred stock
will be raised from 2% to 4.5% in phases starting from January 2013
to be completed within 2015.
• In addition banks have to set aside another 2.5% as contingency for
future stress.
• The new rules are based on renewed focus of Central Bankers
macro prudential stability as global regulators are determined t
ensure financial stability of the system as a whole rather than micro
regulation of individual bank.
• Indian banks are not likely to be impacted by the new rules as the
capital to risk weighted assets ratio of the Indian banking system
stood at 12.4% with Tier I at 9.3%.
• There may be some negative impact arising from shifting some
deductions from Tier I and Tier II capital to common equity.
At Present we follow Basel II Norms
• BASEL II is a framework for calculating regulatory
capital
• Regulators are interested in protecting
depositors.
• Banking collapse will have disastrous
consequences for society, thus public interest
served by regulation.
• Regulators require banks to hold capital to offset
losses.
• The original BASEL accord was a rules-based
approach to capital adequacy not based on internal
risk management practices.
• Simple formula: Regulatory Capital = 8% x RWA(Risk
Weighted Asset % of notional assets)
• BASEL II recognizes that banks are in the best position
to assess their risks and thus tries to align.
• capital measurement with internal risk measurement.
Comparison of Basel I & II
Basel I Basel II
Capital Calculation Top-down Bottom-up
Complexity Simple Complex
Risk Sensitivity Risk Insensitive Risk Sensitive

 Pillar One – Minimum Capital Requirements
Basel II • Recommends options of increasingly sophisticated
frameworks for banks to quantify credit and operational risks
Framework and allocate capital commensurate. with these risks
• Provides a range of methods for calculating the capital
composed of 3 requirements; banks may choose (within the bounds of
guidance by their supervisor) which approaches to employ.
pillars • Basel Committee Objective: Provide a more accurate, risk
sensitive approach to allocating capital to protect against
credit, market and operational risk exposure.
 Pillar Two – Supervisory Review Process

• Provides a framework and set of principles to guide an
expanded review of banks by supervisors. Supervisors will
ensure that banks have implemented processes that monitor
risks and that capital reserve levels remain adequate and
appropriate.
• Basel Committee Objective: Create a framework to guide
bank supervisory authorities in their supervision.
 Pillar Three – Market Discipline

• Prescribes a detailed set of requirements for public disclosure
of banks’ capital structure, risk profile, risk exposure and
capital adequacy –both quantitative and qualitative.
• Basel Committee Objective: Promote market discipline by
exposing banks’ capital structure, risk exposures and
mitigation strategies to the public.
Pillar I: Minimum Capital
Requirements
 This consists of risks like Credit Risk, Market Risk and Operational risk.
 Credit Risk:
• Assets classified as: Sovereigns, Banks, Corporates, Retail, Securitization,
Equities, Specialised Lending, “Other”.
• Assessment approach based on external ratings
• Risk weight x Exposure = RWA.
 Market Risk:
• Specific risk, Options risk, Credit Default risk charges Counterparty Credit
Risk.
 Two options to calculate Specific Risk charges:
• Standardized Approach
• Internal Models Approach
Operational Risk
• Basel Committee defines operational risk as:
• "The risk of loss resulting from inadequate or failed internal processes, people and
systems or from external events.“
• The following lists the official Basel II defined event types with some examples for
each category:
• Internal Fraud - misappropriation of assets, tax evasion, intentional mismarking of
positions, bribery
• External Fraud- theft of information, hacking damage, third-party theft and forgery
• Employment Practices and Workplace Safety - discrimination, workers
compensation, employee health and safety
• Clients, Products, & Business Practice- market manipulation, antitrust, improper
trade, product defects, fiduciary breaches, account churning
• Damage to Physical Assets - natural disasters, terrorism, vandalism
• Business Disruption & Systems Failures - utility disruptions, software failures,
hardware failures
• Execution, Delivery, & Process Management - data entry errors, accounting errors,
failed mandatory reporting, negligent loss of client assets
3 broad methods of Capital
calculation for Operational Risk
• Basic Indicator Approach - based on annual revenue of the Financial
Institution
• Standardized Approach - based on annual revenue of each of the

broad business lines of the Financial Institution
• Advanced Measurement Approaches - based on the internally

developed risk measurement framework of the bank adhering to
the standards prescribed (methods include IMA, LDA, Scenario-
based, Scorecard etc.)
• The Operational Risk Management framework should include

identification, measurement, monitoring, reporting, control and
mitigation frameworks for Operational Risk.
Pillar II-Supervisory Review Process
Pillar II establishes four key principles of Supervisory
Review:
• Banks should have a capital adequacy assessment
process/strategy.
• Supervisors should evaluate banks’ capital adequacy
assessments, process and strategy - and take appropriate
action if not satisfied.
• Supervisors should expect banks to operate above
minimum capital ratios and be able to enforce
requirements.
• Supervisors should intervene at an early stage to prevent
capital falling below minimum levels and should require
rapid remedial action if capital is not maintained/restored.
Pillar III-Market Discipline
The aim is to achieve market discipline through disclosures
that will allow market participants to assess information about
capital adequacy, risk exposures, and other relevant factors. The
reasons for this include:
• Reliance on internal methodologies gives banks a greater degree of
discretion in assessing capital requirements, therefore a greater
degree of disclosure is appropriate.
• In an environment of increased focus on corporate governance,
clear and complete information about risk management and capital
is already expected by the markets.
• Educating the public, and presenting the required information in a
way that advances rather than hinders understanding will be one of
the industry’s bigger challenges.
Hudco
The Housing and Urban
Development Corporation
Ravi raushan
Aiyappa
•The Housing and Urban Development Corporation Ltd.
(HUDCO) was incorporated on April 25, 1970 under the
Companies Act 1956, as a fully owned enterprise of the
Government of India.
•HUDCO focus on the social aspect of housing and utility

infrastructure provision. Preferential allocation of resources
to the socially disadvantaged.
•The effective span of HUDCO's omnipresent techno-financial

umbrella could be gauged by the fact that, on an average,
one in every 16 houses in the country has invariably
availed HUDCO's financial assistance.
•In spite of being commercial in its
orientation, it continues to focus on sectors
which are more socially relevant rather than
only on commercially viable and profitable
sectors. HUDCO's techno-economic focus, its
high caliber human resources, and its
financial and project re-engineering
capabilities has enabled it to continue as an
Institution par excellence in the field of
housing and urban development.
•A Unique Institution of Social Relevance

OBJECTIVE
• To provide long term finance for construction of houses
for residential purposes or finance or undertake
housing and urban development programmes in the
country.
• To finance or undertake, wholly or partly, the setting

up of new or satellite town.
• To subscribe to the debentures and bonds to be issued by

the State Housing (and or Urban Development) Boards,
Improvement Trusts, Development Authorities etc.,
specifically for the purpose of financing housing and
urban development programmes.

• To finance or undertake the setting up of
industrial enterprises of building material.
• To administer the moneys received, from time to

time, from the Government of India and other
sources as grants or otherwise for the purposes of
financing or undertaking housing and urban
development programmes in the country.
• To promote, establish, assist, collaborate and

provide consultancy services for the projects of
designing and planning of works relating to
Housing and Urban Development programmes in
India and abroad.

MISSION

"TO PROMOTE SUSTAINABLE HABITAT DEVELOPMENT

TO ENHANCE THE QUALITY OF LIFE"

VISION
"TO BE AMONG THE LEADING KNOWLEDGE HUBS AND FINANCIAL

FACILITATING ORGANISATIONS FOR HABITAT SETTLEMENT"
Major activities
Housing
Infrastructure
Action Plan Schemes
Building Technology
Consultancy
Disaster Mitigation
Research / Training
Implementing Agencies
HOUSING
Urban Housing
Rural Housing
Co-operative Housing
Community Toilets and Sanitation
Slum Up gradation
Staff Housing
Repairs & Renewals
Private Sector
Take out finance
Land Acquisition
HUDCO Home Loans
INFRASTRUCTURE
Utility Infrastructure
Commercial Infrastructure
Social Infrastructure
Industrial Infrastructure
Information/Communication/Entertainment
Telecom
Innovative Project
ACTION PLAN SCHEMES
VAMBAY
Housing Programme
Major Initiatives
HUDCO IN NEWS
•HUDCO Records Highest Profit - Pays dividend to the
Government
•Reduction in HUDCO's Interest Rates During 2009-10
•HUDCO earmarks 3% profit towards CSR activities
•HUDCO pays dividend
•HUDCO accorded 'AAA' rating
• HUDCO and MoHUPA ( Ministry of Housing and Urban

Poverty Alleviation) sign MoU for 2009 – 10
•HUDCO Conferred Enterprise Excellence Award

MICRO-FINANCE
Nishan
th
Prathib
a
Aiyap
pa
DEFINING MICROFINANCE
Microfinance is the provision of

financial services to low-income
clients, including consumers and the
self-employed, who traditionally lack
access to banking and related
services
Supply of loans, savings and other basic
financial services to poor, as the financial
services of microfinance usually involve
small amount of money, small loan, small
savings etc
The term microfinance helps to differentiate

these services from those which formal
bank provides.
HISTORY OF MICROFINANCE
• Credit union movement, 19th Century in Germany
• Microfinance movement begins in 1976
• Professor Yunus’ experimentation lead to the

initiation of the Grameen Bank in 1983
Microfinance does not satisfy an existing

market. Demand for microfinance services
emerges after creating institutions to provide
such services
The Microfinance Revolution
Started in Bangladesh, 1976: Grameen Bank
(Nobel Peace Prize 2006, Muhammad Yunnus)
10,000+ Microfinance Institutions in 60 countries
Reached 82 million households by end 2009
Repayment rates around 97%

Poverty is Multi-dimensional
low food consumption, poor housing
Lack of
Low human voice &
development POVERTY ability to
(education, influence
health)
decisions
illness, economic crises, natural disasters
RELATIONSHIP BETWEEN POVERTY AND MICROFINANCE
Access
Accesstotomicrofinance
microfinance
Increase incomes
Plan for the future

Make choices
Increase food consumption

Invest in education & health
Invest in housing, water, sanitation
The Impact of Microfinance
• Microcredit leads to an increase in household income
• Loans and deposit services can result in diversification

of income sources or enterprise growth
• Access to microfinance enables clients to build and

change their mix of assets
• Access to microfinance enables poor people to manage

risk better and take advantage of opportunities
 For women, greater control over resources
leads to growth in self-esteem, self-confidence,
and opportunities
 Microfinance clients tend to have higher levels

of savings than non-clients
 Enterprise revenues rise as a result of

microfinance services
The Goals of Micro-Finance
• Eradicate extreme poverty and hunger
• Achieve universal primary education
• Promote gender equality and empower women
• Reduce child mortality
• Combat HIV/AIDS, malaria, and other diseases
• Ensure environmental sustainability
Status of Micro Finance in India
Micro Finance Approaches
SHG –Bank Linkage -Dominant Model
Financing through MFIs

The Self Help Group (SHG)
A homogeneous group of about 15 to 20
Every member to save a small amount regularly. Pooled
savings kept in a savings bank account in SHG’s name
transaction costs of both the poor and bank reduced !
SHG to use pooled thrift to give interest bearing loans to
members –decisions taken in group meetings
Every member learns prioritisation and financial discipline.
Their capacities to think and handle larger resources
improves!
Depending on the SHG’s maturity, bank gives loan to the SHG
as a multiple of the pooled savings.
Adequate & sustained access to financial services
Features of SHGs
Enables exclusion of rich
Focus on women
Saving first and credit later
Intra group appraisal systems
Shorter repayment terms
Market rates of interest
Progressive lending
SHG-Bank Linkage Models
MODEL-I SHGs formed and

financed by Banks –20%
MODEL-II NGOs act as Facilitators –

SHGs financed directly –74%
MODEL-III SHGs financed by Banks

using NGOs as Financial
Intermediaries – 6%
MFIs
NGO MFIs
Societies Registration Act, 1860 or similar Provincial Acts and/or Indian
Trust Act,1882
Non-profit Companies
Section 25 of the Companies Act, 1956
Cooperative MFIs
Cooperative Societies Acts of the State & Central Governments
Non-Banking Financial Companies (NBFCs)

Indian Companies Act, 1956
Reserve Bank of India Act, 1934
ASA, Bangladesh
• ASA has the reputation of being the most rapidly expanding and
best-managed MFI in the world
• ASA has emerged as one of the largest and most efficient

Microfinance Institution (MFI) in the world and has been working
relentlessly to assist the poor since its inception in 1978
• The major drive behind ASA is to gradually eradicate poverty from

society
• As of June 2008, ASA has successfully extended its outreach in

Bangladesh through 3,324 branches and its 25,125 staff work
relentlessly to serve more than 7.13 million clients in 72,204
villages
THANK U U U….

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Financial Markets and

Financial Markets and Intermediaries-

Financial Markets and Intermediaries-

Financial Markets and Intermediaries-

Prasanna chandra:The financial system consists of a

Financial Markets and Intermediaries-

Financial Markets and Intermediaries-

• Capital Market- for long-term funds

• Provide citizen with means of payment

• Spread and put a price on financial risk

• Channel capital further so that savings can be used

Financial Markets and Intermediaries-

Financial Markets and Intermediaries-

Financial Markets and Intermediaries-

Financial Markets and Intermediaries-

Financial Markets and Intermediaries-

Financial Markets and Intermediaries-

Development Financial Institutions

Specialized Financial Institutions

Savers Lenders Households Foreign

Corporate Sector Un-organized Sector

Regulators Financial Financial Financial

Forex Capital Money Credit

Money Market Capital Market

• Affected by forces of supply and demand

• In Finance, Financial markets facilitates

Financial Markets and Intermediaries-

Govern Central Zero Coupon Bonds, Coupon Bearing Bonds,

Financial Markets and Intermediaries-

• Securities and Exchange Board of India

• Reserve Bank of India

Financial Markets and Intermediaries-

Financial Markets and Intermediaries-

• It regulates the stockbrokers and sub-brokers.

• To promote Research and Investigation

Financial Markets and Intermediaries-

• Promotes Investors Interest.

• Makes rules and regulations for the securities

Financial Markets and Intermediaries-

• For Share Prices

• For Mutual Funds

Financial Markets and Intermediaries-

• The Central Office of the Reserve Bank has

• It acts as the apex monetary authority of the

Financial Markets and Intermediaries-

Financial Markets and Intermediaries-

• Prescribes broad parameters of banking operations

Authority On Foreign Exchange:

• Manages the Foreign Exchange Management Act, 1999.

Financial Markets and Intermediaries-

Financial Markets and Intermediaries-

• Methods employed by the indigenous bankers are

• IB should have their accounts audited by certified

Financial Markets and Intermediaries-

– Administered interest rates

Financial Markets and Intermediaries-

• Macro economic stability

• To attain a balance between the goals of financial stability

Financial Markets and Intermediaries-