Financial Institution and Markets

April 2022 Examination

Q1. “A Financial System acts as an intermediary between borrowers and lenders of an

economy.”
In the light of the above statement, explain the functions and structure of the Indian
Financial System. (10 Marks)

Ans 1.

Introduction
The economic surroundings have advanced considerably after independence, resulting in
tremendous advances in a broad type of discipline. The economic system has had a stable year of
growth and diversity. For India to gain the overall advantages of its growing dependence on
voluntary, market-based selection-making, economic establishments should be efficient.

The financial region may be the maximum essential monetary reform tool. Economic
establishments must perform at their high quality to reach large country-wide desires, whether or
not mobilizing money or distributing it in a green, robust, and equitable manner. The Indian
economic device includes financial institutions, markets, economic instruments, and offerings
that allow money motion in India. The financial gadget allows the trade of products and services.
It acts as an intermediary between folks that want to keep cash and those who need to invest their
money.

Concept and analysis

The Indian financial machine consists of the following components:

Financial institution -Economic institutions, which act as mediators among investors and
debtors, are responsible for ensuring the financial device's easy functioning. It is viable to get a
greater return rate by investing extra unit savings in productive sports. The Indian financial
device presents various services to entities (people, groups, and governments) looking for advice
on various issues. Agencies and different groups in need of government or private-quarter
finance may also use a vast range of services (Pandey and Banwet, 2018.).

Financial Market -Open and negotiated lending markets are the two basic styles of monetary
markets. A negotiated loan is one in which the loan phrases are agreed upon with the aid of both
lender and the borrower. People in business, as an example, may additionally borrow cash from
economic groups. Loans are made to be had via huge and small lending institutions. It's a cold,
impersonal market in which considerable volumes of uniformed securities are exchanged on the
open market in a complex, impersonal placing. For example, the stock market is an instance of a
market reachable to the entire public. Economic markets are defined as a credit marketplace that
gives offerings to individuals, organizations, and networks in general. The credit score is
provided for each short-time period and lengthy-term business accomplishment.

Financial Instruments -Financial instruments, securities, and assets are examples of monetary
assets. Its miles essential to have this in the area to keep the financial machine strong. To
position it any other way, they're contracts with monetary prerequisites. Trading financial assets,
securities, and different devices on an economic market is a way for firms and individuals to
raise capital. Due to the fact, buyers and loan seekers have a massive range of wishes, and the
market gives many economic gadgets. A financial tool can be used to represent any financial
value within the economic region, whether or not it's far within the shape of tangible or digital
paper. Equity-based economic merchandise provides a hobby in a specific asset or asset
elegance. Debt-based financial gadgets replicate a loan made using an investor to the real estate
owner.

Financial Services- Financial services are provided in a ramification of forms. Asset and
liability management corporations offer those services. They help collect vital budgets and
ensure they're put to desirable use. These specialists decorate their expertise base to appear as a
resource.

Compared to other countries, Indian economic institutions are built from the ground up. Buyers
and depositors advantage from a progressive community of markets and financial establishments
providing numerous items and services. The presence of a prepared economic machine facilitates
cash movement between parties. Relying on who you ask, the Indian financial device can be
defined as having each national and international attain.

RBI

The Reserve bank of India is one of the world's most widespread central banks (RBI). The
banking business includes each scheduled and unscheduled commercial bank.

The commercial Banking area in India may be divided as follows:

Public Bank Sector State Bank of India state Bank Group

Associated Bank Nationalized

14 Nationalized Bank-1969 Nationalized

6 National Banks - 1980 Sponsored

Regional Rural Banks by Sponsored

Public

Private Banks other private banks

New private banks

cooperative banks in India

Non Scheduled Bank

Conclusion

After analyzing everything, the researcher should conclude that implementing banking reforms
might also improve a financial institution's financial fitness and popularity. Under the Banking
Corporation’s regulation Act of 1949, the Reserve bank of India (RBI) is tasked with regulating
and supervising business banks in India. The reason for capital adequacy requirements,
prudential sales popularity requirements, and repayment for failed loans is to decorate banks'
financial health (Khan, 2013). Banks' easy and healthy stability sheets mirror the absence of
external constraints in the laws of pre-emption of funds, benefits, and prudential regulation, as
well as in recapitalization and capital base write down. While the reform attempt has presented
mild issues in public area economic institutions, it has also found new ones. Improve Indian
banks' fitness and equip them to participate in a rapidly liberalizing and globalizing market.

Q2. Rose Ltd. is a newly established company dealing in apparels. The company is
currently getting good number of orders and hence is making good amount of business. To
meet the expenses incurred for delivering these orders, the company is in need of short-
term loans. Some financial advisors have suggested Rose Ltd. to approach Money Markets
for such short-term capital requirements. In context of the above case, you are required to
explain the Meaning, Features and Instruments traded in the Money Markets. (10 Marks)

Ans 2.

Introduction
The Reserve bank of India defines the "cash market" as a market wherein short-term financial
assets are exchanged. Cash exchange within the number one and secondary markets depends on
these assets in view that they are a close equal for coins. The cash marketplace is essentially a
mechanism for lending and borrowing money for brief-time period finance. It includes business
banks, non-banking economic organizations. Their maximum defining characteristics are money
market products' brief maturity dates and excessive liquidity.

Bill markets, reputation markets, call money markets, and different submarkets are all part of the
broader financial enterprise called cash markets. Instead of utilizing real cash, cash market
traders utilize fictional financial contraptions and exchange bills and government securities. On
the other hand, Brokers aren't accredited to behavior money market transactions, which have to
be instead finished through formal office work, conversation, or a mixture of the two.

Concept and analysis

The traits of the money marketplace are as follows. Those can assist Rose Ltd in organizing their
employer dealings

● In addition to functioning as a depository for quick-time period surplus cash, the money
market also works to relieve short-time period deficits.

● Their cooperation makes liquidity regulation simpler.

● Money marketplace liquidity gives low-cost loads to quick-term fund clients like Rose
Ltd.

● They intend to resource inside the improvement of effective economic regulations.

● They help business banks in walking more efficiently.

Features of Money Market Instruments

1. Exceptional Flow Rates

The unique capability of that financial property is its excessive flow fee. They provide investors
with a consistent income supply and are highly liquid because of their short maturities. As a
result, money market items are seen as close substitutes for coins.

2. Reliable

Investing in those financial assets is one of the most straightforward answers to be had on the
market. Money market devices have a minimum risk of loss due to their issuers' notable credit
score scores and pre-determined returns (Mesagan,2019).

3. Fixed Returns
Cash market items are marketed to reduce their face value, so the investor knows precisely how
much cash they will get while the product matures. While choosing which device is most
applicable to someone's condition, the desires and investment horizon are considered.

Money Market Instruments

Cash market instruments are devices or tools used inside the money market. Each borrower and
creditors may additionally advantage from these quick-term, clean-to-access agreements.

Kinds of money market units

● Treasury bills (T-bills)

Treasury bills are among the safest money market securities since the federal government
troubles them. In case you keep Treasury bills, you are secure. Moreover, there's no chance of
using them. As a result, their returns are not all that appealing." Treasury bills with maturities
from three months to a year are exchanged within the primary and secondary markets. The
federal government sells Treasury notes at a reduction from their face value. If the adulthood fee
of the tool is much less than what the purchaser paid at auction, the consumer could be interested
in the distinction. The Indian authorities now problems three treasury notes via auction: 91-day,
182-day, and 364-day.

● Deposit Receipt (CDs)

Certificates of Deposit are deposit receipts utilized by financial institutions and banks (CDs).
There are widespread differences between a certificate of Deposit and a hard and fast Deposit
Receipt. There is a vast difference between a CD and a digital download. You could trade
certificates of Deposit for some other financial tool for the second time. Due to their lower risk
and better interest quotes than Treasury payments and period deposits, certificates of deposit
(CDs) issued through the RBI have become a famous short-time period surplus investment
alternative for companies. The fact that certificates of Deposit are very liquid advantages the
institutions that issue them. CDs, like treasury bills, have maturities ranging from seven days to
365 days and are given at a discount.

● Commercial paper (CPs)

To raise finances from the marketplace, distinctly rated organizations trouble commercial papers
with short-term promissory notes. Maturation timeframes for CPs typically vary from one day to
270 days. Business files that are substantially utilized in many nations (including Japan) generate
large yields than Treasury bills however are inherently less safe. There is also a thriving
secondary marketplace for business documents.

Conclusion

Monetary market contraptions that are short-time period bonds and cash market securities come
under this group and are called money market devices. Because those gadgets are liquid, they no
longer pose an extensive danger. The cash market contraptions traded at the trade is managed
with the aid of the authorities, monetary establishments, banks, and companies. Due to the fact
this market is short and easy, it is feasible to lend and borrow money for a quick time frame.
Customers and competition need to be aware of the maximum contemporary fashion traits to
thrive inside the market.

3.a. Pooja is a Software Engineer by profession. She possesses good knowledge about the
Financial System and the various instruments traded in Financial Markets. She has been
investing her savings in the various IPOs but is not very confident when it comes to
Secondary Market. You are therefore required to explain to Pooja the Meaning of
Secondary Market along with the Trading Mechanism in the Secondary Market. (5
Marks)

3.b. Mr. Damodar has recently started investing in the Financial Market as guided by one
of his close friends. Since Mr. Damodar has no detailed knowledge about the Financial
Market, he is unable to understand the reasons for fluctuations in the Financial Market. In
the light of the above case, explain the Meaning and Types of Risks in Financial Market.
(5 Marks)

Ans 3a.

Introduction
The phrase "secondary market" refers to a stock change where investors buy and promote stock
in various companies. These issued by the issuing enterprise are decided solely through the
corporation's market performance, not through transactions between investors. So long as the
issuing firm does not intrude, buyers are free to accumulate and sell shares. 

Concept and analysis

As per the question, Mr. Damodar has recently begun investing in the financial market. Presently
he has much less information about this subject. So in context to this mechanism, in the
secondary market are sold from one investor to any other. Investing in this marketplace generates
a profit. Examples are brokers and advisory service vendors, including commission brokers and
securities dealers. Non-Banking financial establishments, insurance corporations, banks, and
mutual funds are examples of financial intermediaries.

The fact that consumers and dealers make up the majority of the stock market distinguishes it
from other styles of exchanges. But, the market isn't always the handiest made up of buyers and
sellers. Before starting to exchange stocks at the inventory marketplace, one should first open a
Demat and trading account. An IPO, additionally known as a preliminary public providing, is the
primary time a company's shares are issued to most people (IPO). 

Investing in a business stock may additionally bring about earnings or losses. This kind of stock
buying and selling is done via a stockbroker or brokerage business as an intermediary. You can't
cross incorrect with a dealer acting as a liaison between you and the stock market. While you
want to buy or sell a stock, you vicinity an order with your broker at a predetermined price. The
order is placed by the broker, after which forwarded to the inventory trade. After then, a buyer or
dealer has to be placed to execute the order at the fee distinct. The alternate alerted the broker
that their order was processed shortly later. To reduce the chance of default, stock exchanges
maintain a record of all of the facts of customers and sellers who exchange available on the
market through brokers. That is observed through an electronic switch of the seller's object to the
consumer. Settlements used to take weeks before Demat and digital settlements. However, today
they may be completed in T+2 days. 

Conclusion

Earlier than becoming a member of this profitable quarter, it's far essential to understand one's
risk-taking capability. A SEBI-registered economic adviser can offer you an assessment of your
chance profile. It additionally requires extensive expertise in the financial markets. The Indian
Capital Markets have their own set of issues to address in terms of drawbacks. 

Ans 3b.
Introduction
The term "economic markets" refers to any place in which securities are traded. This is a broad
period. Several monetary markets are available, together with FX, money, stock, and bonds.
Assets and securities in those markets may be traded on regulated exchanges or over the counter

Concept and analysis

Mr. Damodar has much less information about the financial markets in keeping with the case
examination. As a result, the potential dangers related to those are explained in this element.
Economic markets, which deal in many economical products, are critical to capitalist systems.
While economic markets crumble, recessions and process losses may additionally happen. First
and essential, each company must prioritize minimizing financial chance. The marketplace's
volatility can be produced by a ramification of reasons, which elevates the risk of undertaking
economic transactions. Stocks, bonds, currencies, and derivatives are monetary merchandise
traded in the world's monetary markets. Intending to charge matters efficaciously, economic
markets depend significantly on the availability of information.

Risk with Market - Inside the economic context; marketplace chance can be described as either
directional or asymmetric. Directional chance is caused by various factors, such as fluctuations
in stock charges and interest charges. On the other hand, Volatility can be used to represent the
chance that isn't directed. Those are full-size theories, and they could fluctuate with the specific
situation.  

Liquidity Risk- While transactions cannot be finished, this type of threat happens. Due to the
fact, there are not enough buyers or dealers, and asset liquidity is jeopardized. Liquidity danger is
classed into asset risk and finance liquidity hazard. 

Operational Risk- This kind of threat may be generated using operational flaws, including lousy
management or faulty gadgets. Even as wrong version utility increases model danger, a loss of
controls will increase the opportunity of fraud. 

Legal Risk- legal regulations, which include a lawsuit, constitute an economic risk. There may
be a legal danger while a firm is forced to bear the financial price of felony moves.

Conclusion

Ultimately, the researcher could finish that economic markets encompass the stock and bond
markets, the foreign exchange market, and the derivatives market. Monetary markets are
necessary for capitalist economies to operate. The inventory marketplace is a specific kind of
economic market.