SUBJECT – INDIAN BANKING AND FINANCIAL SYSTEM

NAME: YATIN BANSAL

PRN:20021021534
BATCH: 2020-23
SEMESTER -3

IBFS
Ans 1) The Reserve Bank of India (RBI) uses credit control as a monetary policy tool to
manage the demand for and supply of money as well as the flow of credit in an economy. The
Reserve Bank of India supervises commercial bank loans. According to the RBI, the main
goal is to "prevent inflationary tendencies in the economy in order to ensure strong economic
growth with appropriate liquidity and maximum utilisation of resources."
A bank's ability to create credit sets it apart from other financial institutions. Simply put,
credit creation is the rise of deposits. Furthermore, because demand deposits are the most
common form of payment, banks can expand their demand deposits to a multiple of their cash
holdings. Credit control and creation is an important tool used by RBI, a major weapon of the
monetary policy used to control the demand and supply of money (liquidity) in the economy.
Central Bank administers control over the credit that the commercial banks grant. Such a
method is used by RBI to bring "Economic Development with Stability". It means that banks
will not only control inflationary trends in the economy but also boost economic growth
which would ultimately lead to increase in real national income stability. In view of its
functions such as issuing notes and custodian of cash reserves, credit not being controlled by
RBI would lead to Social and Economic instability in the country.

RBI alters its credit control measures on a regular basis, sometimes using more quantitative
credit control measures and other times using more qualitative credit control measures,
depending on the economic situation.

RBI brings timely changes in its credit control measures and sometimes uses more
Quantitative Credit control measures and sometimes Qualitative Credit Control measures as
per the economic requirement. The measure tools to regulate the credit control are Bank Rate,
Cash Reserve Ratio, Statutory Liquidity Ratio, Repo Rate among others.

Credit creation and control objectives include:

• ensuring pricing stability inside the country; and

• establishing financial stability, i.e., money market stability.
• The purpose is to maintain a stable foreign exchange rate.
• To meet financial obligations in the face of a downturn in the economy;
• To boost the economy's revenue, output, and employment; and
• To boost the country's economic growth and development.
There are two methods of credit creation and control and they are:
• Qualitative Tools
1. Margin Requirements- The Central Bank determines the margin requirements for
certain securities. A change in margin requirements will have an impact on the flow of credit.
A rise in the margin requirement reduces the borrowing value of the security, whereas a
decrease in the margin requirement increases the borrowing value of the security.
2. ii) Credit Rationing- Credit rationing is a mechanism used by the Central Bank to
limit the maximum amount of loans and advances and, in some situations, to set ceilings for
specific types of loans and advances.

• Quantitative tools
1. Bank Rate- It refers to the rate charged by the RBI to commercial banks on loans and
other advances. It has a direct relationship with other rates of interests, i.e., an increase in
bank rate a lead to increase in other rates as well. In an inflationary situation., the RBI would
increase the Bank rate, so that commercial banks are discouraged from giving out loans and
thus, money supply decreases. But, in a deflationary situation, the bank rate would be
decrease so that more loans are given, thus increasing money supply in the economy.
2. Open Market Operations- It refers to sale and purchase of government securities by
the RBI to commercial banks. In an inflationary scenario, the RBI would sell government
security to the commercial banks and in a deflationary scenario, the RBI would purchase it
from the commercial banks.

Ans 2) Money Market refers to the market where the arrangement of funds is based for a
period of less than one year. The money market guarantees a great degree of safety and thus
also low rates of return to the investor.
Investors interested in the money market can access it most easily through money market
funds. A money market fund is a kind of mutual fund that invests in highly liquid, short-term
instruments. These instruments include cash, cash equivalent securities, and high-credit-
rating, debt-based securities with a short-term maturity. Money market funds are intended to
offer investors high liquidity with a very low level of risk. Money market funds are also
called money market mutual funds.

Some of the examples of instruments of money market are:

Calls and Inter Bank Term Money, repo transactions (i.e., banks 'borrowing window from the
RBI), Certificate of Deposits, Commercial Papers, Treasury Bills, Bill Rediscounting, etc.)

Talking about the instruments in detail:

1.Treasury Bills
T-bills are a common type of money market instrument. They mature at different rates in the
near term. The Indian government offers it at a discount for 14 to 364 days. These securities
are sold at a discount and are repaid at face value when they reach maturity. TBs can also be
purchased by a company, firm, or individual. They're available in lots of Rs. 25,000 for 14
days and 91 days, and Rs. 1,000,000 for 364 days.
2. Business Bills
Commercial bills, which are also money market instruments, function similarly to bills of
exchange. They are issued by businesses to meet their short-term cash needs.These
instruments have a lot more liquidity. In the event of an emergency, the funds can be
transferred from one individual to another.
3. A deposit certificate
CDs are a type of negotiable term deposit that is accepted by commercial banks. A
promissory note is frequently used to issue it.

Individuals, corporations, trusts, and other entities can all receive CDs. CDs can also be
issued at a discount by scheduled commercial banks. These can last anywhere from three
months to a year. When granted by a financial institution, the same is valid for a minimum of
one year and up to three years.

4. Commercial Paper (CP)

Issued by corporations to cover their short-term working cash needs. As a result, it can be
used as an alternative to borrowing money from a bank. In addition, the duration of
commercial paper varies from 15 to 1 year.

The Reserve Bank of India establishes policy for the issuance of CPs. As a result, in order to
issue a CP in the market, a corporation must first obtain RBI permission.
Denomination and the size of CP:
• Minimum size – Rs. 25 lakhs
• Maximum size – 100% of the issuer’s working capital

5. Call Money
It is a segment of the market where scheduled commercial banks lend or borrow on short
notice (say a period of 14 days). In order to manage day-to-day cash flows.

The interest rates in the market are market-driven and hence highly sensitive to demand and
supply. Also, the interest rates have been known to fluctuate by a large % at certain times.
Ans 3) A roadshow is a series of presentations given in several places before to an initial
public offering (IPO). The roadshow is a sales pitch or promotion given to potential investors
by the underwriting firm and the company's management team prior to becoming public.
Roadshows are typically held in big cities to generate interest in a forthcoming deal. The
company, its history, and important individuals are all presented to potential investors.
Investment bankers travel to several locations to introduce the IPO to institutional investors,
analysts, fund managers, and hedge funds in order to pique their interest in the asset. The
roadshow also gives underwriters a chance to introduce the firm's management and investors
a chance to hear management's vision and ambitions for the company.
The purpose of the roadshow is to generate excitement for the company's approaching IPO,
which means that the IPO's success is contingent on the roadshow's performance.
Roadshows are a valuable tool for book building and assisting underwriters in appropriately
pricing a marketed offering. They enable the corporation's management to meet many of their
largest potential investors in a short period of time and deliver a convincing case for why they
should invest.
The final prospectus is developed and distributed to potential investors once a roadshow is
completed. Based on the information obtained during the book-building process, an initial
price for the offering is decided, and the IPO date is set.
A successful roadshow is often critical to the success of the IPO. The goal of the roadshow is
to generate excitement about the company and its IPO. By traveling to different cities,
underwriters introduce the IPO to institutional investors, analysts, fund managers, and hedge
funds to interest them in the security. The roadshow also provides an opportunity for the
underwriters to introduce the company's management and for investors to hear management's
vision and goals for the company.
Roadshow events may attract hundreds of prospective buyers interested in learning more
about the offering in a face-to-face setting and online. Events may include multimedia
presentations and question-and-answer sessions. Many companies may hold smaller, private
meetings in the months and weeks leading up to the IPO, while the majority livestream some
of their events to those who can't attend. Some of the topics covered during a roadshow
include the company’s history and any future plans. Other information may include:
• A video or digital media presentation
• Meeting the executive management
• The unique value proposition of the company
• Earnings and financial performance
• Prior sales growth with projections and forecasts
• The investment opportunity and growth potential
• IPO stock price target
The roadshow is essential to the IPO since it provides a forum where the company can
communicate directly with potential investors to address any concerns or highlight successes.
The underwriters also use information gathered from investors to complete the book-building
process, which involves gathering prices potential investors are willing to pay for the
offering.

Ans 4) As a consequence of strong government policies supporting entrepreneurship and

innovation, as well as significant funding from top venture capital and private equity firms,
India has risen to prominence in the global start-up ecosystem in recent years.
Businesses require finance for a variety of reasons, but there are a few that come up
frequently. Working capital, machinery acquisitions, personnel expansion, and even
refinancing current loans to minimize monthly payments are all possible uses for business
grants and loans.
A venture capitalist (VC) is a private equity investor who makes investments in high-growth
companies in exchange for a stake in the company. Sponsoring new initiatives or supporting
small businesses that want to expand but don't have access to the stock market are examples
of this.
Venture capitalists (VCs) are experienced, generally institutional investors who specialize in
helping businesses grow by offering finance, business expertise, and a network of contacts.
They are frequently in the enviable position of allowing entrepreneurs to "pitch" within a
limited time frame due to significantly greater demand for VC funding than supply.
New entrepreneurs are always worried about how they'll pay for their ventures, but venture
capitalists are there to aid for a reason. Venture capitalists are drawn to enterprises that have a
competitive advantage, whether through private intellectual property or other ways. Maybe
you have intellectual property that you can utilise to keep competitors at bay.
Venture capitalists are interested in investing in start-up companies (private companies)
because they can profit handsomely if the company becomes public or undergoes another
liquidity event, such as a merger.
Venture capital firms or funds invest in these early-stage businesses in exchange for equity,
or a piece of ownership. In the hopes of seeing some of their investments succeed, venture
capitalists take on the risk of investing in high-risk start-ups.
They invest in start-ups for the following reasons:

PROFITS: Typically, venture capitalists are aiming to make a profit. Entrepreneurs can
anticipate VCs bringing up the subject of existing revenues early in the conversation. While
concepts like "changing the world" and "revolutionising technology" may seem intriguing, a
seasoned VC will focus on the company's current sales. As a result, it's reasonable to assume
that VCs are more interested in a profitable idea than a revolutionary one.
POWER TO MAKE DECISIONS: Venture capitalists are frequently interested in joining a
company's board of directors. Their plans for their board seat, on the other hand, are typically
very different from those of a founder. Most venture capitalists aren't interested in buying
your company or managing it on a daily basis. Instead, they usually simply want to be a part
of the decision-making process in order to provide the highest potential return on investment.
FOCUS ON IPO: VCs aren't normally in the business of investing in a firm for the long
haul. VCs, like many other private equity professionals, are often focused on a successful exit
- typically an IPO that returns multiples on their investment.

Ans 5) A Non-Banking Financial Company (NBFC) is an organization enrolled under the

Companies Act, 1956 occupied with the matter of advances and advances, obtaining of
offers/stocks/securities/debentures/protections gave by Government or neighborhood
authority or other attractive protections of a like sort, renting, recruit buy, protection business,
chit business yet does exclude any establishment whose foremost business is that of farming
movement, modern action, buy or offer of any products (other than protections) or offering
any types of assistance and deal/buy/development of steadfast property.

Distinction between banks and Non-Banking Financial Corporations: Non-Banking Financial

Corporations are doing capacities like that of banks; but there are a couple of contrasts:
1) A Non-Banking Financial Corporations can't acknowledge request stores,
2) It isn't a piece of the installment and settlement framework and as such can't give checks to
its clients,
3) Deposit protection office of DICGC isn't accessible for Non-Banking Financial
Corporations investors not at all like if there should arise an occurrence of banks

In spite of this NBFCs are confronting emergency which are making issues In the economy
NBFCs are confronting a liquidity crunch. As such, they don't have cash to loan or are
confronting tremendous challenges in raising assets. NBFCs ordinarily acquire cash from
banks or offer business papers to common assets to fund-raise. They on-loan these cash to
little and medium endeavors, retail clients, etc. At the point when NBFCs don't have cash to
loan, that lessens the credit stream to the economy, hits monetary development and makes
numerous borrowers’ default on advances.
We can note down two things here:
One, the NBFC plan of action itself is imperfect, regardless. It depended on raising
momentary assets which were then loaned out as long-haul credits. This prompts a
circumstance called a resource obligation befuddle. For instance, a NBFC fund-raises by
selling half year obligation papers and on-loans this as a vehicle advance with a residency of
5 years. This prompts a circumstance where the NBFC needs to turn over (or restore) the half
year obligation paper or raise new credits to reimburse the obligation paper. In fun occasions,
this occurs as per normal procedure. Be that as it may, when difficulties are out of hand, this
cycle is broken.
That drives us to the subsequent element. The cycle was broken by a default of certain
organizations of the IL&FS bunch. There were fears that this would end up being a virus.
Basically, banks, common assets and their financial backers were worried about the
possibility that that all the more such substances wouldn't default. As this dread grabbed hold,
numerous foundations wouldn't give cash to NBFCs. The expense of assets rose by however
much 150 premise focuses for NBFCs.
Over the most recent couple of years, particularly after demonetisation, there was abundance
cash sloshing around in the framework. That is on the grounds that a great deal of money was
saved with banks and financial backers stopped more cash with shared assets. As asset chiefs
of obligation plans conveyed the assets in currency markets, NBFCs had the option to get to
modest assets without any problem. They had the option to develop their advance portfolios
at twofold the speed of banks.
Yet, on the other side, note that shared asset chiefs were pursuing exceptional yields for their
financial backers thus also were NBFCs and banks. This drove them to face challenges and
put squeeze on the nature of their endorsing norms. Note that this overabundance cash was
given not exclusively to NBFCs yet additionally to different organizations like framework
players - - as credit against shares - - which have returned to haunt now.

As clarified before, NBFCs are having an undeniably significant impact in the economy.
Their portion of credit has expanded on the grounds that they were loaning in areas where
banks would not go or didn't have any desire to go. The pre-owned business market is a
genuine model here.
Since NBFCs are thinking that it is hard to fund-raise or paying a gigantic expense for doing
as such, this will gag the progression of credit to the economy. It will hit the MSME area
which is now experiencing the twin blows of demonetisation and the labor and products
charge

Ans 6) The statement "The stock market is not for the common man, It has the ability to wipe
out all of a person's savings." is not entirely right; the stock market is both a wealth creator
and a wealth destroyer. People who study and gain the necessary knowledge to invest in the
market make the most of it over time, whereas those who just invest without gaining the
necessary expertise remain in the market and lose money. I disagree with the assertion
because the stock market is designed for anyone who takes the time to learn about it, which
includes ordinary people like us. The stock market refers to the market in which equity shares
of publicly-traded businesses are bought and sold, the stock market measures the aggregate
value of all publicly-traded companies. Along with debt markets, which are often more
onerous but do not trade publicly, the stock market is one of the most important avenues for
firms to raise money. Businesses can become publicly listed and raise more financial capital
for expansion by selling shares of ownership in a public market. This demonstrates the value
of equities and the stock market in the economy.
The stock market has shown to be a significant aspect of the dynamics of economic activity,
assisting firms in raising debt-free cash that aids in the development of their businesses. An
up-and-coming economy is defined as one in which the stock market is on the rise. The stock
market is sometimes seen as the most important measure of a country's economic strength
and progress.
Rising stock prices, for example, are frequently linked to higher corporate investment.
It can be said that the stock market and the economic performance of a country go together.
Thus, when the stock market of a country does well, it usually indicates the growth of the
economy of the country as a whole.
The stock market reflects an economy's economic conditions. If an economy is growing,
output will rise, and most businesses should earn more. This increased earnings makes the
company's stock more appealing to investors since it allows it to pay larger dividends to
shareholders. Shares will profit from a long period of economic development.
If, on the other hand, the stock market forecasts a recession, share prices would often decline
in expectation of lower profits.
Stock markets will often decrease if the economy is expected to enter a recession. This is
because a recession means reduced profits, less dividends, and the possibility of companies
going bankrupt, all of which are negative for shareholders.
In addition, in times of uncertainty, investors may opt to buy bonds for the added security
rather than shares because of the higher risk.
Thus, it can be very well noted that the stock market is very important for the growth of the
economy of the country.
Ans 7) Mutual funds aggregate money from a group of participants and invest it in a variety
of securities, including stocks, bonds, money market accounts, and other types of
investments. Different investment objectives are pursued by different funds, and their
portfolios are customized to meet those goals. Each fund is overseen by a money manager.
By allocating assets inside the fund, they produce income for investors.
Mutual funds can hold a wide range of securities, making them an appealing investment
alternative. Diversification, simplicity, and cheaper expenses are just a few of the reasons
why people prefer mutual funds over individual equities. Ask any investment professional,
and they'll tell you that diversity is one of the most important methods to limit risk. After the
financial crisis, most people learned this lesson. One of the key reasons investors use mutual
funds to offer the equity element of their portfolio rather than buying individual stocks is
their ease.
The SEBI plays a very important role in protecting the interest of investors by:
First, increase investor capacity through education and awareness so that they can make well-
informed investment decisions. SEBI strives to ensure that the investor learns how to invest,
that is, that he obtains and uses the information needed for investing, evaluates various
investment options to suit his specific goals, ascertains his rights and obligations in a
particular investment, deals through registered intermediaries, takes necessary precautions,
and seeks help if he has a grievance, among other things. SEBI has held investor education
and awareness workshops both directly and through investor organizations and market
participants, and has encouraged market participants to hold similar events. It keeps an up-to-
date, comprehensive website for investor education. It uses numerous forms of media to
distribute various types of warnings. It responds to investor questions by phone, e-mail,
letters, and in person for individuals who come to the SEBI office.
Second, ensure that the market has processes and practices in place to ensure that transactions
are secure. To protect the interests of investors in securities, SEBI has implemented various
measures such as a screen-based trading system, dematerialization of securities, T+2 rolling
settlement, and framed various regulations to regulate intermediaries, issue and trading of
securities, corporate restructuring, and so on. It also assures that only fit and proper people
are allowed to work in the market, that every participant has an incentive to follow the rules,
and that miscreants are punished severely.
Third, make every detail related to investment available in the public domain. The Securities
and Exchange Board of India (SEBI) has implemented a disclosure-based regulatory regime.
Issuers and intermediaries are required to disclose important information about themselves,
their goods, the market, and regulations under this framework so that investors can make
informed investment decisions based on these disclosures. SEBI has established and monitors
a number of initial and ongoing disclosures.
Finally, make it easier to resolve investment complaints. SEBI has a comprehensive process
in place to help investors with complaints about intermediaries and publicly traded
businesses. It follows up with corporations and intermediaries that do not resolve investor
complaints by sending reminders and meeting with them. When progress in resolving
investor grievances is not satisfactory, it takes necessary enforcement procedures as permitted
by law (including launching adjudication, prosecution processes, and directions). It has
established a thorough arbitration structure for the resolution of investor disputes in stock
exchanges and depositories. When a broker is deemed a defaulter, the stock exchanges have
investor protection funds to pay investors. The depository compensates investors for losses
caused by the depository or a depository participant's fault.