DSC-8 - Financial Market and Institutions - 240329 - 212709

Department of Distance and
Continuing Education
University of Delhi
Master of Business Administration (MBA)

Semester - III
Course Credit - 4.5
Core Course - MBAFT - 7412
Financial Markets and Institutions
This material is useful for similar courses of other management programmes running
under DDCE, SOL / COL, University of Delhi.
BBA-FIA (DSC-8), Semester – III, Course Credit - 4
© Department of Distance & Continuing Education, Campus of Open Learning,

School of Open Learning, University of Delhi
MBA
Editors
Dr. Kumar Bijoy
Associate Professor, Campus of Open Learning, DU
Prof. Yogieta S. Mehra
Professor, Deen Dayal Upadhyaya College, DU
Content Writers
Prof. Yogieta S. Mehra, CA Vishal Goel, Ms. Chandni Jain,
Ms. Manisha Yadav, Ms. Jasmit Kaur, Mr. Ravi Yadav,
CS Monika Saini, Dr. Neerza, Mr. Gurdeep Singh
Academic Coordinator
Mr. Deekshant Awasthi
© Department of Distance and Continuing Education

ISBN: 978-81-19169-87-0
Ist edition: 2023
E-mail: ddceprinting@col.du.ac.in
management@col.du.ac.in
Published by:
Department of Distance and Continuing Education under
the aegis of Campus of Open Learning/School of Open Learning,
University of Delhi, Delhi-110007
Printed by:

Attention
Corrections/Modifications/Suggestions proposed by Statutory Body,

DU/ Stakeholder/s in the Self Learning Material (SLM) will be
incorporated in the next edition. However, these
corrections/modifications/ suggestions will be uploaded on the website
https://sol.du.ac.in. Any feedback or suggestions can be sent to the
email- feedbackslm@col.du.ac.in

Index
Lesson 1: An Overview of the Indian Financial System…………………………………01
1.1 Learning Objectives
1.2 Introduction
1.3 The Indian Financial System
1.4 Insolvency and Bankruptcy Code (IBC)
1.5 Payment Banks
1.6 Goods and Services Tax (GST)
1.7 Innovative Remittance Services
1.8 Regulatory Institutions in India
1.9 Glossary
Lesson 2 : Introduction to Financial Intermediation……………………………..38

2.2 Introduction
2.3 Concept of Intermediation and Disintermediation
2.4 Merits and Demerits of Intermediation and Disintermediation
2.5 Kinds of Intermediaries
2.6 Flow-Of-Funds in The Indian Economy
2.7 Taxonomy of Financial Markets and Institutions
2.8 Regulatory Framework and Super-Regulation
2.9 Financial Sector Reforms and Contemporary Issues
2.10 Summary
Lesson 3: Depository Institution Of Banking……………………….………..........58

3.2 Introduction
3.3 Overview of banking
3.4 Principles of Lending and credit creation
3.5 Products and services offered by banks.
3.6 Banking regulations
3.7 Role of market regulator
3.8 Key market players
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3.9 Evaluation of banking sector

3.10 Summary
Lesson 4: Banking…………………………………………………………………..…84
4.2 Introduction
4.3 Role of Banks
4.4 Importance of Banks in Financial Markets
4.5 Types of Banks
4.6 Non-Performing Assets (NPA)
4.7 Reasons for NPA Accumulation
4.8 Impact of NPA On Banks and The Economy
4.9 NPA Management and Resolution
4.10 Risk Management in Banks
4.11 Risk Management Framework
4.12 Credit Risk Management
4.13 Market Risk Management
4.14 Operational Risk Management
4.15 Universal Banking
4.16 Benefits and Challenges of Universal Banking
4.17 Universal Banking in India
4.18 Core Banking Solutions (CBS)
4.19 Features and Benefits Of CBS
4.20 Implementation and Challenges Of CBS
4.21 NBCFs And Its Types
4.22 Comparison Between Banks and NBCFs
4.23 Summary
Lesson 5: Financial Markets………………………………………………………..128

5.2 Introduction
5.3 Role and Importance of Financial Markets
5.4 Types of Financial Markets
5.5 Linkages between Economy and Financial Markets
5.6 Integration of Indian Financial Markets with Global Financial Markets
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5.7 Primary Market Instruments

5.8 Merchant Bank: Role and Functions
5.9 Listing and delisting of corporate stocks
5.10 Introduction to Foreign Exchange Market
5.11 Summary
Lesson 6: Types of Mutual Fund Schemes……………..…………………………150

6.2 Introduction
6.3 Types of Mutual Fund Scheme
6.4 Multiple-Choice Questions
6.5 Answers
6.6 Summary
Lesson 7: Capital Market ……………………………………………………….….167

7.2 Overview of Capital Market
7.3 Security market regulations and Role of the market regulator
7.4 Capital market instruments and Services
7.5 Evaluation of Capital Market
7.6 Regional and Modern Stock Exchanges
7.7 International Stock Exchanges
7.8 Demutualization of Exchanges
7.9 Indian Stock Indices and their Construction
7.10 Major Instruments Traded in stock markets.
7.11 Summary
Lesson 8: Trading Mechanism of Exchanges…………………………………….190

8.2 Introduction
8.3 Trading Mechanism on the Stock Exchanges
8.4 Clearing and Settlement Procedure in the Stock Exchanges
8.5 NSE: Trading and Settlement
8.6 Summary
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Lesson 9: Money Market And Debt Market…………………….…………….…..208

9.2 Introduction
9.3 Money Market: Meaning, Role, and Participants in money markets
9.4 Segments of Money Markets
9.5 Call Money Markets
9.6 Repo and Reverse Repo
9.7 Treasury Bill Markets
9.8 Certificate of Deposit
9.9 Commercial Paper
9.10 Debt Market: Introduction and Meaning
9.11 Primary Market for Corporate Securities in India
9.12 Issue of Corporate Securities
9.13 Secondary market for government/debt securities (NDS-OM)
9.14 Auction process
9.15 Corporate Bonds and Government Bonds
9.16 Retail Participation in Money and Debt Market-RBI Retail Direct platform
9.17 Evaluation of Debt Market in India
9.18 Summary
Lesson10: Other Markets……………………………………………………….......231

10.2 Introduction
10.3 Fund-Based and Fee-Based Markets
10.4 Regulatory Issues in Such Markets
10.5 Market Regulators
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10.6 Alternative Financial Instruments and Services

10.7 Evaluation of Financial Markets in India
10.8 Key Market Players
10.9 Summary
Lesson 11: External Market………………………………………………………255

11.2 Introduction
11.3 Overview of External Financial Market
11.4 International Capital Flows
11.5 Capital Account Convertibility
11.6 International financial instruments
11.7 International financial Centres
11.8 Selection of Sources of Funds
11.9 Summary
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LESSON 1
AN OVERVIEW OF THE INDIAN FINANCIAL SYSTEM
Prof. Yogieta S Mehra
Dept. of Management Studies
Deen Dayal Upadhyaya College
University of Delhi
Email-Id: yogieta@ddu.du.ac.in
STRUCTURE

1.2 Introduction
1.3 The Indian Financial System
1.4 Insolvency and Bankruptcy Code (IBC)
1.5 Payment Banks
1.6 Goods and Services Tax (GST)
1.7 Innovative Remittance Services
1.8 Regulatory Institutions in India
1.9 Glossary
1.10 Answers to In-Text Questions
1.11 Self-Assessment Questions
1.12 References / Suggested Readings
1.1 LEARNING OBJECTIVES
1. Understand the fundamental components and functions of the Indian financial system.
2. Explain the key features and implications of the Insolvency and Bankruptcy Code in
the Indian financial system.
3. Analyze the impact of the Goods and Services Tax (GST) on the Indian economy and
various stakeholders.
4. Discuss the concept and role of payment banks in the Indian financial system.
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5. Explore innovative remittance practices and their significance in facilitating efficient

financial transactions.
6. Examine the functions, role, and regulatory framework of the Reserve Bank of India
(RBI).
7. Understand the role and responsibilities of the Securities and Exchange Board of India
(SEBI) in regulating the Indian securities market.
8. Discuss the objectives and functions of the Insurance Regulatory and Development
Authority (IRDA) in regulating the insurance sector in India.
9. Explore the role and functions of the Pension Fund Regulatory and Development
Authority (PFRDA) in regulating pension funds and schemes in India.
10. Summarize the key points covered in the lesson to consolidate understanding of the
Indian financial system and its various components.
1.2 INTRODUCTION
An overview of the Indian financial system

Allocating a country's limited cash and resources to productive endeavours is largely
dependent on the effectiveness of its financial system. It is crucial to an economy's
development that it operate smoothly. The key to a healthy economy is a structure that
promotes savings, investment, and the efficient distribution of funds. A nation's economic
growth may be hastened or sped up depending on the quality of its financial infrastructure.
India has one of the world's biggest economies, ranking fifth in terms of nominal GDP. The
Indian financial system is a crucial pillar of the Indian economy, helping to sustain the
country's rapid development and its abundant wealth. Consistent economic growth in the
nation may be attributed in large part to this factor.
Structure of Indian Financial System
The Indian economy may be broken down into two distinct categories: the official, or
organized, financial system, and the informal, or unorganized, financial system.
Formal or Organised Financial System: This is the preferred financial system since it is
bound by rules and regulations. It is a transparent system which is very systematic in nature
and works towards the development and growth of the economy. The main constituents of the
Formal Financial System are:
(i) Financial Institutions
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(ii) Financial Markets

(iii) Financial Instruments and
(iv) Financial Services
Informal or unorganized Financial System: People like chit fund businesses, money
brokers, and local bankers are all part of the informal financial system. These firms are not
governed by the law of the state. They operate on a very informal level and fleece the users
on many occasions. Many people have lost huge sums of money due to promises by some
fraudulent operators. However, they are still popular due to their informal nature with
minimal paperwork and ease of transactions.
1.3 THE INDIAN FINANCIAL SYSTEM
Components of Indian financial system

Financial Institutions: They play a significant role in the Indian financial system by
collecting deposits from the general population and disbursing those funds to borrowers with
legitimate financial needs. The financial institutions are an integral part of economic and
financial development of the country due to the numerous services provided by them.
There are further classified into two types:
(i) Banking Institutions
(ii) Non-Banking Institutions.
Banking Institutions:
The financial system of each nation relies heavily on its banking institutions. They make sure
the people's savings are put to good use by lending it to responsible borrowers. There are two
types of banks in India: scheduled and nonscheduled.
 The Reserve Bank of India (RBI) Act, 1934 designates some banks as "scheduled"
under its second schedule. Scheduled banks need at least 5 Lakh in paid-up capital
and total assets before they may be considered. Banks that receive loans from the RBI
at the bank rate are qualified to join the RBI's clearing house.
 Banks that are not included in the second schedule of the RBI Act of 1934 are referred
to as "Non-Scheduled Banks." The total amount of monies raised and invested is less
than INR 5 Lakh. They don't have to use the Reserve Bank of India's loan program.
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Commercial Banks
Scheduled and non-scheduled commercial banks are both subject to the Banking Regulation
Act of 1949. These financial institutions take deposits from customers and lend money to
individuals, companies, and governments. The most common forms of commercial banking
are:
 Public Sector Banks: In India, the government or "nationalized" banks control more
than 75% of the market. The government of India is a key player in this market.
 Private Sector Banks: Investors, rather than the Reserve Bank of India or the
government of India, make up the vast majority of Private Sector Banks' shareholders.
However, the RBI has strict rules that these institutions must follow.
 Foreign Banks: Banks with overseas headquarters that do business in India do so
independently under the name of an Indian company. They act in accordance with
both domestic and international law.
 Regional Rural Banks: These are commercial banks with specialized services for
low-income clients, such as subsistence farmers, farmhands, and small companies.
The Central Government owns 50%, the State Government owns 15%, and a
Commercial Bank owns the remaining 35%. RRBs are regional financial institutions
that provide agricultural and the rural sector with subsidized loans and other financial
services like debit cards, bank lockers, free insurance, etc.
Small Finance Banks : Small finance banks, which are authorized under Section 22 of the
Banking Regulation Act, 1949, focus on customers who are underserved by larger financial
institutions. They cater to the needs of micro- and cottage-based enterprises. These financial
institutions provide loans and other forms of aid to those in the informal economy, including
small businesses and farmers. The country's central bank sets the rules for these financial
institutions.
Local Area Banks: They are set up by private companies with profit maximization in mind.
The year 1996 saw its debut in India. Currently, in South India, just four Local Area Banks
exist.
Specialized Banks: They have been established with a specific role to aid in the financial
development of the country. Some of the specialized banks in India are:
SIDBI: A loan for a modestly sized business may be obtained through the Small Industries
Development Bank of India (SIDBI). This financial institution lends money to small
companies so that they may set up innovative production units and contribute to the growth
of the economy.
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EXIM Bank: The acronym "EXIM Bank” refers to the Export and Import Bank. This kind of
bank is a preferred option for companies who need loans or other forms of financial aid to
facilitate their exports and imports.
NABARD: NABARD is a resource for anyone seeking funding for rural, handicraft, village,
or agricultural projects.
Payments Banks : Payment Banks are relatively new form of banking. The Reserve Bank of
India mandates that these banks may only accept deposits up to INR 1 Lakh per user. They
provide debit and ATM cards and offer a full suite of electronic banking services. Payments
bank account holders are restricted to making deposits of up to Rs.1,00,000/- and are not
eligible for loans or credit cards.
Cooperative Banks : These institutions are chartered as cooperatives under the Cooperative
Societies Act of 1912. Financial products and services are provided to corporations,
enterprises, and startups. These are put in place to protect the members' best interests. They
take deposits and provide loans to eligible members on a cooperative basis.
Non-banking Institutions:
NBFIs, or non-banking financial institutions, are businesses that provide financial services
like banking, but are not subject to the same regulations as banks. The purpose of non-
banking financial organizations is to lend money to businesses and individuals without the
involvement of a bank. Two broad categories of non-banking financial entities exist: the
organized and the unstructured. These are examples of some of India's many non-banking
institutions:
 Insurance companies: Insurance policies are sold by these firms to both consumers
and businesses. Life insurance, along with other types of insurance including those for
vehicles, health care, and property, are all available via these plans.
 Investment banks: To obtain capital, these institutions facilitate the issuance and sale
of securities by corporations. In addition to trading stocks and bonds and advising on
M&A, they also offer other services. They play a mediating role in the IPO funding
process.
 Pension funds: Workers may rely on this money when they reach retirement age. The
funds are put into various investments such as equities and bonds.
 Mutual funds: Investors' money is pooled in these funds and invested across a variety
of asset classes, including stocks, bonds, and other securities.
 Hedge funds: Private investment partnerships like this utilize a wide range of
investing methods to generate profits for its investors.
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 Private equity firms: These corporations make growth investments in privately held
businesses. In addition, they might steer the firm toward becoming public.
 Venture capital firms: These corporations support promising startups in their
formative years.
All of these non-banking financial organizations are geared toward the same end—providing
capital to firms and individuals—but they do it in their own unique ways.
Difference between Non-Banking Financial Institutions and Banks?
Non-banking financial entities are distinct from banks in many important respects.
 The rules and regulations that apply to banks do not apply to non-banking financial
firms.
 Money is raised by non-banking financial entities via the sale of securities or the
issuance of debt; they do not accept consumer deposits.
 Financial entities that are not banks are not subject to the same reserve ratio
requirements. A bank's required reserve ratio is the fraction of customer deposits it
sets aside for withdrawals.
 Capital requirements for financial firms that are not banks are different. This implies
they are exempt from having a "reserve" of a certain amount of money set aside in
case of a loss.
 Last but not least, unlike banks, non-bank financial organizations are not required to
adhere to the same lending regulations. This implies that they are not restricted by
government regulations and may provide loans to anybody they like.
Financial markets -
The term "financial markets" is used to describe any marketplace where stocks, bonds,
currencies, and other financial products are traded between buyers and sellers. The growth of
a country's economy may be boosted exponentially by healthy financial markets. They may
make saving and investing more efficient and boost capital creation.
Financial Market players include private investors, banks, FIIs, corporations, and
governments. These organizations engage in market activity either alone or with the
assistance of intermediaries. By facilitating the transfer of capital between savers and
investors, progressive financial markets serve as an important link in the financial system.
Classification of Financial Markets: One may broadly divide India's financial markets into
"unorganized" and "organized" sectors.
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Unorganized Financial Markets: Local money lenders, indigenous bankers, dealers, etc.,
who lend money to the public from their own finances, make up the bulk of India's
unorganized financial markets. Their interest rates tend to be sky-high, but they need nothing
in the way of documentation. They operate outside of the purview of the Reserve Bank of
India and any other applicable governing bodies.
Organized Financial Markets: The laws and regulations of organizations like SEBI, RBI,
etc. apply to this sector of the financial markets. There are two subsets of the structured
financial markets: the capital market and the money market.
Capital Markets: The capital market is a regulated exchange where investors and savers
meet to pool their resources in order to finance economic activity. The financial assets traded
on the capital market often have a very long or infinite lifespan. The long-term securities
market goes under other names as well. It's a formal system set up for borrowing and lending
over a longer time frame.
Money Market: In place of physical currency, the money market deals in short-term debt
instruments having maturities of less than a year, such as trade bills and promissory notes.
The ability to quickly and inexpensively convert money market instruments into cash with no
loss or no transaction costs is their most attractive feature. In order to provide liquidity, this
market is comprised of financial institutions and money or credit dealers. So, the money
market is the place to buy and sell treasury bills, commercial papers, CDs, and other short-
term liabilities.
The rapid and simple availability of capital is made possible by the financial market. With the
use of demat accounts and other forms of online storage, financial markets have made it
possible to convert assets (security holdings) into cash quickly and easily.
Financial Instruments / Assets:
The financial asset is the primary output of every economic system. Financial assets and
securities are other names for financial products. Value is created in financial assets because
of contractual agreements.
• A claim on the repayment of principle or the periodic payment of interest or dividends
is represented by a financial asset or instrument. Securities such as stocks, bonds, and
debentures are all instances of equity.
• Deposits in banks, corporations, and post offices, insurance policies, the National
Savings and Investment Account, provident funds, and pension funds are all examples
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of non-tradable financial assets. Shares of stock, debentures, and government and

corporate bonds may all be traded on the stock market.
• The many types of financial instruments include:
(i) Money Market instruments (ii) Capital Market instruments
Money market products are utilized for short-term financing needs, often less than a
year. Treasury bills, commercial paper, call money, short notice money, CDs,
commercial bills, and money market mutual funds are all examples of money market
instruments.
Financial instruments traded on the capital market are issued with maturities of more
than one year, sometimes even perpetuity. Equity shares, preference shares, warrants,
debentures, and bonds are all types of equity instruments.
Equity and debt characteristics are combined in hybrid products. Convertible
debentures, securitized assets, mortgage warrants denominated in a foreign currency,
etc.
Financial Services:
Loans, insurance, credit cards, investment possibilities, and personal financial
management are all examples of financial services provided by banks, credit unions, and
other financial organizations. The phrase "financial intermediation" may be used to
describe these services. Mobilizing excess funds and providing them to different needy
groups (industries, firms, businesspeople, individuals, etc.) is another definition of
financial intermediation.
Important Types of Financial Services: Banking, Foreign Exchange, Investment, and
Insurance Services are the Four Most Important Financial Services Offered by Different
Institutions. In addition to traditional banking services, alternative options exist, such as
private equity, venture capital, angel investing, etc. The financial services may be broken
down into two categories: those that are fund-based and those that are fee-based.
 Fund Based Services: Services involving the management of money or other assets,
often in exchange for a fee or a rate of interest, are known as "fund-based" or "asset-
based" financial services. Leasing, Factoring, Bills Discounting, Venture Capital,
Loans, Mortgages, and Hire Purchase are all examples of services that involve the
movement of money from one location or person to another.
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 Fee Based Services: Transferring money from one party to another is not required for
fee-based services. They are offered for a certain sum of money, whether it is a flat
rate or a percentage. Services such as issue management, portfolio management, loan
syndication, corporate counseling, and international collaboration often come with a
price tag attached to them.
2. Objectives: The objectives of a sound, stable and growing financial system are:
1. Accelerate growth of country’s economic development by serving as a catalyst to
country’s industrialisation.
2. Act as an agent to provide the gamut of financial services to every nook and corner of
the country.
3. Accelerate rural development by developing a network of all services and institutions
in their close vicinity.
4. Provide timely financial support to industry leading to economic growth.
5. Help those in far-flung places get houses and small businesses off the ground by
financing their development.
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1.4 INSOLVENCY AND BANKRUPTCY CODE (IBC)
The Indian Financial System has grown at a massive scale in the last decade. Government
has introduced some reforms to create an efficient financial market arena which can
comfortably compete with International financial institutions. Some of the products of their
reforms are:
(i) Insolvency and Bankruptcy Code (IBC)
(ii) Payment Banks
(iii)Goods and Services Tax (GST)
(iv) Innovative Remittance Services
Insolvency and Bankruptcy Code (IBC)

India's 2016 Insolvency and Bankruptcy Code (IBC) is a sweeping piece of legislation with
the dual goals of streamlining the insolvency and bankruptcy process and enhancing the
country's economic climate. The Insolvency and Bankruptcy Code sets deadlines for closing
bankruptcies. When a debtor fails to make timely payments, the creditors are in a position of
bankruptcy and must take the debtor's assets. IBC allows either the debtor or the creditor to
start "recovery" actions. India had the longest average time to settle a bankruptcy case at 4.3
years, far longer than the United Kingdom at 1 year and the United States at 1.5 years. This
time must be decreased in to make big-ticket loan account settlement easier.
The Working of Insolvency and Bankruptcy Code: IBC applies to corporations,
partnerships, and sole proprietors. It's a limited-duration process for getting out of debt.
When a debtor fails to make timely payments, creditors assume control of their assets and
must make difficult decisions regarding the best way to handle the debtor's bankruptcy.
"Recovery" actions may be started by either the debtor or the creditor under IBC.
Timeframe: Businesses filing for insolvency under IBC have 180 days to do so. The
deadline may be pushed back if there is no pushback from the creditors. For companies,
including startups, with annual revenues of up to Rs 1 crore, the insolvency procedure must
be completed within 90 days, with a 45-day extension possible. Liquidation will occur if debt
forgiveness is not granted.
Regulator of IBC: The Insolvency and Bankruptcy Board of India has been designated to
supervise these procedures. The Reserve Bank of India and the Finance and Law Ministries
each have two members on the board of IBBI. A licenced expert oversees the settlement
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process, manages the debtor's assets, and gives creditors information to help them make
decisions.
Adjudicator of the proceedings: The National Companies Law Tribunal (NCLT), which
hears cases involving corporations, and the Debt Recovery Tribunal (DRT), which hears
cases involving people, decides on the resolution process's proceedings. By authorizing the
appointment of the insolvency professional and the final decision made by the creditors, the
courts allow the resolution process to begin. The Insolvency and Bankruptcy Board is
responsible for regulating insolvency practitioners, insolvency professional organizations,
and information utilities formed under the Code.
Procedure of resolving Bankruptcy: When a default occurs, the process of settlement may
be initiated by either the debtor or the creditor. The insolvency professional is in charge of
the process. The expert oversees the debtor's assets and gives the creditor with data gleaned
from various sources. Any legal action against the debtor is barred for the 180 days while this
process lasts.
Role of Committee of Creditors: The insolvency professional establishes a committee made
up of the lenders of funds to the debtor. The creditors' committee will determine what will
happen to their unpaid debt. It's possible they'll try to resuscitate the debt owed to them by
renegotiating the repayment terms or liquidating the debtor's assets. If a decision is not
reached within 180 days, the debtor's assets will be sold.
Process after Liquidation: If the debtor declares bankruptcy, the liquidation procedure is
managed by an insolvency specialist. The profits from the sale of the debtor's property are
allocated as follows. First, there are expenses related to insolvency resolution, such as the
compensation of the insolvency professional; second, there are secured creditors, whose loans
are secured by collateral; third, there are employee dues; and fourth, there are unsecured
creditors.
Key Features of the IBC: The IBC has several key features that make it a comprehensive
and effective legal framework for insolvency and bankruptcy in India. Some of the significant
features are:
1. A Single, Unified Law: Both the Recovery of Debts Due to Banks and Financial
Institutions Act and the Sick Industrial Companies Act have been rendered obsolete by
the IBC. The Indian Bankruptcy Code (IBC) is a single, comprehensive statute that
establishes a uniform and open legal framework for insolvency and bankruptcy in India.
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2. Insolvency Resolution Process: The IBC establishes a time-bound insolvency resolution

process with a 180-day goal for the resolution of insolvency cases. A committee of
creditors that decides on the resolution plan is appointed together with an insolvency
specialist who assumes control of the company's administration.
3. Liquidation Process: The IBC stipulates a time-limited liquidation process in the event
that the resolution process is unsuccessful. The liquidation procedure aims to sell the
company's assets and fairly and openly distribute the proceeds to the creditors.
4. Cross-Border Insolvency: The IBC establishes a framework for cross-border insolvency,
allowing Indian courts to engage with foreign courts to resolve insolvency matters
involving overseas businesses and people.
5. Employee Protection: The IBC offers protection to employees of a company going
through the insolvency procedure. The insolvency professional is responsible for making
sure the employees are treated properly throughout the procedure, and they are entitled to
collect their salary for up to 24 months.
Benefits of the IBC: The Indian economy and business climate will gain in a number of
ways from the adoption of the IBC. Significant advantages include:
1. Insolvency cases are resolved more swiftly thanks to the IBC's introduction of a time-
bound insolvency resolution process, which guarantees that bankruptcy cases are
handled effectively and promptly. This lessens the financial load on the creditors and
makes it possible for them to rapidly recover their money.
2. Higher Recovery Rates: The IBC establishes a clear and uniform legal framework for
insolvency and bankruptcy, which raises the likelihood that creditors will be paid back.
This encourages financial organisations and banks to lend money to companies and
people, which supports economic growth.
3. Ease of Doing Business: By streamlining the bankruptcy and insolvency procedures, the
IBC fosters a climate that is favourable for enterprises to operate in India. Since the
IBC's introduction, doing business in India has become simpler.
4. Efficient Use of Resources: The IBC makes sure that a firm going through the
insolvency process sells its assets in a fair and open way, ensuring that resources are
used effectively. All the entities including Creditors, workers, and the economy as a
whole gain from this.
Challenges for the IBC: The implementation of the IBC has also faced several challenges.
Some of the significant challenges are:
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1. Legal Framework: Implementing the Insolvency and Bankruptcy Code (IBC) in India
has faced challenges due to complexities in the legal framework. The IBC requires
coordination among multiple stakeholders, including debtors, creditors, insolvency
professionals, and adjudicating authorities.
2. Institutional Capacity: India's insolvency resolution ecosystem faced capacity
constraints initially, with a limited number of insolvency professionals and infrastructure.
Building a robust institutional framework and enhancing the capacity of key institutions
such as the National Company Law Tribunal (NCLT) and Insolvency and Bankruptcy
Board of India (IBBI) has been a challenge.
3. Lengthy Resolution Process: The IBC aims to expedite the resolution process, but it has
faced criticism for lengthy proceedings. The time-bound resolution mandated by the IBC
has not always been achieved, leading to delays and increased costs.
4. Operational Issues: The effective implementation of IBC requires smooth coordination
and cooperation among various stakeholders. However, operational issues such as the
availability of information, conflicts of interest, and coordination challenges among
lenders and creditors have posed challenges to the successful implementation of the code.
5. Cultural and Mindset Change: The IBC represents a significant shift in the insolvency
and bankruptcy landscape in India. Encouraging a cultural and mindset change among
stakeholders, particularly debtors and creditors, towards a more proactive approach to
resolving insolvency cases has been a challenge.
Addressing these challenges requires continuous efforts, including legislative amendments,
capacity building, awareness campaigns, and improved coordination among stakeholders, to
ensure the effective implementation of the IBC in India.
IN-TEXT QUESTIONS
1. What is the different type of Commercial Banks in India
a) Public and private sector Banks
b) Foreign Banks
c) Regional Rural Banks
d) All of these.
2. SIDBI and EXIM Bank are examples of
a) Specialised Banks b) Local Area Banks
c) Small Finance Banks d) Co-operative Banks
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1.5 PAYMENT BANKS
Payment institutions are a new kind of institution in the Indian banking system introduced by
the Reserve Bank of India (RBI). They were developed to serve the credit and remittance
requirements of microbusinesses, low-income individuals, and the informal economy. They
do the majority of banking tasks, although they are not allowed to make loans or dispense
credit cards.
According to data from the RBI, the banking industry still does not serve about 60% of the
country's population. Additionally, it primarily consists of rural residents with lower incomes
who migrate to urban regions in search of jobs in the unorganised sector. Therefore, payment
banks strive to broaden the availability of financial services and payments to those with
limited means, small businesses, and migratory workers. It is said to be conducted safely and
using cutting-edge equipment.
The Background
Reserve Bank of India appointed Dr. Nachiket Mor to head a group that would look at
"Comprehensive financial services for small businesses and low-income households." in
September 2013. Payment banks, which the committee recommended be established in order
to help those with lower incomes and small businesses, first opened for business in January of
2014.
Objectives of setting up Payment Banks
• Provide banking and payment services to small businesses, low-income households,
and migratory workers in a safe, technology-driven environment.
• Increase the extent to which financial services are accessed in rural areas of the
nation.
Features of Payment Banks
 The Reserve Bank of India grants both universal and specialized bank licenses to
financial institutions. Payments banks are subject to separate banking regulations
since they cannot compete on a level playing field with traditional commercial banks.
In particular, a payments bank is unable to provide credit.
 Payment banks are permitted to open both savings and current accounts for their
clients.
 They are allowed to give customers ATM or debit cards, but not credit cards.
 They are permitted to collect remittances from across borders and make personal
payments on current accounts.
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 Like Commercial Banks, they must deposit the appropriate CRR (Cash Reserve
Ratio) amount with the Reserve Bank of India. At least 75% of their demand deposits
must be placed in short-term government assets like treasury bills with maturities of a
year or less. In addition, no more than 25% of their total deposits may be held in
operational current and fixed deposits with any one commercial bank.
 The Customers of payment banks can pay their utility bills online.
 These banks are prohibited from establishing subsidiaries to engage in any non-
banking financial services-related activity.
 In order to distinguish themselves from other banks, Payments Banks must have the
word "Payments Bank" in their names.
 Payments banks can only collaborate with other commercial banks as partners and sell
goods like mutual funds, insurance, and pensions after requesting permission from the
RBI.
Activities permitted to payment Banks Activities not permitted
Deposits to payment banks are limited to The RBI grants payment banks a
Rs. 2,000,000. Demand deposits in the form "differentiated" bank licence, which
of savings and current accounts are prevents them from making loans.
acceptable.
75% of the money received in the form of Cannot issue credit cards.
deposits can be invested in
secure government securities in the form of
Statutory Liquidity ratio (SLR).
The remaining 25% has to be placed.
as time deposits with other
scheduled commercial banks.
Transfer money domestically and Payment Banks are not permitted to accept
internationally on current accounts. They time deposits as well as NRI deposits.
can also provide remittance services
Issue Debit Cards. Cannot set up subsidiaries to undertake non-

banking financial activities
Perform the role of a Business Cannot grant loans to any entity.
Correspondent (BC) of another bank
(subject to RBI guidelines)
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Advantages of Payment Banks

 Ease of operations and digital mode of operations has `enhanced rural banking and
financial inclusion in far flung areas.
 Easy access to payment banks has widened the entire formal financial system.
 Payment banks have become a viable substitute for commercial banks.
 Payment Banks are able to manage high volume, low value transactions effectively.
 Payment Banks provide access to diversified services.
Challenges Ahead for Payment Banks
 Lack of public awareness on availability of services of payment banks.
 Incentives for the agents to participate in these activities are minimal.
 Infrastructure hurdles and technological difficulties in effective usage of Payment
Banks.
Eligible Promoters
In India, payments banks may only be established by the following individuals and/or
organizations:
 Mobile telephone firms and supermarket chains are eligible for payment bank
license.
 Present non-bank Expert issuers of prepaid payment instruments (PPI) have worked
in this field for at least ten years.
 Individuals with "fit and proper" qualifications in the banking industry, the financial
sector, the NBFCs, or the Micro Finance Industry.
 NBFCs (non-banking financial companies) that get things done.
 Businesses owned and operated by locals; Businesses owned and operated by non-
locals; Governmental organizations.
 Joint venture between a promoter or group of promoters with an established,
chartered commercial bank.
 Equity investments in payments banks are permissible for scheduled commercial
banks to the degree allowed by the Banking Regulation Act, 1949.
Around 11 applicants have received "in - principle" clearance from the RBI to launch
payments banks in the nation. Only 6 of them are now in use, as shown below:
 Fino Payments Bank Limited
 NSDL Payments Bank Limited
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 India Post Payment Bank <Limited

 Airtel Payment bank Limited
 Paytm Payment Bank Limited
 JIO Payment Bank Limited
1.6 GOODS AND SERVICES TAX (GST)
Several additional indirect taxes in India have been replaced by the Goods and Services Tax
(GST). The GST is applicable across the whole supply chain, from manufacturing to retail to
final consumer. The adoption of GST in India is a significant move toward the unification of
the market and the simplification of the indirect tax structure.
History of GST in India: In his 2007 budget address, Shri Arun Jaitly proposed a federal
Goods and Services Tax (GST). The GST Act was enacted by Parliament on March 29, 2017,
after being supported by a number of Finance Ministers. After years of debate and discussion
between the Central and State Governments, Industry and Trade Associations, and other
stakeholders, India finally introduced the GST on July 1, 2017, under the tagline "One
Nation, One Tax."
The Working of GST: A product goes through a number of phases on its way to the
consumer, starting with the purchase of raw materials, followed by manufacture, storage,
sales to wholesalers and retailers, and then sales to the final customer. It is a multi-stage tax
since the Goods and Services Tax is charged at each of these steps. GST works on the
principle of Value Addition. Fabric, thread, and other materials are purchased by a producer
of shirts. When the fabric, thread, elastic, buttons, etc. are stitched together to create a shirt,
the value of the inputs rises. The warehousing agent packs and labels the shirts once the
maker sells them to him or her. This gives the shirts yet another layer of value. The
warehouse representative then sells it to the store.
The store is investing on advertising and special packaging for these shirts to boost their
sales. GST applies to the sum of all value additions made along the supply chain prior to final
sale to the end customer.
Destination-Based: In the above example, if the goods are manufactured in Gujarat and
delivered to a buyer in Madhya Pradesh, the Goods and Service tax will be collected at the
point of consumption i.e., Madhya Pradesh. So, Madhya Pradesh, will receive the full tax
income.
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Salient features of GST

(i) GST is applied on the "supply" of products or services rather than the "production,"
"sale," or "provision" of the same items.
(ii) The GST is based on the theory of destination-based consumption taxes, as opposed
to the traditional concept of taxing at the point of origin.
(iii) Every value addition is subject to this comprehensive, multistage, destination-based
tax. from the point of manufacture till the consumer's final transaction.
Value Addition: Value Addition:
GST Structure: The Central and State Governments of India both contribute to the GST that
is charged on goods and services in the country. The GST framework consists of the
following four parts:
1. The GST collected by the federal government is called Central Goods and Services
Tax (CGST).
2. Intrastate sales are subject to the State Goods and Services Tax (SGST), which is
collected by the State government.
3. The Central Government now collects a single tax on all sales of goods and services
made between states called the Integrated Goods and Services Tax (IGST).
4. Union Territory Goods and Services Tax (UTGST): The Union Territory Government
levies this tax on intra-state sales of goods and services.
Advantages of GST: There are several ways in which the Indian economy has profited from
the implementation of GST. Among the many advantages are:
1. The Goods and Services Tax (GST) is a consumption tax collected in lieu of a variety of
other indirect taxes (such as the excise tax, the service tax, the value-added tax, and
others) in all states. The GST has decreased the overall tax burden on consumers.
2. Development of a Unified Market: The GST has facilitated the free flow of goods and
services across all state borders.
3. Economic Growth: The GST has increased tax system transparency, which has helped the
economy. Additionally, it has broadened the revenue base and improved tax compliance.
Tax administration is simplified since the federal government determines tax rates and
establishes rules. People are more likely to file their taxes on time now that they don't
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have to juggle as many different returns types. The Goods and Services Tax (GST) has
helped streamline corporate processes and drawn more companies into the formal sector.
6. The cascading impact of taxes is no longer an issue since taxpayers may now use tax
credits from one indirect tax to offset the costs of another. By solely taxing the
incremental value created at each level of the supply chain, GST prevents additional taxes
from being levied on top of existing ones.
7. Tax Evasion is Reduced: The GST system restricts taxpayers from claiming input tax
credits on fake invoices by requiring them to use actual supplier invoices. The use of
electronic invoices has bolstered this objective. Since GST uses a centralized monitoring
system, it is significantly easier and faster to punish lawbreakers. Because to GST, both
tax fraud and evasion have decreased.
8. To encourage low prices and more consumption: Revenues from both direct and indirect
taxes have risen since the GST was introduced. The generalization of GST rates has
contributed to the competitiveness of the Indian market. As a result, demand has climbed
and revenue has grown, helping to accomplish yet another important objective.
Challenges of GST: Although the GST has brought significant advantages, it also faces some
challenges. Some of the major challenges are:
1. GST compliance requirements are quite complex, and many businesses encounter
difficulties adhering to them.
2. Technology Challenges: The GST is a technology-driven tax system, and many small
businesses find it challenging to adopt the new technology.
3. Rate Rationalization: The GST rates are still high for some goods and services, which
has resulted in inflation.
4. Administrative Problems: Many administrative problems have arisen during the GST
introduction, confusing taxpayers.
5. Problems with Input Tax Credits (ITC): In a number of cases, taxpayers have been
refused ITCs, which has led to higher costs.
GST Rates:
The GST Council has classified goods and services under various tax slabs, ranging from 0%
to 28%. The tax rates are as follows:
1. 0% Tax Rate: The goods and services that come under this category are essential
commodities like rice, wheat, milk, curd, salt, and books.
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2. 5% Tax Rate: The goods and services that come under this category are items like
edible oils, tea, coffee, sugar, and medicines.
3. 12% Tax Rate: The goods and services that come under this category are items like
mobile phones, computers, and processed foods. Goods and services that fall under this
category include air conditioners, refrigerators, and footwear.
4. 28% Tax Rate: The goods and services that come under this category are luxury items
like high-end cars, yachts, and cigarettes.
The Road Ahead: The future of GST in India looks promising. Further, the government is
taken several measures to improve taxation. Some of the significant future developments of
GST are:
1. Simplification and Rationalization of Tax Structure: The GST Council regularly
reviews and revises the tax structure to simplify and rationalize it. This includes
reducing the number of tax slabs and bringing more items under a uniform tax rate.
2. Inclusion of Petroleum and Alcohol Products: Currently, separate state-level taxes
are levied on Petroleum and Alcohol Product. In the future, these products may be
included under the GST regime, which would bring greater uniformity in taxation.
3. Introduction of E-Invoicing and Real-Time Reporting: The implementation of e-
invoicing and real-time reporting is expected to improve tax compliance and
transparency. The government may continue to enhance and expand the scope of these
digital initiatives to ensure a smooth flow of information and minimize tax evasion.
4. Integration of GSTN with other Systems: The Goods and Services Tax Network
(GSTN) acts as the IT backbone for GST implementation. Government may integrate
GSTN with other government systems like income tax, customs, and other regulatory
bodies, enabling better data sharing and analysis.
5. International Collaboration: The government may actively engage in international
collaboration and best practice sharing with other countries that have implemented GST
or similar tax reforms. This would facilitate learning and adoption of global best
practices in GST administration and compliance.
In future, it is expected that the government's focus will be on fine-tuning the GST
framework to achieve its objectives of simplifying the tax structure, increasing compliance,
and promoting economic growth.
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1.7 INNOVATIVE REMITTANCE SERVICES

Remittance is defined as the transfer of money from one nation to some other. Since millions
of Indians live abroad, they send money for their families back in India. This makes India
largest receiver of remittances all over the world. The remittance industry in India has
withstood significant changes through the years, with all the advent of new technologies and
services that are innovative. Over a period of time, these remittance services have also
evolved so as to make the process easy and convenient both from sender and receiver’s
viewpoint.
Traditional Remittance Services: Traditionally, people have been using bank transfers,
money sales, and cable transfers as the most popular means of sending money. These
services were reliable but expensive and time-consuming. Moreover, the time taken to
complete the transfer also extends to many days. Furthermore, this process of remittance
requires both the transmitter and receiver to have a bank-account.
Innovative Remittance Services: The advent of the latest technologies has led to the growth
of innovative remittance services in India. These services are fast, affordable, and convenient.
Some of the important remittance services available in India are:
1. Mobile Wallets: Mobile wallets like Paytm, PhonePe, and Google Pay have become
very popular in India in the past few years. These wallets enable users to receive and
send money instantly. The charges of these services are considerably lower than
conventional remittance solutions. Additionally, these Mobile wallets can also be used
to pay bills, recharge their cell phones, make online purchases, making them a versatile
remittance option.
2. Remittance Companies: Several remittance companies like Western Union,
MoneyGram, and Ria Money Transfer operate in India. These companies offer fast
remittance services that is affordable and also have a vast network of agents around the
world. The fees of these ongoing services usually are lower than conventional bank
transfers.
3. Cryptocurrency: Cryptocurrency like Bitcoin and Ethereum are also gaining
popularity in India. Cryptocurrency permits users to transfer money immediately at
considerably lower charges as compared to traditional bank transfers. However, usage
of cryptocurrency as a means for remittance is still testing waters in India. Since there
are issues about its legality and safety, cryptocurrency is an avoidable option.
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4. Prepaid Cards: Prepaid cards like Visa and MasterCard are also becoming popular as a
remittance option in India. These cards can be loaded with cash and utilized to
withdraw cash from ATMs or make purchases at stores that accept credit or debit cards.
Prepaid cards are a convenient remittance option, since they do not require the
transmitter or receiver to have a bank-account.
5. Peer-to-Peer (P2P) Services: Peer-to-peer solutions like TransferWise and InstaReM
enable users to move cash with other users in different nations. These services use the
mid-market exchange rate, which is usually better than the rates offered by traditional
remittance services. P2P solutions also offer a quick and affordable option.
Challenges of Innovative Remittance Services: While innovative remittance services offer
many benefits over their traditional peers, they face several challenges too. Some of the
significant challenges are:
1. Limited Network: Some remittance services like cryptocurrency and P2P are
innovative in nature but have a very limited network, rendering it difficult for users to
find recipients in certain countries.
2. Lack of Regulation: The use of cryptocurrency for remittance continues to be mostly
unregulated in India, and also has issues about its security and legality.
3. Fraud: Fraud is really a concern that is significant in the remittance industry, and users
must be careful when utilizing innovative remittance services.
4. Exchange Rate Fluctuations: The exchange rate can fluctuate quickly, and users have
to be conscious of current exchange rate before using innovative remittance services.
Conclusion: Innovative remittance services have revolutionized the remittance industry in
India. The solutions provided by these services are fast, affordable, and convenient making
them a popular choice over their traditional counterpart.
1.8 REGULATORY INSTITUTIONS IN INDIA
Reserve Bank of India (RBI): It is the Central and Apex Bank of India. Indian currency is
issued and managed by the Reserve Bank of India (RBI). On April 1, 1935, it opened for
business as required by the Reserve Bank of India Act, 1934. The Reserve Bank of India
provides funding for the government and commercial banks in India. It's in charge of keeping
the Indian banking industry in check.
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Various functions of RBI under the RBI Act, 1934 are as follows:
Banker to the Government: The RBI serves as the government's lender, agent, and advisor.
The fund raising for both Central and state governments is taken care of by RBI. RBI raises
money for the government by issuing bonds, treasury bills.
Banker to Banks: The Reserve Bank of India (RBI) acts as a "Banker to Banks," providing
short-term loans and advances to certain banks as required to encourage lending to specific
sectors and purposes. Banks provide these loans in return for promissory notes and other
security.
Lender of Last Resort: The RBI serves as lender of last resort to Bankers. in this capacity.
When no one else is willing to give credit to that bank, it can save a bank that is solvent but
is experiencing short-term liquidity issues by providing it with much-needed liquidity.
The RBI offers this facility to safeguard the interests of the bank's depositors and prevent
potential bank failure, which might have a negative effect on financial stability and,
consequently, the economy.
Management of Currencies and Foreign Exchange: The RBI is in charge of creating and
overseeing the Indian Rupee. The Indian foreign exchange market is governed by the RBI as
well.
Monetary Policy: The RBI is responsible for developing and implementing India’s monetary
policy. It is effectively implemented and periodically reviewed by the Central Bank to
manage inflation, encourage economic expansion, and preserve financial stability.
Functions of Public Debt: The RBI's debt management strategy aims to reduce borrowing
costs, rollover and other risks, smooth the maturity structure of debt, and enhance the depth
and liquidity of the markets for Government Securities by creating an active secondary
market.
Regulation & Supervision of banks and Co-operative Banks: The RBI in its capacity as
the Central Bank of India regulates and supervises banks to ensure that they are safe, sound
and adhere to good banking practises. The RBI is authorized by law to conduct periodic
inspections of financial institutions and to obtain reports and other data from them. The
standards for Indian banking have improved greatly thanks to the RBI's oversight
responsibilities. The RBI has extensive jurisdiction over commercial and cooperative banks,
including their licensing and establishments, branch development, asset liquidity,
management and working practices, merger, reconstruction, and liquidation.
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Regulation and supervision of NBFCs: The RBI shall use all of the aforementioned powers
in the public interest, to regulate the nation's financial system to its advantage, or to prevent
any NBFC from conducting its business in a way that is harmful to depositor interests or
adverse to the NBFC's own interests.
Financial Stability: The RBI is in charge of preserving the country's financial stability. In
order to avert systemic risk, the RBI monitors the financial system and takes appropriate
action.
Promotional Role of RBI
Additionally, the RBI promotes the Indian economy. The RBI accomplishes this by aiding
the public and private sectors financially, encouraging financial inclusion, and expanding the
Indian financial markets. The Reserve Bank of India (RBI) is a vital part of the Indian
economy. It is crucial for the formulation and implementation of monetary policy, banking
sector oversight, and currency management.
Some of the promotional roles of RBI are:
 Providing financial assistance to the government: The RBI provides financial
assistance to the government by buying government bonds and treasury bills. This helps
the government to finance its budget deficit.
 Promoting financial inclusion: The RBI promotes financial inclusion by encouraging
banks to open branches in rural areas and by providing financial products and services
to low-income households.
 Developing the financial markets: The RBI develops the financial markets in India by
providing liquidity to the markets and by promoting the development of new financial
products and services.
The RBI plays a very important role in the promotion of the Indian economy. It helps to
ensure that the financial system is stable and that it provides access to financial services to all
segments of the population. This helps to promote economic growth and development.
Securities and Exchange Board of India (SEBI)
The Securities and Exchange Board of India (SEBI) is the regulatory body for India's
securities market. It began operations in 1988 and has its headquarters in Mumbai. The
Securities and Exchange Board of India (SEBI) has two primary objectives: investor
protection and the development of the securities market. In this part, we'll talk about the
Securities and Exchange Board of India (SEBI) and its role as an Indian regulator.
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Role of SEBI as a Regulator:

1. Securities Market Regulation: SEBI is in charge of overseeing the Indian securities
market. The operation of stock exchanges, brokers, depositories, and other market
intermediaries are under its control. New product approval, market infrastructure
regulation, and the establishment of securities trading regulations are all within the
purview of SEBI.
2. Investor Protection: SEBI safeguards the interests of investors by promoting fair and
open trading in securities, all businesses that want to seek money from the public
must follow SEBI's Disclosure and Investor Protection (DIP) guidelines. SEBI has
framed these guidelines so that retail investors make an educated decision. The DIP
set of standards requires that corporates disclose to investors all pertinent information,
including financial statements, board resolutions, and related party activities.
• Investor education: SEBI runs many programmes to educate investors on the
dangers associated with purchasing securities.
• Promoting financial literacy: SEBI makes many efforts works to increase
investor’s financial literacy. This helps investors in understanding the benefits and
hazards of making securities investments.
• Redressal of investor complaints: SEBI has a very effective procedure in place to
address all types of investor complaints.
3. Regulation of Market Intermediaries: SEBI oversees the operations of market
intermediaries like brokers, investment consultants, and portfolio managers. All of
these middlemen are required to register with SEBI. All intermediaries must complete
a thorough registration process to demonstrate that they are qualified and capable of
serving investors. In order to ensure that all SEBI regulations are rigorously obeyed,
SEBI has established a rigid code of conduct for them.
4. Enforcement: SEBI has the authority to impose sanctions on businesses, market
intermediaries, and individuals that disobey its rules. It has the authority to impose
sanctions, impose legal action, or even suspend or revoke a market intermediary's
registration.
5. International Cooperation: SEBI collaborates with other regulators and
organizations globally to share information and best practices. It has signed MoUs
with regulators in various countries to facilitate cooperation and exchange of
information.
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Benefits of SEBI as a Regulator:

1. Investor Protection: SEBI's regulations and guidelines help protect the interests of
investors by ensuring fair and transparent trading in securities. This has helped to increase
investor confidence and attract more investment into the securities market in India.
2. Efficient Market: SEBI's regulatory framework has helped in creating a more efficient
and transparent securities market in India. This has facilitated the smooth functioning of
the market and reduced the risk of market abuse.
3. Innovation in Products: SEBI has encouraged the introduction of new products in the
securities market, such as derivatives and ETFs. This has provided investors with more
options to diversify their portfolios and has contributed to the growth of the securities
market.
4. International Recognition: SEBI's regulatory framework has gained recognition
globally, which has helped in attracting foreign investment into the securities market in
India. This has contributed to the growth of the Indian economy.
Challenges for SEBI as a Regulator:
1. Market Complexity: SEBI, as the regulator of securities markets in India, faces the
challenge of regulating a complex and dynamic market environment. The rapid
advancements in technology, the emergence of new financial instruments, and the
evolving market practices require SEBI to stay vigilant and adapt its regulations to ensure
investor protection and market integrity.
2. Enforcement and Surveillance: Effectively enforcing regulations and conducting
surveillance activities to detect market manipulation, insider trading, and other
malpractices are significant challenges for SEBI. With a large number of participants and
vast amounts of trading data, ensuring timely and effective enforcement actions can be
resource-intensive and require advanced technological capabilities.
3. Investor Education and Awareness: Promoting investor education and awareness is
crucial for the functioning of a healthy securities market. SEBI faces the challenge of
reaching out to a diverse investor base, especially retail investors, and equipping them
with the necessary knowledge and skills to make informed investment decisions.
Enhancing financial literacy and investor protection remains an ongoing challenge.
4. Technological Disruptions: The rapid advancement of technology in the financial sector
poses both opportunities and challenges for SEBI. While technology has facilitated
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market efficiency and innovation, it also brings risks such as cybersecurity threats,
algorithmic trading complexities, and the emergence of new business models that may
require regulatory adaptation and oversight.
5. Coordination with Other Regulators: SEBI operates in conjunction with other
regulators in the financial ecosystem, such as the Reserve Bank of India (RBI) and the
Insurance Regulatory and Development Authority (IRDA). Ensuring effective
coordination and cooperation among these regulators to address systemic risks and
maintain overall financial stability can be challenging, requiring ongoing dialogue and
information-sharing mechanisms.
SEBI's ability to navigate these challenges requires a proactive approach, continuous
monitoring of market developments, capacity building, and the adoption of advanced
technologies. By addressing these challenges, SEBI can enhance market integrity, investor
confidence, and the overall stability of the Indian securities markets.
IRDAI
The Government of India formed the independent IRDA, or Insurance Regulatory and
Development Authority of India, in 1999 to oversee and advance the insurance industry. The
insurance industry in India is supervised and governed by this supreme organisation. The
main goals of the IRDA are to protect policyholder interests and promote the expansion of
insurance in the nation. All the Life Insurance and General Insurance Companies operating in
India are governed by IRDA.
Evolution of IRDAI
On the advice of the Malhotra Committee report, the Insurance Regulatory and Development
Authority (IRDA) was established as an independent agency in 1999 to oversee and advance
the insurance sector. In April 2000, the IRDA became a formal organisation. The IRDA's
main goals include fostering competition to raise customer satisfaction by increasing
consumer choice and lowering premiums, all the while preserving the insurance market's
financial stability.
The IRDA's constitution, which permitted foreign businesses to own up to 26% of the
company, opened the market in August. According to Section 114A of the Insurance Act of
1938, the Authority is able to create regulations, and since 2000, it has done so with a variety of
rules covering everything from the registration of businesses engaged in the insurance industry
to the protection of policyholders' interests.
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The General Insurance Corporation of India's subsidiaries underwent an independent company

restructuring in December 2000, and GIC was simultaneously transformed into a national re-
insurer.
The enormous insurance industry is expanding quickly, at a pace of 15-20%. Insurance
services together with banking services boost the nation's GDP by roughly 7%. A thriving
and advanced insurance industry is beneficial for economic growth as it increases the nation's
capacity to take risks while providing long-term funding for infrastructure development.
Objectives of IRDA: The primary objective of IRDA is to ensure that all the insurance
companies follow provisions given in The Insurance Act. As per the mission statement of
IRDA, its main objectives are:
 Help India's insurance industry expand.
 safeguard policyholders' interests and guarantee equitable resolution of disputes.
 Ensure the financial soundness of insurance companies.
 Promote fair competition in the insurance sector.
 Regulate the insurance sector in a transparent and efficient manner.
 Review the regulations on a regular basis to eliminate any doubt with respect to insurance
rules.
IRDA has succeeded in attaining a number of its goals. Since the creation of the IRDA,
India's insurance industry has experienced substantial growth. At the end of March 2022,
India had 67 active insurers, of which 24 were life insurers, 26 were general insurers, 5 were
stand-alone health insurers, and 12 were re-insurers, including branches of overseas
reinsurers. Eight of the 67 insurers that are now in business are in the public sector, and 59
are in the private sector. Ensuring the financial stability of insurance businesses and
defending the rights of policyholders are other accomplishments of IRDA. In India, one of
the main industries for investment and employment is insurance. IRDA is trying to make sure
that the insurance industry is viable and that it offers policyholders a reliable source of
financial protection.
The insurance sector in India is governed by the Indian Insurance Regulatory and
Development Authority (IRDA), which does so in a variety of ways, including:
• Issuing regulations and guidelines;
• Conducting inspections of insurance companies;
• Tracking the financial performance of insurance companies;
• Taking enforcement action against insurance companies that violate regulations; and
• Raising public awareness of insurance.
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Key achievements of IRDA:

 The insurance sector in India has grown significantly since the establishment of IRDA.
The gross written premium (GWP) of the insurance sector increased from ₹28,000 crore
in 1999-2000 to ₹4,51,000 crore in 2020-21 while the number of insurance companies
operating in India has increased from 24 in 1999-2000 to 67 in 2021-22.
 Promoting Insurance Penetration: The Insurance Regulatory and Development Authority
of India (IRDA) has played a crucial role in promoting insurance penetration in the
country. By implementing various initiatives and regulatory measures, IRDA has
facilitated the growth of the insurance sector, leading to increased insurance coverage and
financial protection for individuals and businesses.
 Enhancing Consumer Protection: IRDA has prioritized consumer protection by
implementing robust regulatory frameworks and guidelines. It has mandated fair and
transparent practices by insurance companies, ensuring that policyholders are well-
informed about the terms and conditions of insurance policies. IRDA's initiatives have
contributed to enhancing consumer trust and confidence in the insurance industry.
 Strengthening Insurance Regulation: IRDA has been instrumental in establishing and
enforcing prudential norms and regulations for insurance companies. It has set stringent
capital adequacy requirements, solvency ratios, and investment norms to ensure the
financial soundness and stability of insurance companies. By continuously monitoring
and supervising insurers, IRDA has strengthened the regulatory framework of the
insurance sector.
 Promoting Innovation and Market Development: IRDA has encouraged innovation and
market development within the insurance sector. It has introduced regulations to facilitate
the introduction of new insurance products and services, including microinsurance and
customized policies. IRDA's initiatives have promoted competition, product diversity,
and the expansion of insurance offerings to cater to the evolving needs of consumers.
 Implementing Digital Transformation: Recognizing the importance of technology in the
insurance industry, IRDA has focused on promoting digital transformation. It has
facilitated the adoption of digital processes, including online policy issuance, premium
payments, and claims settlement. This has not only improved operational efficiency for
insurers but also enhanced convenience and accessibility for policyholders.
 Facilitating Reinsurance and Risk Management: IRDA has facilitated the development of
the reinsurance market in India. It has established guidelines for reinsurance operations
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and encouraged the participation of international reinsurers in the Indian market. By

promoting effective risk management practices, IRDA has contributed to the stability and
resilience of the insurance industry.
 Strengthening Corporate Governance: IRDA has emphasized the importance of good
corporate governance practices in the insurance sector. It has implemented guidelines
related to board composition, disclosure requirements, and risk management frameworks
for insurers. By promoting sound corporate governance practices, IRDA has enhanced
transparency, accountability, and ethical conduct within the industry.
Through these achievements, IRDA has played a vital role in nurturing a robust and inclusive
insurance sector in India. Its efforts have resulted in increased insurance penetration,
enhanced consumer protection, strengthened regulation, market development, and the
promotion of innovation and digitalization in the insurance industry.
However, going forward, IRDA also faces many challenges in its quest to promote insurance
and protect consumer’s interest in the Indian Economy. Some of the key challenges are:
1. Increasing Insurance Penetration: Despite the progress made, one of the key challenges
for the Insurance Regulatory and Development Authority of India (IRDA) is to further
increase insurance penetration in the country IRDA needs to promote awareness,
affordability, and distribution channels to reach a wider customer base.
2. Addressing Underinsurance and Low Awareness: Many individuals in India remain
underinsured or lack awareness about the importance of insurance. IRDA faces the
challenge of educating the public about the benefits and relevance of insurance,
particularly in areas such as health, life, and property insurance. Efforts to enhance
financial literacy and consumer education are crucial to overcome this challenge.
3. Enhancing Consumer Protection: While IRDA has taken steps to protect consumers'
interests, ensuring effective implementation and enforcement of consumer protection
regulations remains a challenge. IRDA needs to continuously monitor insurance
companies' practices, address issues related to mis-selling, improve the grievance
redressal mechanism, and empower consumers with timely and accurate information to
make informed decisions.
4. Managing Technological Disruptions: The insurance sector is witnessing significant
technological disruptions, including the rise of insurtech, digital platforms, and advanced
analytics. IRDA must adapt to these changes and establish a regulatory framework that
balances innovation and consumer protection. It needs to address challenges related to
data privacy, cybersecurity, and the ethical use of technology in insurance operations.
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5. Strengthening Risk Management and Solvency: IRDA faces the challenge of ensuring
the financial stability of insurance companies and safeguarding policyholders' interests. It
needs to continuously monitor insurers' risk management practices, solvency levels, and
investment strategies. Enhancing risk-based supervision and stress testing frameworks
will be essential to address potential risks and vulnerabilities in the insurance sector.
6. Promoting Long-Term Savings and Retirement Planning: Encouraging long-term
savings and retirement planning is a significant challenge for IRDA. It needs to develop
policies and regulations that incentivize individuals to invest in retirement products and
annuities. Promoting pension and annuity options, along with creating awareness about
their benefits, will be crucial for addressing the challenges associated with an aging
population and the need for long-term financial security.
7. Coordinating with Other Regulators: Collaborating and coordinating with other
regulators, such as the Reserve Bank of India (RBI) and the Securities and Exchange
Board of India (SEBI), is essential for IRDA. Addressing regulatory overlaps,
harmonizing guidelines, and ensuring seamless coordination among regulators is vital to
maintain stability and avoid regulatory arbitrage within the financial system.
Meeting these challenges requires IRDA to adopt a proactive approach, engage in continuous
dialogue with stakeholders, monitor global trends, and update regulations to keep pace with
market developments. By effectively addressing these challenges, IRDA can foster a resilient
and inclusive insurance sector that meets the evolving needs of Indian consumers.
IRDA is working to address these challenges and is committed to ensuring the continued
growth and development of the insurance sector in India.
PFRDA
The Government of India established the Pension Regulatory and Development Authority
(PFRDA) in 2003 in accordance with the PFRDA Act 2013. The PFRDA was established
with the goals of promoting, regulating, and developing the pension sector in India. All
citizens of India, NRIs, and independent contractors are eligible for PFRDA services.
PFRDA has a national office in New Delhi and regional offices all across the nation.
Objectives of PFRDA:
1. Development of Pension Sector: PFRDA aims to develop the pension sector in India by
creating a conducive environment for the growth of pension funds and schemes. It
collaborates with other stakeholders to create a conducive environment for the growth of
pension funds and schemes.
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2. Protection of Subscriber Interests: PFRDA aims to protect the interests of subscribers

of pension funds by ensuring transparency and accountability in the operations of pension
funds.
3. Promoting Pension Coverage: PFRDA aims to promote pension coverage in India by
increasing the reach of pension funds and schemes to more people.
4. Regulating Pension Funds: PFRDA aims to regulate the operations of pension funds by
setting standards for their conduct and ensuring compliance with the regulatory
framework.
PFRDA introduced the National Pension System, a voluntary defined contribution retirement
savings scheme. PFRDA administers and manages the NPS, which provides individuals with
a platform to accumulate savings for their retirement years. The PFRDA also works to defend
the interests of pension savers by ensuring that the pension system is fair and transparent.
PFRDA is a strong organisation with several different duties.
As a regulator, PFRDA plays the following roles:
1. Registration and Regulation of Pension Funds: PFRDA is responsible for
registering and regulating pension funds in India. It sets standards for the conduct of
pension funds and ensures compliance with the regulatory framework. PFRDA
regulates the pension sector to ensure that it is fair, transparent, and efficient. PFRDA
has the power to investigate and prosecute violations of pension regulations.
2. Approval of Pension Products: It is mandatory for all the pension products and
schemes offered by pension funds in India to be approved by PFRDA. It ensures that
these products and schemes are in compliance with the regulatory framework and are
suitable for subscribers.
3. Promotion of Pension Awareness: PFRDA promotes awareness about pensions and
retirement planning among the general public. It conducts pension awareness
campaigns to provide information about pension funds and schemes.
Monitoring of Pension Fund Managers: PFRDA grants licenses and regulates pension fund
managers (PFMs) who manage the investments of NPS subscribers. PFRDA monitors the
operations of pension funds in India to ensure compliance with the regulatory framework. It
conducts inspections and audits of pension funds to detect any irregularities or misconduct.
These PFMs are responsible for providing investment options, managing the pension funds,
and delivering returns based on the subscribers' chosen investment schemes.
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1. Regulation and Oversight: PFRDA is responsible for regulating and overseeing various
entities involved in the pension system, including pension fund managers, custodians, and
central recordkeeping agencies. It formulates and enforces regulations, guidelines, and
investment norms to ensure transparency, integrity, and safety in the pension industry.
2. National Pension System (NPS): PFRDA introduced the National Pension System, a
voluntary retirement savings scheme, which allows individuals to accumulate savings for
their post-retirement period. PFRDA administers and manages the NPS, including the
registration and enrollment of subscribers, as well as ensuring proper investment and fund
management.
3. Licensing and Supervision: PFRDA licenses and regulates pension fund managers
(PFMs) who manage the investments of NPS subscribers. It sets eligibility criteria,
monitors their performance, and takes necessary actions to protect the interests of
subscribers. PFRDA also supervises other service providers involved in the NPS, such as
custodians and recordkeeping agencies.
4. Technology Adoption: PFRDA adopts technology-driven solutions to enhance the
efficiency and accessibility of pension-related services. It implements e-governance
systems, online interfaces, and mobile applications to facilitate easy enrolment.
5. Protecting the interests of pension savers: PFRDA protects the interests of pension
savers by ensuring that pension funds are sound, fair and transparent. It has also set up an
effective grievance redressal mechanism for subscribers.
6. Market Development and Awareness: PFRDA focuses on developing and expanding
the pension market in India. It undertakes initiatives to increase awareness about the
benefits of pension planning, conducts promotional campaigns, and collaborates with
various stakeholders to encourage more individuals to participate in the NPS.
7. International Collaboration: PFRDA collaborates with international pension regulators
and organizations to share best practices, learn from global experiences, and benchmark
India's pension system against international standards. This collaboration helps PFRDA in
adopting global best practices and improving the efficiency of the Indian pension sector.
Through its regulatory oversight, market development initiatives, and focus on subscriber
welfare, PFRDA plays a vital role in fostering a sustainable and inclusive pension system in
India. Its efforts aim to provide individuals with the means to secure their financial well-
being during retirement.
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Functions of PFRDA
 The primary goal of the PFRDA is to enhance long-term financial security. This is
done by creating and regulating pension funds, safeguarding programme participants
in pension fund schemes, growing pension funds, and identifying issues with them.
 PFRDA is in charge of overseeing and managing the National Pension System's Tiers
1 and 2. In order to meet the income expectations of workers upon retirement,
PFRDA assists in the promotion and encouragement of both mandatory and voluntary
pension systems.
 PFRDA uses a number of middlemen, such as Central Record Keeping Agency and
Pension Fund Managers, to manage its operations.
 The PFRDA also underlines the importance of pensions and increases public and
stakeholder awareness of it.
 The PFRDA also trains intermediaries who are responsible for educating society's
citizens about the value and relevance of pensions.
 Issues that develop between intermediaries, such as banks, customers, and
intermediaries, are also addressed and resolved by the PFRDA.
Benefits of PFRDA as a Regulator:
1. Protection of Subscriber Interests: PFRDA's regulatory framework ensures the
protection of subscriber interests by setting standards for transparency and accountability
in the operations of pension funds.
2. Development of Pension Sector: PFRDA's efforts have contributed to the development
of the pension sector in India. It has created a conducive environment for the growth of
pension funds and schemes, which has increased pension coverage in India.
3. Promoting Pension Awareness: PFRDA's pension awareness campaigns have helped in
promoting awareness about pensions and retirement planning among the general public.
This has encouraged more people to invest in pension funds and schemes.
4. Regulating Pension Funds: PFRDA's regulatory framework ensures compliance with the
regulatory standards set for the conduct of pension funds. This has reduced the risk of
misconduct and irregularities in the operations of pension funds.
Challenges for PFRDA as a Regulator:
1. Limited Pension Coverage: Despite PFRDA's efforts, the pension coverage in India
remains low. Many people in the unorganized sector still do not have access to pension
funds and schemes.
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2. Lack of Awareness: The lack of awareness about pensions and retirement planning
among the general public is still a challenge for PFRDA. It needs to increase its efforts to
promote awareness about pensions.
3. Enforcement: PFRDA faces challenges in enforcing its regulatory framework. It needs to
have more resources and better enforcement mechanisms to ensure compliance with the
regulatory.
1.9 GLOSSARY
Small Finance Banks Small finance banks focus on customers who are underserved
by larger financial institutions. They cater to the needs of
micro- and cottage-based enterprises.
Payments Banks Payment Banks are relatively new form of banking. They
accept deposits up to INR 1 Lakh per user. They provide debit
and ATM cards and account holders are restricted to making
deposits of up to Rs.1,00,000/- and are not eligible for loans
or credit cards.
Non-Banking Financial Businesses that provide financial services like banking but are
Institutions not subject to the same regulations as banks. They lend
money to businesses and individuals without the involvement
of a bank
Insolvency and Bankruptcy Insolvency and Bankruptcy Code (IBC) sets deadlines for
Code (IBC) closing bankruptcies. When a debtor fails to make timely
payments, the creditors are in a position of bankruptcy and
must take the debtor's assets. IBC allows either the debtor or
the creditor to start "recovery" actions.
SEBI The Securities and Exchange Board of India (SEBI) is the

regulatory body for India's securities market. It began
operations in 1988 and has its headquarters in Mumbai. The
Securities and Exchange Board of India (SEBI) has two
primary objectives: investor protection and the development
of the securities market
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IRDA Insurance Regulatory and Development Authority of India,

was established to oversee and advance the insurance
industry. It aims to protect policyholder interests and promote
the expansion of insurance in the nation. All the Life
Insurance and General Insurance Companies operating in
India are governed by IRDA.
RBI Reserve Bank of India is the Central Bank of India and is the
regulator for all types of banks in India. It also serves as Banker to
the Government of India.
PFRDA The PFRDA was established with the goals of promoting,

regulating, and developing the pension sector in India
1.10 ANSWERS TO IN TEXT QUESTIONS
1. (d) All of these.

2. (a) Specialised Banks
1.11 SELF-ASSESSMENT QUESTIONS
1. What is the role of Reserve Bank of India in the Indian economy

2. What is the difference between Payment Banks and Scheduled Commercial Banks
3. IRDA is the regulator of Insurance sector in India. Elaborate on the challenges faced
by insurance sector in India.
4. The New Pension Scheme is a good option for Government employees. However, we
are yet to develop an effective Pension scheme for the private sector employees.
Comment.
5. Goods and Services Tax is a landmark reform in the Indian economy. List the key
advantages of GST over the previous indirect tax regime.
6. Innovative Remittance Services have provided the much-needed relief to Indians
settled abroad in easing the process of sending funds to India. Explain the innovative
remittance instruments.
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1.12 REFERENCES / SUGGESTED READINGS
 Pathak, B. Indian Financial System (5th ed). Pearson Publication

 Saunders, A. & Cornett, M.M. Financial Markets and Institutions (3rd Ed). Tata
McGraw Hill.
 Bhole L.M. and Mahakud J., Financial Institutions and Markets: Structure, Growth,
and Innovations (6th Edition). McGraw Hill Education, Chennai, India
 Jeff Madura, Financial Institutions and Markets, Cengage Learning EMEA, 2008
 Khan, M.Y. Financial Services (8th ed). McGraw Hill Education
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LESSON 2
INTRODUCTION TO FINANCIAL INTERMEDIATION
CA. VISHAL GOEL
(CA, CFA, PGDBA, M. Com, CS, UGC-NET)
Sr. Mentor & Professor- IMS Proschool Pvt. Ltd.
Ex- adjunct Faculty Amity University
Ex- Associate Professor- IILM University
Email-Id: cavishalgoel7@gmail.com
STRUCTURE

2.2 Introduction
2.3 Concept of Intermediation and Disintermediation
2.4 Merits and Demerits of Intermediation and Disintermediation
2.5 Kinds of Intermediaries
2.6 Flow-Of-Funds in The Indian Economy
2.7 Taxonomy of Financial Markets and Institutions
2.8 Regulatory Framework and Super-Regulation
2.9 Financial Sector Reforms and Contemporary Issues
2.10 Summary
2.11 Glossary
2.12 Answers to Intext Questions
2.14 Suggested Readings
After reading this lesson student should be able to understand:

● Concept of Intermediation
● Concept of Disintermediation
● Difference between Intermediation and disintermediation
● Kinds of Intermediation
● Sources of Flow-of-Funds in Indian Economy
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● Taxonomy of Financial Markets and Institutions

● Regulatory Framework and Super-regulation in Indian Financial Markets
● Financial Sector Reforms and Contemporary issues in Indian Financial markets
2.2 INTRODUCTION
Indian Financial Markets & Institutions

The history of Indian financial markets dates back to the early 19th century when the British
established the country's first bank, the Bank of Bengal, in 1806. In the following years, few
other banks were established, and the financial sector in India began to grow.
Reserve Bank of India (RBI) was established in 1935 to regulate the banking system in the
country. After independence in 1947, the government of India initiated various measures to
develop the financial sector in the country. During 1960s and 1970s, the government
nationalized major banks to ensure that credit was available to priority sectors like agriculture
and small-scale industries.
Realising the importance of participation of general Public in the whole financial system
through investment in companies, the Indian capital market was established in the mid-19th
century and Bombay Stock Exchange (BSE)was set up in 1875. The BSE is the oldest stock
exchange in Asia and the first in India. It was followed by the National Stock Exchange
(NSE), which was established in 1992.
In the 1990s, the Indian government introduced economic reforms to liberalize the economy
and promote private investment. These reforms led to the emergence of new financial
institutions, including non-banking financial companies (NBFCs) and mutual funds. The
government also introduced new financial products like equity derivatives and interest rate
futures.
In recent years, the Indian financial sector has witnessed significant growth, driven by factors
like a growing middle class, increasing financial literacy, and the rapid growth of the Indian
economy. A fairly regulated financial market is what drives public to financial system and
help to financial inclusion to a large extent.
India's financial market has come of Ages and is consists of various institutions that facilitate
the transfer of funds between savers and borrowers. All these institutions are largely
regulated by the Reserve Bank of India (RBI) and Securities and Exchange Board of India
(SEBI).
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Some of the major financial markets and institutions in India are: -

Stock market: The stock market in India is regulated by SEBI. As mentioned above, The
Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the two major stock
exchanges in India. They provide a platform for trading in equities, derivatives, options and
other securities.
Debt market: The debt market in India comprises of government securities, corporate bonds,
and other debt instruments. Various debt instruments are, bonds, government securities and
debentures.
Money market: The money market in India deals with short-term financial instruments like
treasury bills, commercial papers, and certificates of deposit. It is regulated by the RBI.
Mutual funds: Mutual funds in India are regulated by SEBI and provide an investment
avenue for individuals to invest indirectly in equities, debt instruments, and other securities.
Insurance: The insurance industry in India is regulated by the Insurance Regulatory and
Development Authority (IRDAI). The industry provides various insurance products like life
insurance, health insurance, and general insurance.
Banking: The banking sector in India is regulated by the RBI and provides various financial
services like deposits, loans, and remittances. There are various types of banks in India,
including commercial banks, cooperative banks, and regional rural banks.
Non-banking financial companies (NBFCs): NBFCs in India are regulated by the RBI and
provide various financial services like loans, leasing, and hire-purchase. They do not accept
deposits like banks.
These are some of the major financial markets and institutions in India. The government of
India has taken several measures to promote financial inclusion and to increase the
penetration of financial services in the country increase the confidence of investors. We will
discuss that in further sections of this lesson.
2.3 CONCEPT OF INTERMEDIATION AND DISINTERMEDIATION
INTERMEDIATION AND DISINTERMEDIATION:

These two terms are commonly used in the financial sector to describe the process of
connecting buyers and sellers of financial products and services and building layers or
removing layers between them. Let’s discuss them one by one.
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Intermediation:
It refers to the process of introducing one or more intermediaries or middlemen between
buyers and sellers of financial products, such as banks, brokers, or financial advisors, who
facilitate the buying and selling of financial products and services between two or more
parties. For example, a bank acts as an intermediary between a borrower and a lender by
providing loans to the borrower and taking deposits from the lender.
In a country like India where people used to have their savings kept at home only,
intermediation has played a crucial role in the financial sector, particularly in banking and
capital markets. The Indian banking system comprises various intermediaries such as
commercial banks, co-operative banks, regional rural banks, and non-banking financial
companies (NBFCs). These intermediaries mobilize savings from households and provide
credit to businesses, thereby contributing to the growth of the economy.
Earlier to this both borrowers and lenders were facing problems, For e.g. Those who had
money were unaware about the avenues to invest money safely, so they used to park their
funds either at home only or to private individuals where the risk of default is very high.
Similarly, those who need money don’t know whom to approach and were largely dependent
on private money lenders who exploit them by charging heavy interest and providing funds to
them on terms and conditions which were not at all favourable to them.
Here are a few examples of functions Intermediaries provide:
• An intermediary provides a place for clients to store money and assets
• They provide a place where clients can store excess money
• They give counsel and advice on how and where to invest money
• They convert savings into investments
• They provide both long- and short-term loans to help finance investments and assets
Disintermediation:
It refers to the process of bypassing intermediaries and connecting buyers and sellers directly.
This has been made possible with the rise of technology. Ironically the intermediaries which
were introduced to help buyers and sellers of financial product were regarded as barriers by
many now, as the new generation want control in their hands at click of button and don’t
want to go through long process of documentation and visit any intermediary physically at
their location. The penetration of internet to every corner of the country has led to the growth
of disintermediation in many industries, including finance. In the Indian context,
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disintermediation has been enabled by various fintech platforms that allow consumers to
access financial products and services directly, at the click of a button without the need for
intermediaries.
For example, peer-to-peer (P2P) lending platforms in India enable borrowers to connect
directly with lenders, bypassing traditional intermediaries such as banks. Similarly, digital
payment platforms such as Paytm and PhonePe allow consumers to make payments directly
to merchants, without the need for intermediaries such as banks or credit card companies.
In conclusion, both intermediation and disintermediation are required depending on
requirements and profile of borrowers and lenders and both have their advantages and
disadvantages. On one hand if intermediation has been a key driver of financial inclusion and
economic growth then on the other hand disintermediation has the potential to increase
efficiency, speed up the process, reduce costs, and improve access to financial products and
services to every nook and corner of the country. One section of population who is not very
tech savvy still prefer intermediaries to guide them even if they have to pay a little cost as
commission to intermediary. On the other hand, the section of population which has smart
phones and are tech savvy prefer quick direct access to financial products at low cost.
2.4 MERITS AND DEMERITS OF INTERMEDIATION AND

DISINTERMEDIATION
Intermediation and disintermediation are two sides of the same coin, and both have their
merits and demerits in the Indian context.
Merits of Intermediation:
1. Specialised services: Intermediaries bring their exclusive experience along with the
products and services they offer on the table, which can be beneficial for consumers
who may not have the same level of knowledge or experience.
2. Financial inclusion: Intermediaries such as banks and NBFCs have played a crucial
role in bringing financial services to untouched corners of country and yet unserved
populations in India.
3. Risk management: Intermediaries help to minimise risks associated with financial
transactions by conducting due diligence and credit analysis. So, on one side investor
knows that his/her money is in safe hands and on other hand borrower knows he will
not be unnecessarily exploited.
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4. Economies of scale: When borrower borrows money through intermediary rather

than a private individual, normally rate of interest charged is much less. The cost of
transaction is lower as compared to transactions between 2 individuals like these days
buying Gold ETF through banks is more economical than physical gold via jeweller if
it’s for investment. All this is made possible by economies of scale.
5. Liquidity: This is one very important benefit of intermediary and stock exchanges are
best example of this. One can liquidate investment of lacs of Rupees by just giving
instructions to the respective broker. Based on current regulations, money will be
credited in your account in 2-3 days.
6. Timing: Intermediaries have access to vast market knowledge so they can time the
returns in much better manner than individuals. In this manner, they are able to reap
higher monetary benefits for all the participants.
Demerits of Intermediation:
1. High costs: Sometimes Intermediaries like banks add significant costs to financial
transactions in the name of commissions and finance charges. This can be a burden
for low-income consumers and small businesses as compared to funds borrowed
locally that might be cheaper.
2. Low degree of penetration: Intermediaries still do not have 100% penetration in the
country. Some intermediaries may not serve certain populations or geographies,
which can limit access to financial services for some people.
3. Different Goals: Sometimes intermediaries like stockbrokers or mutual fund
managers have different goals than the actual investor and their personal biases may
lead to different than expected results.
4. Too much documentation: Intermediaries may require client to agree on too many
terms and conditions to mitigate their own risks. Most of the time clients don’t even
know the real purpose and content of so many documents that they sign.
Merits of Disintermediation:
1. Lower costs: If we compare transactions done via intermediary and transactions done
after disintermediation then the latter one has lower costs for financial transactions, as
there are fewer intermediaries involved.
2. Speed & Efficiency through automation: Disintermediation eliminates the need for
intermediaries to verify the documents and approve transactions thereby reducing the
time to process transaction with minimal or no human interaction at all.
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3. Innovation: Disintermediation can spur up the innovation in financial products and

services, as new players enter the market and compete with traditional intermediaries.
4. Customised products: With the introduction of technology, clients especially lower-
and middle-income groups can choose products and customise as per their
requirements at click of button, for e.g., Customer can choose tenure for EMI, amount
of EMI etc.
5. Large reach: Disintermediation has led to high degree of penetration in market so
financial products and services are available to even those who do not have access to
financial institutions including banks.
Demerits of Disintermediation:
1. Security risks: Disintermediation expose consumers to security risks, as they may be
required to provide personal information to third-party platforms. Many clients may
not be very comfortable for the same.
2. Lack of regulation: Disintermediation can lead to a lack of regulation, as new
players enter the market and may not be subject to the same level of control by the
regulators as traditional intermediaries. We have seen this in case of many On-the go
loan apps available as mobile apps. Many apps used to offer short-term loans instantly
to the public, but due to data privacy concerns, regulators later prohibited several such
apps.
3. Limited access: Disintermediation may not be accessible to all consumers, especially
those who do not have access to technology or who are not very comfortable
conducting financial transactions online.
To summarize, intermediation and disintermediation have both advantages and
disadvantages, and which option to choose depends on the particular requirements and
circumstances of each consumer or business. Finding a balance between intermediation and
disintermediation is crucial to ensure that all consumers have access to cost-effective and
secure financial services.
2.5 KINDS OF INTERMEDIARIES

So, from the above discussion it is quite evident that despites some of its limitations,
intermediaries play a critical role in financial markets by facilitating transactions, managing
risks, and providing valuable information and advice to investors and borrowers.
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There can be many categories of intermediaries depending upon basis of classification. Let us
concentrate on more common kinds of intermediation that exist in Indian financial markets.
The list includes but not limited to:
1. Banks: Banks are the most popular financial intermediaries in the world. Banks act as
intermediaries by accepting deposits from customers and lending the funds to
borrowers. They play a crucial role in the financial system by facilitating transactions
and managing risk. They offer services in multiple specialties that include saving,
investing, lending, and many more. Now a days, one can buy mutual funds, insurance
as well as gold ETFs from bank.
2. Non-bank financial intermediaries: These intermediaries include insurance
companies, pension funds, mutual funds, and other financial institutions that pool
funds from investors and invest them in various assets. They offer almost all services
just like banks except that they do not perform retail banking functions and do not
offer savings or current accounts for customers.
3. Stock Market & Brokers: Once buying corporate stocks was a long and tedious
process. In order to simplify it, stock exchanges were invented. Stock exchanges serve
as vast platforms where individuals can submit orders to buy or sell securities of
specific companies, among many others. In these exchanges, individuals looking to
sell their securities can find interested buyers, and vice versa. By acting as
intermediaries, stock exchanges facilitate these transactions and, in exchange for
minimal fees, provide valuable assistance to both parties involved. Stock exchange
also serves as a platform for companies to raise funds through IPO or FPO. Stock
exchange further take help from brokerage firms, Depositaries and Custodians to
smoothen the whole process.
4. Investment bankers: Investment bankers assist companies in raising capital by
underwriting new securities offerings, such as IPOs. They also provide advice on
mergers and acquisitions and other strategic transactions.
5. Lead Managers: The role of lead managers, also known as book runners, is crucial in
the process of issuing securities, particularly in initial public offerings (IPOs) and
other large-scale offerings. Lead managers are typically investment banks or financial
institutions that assist the issuer in navigating the complexities of the issuance process
and ensure its successful execution. lead managers serve as trusted advisors and
facilitators throughout the securities issuance process.
6. Book builders: Book builders play a crucial role in the process of pricing and
allocating securities in an offering, particularly in the context of initial public
offerings (IPOs) or follow-on offerings. Book building refers to the process of
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generating and managing the order book for the securities being offered. Book
builders are typically investment banks or financial institutions that facilitate this
process.
7. Market makers: Market makers facilitate trading in financial markets by buying and
selling securities, providing liquidity to the market.
8. Credit rating agencies: Credit rating agencies provide information on the
creditworthiness of borrowers, helping investors to assess the risks associated with
investing in certain securities.
2.6 FLOW-OF-FUNDS IN INDIAN ECONOMY

The Flow-of-Funds in the Indian economy refers to the movement of funds between various
sectors, institutions, and agents in the economy. In India, the Reserve Bank of India (RBI) is
responsible for compiling and publishing the flow-of-funds statement. This statement tracks
the sources and uses of funds in the economy and provides valuable insights into the financial
behaviour and health of different institutions and sectors.
It includes financial transactions of various sectors such as households, businesses,
government, and the external sector, and highlights sources and uses of funds such as
domestic savings, foreign savings, investment, lending, borrowing, and capital flows.
Policymakers, investors, and analysts rely on the flow-of-funds statement to understand the
financial position of different institutions and sectors in the economy. It also helps identify
potential imbalances and vulnerabilities that may require policy interventions. Based on this,
both Ministry of finance and RBI made their policies to support particular weak sectors of the
economy by prioritising loans disbursal to such sectors
So, to conclude the statement of flow-of-funds in the Indian economy provides a
comprehensive understanding of the financial transactions and positions of various
institutions and sectors, which is crucial for informed decision-making and policy
formulation.
2.7 TAXONOMY OF FINANCIAL MARKETS AND INSTITUTIONS

By now we know that the financial market is a marketplace where the creation and trading of
financial assets, including shares, bonds, debentures, commodities, etc., is done.
Financial markets can also be described as intermediaries between those who need funds
(generally businesses, government, etc.) and those who have funds (typically investors,
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households, etc.). It mobilizes funds between them, helping allocate the country’s limited
resources.
The financial markets can be classified into four categories:
1. By Nature of Claim
2. By Maturity of Claim
3. By the Timing of Delivery
4. By Organizational Structure
Let's delve into each category in detail:
1. Based on Nature of Claim
Markets can be classified by the type of claim investors have on the entity's assets
they've invested in. There are two types of claims: fixed and residual. Consequently,
two markets exist:
a. Debt Market
The debt market involves the trading of debt instruments like debentures and
bonds, which have fixed claims on the entity's assets up to a certain amount.
Additionally, these instruments generally carry a fixed coupon rate, commonly
known as interest, for a specific period. These instruments generally do not have
any right to participate in management of entity issuing them.
b. Equity Market
Equity instruments are traded in this market. Equity represents the owner's capital
in the business and has a residual claim. After paying off the fixed liabilities,
whatever remains in the business belongs to equity shareholders, regardless of
the face value of their shares. These instruments generally have any right to
participate in management of entity issuing them.
2. Based on Maturity of Claim
The maturity period of an investment affects the amount and risk profile of the
investor. There are two markets based on the maturity of the claim:
a. Money Market
Investors who want to invest for no longer than a year enter the money market,
where short-term funds are traded. This market deals with monetary assets like
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treasury bills, commercial paper, and certificates of deposit, and all these
instruments have a maturity period of not more than a year. These instruments
carry low risk and offer a reasonable rate of return for investors, usually in form
of interest.
b. Capital Market
The capital market trades instruments with medium- and long-term maturity. It is
the market where maximum interchange of money occurs, and it helps companies
access money through equity capital and preference share capital. Investors can
invest in the company's equity share capital and be a party to the profits earned
by the company. The capital market further has two verticals:
i) Primary Market: Where a company lists security for the first time, or an
already listed company issues fresh security.
ii) Secondary Market: Once a company lists the security, it becomes available
for trading over the exchange between investors.
3. Based on Timing of Delivery
The timing of delivery of the security is another factor that distinguishes markets into
two parts, mainly in the secondary market or stock market:
a. Cash Market
In this market, transactions are settled in real-time, requiring investors to pay the
total investment amount through their funds or borrowed capital, known as
margin.
b. Futures Market
The delivery or settlement of security or commodity occurs later in this market.
Therefore, transactions in such markets are generally cash-settled, and a margin
up to a certain percentage of the asset amount is sufficient to trade in the asset.
4. Based on Organizational Structure
Markets can also be classified based on their organizational structure, i.e., how
transactions are conducted:
a. Exchange-Traded Market
A centralized market that works on pre-established and standardized procedures,
the exchange-traded market, involves transactions entered with the help of
intermediaries, who ensure the settlement of transactions between buyers and
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sellers. Standard products are traded in this market, so customized products are
not required.
b. Over-the-Counter Market
This decentralized market allows customers to trade customized products based on
their requirements. In this market, buyers and sellers interact with each other, and
transactions usually involve hedging foreign currency exposure and exposure to
commodities. These transactions occur over the counter as different companies
have different maturity dates for debt, which generally does not coincide with the
settlement dates of exchange-traded contracts.
Over time, financial markets have gained importance in fulfilling capital requirements for
companies and providing investment avenues to investors in the country. Financial markets
offer transparent pricing, high liquidity, and investor protection from frauds and malpractices.
Apart from these Popular types of financial markets there are other important financial
institutions which play important role in development of an economy and maintaining flow of
funds which we have discussed under the section intermediaries. Some of them are:
Banks: Banks accept deposits from customers and lend the funds to borrowers, earning
interest on the loans.
NBFC’s: Non-bank financial institutions include insurance companies, pension funds,
mutual funds, and other financial institutions that pool funds from investors and invest them
in various assets.
Investment Banks: Investment banks assist companies in raising capital by underwriting
new securities offerings, providing advice on mergers and acquisitions, and other strategic
transactions.
Brokerage Houses: firms facilitate trades between buyers and sellers in financial markets
and earn commissions on the transactions they execute on behalf of their clients.
CRA’s: Credit rating agencies provide information on the creditworthiness of borrowers,
helping investors assess the risks associated with investing in certain securities.
2.8 REGULATORY FRAMEWORK AND SUPER-REGULATION

For any financial market to grow and remain relevant on a global scale, it is imperative to
have a dependable and standardized regulatory framework in place. Indian financial market
has also come of ages and in the process of making it globally competitive lot of regulatory
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frameworks were developed and implemented which were much appreciated by even global
counterparts. The regulatory framework in Indian financial markets refers to the set of rules,
regulations, and guidelines that govern the functioning of financial market participants. The
regulatory framework is designed to ensure that financial markets operate in a fair,
transparent, and efficient manner, and that investors are protected from fraudulent activities
and market manipulation.
The regulatory framework for Indian financial markets is overseen by multiple regulatory
bodies such as the Reserve Bank of India (RBI), Securities and Exchange Board of India
(SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and
Pension Fund Regulatory and Development Authority (PFRDA), among others. Each
regulatory body has a specific area of focus, and together they work to create a
comprehensive regulatory framework for the Indian financial markets.
1. The Reserve Bank of India (RBI) is the apex monetary institution in India. RBI is
India’s central bank, established under the RBI Act of 1934 and is responsible for
numerous functions under the Banking Regulation Act of 1949.
2. The Securities and Exchange Board of India (SEBI) protects the interest of
investors in securities and also promotes the development and regulates the securities
market. It was established in 1992 under the Securities and Exchange Board of India
Act, 1992.
3. The Insurance Regulatory and Development Authority of India (IRDAI) is the
authority that regulates insurance in India. It was established under the Insurance
Regulatory and Development Authority Act of 1999.
4. The Pension Fund Regulatory and Development Authority (PFRDA) regulates the
pension scheme in India. It regulates the National Pension Scheme (NPS) and Atal
Pension Yojana (APY). It was established under the PFRDA Act, 2013.
Furthermore, in Indian financial markets, there exists the concept of super-regulation, which
involves a single entity or regulator overseeing multiple regulators. The primary goal of
super-regulation is to prevent regulatory overlap and ensure efficient coordination within the
regulatory framework. The idea was initially introduced by the Financial Sector Legislative
Reforms Commission (FSLRC) in 2013, which proposed the creation of a unified financial
regulator known as the Indian Financial Code. This regulator would streamline the regulatory
framework and oversee all financial market regulators.
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The Financial Sector Legislative Reforms Commission (FSLRC) made several key
recommendations to improve the regulatory framework in the Indian financial markets. These
included the need for a uniform legal process for financial sector regulators that emphasized
the rule of law, along with the creation of independent regulators with clear goals, powers,
and accountability.
Another important recommendation was to ensure that every entity operating in the financial
space was under the oversight of a financial regulator. The FSLRC also emphasized the
importance of consumer protection, which it saw as the ultimate objective of financial sector
regulation. This included focusing on prevention and cure of consumer grievances, with
financial regulators responsible for the former and a proposed financial redressal agency
(FRA) responsible for the latter. The FRA would span across the financial sector and provide
a feedback loop to regulators to help them address consumer grievances with appropriate
regulations.
Finally, the FSLRC recommended the creation of a resolution mechanism to address the
failure of financial firms and to protect consumers. This mechanism would also manage the
deposit insurance scheme.
However, the proposal has yet to be implemented fully, and the current regulatory framework
remains under the supervision of multiple regulatory bodies. Nevertheless, efforts are being
made to strengthen the regulatory framework and promote greater coordination among
regulators to ensure the stability and growth of Indian financial markets.
2.9 FINANCIAL SECTOR REFORMS AND CONTEMPORARY

ISSUES
Financial sector reforms in India refer to the measures taken by the Indian government to
develop and strengthen the financial sector of the country. These reforms were initiated in
1991 with the objective of liberalizing and deregulating the financial sector, making it more
efficient and competitive, and integrating it with the global economy.
The major financial sector reforms introduced in India since 1991 include the establishment
of new institutions as discussed in previous section, like the Securities and Exchange Board
of India (SEBI), the Insurance Regulatory and Development Authority (IRDA), and the
Pension Fund Regulatory and Development Authority (PFRDA), liberalization of foreign
investment, deregulation of interest rates, and the introduction of new financial instruments
like derivatives and securitization.
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The reforms have led to significant changes in the Indian financial sector, with increased
competition, improved efficiency, and greater access to financial services. They have also
contributed to the growth of the Indian economy and its integration with the global economy.
Then in last 10 years various financial sector reforms sometimes referred as JAM (Jan Dhan
Bank Accounts, Adhaar linking and Mobile banking and other financial services available on
mobiles). All this was aimed at financial inclusion of the large section of population which up
to now don’t have access to financial products and services.
However, there are still several challenges that need to be addressed in the Indian financial
sector, such as improving financial inclusion, ensuring financial stability, and addressing
issues related to non-performing assets (NPAs) and corporate governance. The Indian
government and regulatory authorities continue to work towards addressing these challenges
and further developing the financial sector.
Here are a few contemporary issues faced by Indian Financial Sector:
 Non-Performing Assets (NPAs): The Indian banking system has been grappling with
high levels of non-performing assets (NPAs) or bad loans. This has been a persistent
problem in the Indian banking sector and has had a negative impact on the health of
banks and the overall economy.
 Corporate Governance: Corporate governance has become a significant issue in the
Indian financial markets, especially in the wake of a number of corporate scams and
failures. The need for greater transparency and accountability in corporate governance
practices has become increasingly important.
 Digital Transformation: The Indian financial markets have been undergoing a
significant digital transformation, with the rapid adoption of new technologies and the
emergence of new players in the fintech space. This has led to new challenges related
to cybersecurity, data privacy, and regulatory oversight.
 Financial Inclusion: Despite significant progress in recent years, financial inclusion
remains a key challenge in the Indian financial markets. A large portion of the
population, especially in rural areas, still lacks access to basic financial services and
products.
 Challenges in Capital Markets: The Indian capital markets have been facing several
challenges related to liquidity, volatility, and the overall investment climate. There is
a need for greater investor confidence and participation in the capital markets to
support the growth of the economy.
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IN-TEXT QUESTIONS
1. The secondary market is a platform in which
a. Only earlier allotted securities are being traded among investors.
b. Investors trade in new securities
c. Individually cannot participate.
d None of these
2. The capital market is organized in India by?
a. RBI
b. NABARD
c. SEBI
d. IRDA
3. Which of the below mentioned is not the objective of SEBI?
a. To regulate the securities market.
b. To protect the interests of inventors.
c. To promote individual businesses.
d. To promote the development of the market.
2.10 SUMMARY
INTERMEDIATION AND DISINTERMEDIATION:

These two terms are commonly used in the financial sector to describe the process of
connecting buyers and sellers of financial products and services and building layers or
removing layers between them. Let’s discuss them one by one.
Intermediation:
It refers to the process of introducing one or more intermediaries or middlemen between
buyers and sellers of financial products, such as banks, brokers, or financial advisors,
Disintermediation:
It refers to the process of bypassing intermediaries and connecting buyers and sellers directly.
This has been made possible with the rise of technology.
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Merits of Intermediation:
1. Specialised services
2. Financial inclusion
3. Risk management
4. Economies of scale
5. Liquidity
6. Timing
Demerits of Intermediation:
1. High cost
2. Low degree of penetration
3. Different Goals
4. Too much documentation
Merits of Disintermediation:
1. Lower costs
2. Speed & Efficiency through automation
3. Innovation
4. Customised products
5. Large reach
Demerits of Disintermediation:
1. Security risks
2. Lack of regulation
3. Limited access
The list of intermediaries includes but not limited to:
1. Banks
2. Non-bank financial intermediaries
3. Stock Market & Brokers
4. Investment bankers
5. Market makers
6. Credit rating agencies
The Flow-of-Funds in the Indian economy refers to the movement of funds between various
sectors, institutions, and agents in the economy. In India, the Reserve Bank of India (RBI) is
responsible for compiling and publishing the flow-of-funds statement. This statement tracks
the sources and uses of funds in the economy and provides valuable insights into the financial
behaviour and health of different institutions and sectors.
The financial markets can be classified into four categories: –
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By Nature of Claim
 Debt Market
 Equity Market
By Maturity of Claim
 Money Market
 Capital Market
By the Timing of Delivery
 Cash Market
 Futures Market
By Organizational Structure
 Exchange-Traded Market
 Over-the-Counter Market
Regulatory Framework of Indian Financial Market
The regulatory framework for Indian financial markets is overseen by multiple regulatory
bodies such as the Reserve Bank of India (RBI), Securities and Exchange Board of India
(SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension
Fund Regulatory and Development Authority (PFRDA), among others. Each regulatory body
has a specific area of focus, and together they work to create a comprehensive regulatory
framework for the Indian financial markets.
Reserve Bank of India (RBI)
Financial sector reforms
Financial sector reforms in India refer to the measures taken by the Indian government to
develop and strengthen the financial sector of the country. These reforms were initiated in
1991 with the objective of liberalizing and deregulating the financial sector, making it more
efficient and competitive, and integrating it with the global economy.
Contemporary issues faced by Indian Financial Sector:
1. Non-Performing Assets (NPAs
2. Corporate Governance
3. Digital Transformation
4. Financial Inclusion
5. Challenges in Capital Markets
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2.11 GLOSSARY
1. Intermediation: It refers to the process of introducing one or more intermediaries or

middlemen between buyers and sellers of financial products, such as banks, brokers, or
financial advisors, who facilitate the buying and selling of financial products and
services between two or more parties.
2. Disintermediation: It refers to the process of bypassing intermediaries and connecting
buyers and sellers directly. This has been made possible with the rise of technology.
3. Debt Market: The debt market is the one where the trading of debt instruments is
executed like debentures and bonds, which have fixed claims on the entity's assets up
to a certain amount.
4. Equity Market: Equity instruments are traded in this market. Equity represents the
owner's capital in the business and has a residual claim. After paying off the fixed
liabilities, whatever remains in the business belongs to equity shareholders, regardless
of the face value of their shares.
5. Money Market: This market deals with monetary assets like treasury bills,
commercial paper, and certificates of deposit, and all these instruments have a maturity
period of not more than a year.
6. Capital Market: The capital market trades instruments with medium- and long-term
maturity. Investors can invest in the company's equity share capital and be a party to
the profits earned by the company.
7. Primary Market: Where a company lists security for the first time, or an already
listed company issues fresh security.
8. Secondary Market: Once a company lists the security, it becomes available for
trading over the exchange between investors.
9. Cash Market: In this market, transactions are settled in real-time, requiring investors
to pay the total investment amount through their funds or borrowed capital, known as
margin.
10. Futures Market: The delivery or settlement of security or commodity occurs later in
this market. Therefore, transactions in such markets are generally cash-settled, and a
margin up to a certain percentage of the asset amount is sufficient to trade in the asset.
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11. Exchange-Traded Market: A centralized market that works on pre-established and

standardized procedures, the exchange-traded market, involves transactions entered
with the help of intermediaries, who ensure the settlement of transactions between
buyers and sellers. Standard products are traded in this market.
12. Over-the-Counter Market: This decentralized market allows customers to trade
customized products based on their requirements. These transactions occur over the
counter as different companies have different maturity dates for debt, which generally
does not coincide with the settlement dates of exchange-traded contracts.
2.12 ANSWERS TO INTEXT QUESTIONS
1. a Only earlier allotted securities are being traded among investors.

2. c SEBI
3. c to promote individual businesses
Q.1 What are the main objective of introducing intermediaries in the financial markets?
Q.2 What are the advantages and disadvantages of disintermediation?
Q.3 Briefly describe any 5 intermediaries in Indian financial Markets.
Q.4 What are various regulators in Indian Financial markets? Also briefly discuss concept
of super regulator.
Q.5 Discuss briefly any 5 contemporary issues faced by Indian financial markets. Also
discuss various recent reforms in Indian financial markets
2.14 SUGGESTED READINGS
 Bharti. V. Pathak Indian Financial System, 5e, Pearsons

 Frederic S. Mishkin, Stanley Eakins - Financial Markets and Institutions, 8/e,
Pearsons
 I. M Bhole, Jitendra Mahakud- Financial Institutions and Markets: Structure, Growth
& Innovation | 6th Edition, McGraw Hill Education
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LESSON 3
DEPOSITORY INSTITUTION OF BANKING
Chandni Jain
Assistant Professor
University of Delhi
Email-Id - chandni.90.jain@gmail.com
STRUCTURE
3.2 Introduction
3.3 Overview of banking
3.4 Principles of lending and credit creation
3.5 Products and services offered by banks.
3.6 Banking regulations
3.7 Role of market regulator
3.9 Evaluation of banking sector
3.10 Summary
3.11 Glossary
3.14 References/Suggested Readings

After studying this chapter, students will be able to:
 Get an overview of banking
 Know the types of products & services offered by banks
 Understand banking regulations and role of market regulator
 Know the key market players
 Evaluate the banking sector in India
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3.2 INTRODUCTION
A depository is a place where something is kept for protection or storage. Therefore, a
depository can be an organisation, a structure, or a warehouse where people and companies
deposit any important item for safekeeping. The money stored in a depository is utilised for
lending to other persons and businesses as well as investing in other assets, thereby supplying
liquidity to the exchange market.
A depository can thus be defined as follows:

"A depository is a financial institution or organisation that facilitates the purchase and sale of
financial products, such as stocks and bonds, and takes deposits from both corporations and
people. To avoid the risk of holding them, the public can park their precious assets with such
financial institutions.”
Types of Depository Institutions
The following are the three main categories of depository institutions:
Banks
A bank is a type of financial institution authorised to grant loans and accept deposits for
checking and savings accounts. Individual retirement accounts (IRAs), certificates of deposit
(CDs), currency exchange, and safe deposit boxes are other services that banks offer. Retail
banks, commercial or corporate banks, and investment banks are different types of banks. We
mainly talk about commercial banks here. Commercial banks are for-profit businesses that
are typically held by individual investors. The size of the commercial banks affects the range
of services offered by them. For instance, the smaller banks only provide banking for
consumers, modest mortgages and loans, deposits, banking for small businesses, and other
services. In the case of smaller banks, the market selection is likewise constrained. On the
other hand, bigger banks and international banks provide a wide range of services like money
management, investment banking, and services linked to foreign currency. Larger,
international banks may also provide services to other banks and corporations. Among all
depository institutions, the large banks' service offerings are the most varied.
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Credit unions
As financial cooperatives, credit unions mean that the owners of these depository
organisations are people who belong to a certain group. Either the members receive dividends
from the company's earnings, or the money is put back into the business. Credit union
members are the ones with accounts in the organisation; as a result, depositors are also part
owners and are paid dividends. Credit unions are non-profit organisations; thus, they do not
pay taxes. As a result, credit unions charge lower interest rates on loans while paying higher
rates on deposits.
Thrift institutions/Savings Institutions
Savings institutions are the local community banks and lending institutions. Local people
deposit money in the banks, and the banks offer them loans for small enterprises, credit cards,
mortgages, and consumer loans in return. Savings banks are occasionally set up as companies
or organised as financial cooperatives, giving their depositors a stake in the business.
Depository institutions offer the following four crucial services to the economy:
o Safekeeping services
o Cheque and e-transfer payment system
o Pooling the savings of many savers for loans to individuals and businesses and
o Investing in securities.
3.3 OVERVIEW OF BANKING

3.3.1 Meaning of Bank
Financial institutions differ from one country to other depending on the overall economic
structure of the respective nation. One of the most significant financial organisations in the
economy and the main providers of credit are banks. A bank is typically thought of as an
institution that deals with loaning money and accepting deposits. It encompasses more than
just a location for money lending and depositing; it also takes care of the financial issues that
its clients face.
A bank is a type of financial institution that deals with loans, deposits, and other services. It
accepts deposits from people who wish to save money and lends money to people who need
it. The gap between savers and borrowers is closed by it. Banks typically set themselves apart
from other kinds of financial companies through the offering of deposit and loan products.
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Deposit products release funds at request or with advance notice. For banks, deposits are
liabilities that must be handled if they are to operate profitably.
3.3.2 Meaning of Banking
Banking is the commercial activity of receiving, securing, and then lending out money that
belongs to other people or entities in order to make a profit. Banking is defined as the
accepting, for the purpose of lending, or investment of deposits, money from the public,
repayable on demand or otherwise and withdrawable by cheque, draft, or order.
Simply stated, Bank is an organization, or a company and Banking is the business activity of
a bank.
3.3.3 Features of banking
The fundamental traits of banking are:
(i) Dealing with money: Banks receive public deposits and lend the same amount as loans
to those in need. Deposits might be made into many sorts of accounts, including current,
fixed, savings, etc. The terms and conditions under which deposits are accepted vary.
(ii) Deposits must be withdrawable: The public's deposits (aside from fixed deposits) may
be withdrawable by cheques, drafts or other means. In other words, the bank may issue
and pay cheques. Most deposits allow for immediate withdrawal.
(iii) Creation of credit: The only institutions capable of creating credit, or extra money for
lending, are banks. As a result, "creation of credit" is the distinctive feature of banking.
(iv) Commercial in nature: All banking operations are conducted with the intention of
generating profit, so the banks are viewed as commercial in nature.
(v) Agency nature: In addition to performing the fundamental roles of accepting deposits
and disbursing funds in the form of loans, banks also have the characteristics of agents
because of their range of agency services.
3.3.4 How do banks work?
Banks receive deposits from their customers. These deposits are liability for banks as the
money originally belongs to customers. Banks pay interest on these deposits to the customers.
These deposits are used by banks to give out loans and advances to customers. The banks
charge interest on these loans given by them. The interest charged on loans is higher than the
interest paid on deposits. This is how banks earn. For instance, a bank might charge mortgage
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customers an annual interest rate of 6% while offering savings account customers an annual
interest rate of 4%.
Service fees and levies are another revenue source for banks. Account fees (monthly
maintenance fees, minimum balance fees, overdraft fees, and non-sufficient funds [NSF]
penalties), safe deposit box fees, and late fees are some examples of these charges, which
vary depending on the products. In addition to interest fees, many loan packages also include
other charges or fees.
IN-TEXT QUESTIONS
1. Bank is a type of depository institution. True or false?
2. State any two features of banking.
3. Interest earned by banks is greater than interest paid. True or false?
4. Bank is an organisation whereas banking is the business activity of bank. Do
you agree?
3.4 PRINCIPLES OF LENDING AND CREDIT CREATION

 Principle of safety
The most crucial rule of responsible lending is "safety first". A banker must be confident,
before he makes a loan, that the advance is secure—that is, that the money will surely be
repaid. The advance would be at risk, for instance, if the borrower used the funds for a
speculative or unprofitable endeavour or if he or she was dishonest. Similarly, it could be
challenging to collect the money if the borrower experiences losses in his firm as a result of
his incompetence. The banker makes sure that the money he advances goes to the right kind
of borrower, is used in a way that ensures its safety not only at the time of lending but also
throughout and is repaid with interest after serving a useful purpose in the trade or industry
where it was employed. A commercial bank receives consumer deposits and invests them.
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But because it is using the investors’/ depositors’’ funds to give out loans, it puts the security
of the funds first.
 Principle of liquidity
A commercial bank provides two different kinds of deposits:
Demand deposits, which the bank must repay immediately on customers’ demand, similar to
a savings account; and Time deposits, which the bank must repay when a predetermined time
period has passed. Additionally, clients withdraw and deposit cash every day. Therefore, to
satisfy consumer demand for cash, all commercial banks are required to maintain a specific
amount of cash in their possession. It is not enough that the money will return; it also needs
to do so immediately upon request or in accordance with the payback terms that have been
established. When a repayment demand is made, the borrower must be able to pay back the
debt in a timely manner. This is only conceivable if the borrower uses the funds for short
term needs and does not tie them up in the purchase of fixed assets or in long-term
investment schemes. Additionally, the source of repayment must be specified. Bankers value
‘liquidity’ as highly as they value the safety of their funds because most of their deposits are
repaid quickly or on demand.
Despite the safety of the advances, the banker's capacity to meet requests would be severely
hampered if he lent a sizable amount of his capital to borrowers from whom repayment
would come in only gradually. An advance of ₹ 50 lakhs, for instance, will be quite safe if it
is secured by a valid mortgage on a bungalow with a market value of ₹ 100 lakhs. However,
it can take several years to retrieve the mortgage money if a legal procedure is required.
Although safe, the loan is not liquid.
 Principle of profitability
The idea of "profitability" is also crucial in bank advances since, like other commercial
institutions, banks need to turn a profit. First of all, they must pay interest on the deposits
they have received. They must pay for their facility, their rent, their office supplies, etc. They
must account for both the depreciation of their fixed assets and any potential bad or dubious
obligations. A reasonable profit must be earned after covering all of these expenses that are
included in a bank's operating costs; otherwise, it won't be possible to add anything to the
reserve or distribute dividends to shareholders.
A bank determines its loan rate after taking all of these considerations into account.
Sometimes a particular transaction might not seem profitable in and of itself, but there might
be some ancillary business accessible, such deposits from the borrower's other businesses or
his foreign exchange company, which might be very lucrative. This might make the
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transaction beneficial for the bank as a whole. However, it should be emphasised that lending
rates are influenced by the Bank Rate, interbank competition, and, if applicable, Central Bank
directives (such as those of the Reserve Bank of India, or RBI). The rates may also vary
according to the borrower's credit, the security's kind, the method of charge, the form and
type of advance, such as a cash advance or another type.
 Principle of diversification of risks
The diversity of advances is a key component of sound lending. No matter how solid an
advancement may seem, there is always a certain amount of risk involved. Actually, taking
measured risks is at the heart of the banking industry, and a successful banker is skilled at
doing so. He is interested in distributing the risks associated with lending among a large
number of borrowers, industries, and geographic regions, as well as across various assets. For
instance, if someone has bet too much of his money on a single class of securities, he runs a
significant risk if that class of securities sharply declines in value.
The bank receives a wide range of securities against the advances if it has several branches
dispersed throughout the nation. The theory behind diversification is that not all industries
and businesses are affected by a downturn at once.
 Principle of purpose
The goal should be productive so that the funds remain safe and have a reliable source of
repayment. Additionally, the goal should be short-term to guarantee liquidity. Banks prohibit
customers from using loans for speculative or stockpiling purposes. Apart from the fact that
such transactions are anti-social, there are obvious risks associated with them. The banker
must carefully examine the need for the funds and make every effort to guarantee that the
borrower uses the funds in accordance with the purpose for which they were borrowed. In the
modern concept of banking, purpose has taken on a specific relevance.
 Principle of security
Banks have a policy of not lending unless security is provided. Security is viewed as an
insurance policy or a safety net to rely on, in an emergency. For the banker, it allows for an
unforeseen circumstance change that could have an impact on the loan’s/advance's safety and
liquidity. The banker simply takes security in order to protect himself from such occurrences;
should the well-planned and almost assured source of repayment unexpectedly falter; he will
be able to realise it and reimburse himself. An advance proposal should not be evaluated just
in terms of security. A good banker will only approve an advance if it is warranted, which
means that they will consider its safety, likely use, and other factors as well as the borrower's
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character, capacity, and capital in addition to the security's quality. In addition to acting as a
safety valve in case of an emergency, taking security makes it very challenging, if not
impossible, for the borrower to obtain a secured advance from another source against the
same security.
 Principle of national interest and suitability
Even if an advancement complies with all of the aforementioned rules, it may still not be
appropriate. The advance might not be in the country's best interests. The Reserve Bank of
India, for example, may have issued a regulation forbidding banks from allowing a specific
sort of advance. The borrower's business location may not be in an environment that is
conducive to law and order. There might be additional similar-natured reasons why the bank
shouldn't approve the advance. In the evolving idea of banking, purposes of advances,
proposals' feasibility, and national interests are taking on greater importance than security,
particularly in advances to agriculture, small businesses, small borrowers, and other
industries.
 Principle of solvency
Commercial banks need to be stable financially. Additionally, they must continue to have the
necessary funds on hand to manage the bank.
 Principle of providing services
Typically, commercial banks are service-oriented institutions. And good service guarantees a
better reputation and thus, profits.
 Principle of secrecy
Commercial banks make sure to maintain the confidentiality of their clients' accounts. Also,
only authorised individuals are permitted access to the accounts.
 Principle of specialisation
In addition to modernisation, we also live in a time of super-specialization and specialisation.
Commercial banks divide their entire operation into smaller sections, and they assign staff
based on their productivity.
 Principle of modernisation
Modernization and technology coexist in the era we live in. Commercial banks, therefore,
need to utilise cutting-edge technical services like internet banking, mobile banking, etc. to
keep up with global innovations.
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IN-TEXT QUESTIONS
5. Which is the first and foremost principle of lending?
6. “The goal should be productive so that the funds remain safe and have a
reliable source of repayment.” Which principle of lending is referred to?
7. __________ talks about distributing the risks associated with lending among a
large number of borrowers, industries.
3.5 PRODUCTS AND SERVICES OFFERED BY BANKS
Before we talk about the products and services offered by banks, we need to understand that
banking can be of two types:
Retail banking and Wholesale banking
Retail banking means catering to the needs of individual customers whereas wholesale
banking involves catering to clients like corporations or institutions.
Products and services offered by retail banks.
Asset based products
Asset products represent assets of the bank (loans given by banks). Asset products earn
interest for the bank which is paid by the borrower. Various types of Loans offered to retail
customers:
o Credit Cards
o Education Loans (loan for further education)
o Auto loans (for purchase of new / used four and two wheelers)
o Home Loans (for purchase of land & construction of residential house / purchase of
ready built house / for repairs and renovation of an existing house)
o Consumer Loans (for purchasing household goods like air conditioner, fridge etc.)
o Personal loans (for miscellaneous purposes like holiday, medical treatments etc.)
Liability based products.
Liability based products represent liabilities of the bank (deposits accepted by banks). Bank
liability products are useful to consumers since they provide a safe place to keep their funds
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and an opportunity to earn interest on idle cash. List of such products provided by the banks
are:
o Deposit accounts like savings banks accounts, current accounts, fixed deposit
accounts, recurring deposit accounts, etc.
o Foreign Currency Accounts (FCNR)
o NRE accounts for Indian citizens settled abroad.
o Zero Balance account for salaried class people
o Senior Citizen Deposit accounts
Fee based products.
o Insurance
o Mutual Fund
o Investment Advisory Services
o Wealth Management
o Debit Card
Valued added services.
o Safe Deposit lockers
o Depository services
o Insurance Products
o Automated Teller Machine
Miscellaneous services
o Issue of Drafts
o Offering electronic remittances facilities to customers (NEFT and RTGS)
o Collecting Cheques (local and outstation) of customers from other banks
o Renting out Lockers
o Safe Custody Services
o Collection of Taxes from customers on behalf of the Central Bank
o Purchasing / selling of shares/bonds in the Stock Market on behalf of its customers
o Offering net banking / mobile banking / phone banking facilities to customers
o Offering standing instructions’ facilities to customers for periodical payment of
insurance premium on behalf of its customers
o Purchasing / selling of foreign currencies from/to customer when they return from/go
abroad.
o Offering Third Party Products like insurance and mutual funds to customers
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Products and services by wholesale banks

o Cash Management services: A special product offered by banks to handle the work of
collecting monies with the least delay. This leads to efficient management of finances
of corporates. The quicker the monies are realised, the better it is for the functioning
of the company.
o Immediate Payments Products like NEFT (National Electronic Funds Transfer) and
RTGS (Real Time Gross Settlement)
o Short term (Working Capital Finance repayable within a year): Loan given for
managing the smooth-running day to day operations of a corporate
o Long Term (Term Loans repayable after a year, may be in 5-7 years): These loans for
buying assets which will be used for a long time (greater than one year)
o Project Finance / Leveraged Lending / Syndicated lending: Project Finance refers to
finance given to corporates to start new Projects. Finances repaid from cash flows
from the Project in future. Leveraged Lending means giving finance to buy assets,
treating those assets as security for the loans. Syndicated Lending means many banks
joining together to give huge amounts of loans to corporates. (No single bank
can/should give too much loan to a single co.
o Issuing Letters of Credits / Guarantees
o Extending Foreign Currency Transactions
o Trade Finance
o Equipment leasing
o Merchant banking
IN-TEXT QUESTIONS
8. Deposits received by banks are asset-based products. True or false?
9. State any two fee-based products offered by banks.
10. RTGS stands for?
11. “A special product offered by banks to handle the work of collecting monies
with the least delay.” Name the product or service.
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3.6 BANKING REGULATIONS

The Reserve Bank of India Act, 1934
The Reserve Bank of India (RBI) has the authority to establish rules, regulations, instructions,
and guidelines on a variety of topics relevant to banking and the financial sector under the
Reserve Bank of India Act, 1934 (the "RBI Act"). The RBI is the country's central bank and
the main body in charge of banking regulation.
The Reserve Bank of India was established by the Reserve Bank of India Act, 1934, with the
following goals:
(a) to regulate the issuance of bank notes
(b) to maintain reserves to ensure monetary system stability
(c) to efficiently run the country's currency and credit system.
The Reserve Bank of India's powers, functions, and constitution are all covered by the RBI
Act. With the exception of a few sections, such as Sec. 42, which deals with banks'
maintenance of CRR, and Sec. 18, which addresses the direct discounting of bills of
exchange and promissory notes as part of rediscounting facilities to control credit to the
banking system, the act does not directly address the regulation of the banking system.
The RBI Act covers.
o the establishment, funding, administration, and operations of the RBI.
o the RBI's duties, such as issuing bank notes, managing the currency, serving as a
banker to both the national and state governments and banks, serving as a lender of
last resort, and other duties.
o general guidelines for reserve funds, credit funds, audits, and accounts
o giving instructions and penalising people who violate the Act's rules.
Banking Regulation Act, 1949
The Banking Regulation Act, 1949 primarily governs how banks and other financial
organisations are regulated in India. The Banking Regulation Act of 1949 governs financial
institutions from conception to final dissolution. If a bank needs to open for business, it
cannot do so unless it has secured a licence in accordance with the terms of the Banking
Regulation Act, 1949, and if it needs to close, its operations will be wound down in
accordance with the same rules.
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This act was enacted as the Banking Companies Act of 1949 and went into force on March
16, 1949. Additionally, beginning of March 1, 1966, the act's name was modified to the
Banking Regulation Act.
The term banking is defined as per Sec 5(i) (b), as “acceptance of deposits of money from
the public for the purpose of lending and/or investment. Such deposits can be repayable on
demand or otherwise and withdraw able by means of cheque, drafts, order or otherwise.”
The following are some of the crucial clauses of the Banking Regulations Act:
Section 6: This section of the Banking Regulations Act lists the permitted activities of a
banking company as lending, borrowing money, issuing bonds, and conducting any type of
guarantee and indemnity business, while Section 8 of the same Act forbids it from directly or
indirectly participating in any contract involving the purchase, sale, or exchange of goods.
Section 9: According to Section 9, banks are only permitted to keep assets for a maximum of
7 years in order to settle debts or commitments, and RBI has the authority to extend this time
limit.
Section 14: Section 14(A) states that a banking company cannot create a floating charge on
the undertaking or any property of the company without the Reserve Bank of India's prior
approval. Section 14 further prohibits a banking company from creating a charge upon any
unpaid capital of the company.
Section 15: A bank cannot announce a dividend until all capitalised costs have been
completely written down in accordance with Section 15.
Section 19: Section 19(2) provides clarification on the shareholding of a banking company.
No banking firm may own shares in any company for a sum greater than 30% of its own
paid-up share capital plus reserves (or 30% of that company's paid-up share capital,
whichever is less) (either as a pledge, mortgagee, or absolute owners).
Sections 17 and 18: These sections mandate that each banking company create a reserve
fund from its earnings after taxes and interest. At least 3% of the total demand and time
obligations shall be retained as a cash reserve or secured in a current account with the
Reserve Bank of India. Such a reserve amount should be 20% of such earnings by law. Every
second fortnight of each month, on the last Friday, this amount should be deposited or
maintained. The return, which must include the specifics of the amount deposited with the
Reserve Bank of India, must be deposited by the twentieth day of every month.
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Section 24: This section outlines the necessity to maintain Statutory Liquidity Ratio (SLR) as
a percentage of the bank's demand and time liabilities in the form of cash, gold, and
unencumbered securities. This is advised by Reserve Bank of India from time to time.
Section 29: The profit and loss account and balance sheet are outlined in Section 29 and must
be completed on the last working day of each accounting year in the formats provided in the
third schedule. Where there are more than three directors, at least three must sign the
accounts. All directors must sign the accounts if the number of directors is less than three.
Accounts must be signed by a principal officer of the company in India in the case of a
banking company that was incorporated outside of the country.
Section 30: Section 30 outlines the requirements for auditing banking companies. This work
must be performed by an auditor who is legally qualified to perform his job and who can only
be fired with RBI consent. If it is not satisfied, it may order a special audit to be conducted at
the bank's expense.
Section 35: The RBI is authorised to conduct bank inspections under Section 35.
By regulating branch opening and bank location, this comprehensive piece of law reduced
fierce rivalry and also secured a minimum capital requirement to prevent bank collapses.
Thus, the Banking Regulation Act has aided in balanced development and operation of Indian
banks. It has made sure that depositors' interests are protected.
Foreign Exchange Management Act, 1999
The Foreign Exchange Management Act of 1999 regulates international trade and related
activities. This stipulates, among other things, the licencing of specific banking and other
institutions as authorised dealers in foreign exchange.
IN-TEXT QUESTIONS
12. RBI was established under which act?
13. Name the act which deals in licensing of specific banking and other institutions as
authorised dealers in foreign exchange.
14. The ___________ governs financial institution of banks from conception to final
dissolution.
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3.7 ROLE OF MARKET REGULATOR

The RBI was established in 1949 under the Banking Regulation Act to oversee and regulate
the banking industry. Its objectives included safeguarding the rights of depositors,
guaranteeing smooth banking operations, and advancing the stability of the financial system
as a whole.
It serves as the primary operational hub for the Indian monetary system. Mumbai serves as
the headquarters for the Reserve Bank of India. The Indian Ministry of Finance oversees all
aspects of RBI operation. The RBI oversees all of the policies and operations carried out on
behalf of all Indian banks. Therefore, the RBI is India's largest banking regulatory
organisation.
It executes the requirements of the RBI Act, BR Act, and FEMA in addition to formulating
rules and guidelines for banking activities. It is permitted to check and probe the affairs of
banks and to impose penalties in the event of non-compliance. The RBI periodically provides
directives to ensure adherence to the banking regulations and address any non-compliance
that may occur. The RBI may impose a number of penalties for regulatory violations, issue
orders to suspend a bank's operations, and cancel any bank's banking licence.
The RBI's role as a regulator in preserving the nation's financial stability is presented as
follows:
 Setting up of new banks - Reserve Bank of India provides the licence to the banks.
After this licence, they have the authority to regulate their bank in India.
 Capital adequacy and provisioning requirements - RBI grants clearance for a variety
of actions, including the creation of policies, the implementation of Basel II and III
frameworks, the validation of quantitative credit models, and so on.
 Manages all problems involving Indian banks: Anti-Money Laundering, Combating
Financing of Terrorism, Customer Service Policy difficulties, and other difficulties
pertaining to the dissolution of banking companies.
 The scheme for setting up of Wholly Owned Subsidiary by foreign banks in India,
which was published on November 6, 2013, by the RBI addresses the establishment
of branches and subsidiaries by foreign banks. Additionally, foreign banks must
obtain RBI approval before opening a branch in India.
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 The salary packages of Whole-Time Directors and Part-Time Chairpersons of Private

Sector Banks and Chief Executive Officers of Foreign Banks operating in India are
also decided by RBI.
 The RBI is in charge of choosing the chairman, other directors, and extra directors of
Indian banks.
 The RBI oversees the establishment of payments banks and small finance banks.
 Through its KNOW YOUR CUSTOMER standards, which must be followed at any
point someone opens an account with a bank, the RBI makes sure banks maintain
transparency in reporting any fees they impose on their clients and that money
laundering is prevented.
 Based on "CAMELS," which stands for Capital adequacy, Asset quality,
Management, Earning, Liquidity, System, and Control, the RBI has its own
monitoring technique and system for audit and inspection.
OTHER REGULATORS:
RBI frequently works closely with other regulatory authorities as needed, to regulate banking
activities that relate with other financial activity.
Other regulatory authorities in India are:
o The Securities Exchange Board of India ("SEBI"), which is in charge of overseeing
the Indian securities market.
o The Insurance Regulatory and Development Authority of India ("IRDAI") is in
charge of overseeing the insurance industry.
o The Insolvency and Bankruptcy Board of India ("IBBI"), which oversees how
insolvency procedures under the Insolvency and Bankruptcy Code ("IBC") are
conducted.
The CENTRAL GOVERNMENT, specifically the Ministry of Finance, also regulates and
monitors how banks and other financial organisations operate.
o It oversees banking operations through the Department of Financial Services.
o Establishes standards for the management and operation of public sector banks.
o Examines judicial and legislative methods for recovering bank loans, as well as
legislative solutions.
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IN-TEXT QUESTIONS
15. Who is the main regulator of banking industry in India?
16. Does central government play a role in regulating banks? If yes, name the ministry.
17. RBI makes sure banks maintain transparency in reporting any fees they impose on
their clients. Through which service is this made possible?
3.8 KEY PLAYERS IN MARKET

Key actors in the banking industry include the Reserve Bank of India (RBI), commercial
banks, cooperative banks, and development banks.
Reserve Bank of India
It is the apex bank of India. Its various functions with their objectives can be explained as
follows:
 It is the monetary authority which develops, executes, and oversees the monetary
policy. There are several tools for monetary control like CRR, SLR and LAF.
Objective: Maintaining price stability and ensuring adequate flow of credit to
productive sectors.
 As a regulator and overseer of the financial system, RBI sets broad guidelines for
banking activities that the nation's banking and financial system must follow.
Objective: Protect depositors' interest and provide cost-effective banking services to
the public.
 As a manager of foreign exchange, manages the Foreign Exchange Management Act,
1999.
Objective: To encourage the orderly growth and maintenance of India's foreign
exchange market as well as to enable external trade and payment.
 As an issuer of currency, issues and exchanges or destroys currency and coins not fit
for circulation.
Objective: To provide the general people with sufficient quantities of high-quality
cash in both quantity and quality.
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 Performs a variety of promotional tasks to promote governmental goals.

 As a government banker, serves as the central and state governments' merchant banker
and serves as both entities' banker.
 Maintains the accounts of all the scheduled banks as a banker to banks.
 Payment and Settlement networks: It is now widely acknowledged that central banks
have a fundamental duty to regulate and monitor payment networks.
Commercial banks
Commercial banks generate revenue through making loans, including mortgages, vehicle
loans, business loans, and personal loans, and charging interest on those loans. The money
needed to fund these loans is provided by customer deposits to banks.
Commercial banks perform the following functions:
 Primary functions
 Accepting deposits
 Giving loans and advances
 Secondary functions
 Agency functions
Payment and collection of cheques, discounting of bills and promissory notes,
execution of standing instructions’, acting as a trustee, executor or attorney.
 General utility functions
Safe custody, safe deposit vaults, remittances of deposits, pension payments,
acting as a dealer in foreign exchange.
Cooperative banks
o It is an organisation founded on a cooperative basis to handle routine banking operations.
In order to start a cooperative bank, money is raised through the sale of shares, along with
deposits and loans.
They are cooperative credit societies where members come together to offer loans to one
another on advantageous terms.
o They are registered under the Multi-State Cooperative Societies Act of 2002 or the
Cooperative Societies Act of the relevant State.
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o Customer Owned Entities: Members of cooperative banks are both the bank's customers
and its owners.
o Democratic Member Control: The members of these banks own and manage the
institutions, electing the board of directors in a democratic manner. According to the "one
person, one vote" cooperative principle, members typically have equal voting rights.
o Profit Allocation: A sizeable portion of the annual profit, benefits, or surplus is typically
set aside as reserves, and some of this profit may also be paid to the co-operative's
members within the bounds of the law and applicable statutes.
Development banks
o These banks are specialised financial institutions that carry out the dual tasks of providing
medium- and long-term financing to private business owners and acting as catalysts for
the nation's economic growth.
o The development banks are in charge of giving both the industrial and agricultural sectors
medium- and long-term financing. Additionally, they support both the public and private
sectors.
o The Industrial Finance Corporation of India (IFCI), the Small Industries Development
Bank of India (SIDBI), the Export-Import (EXIM) Bank of India, and others are some of
the most well-known development banks in India.
3.9 EVALUATION OF BANKING SECTOR IN INDIA

In the centre of every expanding economy are banks. The economy and the banks both grow
as bank lending increases. It's a partnership that benefits both parties. So, the issue is how
well have Indian banks done in this situation. The answer to this question is discussed in the
paragraphs that follow.
Performance of Indian banking sector in terms of credit, deposits and other aspects in recent
years is summarised as follows:
 In addition to cooperative credit institutions, the Indian banking system includes 12
public sector banks, 22 private sector banks, 46 foreign banks, 56 regional rural
banks, 1485 urban cooperative banks, and 96,000 rural cooperative banks.
 As of September 2021, there were 213,145 ATMs in India, with 47.5% of them
located in rural and semi-urban areas.
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 Bank assets increased in every sector in 2020–2022. In 2022, the total assets of the
banking industry (including both public and private sector banks) rose to US$ 2.67
trillion.
 Bank credit grew at a CAGR of 0.62% from FY16 to FY22. Total credit extensions
reached US$ 1,532.31 billion as of FY22.
 Deposits increased at a CAGR of 10.92% from FY16 to FY22, reaching US$2.12
trillion by FY22. As of November 4, 2022, bank deposits totalled Rs. 173.70 trillion
(2.12 trillion USD).
 According to the RBI's statement on Sectoral Deployment of Bank Credit, non-food
bank credit increased by 17.6% in November 2022 compared to a growth of 7.1% a
year earlier, driven by strong credit demand from sectors including services, industry,
personal, and agriculture and allied activities.
The positive trends and challenges in recent years are also discussed below.
Positive trends
 Retail Winning
Bank lending to industry was a key focus for many years, but that has been changing. Bank
lending to industry reached a peak of 22.4% of the GDP at the end of March 2013. Since
then, it has decreased and as of September 2022, it was 12.5%. Bank financing to the industry
has only increased in absolute terms by 4% annually over this time.
In contrast, retail loans from banks increased from 9% in March 2013 to 14.3% of the GDP
as of September 2022. The total amount of outstanding retail loans increased by 16.1%
annually between March 2013 and September 2022, measured in absolute terms. It is obvious
that banks prefer to offer more consumer loans than business loans. The primary cause of this
was the excessive lending of industrial loans by public sector banks in the 2000s and early
2010s. As a result, there was a significant build-up of subprime industrial loans, which has
made them cautious.
 Private upswing
Another significant development that has occurred with banks is privatisation. Public sector
banks that are primarily held by the government have not yet been privatised, but the industry
as a whole is being steadily privatised. Public sector banks held 74.2% of the deposits and
75.1% of the outstanding bank loans as of March 2010. But since then, they have been losing
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market share. Public sector banks had 59.7% of the deposits as of September 2022 and 54.5%
of the loans.
Private banks' percentage of total lending increased from 17.5% to 37.3%. Their percentage
of deposits increased from 17.7% in March 2010 to 31.4% in September 2022. Once more,
the public sector banks' enormous accumulation of bad loans—which peaked at around $9
trillion as of March 2018—has been a major factor in their declining market share and
sluggish lending activity.
 Loan cleans up.
Bank bad loans have been declining. They reached a high of 10.4 trillion in March 2018
before dropping to 7.4 trillion in March 2022. Bad loans are often those that have gone
unpaid for 90 days or more. An increase in bad loans being written off is the main cause of
this decrease. Over the past five fiscal years, bad loans totalling more than 10 trillion have
been written off. In actuality, the majority of bank loan write-offs are an accounting
occurrence. The amount of bad loans can be decreased by removing from the balance sheet
loans that have been 100% provisioned for and have been bad for four years. Despite the
appalling recovery rate, efforts to collect bad debts that have been written off continue.
 Financial inclusion
Innovative banking formats like payments and small financing banks have recently been
introduced in the Indian banking sector. India has recently concentrated on expanding the
scope of its banking sector through a number of initiatives like the Pradhan Mantri Jan Dhan
Yojana and Post Payment Banks. These types of programmes, together with significant
banking sector reforms like digital payments, neo-banking, the growth of Indian NBFCs, and
fintech, have greatly increased financial inclusion in India and fuelled the country's credit
cycle.
 Digital payment system
With the advent of new technology in the banking industry, customers are rapidly migrating
away from the established branch banking system in favour of the comfort and convenience
of remote electronic banking services or virtual banking. India's Immediate Payment Service
(IMPS), the only system at level five in the Faster Payments Innovation Index (FPII), has
seen the most advancement in its digital payment infrastructure among the 25 countries
studied. Real-time payments have been revolutionised by India's Unified Payments Interface
(UPI), which has recently worked to expand its worldwide reach.
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 Innovation in services
Recent technological advancements have significantly increased efficiency, productivity,
quality, inclusivity, and competitiveness in the expansion of financial services, particularly in
the area of online lending.
 Business fundamentals
The use of digital payment methods has increased dramatically in recent years. as a result,
traditional paper-based instruments like checks and demand draughts now account for a very
small portion of payments, both in terms of volume and value.
Challenges
The key challenges are as follows:
 Stagnating banks
The entire amount of outstanding loans held by Indian banks as of the end of March 2001
was 5.1 trillion rupees, or 23.9% of the GDP of the nation at the time. The amount increased
to $130.4 trillion by September 2022, or 50.3% of GDP. As of the end of March 2001, total
bank deposits were 9.6 trillion, or 45% of GDP; today, they are 175.4 trillion, or 67.6% of
GDP. By expressing credit and deposits in terms of GDP, we can also take into consideration
how quickly the economy is growing.
Even while the expansion seems rapid, it's interesting to note that Indian banking has been
stagnant for more than a decade. Since March 2009, bank lending has remained between 50
and 53 percent of the GDP (with the exception of 2020 and 2021 owing to COVID-19), and
bank deposits have stayed between 67 and 80 percent.
 Basel III implementation
By March 31, 2019, Indian banks had to adhere to Basel III Capital Regulations (Basel
Regulations) in full. Due to the greater capital requirements, the majority of public-sector
banks required additional capital infusions, which in turn decreased the return on equity. Due
to the need for government assistance, the government's financial position came under a lot of
strain. The Basel III standards have not yet been fully implemented.
 Specialised banking
About minor finance bank licences and payments bank licences have been given by the RBI.
Although the RBI has established the framework for their use, it appears that the services
now offered do not adequately serve the unbanked sectors, which include rural areas and
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other underdeveloped and unorganised industries. Given the larger goal of financial
inclusion, additional reorientation of regulatory and supervisory resources will likely be
required to increase access to these systems.
 Asset quality
The number of Indian banks' net non-performing assets (NPAs) has been sharply rising. The
RBI has implemented major structural and regulatory efforts to address this issue throughout
the years. However, the rise in NPAs continues to be one of the most important challenges to
the banking industry.
 Priority sector lending and NPAs
The RBI establishes goals for this and mandates that banks extend loans to specific
underserved groups of society. Banks have previously had difficulty achieving these goals.
These industries frequently produce poor earnings, which negatively affects the profitability
of banks. Separately, there are a lot of NPAs in the agriculture industry, which is one of the
key priority lending sectors. Agricultural NPAs are not taken into account by the new steps
the RBI has implemented to reduce stressed assets, as was previously noted.
 Challenges from cashless economy
The transition to a cashless economy has brought with it a unique set of problems, many of
which centre on access. The RBI has taken coordinated action, including as establishing an e-
wallet connected to the AADHAAR system for unique identity numbers and encouraging
stores and other local companies to offer discounts and cash-back programmes for adopting
electronic payment methods. Most of the nation's infrastructure, from a working internet
connection to the sophistication of its users, is woefully inadequate for such payment systems
to be used frequently. Concerns about privacy and related legal issues have recently come up.
While these problems are currently being addressed, India still has a long way to go before it
becomes cashless economy.
 Enforcement of the new insolvency regime
Since the IBC went into force in December 2016, there has been a noticeable change in how
the RBI and creditors have approached taking legal action against defaulters. Judgements
from the National Company Law Tribunal and the National Company Law Appellate
Tribunal have helped to clarify some issues that the IBC itself left ambiguous. The Ministry
of Finance has been quick to recognise the difficulties and update the IBC with regulations
intended to speed up the process even as the law is still growing. It would be interesting to
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watch if the IBC procedure can keep up with the rising NPAs and raise banks' standing as
creditors in the Indian financial system.
The Reserve Bank of India (RBI) claims that the banking industry in India is adequately
funded and well-regulated. The nation has significantly better financial and economic
circumstances than any other nation in the world. Studies on credit, market, and liquidity risk
indicate that Indian banks are generally robust and have fared well during the global
recession.
3.10 SUMMARY
In this chapter, discussion has been done on the depository institution of banking. Bank is a
financial institution which accepts deposits and lends loan to borrowers. In this process of
lending, banks create credit. There are certain principles to be kept in mind while following
the process of credit creation. Safety is foremost, followed by liquidity, profitability, security,
national interest and suitability among many other principles. There are various kinds of
services offered by the banks apart from deposit and loans. Deposits are the loan-based
products and loans are asset-based products. Banks offer various fee-based services, value
added services and other miscellaneous services as well. RBI is the central bank which is
vested with powers via regulations of banking like Banking Regulation Act, 1949, RBI Act,
1934 and FEMA Act, 1999. Apart from RBI, the key market players are commercial banks
and development banks. The Reserve Bank of India (RBI) claims that the banking industry in
India is adequately funded and well-regulated. The nation has significantly better financial
and economic circumstances than any other nation in the world. Studies on credit, market,
and liquidity risk indicate that Indian banks are generally robust and have fared well during
the global recession.
3.11 GLOSSARY
Bank: Bank is an institution that accepts deposits from public and lends money to the people
who need it.
Banking: Banking consists of various activities that can be done through financial
institutions that will accept deposits from individuals and other entities. These financial
institutions will then utilize this money to offer loans and invest it for a profit.
Principle of Safety: Safety means that the borrower should be able to repay the loan and
interest in time at regular intervals without default.
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Principle of Liquidity: Liquidity refers to the capacity of an institution to obtain sufficient

cash or its equivalent in a timely manner to meet its commitments as they fall due.
Reserve Bank of India: The central bank of India. The apex institution. The RBI acts as a
regulator and supervisor of the overall financial system.
Commercial Banks: Commercial banks are those banks that help in the flow of money in an
economy by providing deposit and credit facilities.
Deposits: Deposits received by a bank from its customers are a liability from the banks point
of view. They are of different types like current account deposit, savings account deposit,
fixed deposit and recurring deposits.
Loans: Money received in form of deposits from customers by a bank are lent out in form of
loans. They are an asset for a bank.

1. True 10. Real Time Gross Settlement
2. Deals in money and Commercial in 11. Cash Management Services
nature 12. RBI Act, 1934
3. True 13. FEMA Act, 1999
4. Yes 14. Banking Regulation Act, 1949
5. Safety 15. RBI
6. Principle of purpose 16. Yes. Ministry of Finance
7. Principle of risk diversification 17. KYC (Know Your Customer)
8. False
9. Insurance & mutual funds

1. What do you mean by Bank?
2. Define the term “Banking”.
3. Explain the fundamental principles of banking.
4. Explain the principle of safety, liquidity and profitability.
5. What are the recent positive trends in Indian banking sector today? Elucidate.
6. Is there any scope of improvement in Indian banking sector? Explain.
7. Explain the various products and services offered by banks.
8. What is the role of RBI as a regulator of banking in India?
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3.14 REFERENCES/SUGGESTED READINGS
 Brand Equity Report. (2013).

 BG Maniar. (2011). Legal Regulations of Banking: Saurashtra University
Publication.
 BSE Institute Ltd. (2015). Banking.
 Dr. A.P. Faure. 2013. Banking: An Introduction. Quoin Institute (Pty) Limited.
 Dr. Babasaheb Sangale. Dr. T. N. Salve. Dr. M. U. Mulani. Fundamentals of
Banking. University of Pune.
 ICSI. (2014). Banking Law and Practice. Delhi.
 India Brand Equity Foundation. (2023). Banking Industry Report.
 Laksmi Ramamurthy. (2012). The Banking Sector: Centre for Public Policy Research.
 M. Buckle, E. Beccalli. (2011). Principles of Banking and Finance. London:
University of London.
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LESSON 4
BANKING
Ms. Manisha Yadav
Dept. of Financial Studies
School of Open Learning
University of Delhi
Email-Id: manishayadav@sol-du.ac.in
STRUCTURE

4.2 Introduction
4.3 Role of Banks
4.4 Importance of Banks in Financial Markets
4.5 Types of Banks
4.6 Non-Performing Assets (NPA)
4.7 Reasons for NPA Accumulation
4.8 Impact of NPA On Banks and The Economy
4.9 NPA Management and Resolution
4.10 Risk Management in Banks
4.11 Risk Management Framework
4.12 Credit Risk Management
4.13 Market Risk Management
4.14 Operational Risk Management
4.15 Universal Banking
4.16 Benefits and Challenges of Universal Banking
4.17 Universal Banking in India
4.18 Core Banking Solutions (CBS)
4.19 Features and Benefits Of CBS
4.20 Implementation and Challenges Of CBS
4.21 NBCFs And Its Types
4.22 Comparison Between Banks and NBCFs
4.23 Summary
4.24 Answers to Text Questions
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Upon completion of this lesson, students should be able to:
1. Understand the role of banks in facilitating economic growth and stability.
2. Define and analyze the concept of Non-Performing Assets (NPA), including its
causes, implications, and impact on banks and the economy.
3. Comprehend the principles and practices of risk management in banks, including risk
identification, assessment, and mitigation.
4. Discuss the need for and importance of universal banking, its benefits, challenges, and
its role in shaping the financial sector and contributing to economic growth.
5. Gain insights into credit risk management, including credit appraisal, monitoring, and
recovery processes, to ensure sound lending practices and minimize default risks.
By achieving these learning objectives, students will develop a comprehensive understanding
of financial markets, institutions, and the various aspects of risk management and banking
operations. They will be equipped with knowledge and skills that are essential for effective
decision-making, risk assessment, and strategic planning in the financial industry.
4.2 INTRODUCTION
Welcome to the lesson on "Commercial Banking." In this comprehensive lesson, we will dive
into the intricate world of financial markets and institutions, focusing on the crucial role
played by banks in the economy. We will examine topics such as Non-Performing Assets
(NPA), Risk Management in Banks, the need for and importance of Universal Banking, and
Core Banking Solutions (CBS), and compare banks with Non-Banking Financial Companies
(NBFCs).
Financial markets and institutions are the backbones of any economy, serving as the channels
through which funds flow between savers and borrowers. They are crucial for efficient
resource allocation, mobilization of savings, credit creation, and overall economic growth.
Among the various financial institutions, banks occupy a central position, performing critical
functions that impact the stability and development of the financial system.
In this lesson, we will begin by understanding the fundamental concepts of financial markets
and institutions and exploring their significance in the broader economic landscape. We will
then delve into the multifaceted role of banks, uncovering how they act as intermediaries,
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mobilize savings, create credit, facilitate payment systems, and contribute to economic
growth.
Non-Performing Assets (NPAs) pose significant challenges to banks, affecting their financial
health and stability. We will explore the causes, consequences, and resolution mechanisms
related to NPAs, recognizing their impact on both banks and the overall economy.
Risk management is a crucial aspect of banking operations. We will delve into the various
types of risks faced by banks, the frameworks employed to manage these risks, and the tools
and techniques utilized for effective risk mitigation.
Universal banking has gained prominence in recent years, and we will examine its need,
importance, advantages, and disadvantages. We will also discuss the concept of Core
Banking Solutions (CBS), its components, benefits, and implementation challenges, and its
impact on enhancing banking operations.
Furthermore, we will explore the landscape of Non-Banking Financial Companies (NBFCs)
and understand their role in the financial ecosystem. We will examine the different types of
NBFCs and draw a comparison between banks and NBFCs, highlighting their unique
characteristics and regulatory frameworks.
By the end of this lesson, you will have gained a comprehensive understanding of the role of
banks in the financial markets and their impact on the economy. You will also be equipped
with insights into NPAs, risk management practices, the concept of universal banking, the
significance of Core Banking Solutions, and the distinctive features of NBFCs.
So, let us embark on this enlightening journey into the world of Financial Markets &
Institutions, uncovering the intricate workings of banks and exploring the dynamic landscape
of financial services.
4.3 ROLE OF BANKS
4.3.1. Definition and Functions of Banks

Banks are financial institutions that facilitate the flow of funds in an economy. They act as
intermediaries between depositors and borrowers, collecting funds from individuals and
institutions with surplus funds and channelling them towards those needing funds for various
purposes.
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As per the Sec5(b) in Banking Regulation Act, 1949 “banking means the accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on demand
or otherwise, and withdrawal by cheque, draft, order or otherwise”.
1. Functions of commercial banks:
i. Accepting deposits: Banks provide a safe and secure platform for individuals and
businesses to deposit their surplus funds. This includes savings accounts, current
accounts, fixed deposits, and recurring deposits.
ii. Granting loans and advances: Banks lend money to individuals and businesses
for various purposes, such as working capital, investment in fixed assets,
education, housing, and more.
iii. Payment and settlement services: Banks facilitate the transfer of funds
domestically and internationally through various channels like checks, demand
drafts, electronic fund transfers, and online banking platforms.
iv. Credit creation: Banks play a crucial role in the creation of credit in an economy
by utilizing the deposits received to extend loans and advances, thereby
stimulating economic activity.
v. Providing trade finance services: Banks offer services like letters of credit, bank
guarantees, and export-import financing to facilitate domestic and international
trade.
vi. Investment and wealth management: Banks provide investment advisory
services, mutual funds, insurance products, and wealth management solutions to
cater to the financial needs of customers.
vii. Foreign exchange services: Banks facilitate foreign exchange transactions,
currency conversion, and hedging instruments to manage foreign exchange risk.
4.3.2. Importance of Banks in Financial Markets
1. Banks as intermediaries: Banks act as intermediaries by bringing together depositors
and borrowers, thereby mobilizing savings, and allocating funds efficiently to
productive sectors of the economy.
2. Mobilization and allocation of funds: Banks mobilize funds from various sources
and allocate them to individuals, businesses, and government entities to finance
investments and expenditures, stimulating economic growth.
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3. Facilitating economic growth and development: Banks provide crucial financial

resources for economic activities, supporting entrepreneurship, investment,
infrastructure development, and employment generation.
4.4 IMPORTANCE OF BANKS IN FINANCIAL MARKETS

Banks play a pivotal role in financial markets and contribute significantly to the overall
functioning and stability of the economy. Here are the key aspects that highlight the
importance of banks in financial markets:
1. Intermediation of Funds: Banks act as intermediaries between depositors and
borrowers. They mobilize funds from individuals, businesses, and institutions with
surplus funds and channel them toward those in need of funds for various purposes.
By pooling deposits, banks can provide a substantial amount of credit to borrowers,
thereby facilitating economic activities and promoting investment.
2. Efficient Allocation of Capital: Banks play a critical role in allocating capital to
productive sectors of the economy. They assess the creditworthiness of borrowers,
analyse investment proposals, and allocate funds based on risk assessment and return
expectations. This process ensures that capital is channelled to viable projects with the
potential to generate economic growth, job creation, and innovation.
3. Facilitating Payments and Settlements: Banks provide essential payment and
settlement services, which are crucial for the smooth functioning of financial markets.
Through mechanisms such as checks, demand drafts, electronic funds transfers, and
online banking platforms, banks enable the seamless transfer of funds between
individuals, businesses, and institutions. These services facilitate the exchange of
goods and services, enhance liquidity, and reduce transaction costs.
4. Credit Creation and Money Supply: Banks have the unique ability to create credit,
which contributes to the expansion of the money supply in the economy. When banks
receive deposits, they are legally allowed to lend out a significant portion of those
funds while keeping a fraction as reserves. This process, known as fractional reserve
banking, enables banks to create new loans and increase the overall money supply,
thereby fuelling economic growth.
5. Risk Management and Financial Stability: Banks play a crucial role in managing
risks in the financial system. They employ risk management practices to assess,
monitor, and mitigate various types of risks, including credit risk, market risk,
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liquidity risk, and operational risk. Effective risk management by banks contributes to
financial stability, as it helps prevent excessive risk-taking and minimizes the impact
of adverse events on the banking system and the broader economy.
6. Stimulating Economic Growth: Banks provide the necessary financial resources for
economic activities, acting as a catalyst for growth and development. By offering
loans and credit facilities, banks enable individuals and businesses to invest in
productive ventures, expand operations, create employment opportunities, and
contribute to overall economic expansion.
7. Financial Inclusion: Banks play a vital role in promoting financial inclusion by
extending banking services to individuals and businesses across different socio-
economic strata. Through the provision of basic banking services, such as savings
accounts, payment facilities, and small loans, banks enable individuals to participate
in the formal financial system, build savings, access credit, and improve their
financial well-being.
In summary, the importance of banks in financial markets cannot be overstated. They serve as
intermediaries, allocate capital efficiently, facilitate payments and settlements, create credit,
manage risks, stimulate economic growth, and promote financial inclusion. Banks act as key
drivers of economic activity and play a crucial role in fostering financial stability and
development.
4.5 TYPES OF BANKS
There are different types of banks that cater to specific financial needs and perform distinct
functions within the banking system. Here is an elaboration on the types of banks:
1. Commercial Banks: Commercial banks are the most common and widely recognized
type of banks. They provide a comprehensive range of financial services to
individuals, businesses, and government entities. The primary functions of
commercial banks include accepting deposits, granting loans and advances,
facilitating payments and settlements, offering trade finance services, providing
investment and wealth management solutions, and engaging in foreign exchange
transactions. Commercial banks serve as the backbone of the banking system and play
a vital role in mobilizing funds and supporting economic activities.
2. Investment Banks: Investment banks primarily focus on capital market activities,
particularly in the field of investment banking. They specialize in providing financial
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advisory services, underwriting securities issuances (such as initial public offerings

and bond offerings), facilitating mergers and acquisitions, and assisting in corporate
restructuring. Investment banks also engage in trading activities, including buying,
and selling stocks, bonds, derivatives, and other financial instruments on behalf of
their clients. Unlike commercial banks, investment banks typically do not accept
deposits from the general public.
3. Central Banks: Central banks are the apex monetary authorities responsible for
formulating and implementing monetary policies to maintain price stability and
promote sustainable economic growth. They act as the regulators and supervisors of
the banking system, overseeing the functioning and stability of financial markets.
Central banks are the sole issuers of a country's currency and manage the nation's
foreign exchange reserves. They play a critical role in maintaining financial stability,
controlling inflation, managing interest rates, and providing lender-of-last-resort
facilities to banks during times of financial stress. Reserve Bank of India is the central
bank of India.
4. Cooperative Banks: Cooperative banks are financial institutions that operate on
cooperative principles, serving the banking needs of specific groups or communities.
They are owned and governed by their members, who are typically individuals or
small businesses sharing a common bond, such as geographic location, profession, or
industry. Cooperative banks provide various banking services, including deposits,
loans, and payment services, tailored to the specific needs of their members. These
banks prioritize the welfare of their members and often focus on promoting financial
inclusion and community development. Cooperative banks in India are registered
under the Cooperative Societies Act, and their functioning is regulated by the Reserve
Bank of India (RBI).
5. Development Banks: Development banks, also known as specialized banks or term-
lending institutions, are established with the primary objective of financing, and
promoting economic development projects. They typically provide long-term
financing for infrastructure development, industrial projects, and sectors that require
specialized funding. Development banks support economic growth by filling gaps in
the availability of long-term capital, providing technical assistance, and promoting
investment in strategic sectors. These banks often operate under the guidance and
support of government authorities. Examples: SIDBI, NABARD, NHB, LIC.
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6. Regional Rural Banks (RRB): These are special types of commercial Banks that
provide concessional credit to agriculture and the rural sector. RRBs were established
in 1975 and are registered under the Regional Rural Bank Act, 1976. RRBs are joint
ventures between the Central government (50%), the State government (15%), and a
Commercial Bank (35%). 196 RRBs have been established from 1987 to 2005. From
2005 onwards government started the merger of RRBs, thus reducing the number of
RRBs to 82. One RRB cannot open its branches in more than 3 geographically
connected districts.
7. Local Area Banks (LAB): Introduced in India in the year 1996. These are organized
by the private sector. Earning profit is the main objective of Local Area Banks. Local
Area Banks are registered under the Companies Act, 1956. At present, there are only
4 Local Area Banks all of which are located in South India
8. Specialized Banks: Certain banks are introduced for specific purposes only. Such
banks are called specialized banks. These include:
 Small Industries Development Bank of India (SIDBI) – Loan for a small-
scale industry or business can be taken from SIDBI. Financing small industries
with modern technology and equipments is done with the help of this bank.
 EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans
or other financial assistance with exporting or importing goods by foreign
countries can be done through this type of bank.
 National Bank for Agricultural & Rural Development (NABARD) – To
get any kind of financial assistance for rural, handicraft, village, and
agricultural development, people can turn to NABARD.
There are various other specialized banks, and each possesses a different role in
helping develop the country financially.
9. Payments Banks: A newly introduced form of banking, the payments bank have
been conceptualized by the Reserve Bank of India. People with an account in the
payments bank can only deposit an amount of up to Rs.1,00,000/- and cannot apply
for loans or credit cards under this account. Options for online banking, mobile
banking, the issue of ATM, and debit card can be done through payments banks.
Given below is a list of the few payments bank in our country:
 Airtel Payments Bank
 India Post Payments Bank
 Fino Payments Bank
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 Jio Payments Bank

 Paytm Payments Bank
 NSDL Payments Bank
10. Islamic Banks: Islamic banks operate in accordance with Islamic principles and
adhere to Shariah law. They offer banking services that comply with Islamic finance
principles, which prohibit the collection or payment of interest (riba) and the
involvement of prohibited activities such as gambling and speculation. Islamic banks
use alternative financing methods, such as profit-sharing arrangements (Mudarabah),
cost-plus financing (Murabaha), and leasing (Ijarah), to provide funding while
adhering to Islamic principles. They cater to customers seeking Shariah-compliant
banking products and services.
It is essential to understand the different types of banks to recognize their distinct roles,
functions, and regulatory frameworks. Each type of bank contributes to the overall stability,
efficiency, and development of the financial system, serving specific needs and segments
within the economy.
4.6 NON-PERFORMING ASSETS (NPA)
Non-Performing Assets (NPA) refer to loans and advances that have stopped generating
income for banks and financial institutions. These assets are considered to be in default or
have become delinquent in terms of interest and principal repayments. NPAs have significant
implications for banks, borrowers, and the overall stability of the financial system. Here is an
elaboration on Non-Performing Assets:
4.6.1. Definition and Classification of NPAs:
1. Understanding NPA and its significance: Non-Performing Assets are loans or
advances that have stopped generating income for the bank, typically due to non-
payment of interest or principal for a specified period (90 days in India). NPAs
indicate the credit quality of a bank's loan portfolio and reflect the potential risks
faced by the financial institution.
2. Classification of NPAs based on RBI guidelines: The Reserve Bank of India (RBI)
provides guidelines for the classification and identification of NPAs. These guidelines
establish specific criteria for determining the status of loans. NPAs are categorized
into three stages:
a. Substandard Assets: Assets that have remained NPAs for a period of 12 months
or less.
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b. Doubtful Assets: Assets that have been classified as Substandard for a period
exceeding 12 months.
c. Loss Assets: Assets that are considered uncollectible and have been identified as
such by the bank, internal auditors, or the RBI.
4.7 REASONS FOR NPA ACCUMULATION
NPA accumulation can occur due to various reasons, encompassing economic factors,
borrower-specific issues, and internal bank-related factors. Understanding these reasons is
crucial for banks and financial institutions to develop effective risk management strategies
and mitigate the impact of NPAs. Here are the key reasons for NPA accumulation:
1. Economic Downturns and Business Cycles: Economic recessions, industry-specific
downturns, and fluctuations in business cycles can significantly impact borrowers'
ability to repay loans. During periods of economic contraction, businesses may
experience reduced sales, declining profitability, and cash flow problems, leading to
difficulties in servicing their debt obligations. Unfavourable economic conditions
increase the risk of loan defaults and NPA formation.
2. Inadequate Cash Flows and Financial Distress of Borrowers: Borrowers may face
financial distress due to a variety of reasons, such as poor business performance,
mismanagement, increased competition, or adverse market conditions. Insufficient
cash flows can hinder their ability to make timely interest and principal payments,
resulting in NPAs. Inadequate cash flows can be a result of low profitability, high
debt burden, overleveraging, or liquidity mismatches.
3. Weak Credit Appraisal and Risk Assessment Practices: Inadequate credit
appraisal and risk assessment processes by banks can contribute to NPA
accumulation. Weak evaluation of borrowers' creditworthiness, inadequate due
diligence, and inaccurate assessment of repayment capacity can result in loans being
extended to borrowers with high default risks. Failure to identify and mitigate risks
upfront increases the likelihood of NPAs.
4. Ineffective Monitoring and Follow-up of Loan Accounts: Inadequate monitoring
and follow-up of loan accounts by banks can lead to NPA formation. Banks need to
regularly track borrowers' financial performance, conduct site visits, review financial
statements, and ensure compliance with loan covenants. Lack of timely identification
of potential repayment issues and delayed remedial actions can result in NPAs.
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5. Diversion of Funds by Borrowers for Unauthorized Purposes: Some borrowers

divert loan funds for purposes other than what the loan was intended for. They may
misuse the funds for personal expenses, speculative activities, or investments
unrelated to the approved project. Such diversion of funds reduces the borrower's
ability to generate income from the intended project, leading to cash flow problems
and NPA formation.
6. Industry-Specific Factors Impacting Borrower Repayments: Certain industries
may face sector-specific challenges that affect the repayment capacity of borrowers.
Factors such as technological disruptions, regulatory changes, market saturation, or
shifts in consumer preferences can impact the profitability and sustainability of
businesses. Industries facing significant headwinds may struggle to generate adequate
cash flows, increasing the likelihood of NPAs.
It is important for banks and financial institutions to assess and monitor these factors to
mitigate the risks associated with NPA accumulation. Implementing robust credit appraisal
processes, conducting regular borrower monitoring, and staying attuned to macroeconomic
and industry-specific trends are essential for effective NPA management.
4.8 IMPACT OF NPA ON BANKS AND THE ECONOMY
The impact of Non-Performing Assets (NPAs) on banks and the economy is significant, as
NPAs can adversely affect the profitability, liquidity, and stability of banks and have broader
implications for the overall economic environment. Here is an elaboration on the impact of
NPAs:
1. Profitability of Banks: NPAs have a direct impact on the profitability of banks.
When loans turn into NPAs, interest income is not realized, and banks may have to
make provisions for potential loan losses. Provisions for NPAs reduce banks'
profitability as they are set aside from the bank's earnings, impacting the net profit. As
the level of NPAs increases, banks may need to allocate more funds towards
provisions, which further affects their profitability and returns to shareholders.
2. Liquidity of Banks: NPAs can also impact the liquidity position of banks. When
loans become NPAs, borrowers may default on interest and principal repayments,
leading to a reduction in the cash inflows for banks. This reduction in cash inflows
affects the liquidity available for banks to meet their obligations, including depositor
withdrawals and payment obligations. High level of NPAs can strain the liquidity
position of banks, potentially leading to liquidity shortages and difficulties in
fulfilling their financial commitments.
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3. Capital Adequacy: NPAs have implications for the capital adequacy of banks. As
NPAs increase, the quality of a bank's loan portfolio deteriorates, and the risk-
weighted assets may increase. This can result in a decline in the capital adequacy ratio
(CAR), which is an important measure of a bank's financial strength and ability to
absorb losses. Inadequate capital levels can limit a bank's lending capacity and ability
to meet regulatory requirements, potentially leading to restrictions on growth and
raising capital from the market.
4. Credit Availability: High levels of NPAs can impact credit availability in the
economy. When banks accumulate a significant amount of NPAs, they become
cautious about extending new loans. The risk aversion amongst banks increases,
leading to tighter lending standards and reduced credit supply. This can affect
businesses and individuals seeking loans for productive purposes, hindering
investment, expansion, and economic growth.
5. Systemic Risks: The accumulation of NPAs poses systemic risks to the financial
system and the broader economy. If a substantial number of banks face a high level of
NPAs simultaneously, it can lead to a systemic crisis. It can erode investor
confidence, impact the stability of the banking sector, and potentially lead to bank
failures. The spillover effects of banking distress can have severe consequences on the
overall economy, such as reduced investment, job losses, and decreased consumer
spending.
6. Interest Rates and Borrowing Costs: NPAs can impact interest rates and borrowing
costs in the economy. When banks face higher levels of NPAs, they may increase
lending rates to compensate for the potential losses. Higher interest rates make
borrowing more expensive for businesses and individuals, reducing their ability to
access credit for productive purposes. This can have a dampening effect on economic
activity, including investment and consumption.
7. Reputation and Investor Confidence: The presence of a large number of NPAs can
negatively impact the reputation and investor confidence in banks and the financial
system. Investors may lose trust in banks' ability to manage risks and protect their
investments. Decreased investor confidence can result in capital outflows, reduced
access to funding, and volatility in financial markets.
To mitigate the impact of NPAs, banks employ various strategies such as NPA resolution
mechanisms, loan restructuring, and strengthened risk management practices. Effective NPA
management is crucial for maintaining the stability of banks, promoting lending activity, and
supporting sustainable economic growth.
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4.9 NPA MANAGEMENT AND RESOLUTION
NPA management and resolution are critical aspects for banks and financial institutions to
mitigate the impact of Non-Performing Assets (NPAs) on their balance sheets and enhance
their overall financial health. Effective management and resolution strategies are aimed at
minimizing losses, recovering dues, and restoring the health of loan portfolios. Here is an
elaboration on NPA management and resolution:
1. Loan Restructuring: Loan restructuring involves modifying the terms and conditions
of the loan to provide relief to borrowers facing financial difficulties. This can include
extending the loan tenure, reducing interest rates, or granting a moratorium on
repayments. Loan restructuring aims to improve the borrower's cash flow and increase
the chances of loan repayment. It is typically done on a case-by-case basis after
careful evaluation of the borrower's financial situation and repayment capacity.
2. Asset Classification and Provisioning: Banks classify their assets into different
categories based on the severity of default. Proper asset classification helps in
assessing the risk profile of the loan portfolio accurately. As per regulatory guidelines,
banks need to make provisions for potential losses on NPAs. Higher provisions are set
aside for loans classified as substandard, doubtful, or loss assets. Adequate
provisioning ensures that banks have adequate buffers to absorb potential losses
arising from NPAs.
3. Recovery Mechanisms: Banks employ various mechanisms to recover dues from
NPAs. These include a. Legal Measures: Banks can initiate legal proceedings to
recover dues by filing lawsuits, obtaining court orders, or attaching the borrower's
assets. b. Debt Recovery Tribunals (DRTs): DRTs provide a specialized forum for
banks to recover dues from defaulting borrowers. They have the power to seize and
sell the borrower's assets to recover the outstanding debt. c. Securitization and Asset
Reconstruction: Banks can transfer NPAs to asset reconstruction companies (ARCs)
through securitization or sell them to ARCs at a discounted price. ARCs specialize in
recovering and resolving distressed assets. d. One-Time Settlement (OTS): Banks
may negotiate with borrowers for a one-time settlement, wherein the borrower agrees
to pay a reduced amount to settle the outstanding dues. e. Debt Recovery Agents:
Banks may engage debt recovery agents who specialize in tracing defaulting
borrowers, negotiating settlements, and facilitating the recovery process.
4. Strengthened Credit Appraisal and Risk Management: To prevent future NPAs,
banks need to strengthen their credit appraisal processes and risk management
frameworks. This includes robust evaluation of borrowers' creditworthiness, thorough
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assessment of the borrower's financials, collateral valuation, and periodic monitoring

of loan accounts. Banks should also implement effective early warning systems to
identify signs of potential default and take timely corrective measures.
5. Loan Sale and Securitization: Banks can opt for loan sale and securitization to
transfer NPAs off their balance sheets. This involves selling NPAs to other financial
institutions or investors at a discounted price. Loan sale and securitization help banks
improve their liquidity position and reduce exposure to NPAs. However, this
approach requires thorough due diligence and proper valuation to ensure a fair price is
obtained.
6. Strengthening Recovery and Collection Processes: Banks can enhance their
recovery and collection processes by establishing specialized recovery units,
deploying trained recovery agents, and leveraging technology-driven solutions.
Improved recovery processes facilitate the timely identification of defaulting
accounts, proactive follow-ups with borrowers, and efficient tracking of recovery
progress.
7. Recapitalization and Capital Infusion: In cases where banks face a substantial
burden of NPAs, recapitalization and capital infusion may be necessary. This involves
raising additional capital through various means, such as government support, equity
dilution, or attracting investments from stakeholders. Recapitalization strengthens the
capital base of banks, enabling them to absorb losses, sustain lending activities, and
meet regulatory capital requirements. Capital infusion provides banks with the
necessary resources to resolve NPAs and restore financial stability.
8. Improved Governance and Risk Culture: Banks need to focus on strengthening
their governance structures and fostering a robust risk management culture. This
includes having independent risk management departments, clear risk policies and
frameworks, and effective internal controls. Strong governance and risk management
practices help in the early identification and mitigation of risks, reducing the chances
of NPAs.
9. Enhancing Credit Monitoring and Early Warning Systems: Banks should
establish robust credit monitoring mechanisms and early warning systems to identify
signs of potential default at an early stage. This involves setting up early warning
indicators, regular monitoring of the financial performance of borrowers, and timely
actions to address emerging risks. Early intervention can help banks take proactive
measures to prevent loans from becoming NPAs.
10. Regulatory and Government Support: Regulators and governments play a crucial
role in facilitating NPA management and resolution. They can introduce policies,
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guidelines, and frameworks to address the challenges associated with NPAs.

Measures such as setting up dedicated debt recovery tribunals, creating asset
reconstruction companies, and implementing bankruptcy and insolvency frameworks
provide a supportive environment for banks to resolve NPAs effectively.
It is important to note that NPA management and resolution require a comprehensive and
holistic approach. Banks need to strike a balance between recovering dues and supporting
borrowers in financial distress. By implementing effective strategies and frameworks,
banks can minimize the impact of NPAs, restore the health of their loan portfolios, and
contribute to the stability of the financial system.
IN-TEXT QUESTIONS
1. What does NPA stand for in the context of banking?

a) Non-Performing Account b) Non-Profit Asset
c) Non-Performing Asset d) Non-Participating Agreement
2. Which of the following is NOT a cause of Non-Performing Assets?
a) Defaulted loan repayments b) Economic downturn
c) Poor credit appraisal and monitoring d) Prompt interest payments
3. What are the implications of high levels of NPAs for banks?
a) Increased profitability b) Enhanced creditworthiness
c) Potential capital erosion d) Higher customer satisfaction
4. Which regulatory body in India oversees the resolution of NPAs in banks?
a) Reserve Bank of India (RBI)
b) Securities and Exchange Board of India (SEBI)
c) Insurance Regulatory and Development Authority of India (IRDAI)
d) Ministry of Finance
5. Which of the following is a common resolution strategy for NPAs?
a) Loan forgiveness
b) Asset Reconstruction Company (ARC)
c) Debt issuance
d) Increasing interest rates
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4.10 RISK MANAGEMENT IN BANKS
Risk management is a crucial aspect of the banking industry as banks are exposed to various
types of risks that can impact their financial stability and performance. Effective risk
management helps banks identify, assess, monitor, and mitigate risks to protect their assets,
maintain profitability, and ensure the safety and soundness of the financial system. Here is an
elaboration on risk management in banks:
1. Risk Identification: The first step in risk management is the identification of various
types of risks faced by banks. These risks include credit risk, market risk, liquidity
risk, operational risk, and strategic risk. Credit risk refers to the potential losses
arising from borrowers' inability to repay their loans. Market risk encompasses the
potential losses arising from adverse movements in interest rates, exchange rates, and
market prices of financial instruments. Liquidity risk is the risk of insufficient funds
to meet obligations. Operational risk involves the risk of losses due to internal
processes, systems, or external events. Strategic risk pertains to risks associated with
the bank's strategic decisions and business model.
2. Risk Assessment and Measurement: After identifying risks, banks assess and
measure the potential impact and likelihood of those risks. This involves quantitative
analysis, stress testing, scenario analysis, and the use of risk models and
methodologies. Credit risk assessment includes evaluating borrowers'
creditworthiness, analyzing collateral, and assigning credit ratings. Market risk
assessment involves measuring potential losses from market fluctuations. Liquidity
risk assessment focuses on analyzing the adequacy of funding sources and the ability
to meet cash flow obligations. Operational risk assessment involves identifying
vulnerabilities in internal processes, systems, and controls.
3. Risk Monitoring and Reporting: Banks implement robust systems to monitor risks
on an ongoing basis. This includes regular monitoring of credit portfolios, market
positions, liquidity positions, and operational processes. Risk monitoring involves the
use of risk indicators, key risk metrics, and early warning systems to detect deviations
from risk appetite and trigger appropriate actions. Banks also establish reporting
mechanisms to provide timely and accurate information on risk exposures to
management, board of directors, regulators, and stakeholders.
4. Risk Mitigation and Control: Banks employ various strategies to mitigate risks and
establish controls to minimize the likelihood and impact of risks. Credit risk
mitigation techniques include diversification of loan portfolios, collateral
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requirements, credit risk transfer through loan securitization or credit derivatives, and
the use of loan guarantees. Market risk can be managed through hedging strategies,
portfolio diversification, and the use of derivatives. Liquidity risk can be mitigated
through maintaining adequate liquidity buffers, diversifying funding sources, and
establishing contingency funding plans. Operational risk can be controlled through
robust internal controls, process automation, employee training, and business
continuity plans.
5. Risk Governance and Framework: Effective risk management requires a strong risk
governance framework within banks. This involves establishing clear risk
management policies, risk appetite statements, and risk management committees.
Banks need to ensure that there is a clear segregation of duties, effective risk culture,
and a risk-aware mindset across the organization. Risk governance also involves
assigning responsibilities for risk management, regular risk assessments, and
independent risk oversight.
6. Regulatory Compliance: Banks operate within a regulatory framework that sets
guidelines and standards for risk management. Compliance with regulatory
requirements is essential for ensuring the stability and integrity of the banking system.
Banks need to adhere to capital adequacy regulations, risk-based capital requirements,
reporting obligations, and stress testing requirements imposed by regulatory
authorities. Compliance with regulations helps banks maintain financial stability and
enhances market confidence.
7. Technology and Data Analytics: Advancements in technology and data analytics
have transformed risk management in banks. Banks now rely on sophisticated risk
management systems, data analytics tools, and artificial intelligence to enhance risk
identification, assessment, and monitoring. These technologies enable banks to
analyze large volumes of data, identify patterns, and make informed risk management
decisions. They also facilitate real-time risk monitoring, scenario analysis, and stress
testing. The use of technology and data analytics improves the efficiency and
effectiveness of risk management processes in banks.
8. Risk Culture and Training: Developing a strong risk culture within the organization
is crucial for effective risk management. Banks need to foster a risk-aware culture
where risk management is embedded in the decision-making process at all levels. This
involves promoting risk consciousness, providing training and awareness programs on
risk management, and incentivizing risk-conscious behaviour. Employees should be
equipped with the necessary skills and knowledge to understand and manage risks
effectively.
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9. Contingency Planning and Stress Testing: Banks should develop comprehensive

contingency plans to address potential risks and adverse scenarios. Contingency
planning involves identifying potential stress events, assessing their impact, and
developing strategies to mitigate the effects. Stress testing is an important tool to
evaluate the resilience of banks against adverse scenarios and assess their ability to
withstand shocks. Banks conduct regular stress tests to identify vulnerabilities and
take proactive measures to strengthen their risk management frameworks.
10. Continuous Improvement and Adaptation: Risk management is an ongoing
process that requires continuous improvement and adaptation to changing market
conditions and regulatory requirements. Banks should regularly review and update
their risk management frameworks, policies, and procedures to address emerging risks
and best practices. They should stay updated with industry developments, regulatory
changes, and evolving risk landscapes to ensure the effectiveness of their risk
management practices.
Effective risk management is essential for banks to navigate uncertainties, protect their
financial health, and maintain the confidence of stakeholders. By implementing robust risk
management frameworks, banks can enhance their resilience, optimize risk-return trade-offs,
and contribute to the stability and soundness of the financial system.
4.11 RISK MANAGEMENT FRAMEWORK
1. Risk Identification, Measurement, and Assessment: Risk identification is the

process of identifying and understanding various types of risks that a bank may face.
This involves identifying both internal and external risks that can affect the bank's
operations, financial position, and reputation. Internal risks include credit risk, market
risk, liquidity risk, operational risk, and compliance risk. External risks encompass
macroeconomic factors, regulatory changes, geopolitical events, and technological
advancements. Once risks are identified, banks need to measure and assess the
potential impact and likelihood of those risks. This involves using quantitative and
qualitative methods to quantify risks and evaluate their potential consequences.
Quantitative methods include statistical models, scenario analysis, and stress testing.
Qualitative methods involve expert judgment and risk assessment frameworks. The
assessment helps prioritize risks and allocate resources for risk mitigation.
2. Risk Mitigation and Control Strategies: Risk mitigation and control strategies aim
to reduce the likelihood and impact of identified risks. These strategies involve
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establishing policies, procedures, and controls to manage risks within acceptable

levels. Risk mitigation strategies may include:
a. Diversification: Banks can diversify their portfolios to reduce concentration risk.
This involves spreading investments across different sectors, geographical areas,
and asset classes to minimize the impact of adverse events in specific areas.
b. Risk Transfer: Banks can transfer risk through various mechanisms such as
insurance, reinsurance, and securitization. Risk transfer allows banks to protect
themselves against potential losses by transferring the risk to external parties.
c. Risk Avoidance: In certain cases, banks may choose to avoid or limit exposure to
high-risk activities or clients. This involves setting risk appetite limits and
avoiding transactions or business activities that exceed these limits.
d. Risk Monitoring and Controls: Banks establish robust risk monitoring systems
and controls to track risk exposures and deviations from established risk limits.
This includes regular reporting, exception monitoring, and internal audit processes
to ensure compliance with risk management policies and procedures.
e. Contingency Planning: Banks develop contingency plans to address potential
risks and adverse scenarios. Contingency planning involves identifying potential
stress events, assessing their impact, and developing strategies to mitigate the
effects. This ensures that banks have appropriate measures in place to respond
effectively to unexpected events.
3. Basel Accords and their Impact on Risk Management: The Basel Accords are
international regulatory frameworks developed by the Basel Committee on Banking
Supervision (BCBS) to enhance the stability and soundness of the global banking
system. The accords provide guidelines and standards for risk management, capital
adequacy, and regulatory supervision. The most significant accords are Basel I, Basel
II, and Basel III.
Basel I, implemented in 1988, introduced minimum capital requirements based on credit risk.
It categorized assets into different risk weights, with higher-risk assets requiring higher
capital reserves.
Basel II, implemented in 2004, expanded the risk categories to include operational risk and
introduced more sophisticated risk measurement and management techniques. It emphasized
the use of internal risk models and introduced the concept of economic capital.
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Basel III, implemented in response to the global financial crisis of 2008, introduced stricter
capital requirements, liquidity standards, and leverage ratios. It emphasized the importance of
risk management and stress testing, requiring banks to hold higher-quality capital and
maintain sufficient liquidity buffers.
The Basel Accords have had a significant impact on risk management in banks. They have
led to improvements in risk identification, measurement, and management practices. Banks
have had to strengthen their risk governance structures, enhance risk measurement models,
and allocate sufficient capital for risk-bearing activities. The accords have also increased the
focus on liquidity risk management and prompted banks to establish robust liquidity risk
management frameworks.
Basel III has particularly emphasized the importance of risk management in banks' day-to-
day operations. It has placed greater emphasis on risk disclosure, stress testing, and capital
adequacy. Banks are required to enhance their risk management capabilities and demonstrate
their ability to withstand adverse economic conditions. Basel III has also introduced
requirements for the measurement and management of interest rate risk in the banking book
and operational risk.
Furthermore, the Basel Accords have influenced risk culture within banks, promoting a
greater focus on risk awareness, accountability, and transparency. Banks have had to
strengthen their risk governance structures, establish clear roles and responsibilities for risk
management, and enhance risk reporting and communication practices.
The implementation of the Basel Accords has not been without challenges. The increased
regulatory requirements have placed additional compliance burdens on banks, requiring them
to invest in advanced risk management systems, data infrastructure, and skilled personnel.
Compliance with the accords has also led to increased capital requirements, potentially
impacting banks' profitability and lending capacity.
Nevertheless, the Basel Accords have contributed to the overall improvement of risk
management practices in banks. They have fostered a more comprehensive and sophisticated
approach to risk identification, measurement, and mitigation. Banks have become more
resilient and better equipped to manage risks, enhancing the stability of the financial system.
In conclusion, the Basel Accords have had a significant impact on risk management in banks.
The accords have prompted banks to strengthen their risk management frameworks, enhance
risk identification and measurement processes, and establish robust risk mitigation strategies.
The focus on capital adequacy, liquidity management, and risk disclosure has led to more
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resilient and transparent banking practices. While compliance with the accords poses
challenges for banks, the overall effect has been a more robust and well-regulated banking
industry.
4.12 CREDIT RISK MANAGEMENT
1. Overview of Credit Risk and Its Sources: Credit risk refers to the potential loss that
a bank may incur if borrowers or counterparties fail to fulfill their contractual
obligations. It is the risk of default on a loan or the deterioration in the
creditworthiness of a borrower. Credit risk can arise from various sources, including:
a. Borrower Risk: This includes the ability and willingness of borrowers to
repay their loans. Factors such as financial stability, repayment history,
industry conditions, and economic factors contribute to borrower risk.
b. Counterparty Risk: Counterparty risk arises from transactions with other
financial institutions or counterparties. It includes the risk of default or non-
performance by the counterparty in derivative transactions, securities lending,
and other financial arrangements.
c. Concentration Risk: Concentration risk refers to excessive exposure to a
particular borrower, industry, sector, or geographic region. Overexposure to a
single entity or sector can amplify the impact of adverse events and increase
the risk of loss.
d. Collateral Risk: Collateral risk is associated with the quality and valuation of
collateral pledged by borrowers. The value of the collateral may fluctuate, and
if it is insufficient to cover the loan amount, the bank faces a potential loss.
e. Country Risk: Country risk arises from lending to borrowers in foreign
countries. Factors such as political stability, legal frameworks, economic
conditions, and exchange rate volatility can impact the ability of borrowers in
foreign jurisdictions to repay their obligations.
2. Credit Appraisal, Monitoring, and Recovery: Effective credit risk management
involves a comprehensive approach to credit appraisal, monitoring, and recovery.
This ensures that banks make informed lending decisions, continuously monitor the
creditworthiness of borrowers, and take timely actions to mitigate potential losses.
The key elements of credit risk management include:
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a. Credit Appraisal: Credit appraisal involves evaluating the creditworthiness

of borrowers before granting loans. This process includes assessing the
financial position of borrowers, their repayment capacity, business viability,
industry analysis, and collateral valuation. It also involves analyzing
qualitative factors such as management quality, market reputation, and
regulatory compliance. The appraisal process helps banks determine the terms
and conditions of loans and establish appropriate credit limits.
b. Credit Monitoring: Once a loan is disbursed, banks need to monitor the
creditworthiness of borrowers on an ongoing basis. This includes tracking
repayment behaviour, financial performance, and any changes in borrower
circumstances that may impact their ability to repay. Early warning indicators,
such as financial ratios, credit scores, and industry trends, are used to detect
signs of potential default. Effective credit monitoring allows banks to take
proactive measures to address deteriorating credit quality and minimize
potential losses.
c. Risk Mitigation: Banks employ various risk mitigation strategies to minimize
credit risk. These strategies include collateral requirements, credit
enhancement mechanisms, and loan covenants. Collateral helps reduce credit
risk by providing an additional source of repayment in case of default. Credit
enhancements such as guarantees, letters of credit, or insurance can also
mitigate credit risk. Loan covenants set conditions that borrowers must meet,
such as maintaining certain financial ratios or providing periodic financial
statements.
d. Credit Recovery: In cases where borrowers default on their loan obligations,
banks need to initiate credit recovery measures. This involves establishing
dedicated recovery units or departments to negotiate with defaulting
borrowers, explore restructuring options, or initiate legal action. Banks may
also engage external agencies or debt recovery mechanisms to recover
outstanding dues. The objective is to minimize losses and maximize recovery
from non-performing assets (NPAs).
e. Credit Risk Policies and Procedures: Banks should have well-defined credit
risk policies and procedures that outline the criteria for credit appraisal, risk
acceptance levels, risk grading frameworks, and loan classification and
provisioning guidelines.
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4.13 MARKET RISK MANAGEMENT
1. Market Risk Types and Measurement Techniques: Market risk refers to the
potential loss that a bank may face due to adverse changes in market conditions,
including fluctuations in interest rates, exchange rates, commodity prices, and equity
prices. It is the risk of losses arising from changes in market prices or rates. Market
risk can be categorized into various types:
a. Interest Rate Risk: This risk arises from changes in interest rates and affects the
bank's net interest income and the value of its interest-sensitive assets and
liabilities. Banks use techniques such as duration analysis, repricing gap analysis,
and scenario analysis to measure and manage interest rate risk.
b. Currency Risk: Currency risk arises from exposure to foreign exchange rate
fluctuations. Banks with international operations or foreign currency-denominated
assets and liabilities are exposed to this risk. Techniques such as value-at-risk
(VaR) models, stress testing, and scenario analysis are used to measure and
manage currency risk.
c. Commodity Price Risk: Banks involved in commodity trading or financing are
exposed to commodity price risk. Fluctuations in commodity prices can impact the
value of collateral, loan repayments, and the profitability of trading activities.
Techniques such as historical simulation, option pricing models, and stress testing
are used to measure and manage commodity price risk.
d. Equity Price Risk: Equity price risk arises from changes in stock prices and
affects banks with equity investments or trading activities. The value of equity
holdings and trading positions can be affected by market fluctuations. Techniques
such as sensitivity analysis, VaR models, and stress testing are used to measure
and manage equity price risk.
e. Volatility Risk: Volatility risk refers to the risk associated with changes in market
volatility. Higher volatility can lead to larger price movements and increased
market risk exposure. Techniques such as volatility modelling, GARCH models,
and option pricing models are used to measure and manage volatility risk.
2. Hedging Strategies and Derivative Products: Banks employ various hedging
strategies and derivative products to manage market risk exposures. Hedging involves
taking offsetting positions in financial instruments to mitigate the impact of adverse
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market movements. Some common hedging strategies and derivative products used
for market risk management include:
a. Interest Rate Hedging: Banks use interest rate swaps, futures, options, and
interest rate caps and floors to hedge against interest rate risk. These instruments
allow banks to manage their exposure to changes in interest rates and protect their
net interest income.
b. Currency Hedging: Banks use currency forwards, options, and currency swaps to
hedge against currency risk. These instruments help banks reduce the impact of
exchange rate fluctuations on their foreign currency positions and transactions.
c. Commodity Hedging: Banks involved in commodity trading or financing use
commodity futures, options, and swaps to hedge against commodity price risk.
These instruments allow banks to mitigate the impact of price fluctuations on their
commodity-related activities.
d. Equity Hedging: Banks use equity futures, options, and swaps to hedge against
equity price risk. These instruments enable banks to protect their equity
investments or trading positions from adverse movements in stock prices.
e. Options and Futures: Banks use options and futures contracts to hedge various
market risk exposures. These instruments provide flexibility in managing risk and
allow banks to protect their positions or portfolios from adverse market
movements.
f. Structured Products: Banks may create or invest in structured products that
provide customized risk management solutions. These products combine various
derivatives and underlying assets to offer specific risk profiles and returns.
Hedging strategies and derivative products provide banks with tools to manage market risk
exposures effectively. However, it is important to note that derivatives also introduce
counterparty credit risk, and banks need to carefully evaluate the creditworthiness of
counterparties and monitor their exposures to avoid excessive risk concentration.
Additionally, banks need to establish robust risk management policies and procedures
governing the use of hedging strategies and derivatives. This includes setting clear guidelines
for risk limits, counterparty risk assessment, collateral management, and valuation
methodologies.
Furthermore, market risk management should be integrated into the bank's overall risk
management framework. This involves coordination and communication between different
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risk management functions, such as credit risk, liquidity risk, and operational risk. The aim is
to have a holistic view of the bank's risk profile and ensure that market risk management
aligns with the bank's overall risk management strategy.
Market risk measurement techniques should be periodically reviewed and updated to
incorporate changes in market conditions, regulatory requirements, and industry best
practices. Banks should stay abreast of advancements in risk modelling methodologies and
use appropriate tools to capture and assess market risk exposures accurately.
Overall, effective market risk management requires a proactive and comprehensive approach.
Banks should have a well-defined risk management framework, appropriate hedging
strategies, and a thorough understanding of the derivative products used for risk mitigation.
Regular monitoring, review, and adaptation of risk management practices are crucial to
ensure that banks can effectively navigate the dynamic and evolving market conditions while
safeguarding their financial stability and profitability.
4.14 OPERATIONAL RISK MANAGEMENT
1. Identifying Operational Risks in Banking: Operational risk refers to the risk of loss
resulting from inadequate or failed internal processes, people, and systems or from
external events. It encompasses a wide range of risks associated with day-to-day
operations in a bank. Identifying operational risks involves recognizing potential
sources of risk and assessing their potential impact. Common sources of operational
risks in banking include:
a. Internal Fraud: This includes fraudulent activities committed by employees,
such as embezzlement, unauthorized trading, or misuse of customer funds.
b. External Fraud: External fraud involves fraudulent activities perpetrated by
individuals or entities outside the bank, such as identity theft, hacking, or
phishing attacks.
c. Legal and Regulatory Compliance: Non-compliance with laws, regulations,
and industry standards can expose banks to operational risks, including fines,
legal actions, and reputational damage.
d. Cybersecurity and Information Technology Risks: Banks face operational
risks related to data breaches, system failures, cyber-attacks, and disruptions to
IT infrastructure. These risks can lead to financial losses, customer data
compromise, and reputational damage.
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e. Business Continuity and Disaster Recovery: Operational risks arise from

disruptions to business operations due to natural disasters, power outages, or
other unforeseen events. Failure to have robust business continuity and disaster
recovery plans can result in significant financial and operational losses.
f. Human Resources: Risks associated with human resources include inadequate
staffing levels, lack of training, poor performance management, and employee
misconduct.
g. Outsourcing and Third-Party Risks: Banks that outsource certain functions or
rely on third-party providers are exposed to operational risks arising from the
performance or failure of those entities.
h. Process and System Failures: Inefficient or inadequate internal processes,
inadequate internal controls, and system failures can lead to errors, delays, and
financial losses.
Identifying operational risks involves conducting risk assessments, internal control
evaluations, and scenario analyses to identify potential vulnerabilities and gaps in operational
processes.
2. Operational Risk Measurement and Control: Operational risk measurement
involves quantifying the potential impact of operational risks and determining their
likelihood of occurrence. While operational risks are challenging to measure
precisely, banks use various techniques to assess and control operational risks,
including:
a. Key Risk Indicators (KRIs): KRIs are quantitative or qualitative metrics that
provide early warning signals of potential operational risks. Examples of KRIs
include the number of cybersecurity incidents, customer complaints, transaction
errors, or employee turnover rates. Monitoring KRIs enables banks to identify
emerging risks and take proactive measures to mitigate them.
b. Loss Data Collection and Analysis: Banks collect and analyze loss data from
internal incidents and external events to identify patterns, trends, and root causes
of operational losses. This data helps banks assess the potential frequency and
severity of operational risks and allocate resources accordingly.
c. Risk and Control Self-Assessment (RCSA): RCSA involves a systematic
evaluation of operational risks and the effectiveness of internal controls. It
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includes self-assessment questionnaires, interviews, and workshops with key

stakeholders to identify control weaknesses, gaps, and areas for improvement.
d. Scenario Analysis and Stress Testing: Scenario analysis involves assessing the
impact of hypothetical events or extreme scenarios on the bank's operations.
Stress testing involves subjecting the bank's operations to severe but plausible
scenarios to evaluate their resilience. These techniques help banks identify
vulnerabilities, evaluate their risk appetite, and enhance their operational
resilience.
e. Risk Mitigation and Control Strategies: Banks implement control measures
and risk mitigation strategies to manage operational risks. These may include
segregation of duties, access controls, fraud detection systems, cybersecurity
measures, disaster recovery plans, and robust internal audit functions. The aim is
to prevent, detect, and mitigate operational risks, as well as to minimize the
potential impact of operational failures.
f. Operational Risk Insurance: Banks may transfer a portion of their operational
risk through insurance coverage. Operational risk insurance policies provide
financial protection against losses arising from operational failures, fraud, and
other related risks.
g. Governance and Compliance: Effective governance structures and compliance
frameworks are crucial for managing operational risks. Banks should establish
clear roles and responsibilities, robust risk management policies and procedures,
and strong internal controls. Compliance with applicable laws, regulations, and
industry standards helps mitigate operational risks associated with legal and
regulatory non-compliance.
h. Training and Awareness: Banks should provide regular training and awareness
programs to employees to enhance their understanding of operational risks,
internal controls, and risk management practices. Educating employees about
operational risk management promotes a risk-aware culture and helps in the early
identification and reporting of potential risks.
i. Continuous Monitoring and Reporting: Banks should establish a framework
for ongoing monitoring and reporting of operational risks. This includes regular
assessments of control effectiveness, incident reporting and analysis, and periodic
risk reporting to senior management and the board of directors. Effective
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monitoring and reporting mechanisms ensure the timely identification of

emerging risks and enable proactive risk management actions.
Operational risk management is an essential component of overall risk management in banks.
By identifying, measuring, and controlling operational risks, banks can enhance their
resilience, protect their reputation, and minimize financial losses. A robust operational risk
management framework, supported by appropriate policies, processes, and control measures,
helps banks navigate the complex operational landscape and ensure the stability and
efficiency of their operations.
4.15 UNIVERSAL BANKING
A. Definition and Evolution of Universal Banking:

1. Understanding Universal Banking Concept: Universal banking refers to a banking
model where financial institutions offer a comprehensive range of financial services,
including commercial banking, investment banking, and other financial activities, all
under one roof. It allows banks to engage in a diverse set of activities, such as deposit-
taking, lending, underwriting, securities trading, asset management, and advisory
services. Universal banks provide a wide array of financial products and services to
cater to the diverse needs of their clients, including individuals, corporations, and
institutional investors. The concept of universal banking contrasts with the traditional
separation of banking activities based on the Glass-Steagall Act in the United States,
which enforced a strict segregation between commercial banking and investment
banking activities. Universal banking models have gained prominence in various
countries worldwide, allowing banks to offer integrated financial solutions and
leverage synergies across different business lines.
2. Historical Development and Global Trends: The evolution of universal banking
can be traced back to the 19th century, particularly in Europe. In countries like
Germany and Switzerland, universal banks emerged as financial institutions that
combined commercial banking with investment banking activities. These banks
provided a range of services, including corporate lending, securities underwriting, and
investment advisory, thus catering to the financial needs of both businesses and
individuals.
The global trends in universal banking have varied across countries and regions.
Some key observations include:
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a. Europe: European countries have a long history of universal banking. In addition

to Germany and Switzerland, countries like France and the United Kingdom have
embraced the concept of universal banking, allowing banks to operate across
various financial sectors. European universal banks have played a significant role
in financing large corporations, facilitating mergers and acquisitions, and
providing comprehensive financial services to individuals and businesses.
b. United States: In the United States, the Glass-Steagall Act, enacted in 1933,
mandated the separation of commercial banking and investment banking
activities. However, this regulatory framework was gradually dismantled over
time. The repeal of certain provisions of the Glass-Steagall Act through the
Gramm-Leach-Bliley Act in 1999 paved the way for the emergence of financial
conglomerates that engage in both commercial and investment banking activities.
This led to the reintegration of banking activities and the adoption of a more
universal banking approach.
c. Asia-Pacific Region: The Asia-Pacific region has witnessed a growing trend
towards universal banking. Countries like Japan, Singapore, and Hong Kong have
embraced this model, allowing banks to offer a wide range of financial services.
Universal banks in the region have expanded their operations and established a
strong presence in multiple financial sectors, including commercial banking,
investment banking, wealth management, and insurance.
The need for universal banking arises from various factors. Some key reasons for the
importance of universal banking include:
a. Integrated Financial Solutions: Universal banks are well-positioned to offer
integrated financial solutions by combining commercial banking, investment
banking, and other financial services. This allows them to provide a
comprehensive suite of products and services tailored to the diverse needs of their
clients. Customers can access a wide range of financial services under one roof,
simplifying their financial transactions and relationship management.
b. Synergies and Cross-Selling Opportunities: Universal banks can leverage
synergies across different business lines. For example, a universal bank can cross-
sell products and services to its existing customer base, leading to enhanced
customer loyalty and increased revenue streams. The integration of banking
activities allows for a more holistic approach to financial services, fostering
stronger customer relationships and promoting long-term business growth.
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c. Risk Diversification: Universal banks can diversify their risk exposure by

operating in multiple financial sectors. Diversification across different lines of
business and geographic regions can help mitigate risks associated with economic
fluctuations, market volatility, and sector-specific challenges. Universal banks can
balance the potential risks and returns of different activities, reducing their
vulnerability to any single sector or market segment.
d. Efficiency and Cost Savings: Universal banks can achieve economies of scale
and scope by integrating various financial activities. Consolidating operations,
systems, and resources can lead to cost savings and operational efficiencies. For
example, sharing infrastructure, technology platforms, and back-office functions
across different business lines can reduce redundancies and streamline processes,
resulting in improved cost-effectiveness.
e. Enhanced Financial Stability: Universal banks, through their diversified
business activities and revenue streams, can enhance financial stability. While
individual sectors or markets may experience volatility or downturns, the overall
resilience of the bank may be strengthened by the combination of different
activities. This can contribute to the stability of the banking system as a whole,
reducing systemic risks and promoting sustainable growth.
f. Global Competitiveness: Universal banks, with their broad range of financial
services and capabilities, are better equipped to compete in the global
marketplace. They can cater to the diverse needs of international clients, provide
cross-border financing, facilitate international trade, and support multinational
corporations. Universal banks can leverage their extensive networks and expertise
to expand their reach and compete effectively in the global financial landscape.
In summary, universal banking offers a comprehensive and integrated approach to financial
services. It enables banks to provide a wide range of products and solutions, leverage
synergies, diversify risks, achieve cost efficiencies, enhance stability, and compete in the
global marketplace. The historical development and global trends have shaped the concept of
universal banking, and its importance continues to grow in the modern financial industry.
4.16 BENEFITS AND CHALLENGES OF UNIVERSAL BANKING
1. Synergies and Diversification Advantages:

One of the primary benefits of universal banking is the potential for synergies and
diversification advantages. By offering a wide range of financial services under one
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roof, universal banks can leverage synergies across different business lines. This
allows for cross-selling opportunities, where customers can access multiple products
and services from a single provider. Cross-selling enhances customer loyalty,
improves customer retention, and increases revenue streams for the bank.
Diversification is another advantage of universal banking. Operating in multiple
financial sectors allows banks to diversify their risk exposure. Economic fluctuations,
market volatility, and sector-specific challenges can be mitigated through
diversification. If one sector or market segment experiences a downturn, the bank can
offset potential losses with gains from other sectors, contributing to overall financial
stability.
2. Regulatory and Operational Challenges: Despite the benefits, universal banking
also presents certain challenges, particularly in the areas of regulation and operations.
a. Regulatory Challenges: Universal banks face complex regulatory frameworks
due to the breadth of their activities. Regulators need to strike a balance between
promoting integrated financial services and ensuring financial stability. Managing
regulatory compliance across various sectors and jurisdictions requires significant
resources and expertise. Universal banks must stay updated with evolving
regulatory requirements, demonstrate robust risk management practices, and
maintain adequate capital and liquidity buffers.
b. Operational Challenges: The operational complexity of universal banking can
pose challenges. Integrating diverse business lines, systems, and processes
requires effective coordination and management. Operational risks, such as
technology failures, cyber threats, and human errors, increase with the expansion
of activities. Universal banks need robust operational risk management
frameworks, adequate internal controls, and ongoing monitoring to mitigate
operational risks effectively.
c. Information and Data Management: Universal banks handle vast amounts of
data across multiple business lines. Managing and integrating data from different
sources can be a significant challenge. Effective information and data
management systems are essential to ensure accurate reporting, risk assessment,
and decision-making.
d. Concentration and Systemic Risks: The concentration of financial services
within a single institution can lead to potential systemic risks. A failure or distress
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in one area of the universal bank could have a cascading effect on other
operations, leading to financial instability. Regulators closely monitor the
interconnectedness and concentration of risk within universal banks to mitigate
systemic risks.
e. Cultural and Organizational Challenges: Universal banks often bring together
different cultures, practices, and expertise from various financial sectors.
Integrating diverse teams and aligning organizational cultures can be a significant
challenge. Harmonizing business strategies, risk appetite, and corporate
governance across different divisions require effective leadership and change
management processes.
Addressing these challenges requires proactive risk management, robust compliance
frameworks, investment in technology and infrastructure, and continuous monitoring and
adaptation to regulatory changes.
In summary, universal banking offers synergies, diversification advantages, and integrated
financial solutions. However, the regulatory and operational challenges should not be
overlooked. Universal banks must navigate complex regulatory environments, manage
operational risks effectively, ensure sound information and data management, mitigate
systemic risks, and address cultural and organizational challenges. By effectively addressing
these challenges, universal banks can harness the benefits of diversification and integration,
contributing to their long-term success in the financial industry.
4.17 UNIVERSAL BANKING IN INDIA
1. Evolution of Universal Banking in India:

The concept of universal banking in India has evolved over time, driven by regulatory
reforms and changing market dynamics. Historically, the Indian banking system was
characterized by a clear separation between commercial banking and investment
banking activities. However, with the aim of promoting a more integrated and
competitive financial sector, India embarked on a gradual transition towards universal
banking.
The process of liberalization and deregulation, which began in the early 1990s, played
a significant role in shaping the evolution of universal banking in India. The
establishment of the Securities and Exchange Board of India (SEBI) and the
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introduction of the Capital Market Reforms Act in 1992 allowed banks to participate
in capital market activities. This marked the beginning of banks expanding their
services beyond traditional lending and deposit-taking activities.
Subsequently, the Narasimham Committee Reports in 1991 and 1998 recommended
measures to enhance the efficiency and competitiveness of the Indian banking sector.
These reports emphasized the need for universal banking to promote integration,
diversification, and risk management in the financial system. The recommendations
included the removal of barriers between commercial and investment banking, the
introduction of new banking licenses, and the strengthening of prudential regulations.
The introduction of new banking licenses and the subsequent entry of private sector
banks further facilitated the growth of universal banking in India. Private sector
banks, such as HDFC Bank, ICICI Bank, and Axis Bank, emerged as universal banks,
offering a wide range of financial services beyond traditional banking.
The Reserve Bank of India (RBI), as the central banking authority, has played a
crucial role in regulating and supervising universal banks. The RBI has implemented
prudential norms, capital adequacy requirements, and risk management guidelines to
ensure the stability and soundness of universal banks in India.
2. Impact on the Indian Financial Sector: The advent of universal banking in India
has had a significant impact on the Indian financial sector. Some key impacts include:
a. Integrated Financial Services: Universal banks in India have expanded their
services to include investment banking, wealth management, insurance, and other
financial activities. This integration has allowed banks to offer a comprehensive
suite of financial products and services to cater to the diverse needs of individuals,
businesses, and institutional clients. Customers can access a wide range of
services under one roof, simplifying their financial transactions and relationship
management.
b. Enhanced Competition and Innovation: Universal banking has intensified
competition in the Indian financial sector. The entry of private sector banks with
universal banking capabilities has spurred innovation, improved customer service,
and led to the development of new financial products and solutions. The
competition has also prompted traditional banks to adapt and diversify their
offerings to remain competitive.
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c. Financial Inclusion: Universal banks in India have played a crucial role in

promoting financial inclusion. By offering a broad range of services, including
basic banking facilities, loans, and insurance, universal banks have expanded
access to financial services for individuals and businesses in both urban and rural
areas. This has contributed to the government's agenda of fostering inclusive
growth and reducing the financial exclusion gap.
d. Risk Management and Governance: Universal banking has brought greater
focus on risk management and governance in the Indian financial sector. With a
wider range of activities and increased interconnectedness, universal banks are
required to implement robust risk management frameworks, strengthen internal
controls, and enhance corporate governance practices. This has led to a greater
emphasis on risk assessment, monitoring, and reporting, promoting a more
resilient and stable financial system.
e. Cross-Selling and Revenue Streams: Universal banks in India have leveraged
cross-selling opportunities to enhance their revenue streams. By offering multiple
financial services, banks can cross-sell products and solutions to their existing
customer base. This not only strengthens customer relationships but also generates
additional revenue for the banks. For example, a universal bank can offer loans,
credit cards, investment products, and insurance policies to its customers,
increasing the overall profitability of the institution.
f. Regulatory Challenges and Governance: The emergence of universal banking
in India has posed regulatory challenges for the authorities. Regulators, such as
the RBI and SEBI, have had to adapt their regulatory frameworks to address the
risks associated with universal banks. Striking a balance between promoting
integrated financial services and ensuring financial stability has been a key focus.
Regulatory guidelines and prudential norms have been put in place to ensure
adequate capital adequacy, risk management practices, and corporate governance
standards for universal banks.
g. Systemic Risk Considerations: The expansion of universal banking in India has
raised concerns about systemic risks. The interconnectedness of different financial
activities within a single institution can amplify risks and vulnerabilities. The RBI
and other regulators closely monitor the concentration of risk within universal
banks to mitigate potential systemic risks and safeguard the stability of the
financial system.
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h. Employment and Economic Growth: The growth of universal banking in India

has contributed to employment generation and economic growth. As universal
banks expand their operations, they create job opportunities in various sectors,
including banking, finance, and allied services. The availability of diverse
financial services and the efficient allocation of capital through universal banking
can also facilitate economic growth by supporting investment, entrepreneurship,
and business expansion.
In conclusion, the evolution of universal banking in India has transformed the financial
landscape, promoting integrated financial services, enhancing competition, and contributing
to financial inclusion. Universal banks offer a wide range of services, diversify revenue
streams, and drive innovation in the sector. However, regulators face challenges in
maintaining financial stability, ensuring effective risk management, and addressing systemic
risks associated with universal banking. The ongoing monitoring and adaptation of regulatory
frameworks are crucial to harnessing the benefits of universal banking while mitigating
potential risks.
4.18 CORE BANKING SOLUTIONS (CBS)
1. Definition and Concept of CBS: Core Banking Solutions (CBS) refer to a

comprehensive and integrated banking software system that allows banks to manage
their core operations and services centrally. It provides a common platform for
various banking functions, including account management, deposits, loans, customer
relationship management, payments, and other financial transactions. CBS acts as the
backbone of a bank's operations, facilitating real-time data processing, efficient
customer service, and seamless integration of multiple delivery channels.
CBS streamlines and automates banking processes, enabling banks to offer enhanced
services to their customers. It eliminates the need for separate systems for different
banking functions and ensures the availability of up-to-date and accurate information
across all branches and channels. With CBS, customers can access their accounts and
perform transactions from any branch, ATM, internet banking, or mobile banking
platform, providing convenience and flexibility.
2. Evolution and Adoption of CBS in Banks: The evolution of CBS can be traced
back to the late 20th century when banks started recognizing the need for centralized
and integrated banking systems. Prior to CBS, banks operated on disparate legacy
systems, where each branch had its own independent systems and databases. This
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fragmented approach resulted in inefficiencies, data inconsistencies, and limited

access to customer information.
The adoption of CBS gained momentum in the 1990s with the advancement of
technology and the increasing competition in the banking sector. Banks realized the
importance of consolidating their operations, standardizing processes, and leveraging
technology to improve efficiency and customer service.
The implementation of CBS typically involves the integration of various modules,
such as core banking, customer relationship management, treasury management, risk
management, and reporting. The core banking module forms the foundation of CBS,
handling key functions like account opening, transaction processing, balance
management, and interest calculations. Other modules enhance the functionality of
CBS by incorporating features like customer data management, analytics, and
regulatory compliance.
Banks started adopting CBS in phases, beginning with the migration of individual
branches or specific functions to the centralized system. Over time, the adoption
expanded to cover the entire network of branches, enabling seamless operations and a
unified customer experience. Today, CBS has become the standard banking
infrastructure for most modern banks, supporting their day-to-day operations,
customer interactions, and overall business growth.
The benefits of CBS adoption include improved operational efficiency, better risk
management, enhanced customer service, streamlined reporting and compliance, and
cost savings through economies of scale. CBS enables banks to respond rapidly to
market changes, launch new products and services, and adapt to evolving customer
expectations. It also facilitates accurate and timely data analysis, helping banks make
informed decisions and develop targeted strategies.
The advancement of technology, particularly cloud computing, artificial intelligence,
and data analytics, is further shaping the evolution of CBS. Banks are leveraging
these technologies to enhance the capabilities of CBS, such as personalization,
predictive analytics, and digital engagement.
In summary, Core Banking Solutions (CBS) revolutionized the way banks operate by
providing a centralized and integrated banking system. CBS improves operational efficiency,
customer service, and risk management for banks. It has evolved as the standard
infrastructure in the banking sector, enabling seamless operations, centralized data
management, and efficient delivery of banking services.
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IN-TEXT QUESTIONS
6. What is the primary characteristic of universal banking?
a) Offering a wide range of financial services under one roof
b) Focusing exclusively on retail banking services
c) Operating in multiple countries simultaneously
d) Specializing in investment banking activities
7. Which of the following is a benefit associated with universal banking?
a) Limited risk exposure due to diversification
b) Specialization in a specific financial service area
c) Reduced regulatory oversight
d) Lower operational costs
8. Core Banking Solutions (CBS) refers to:
a) Integration of various banking systems into a centralized platform
b) Offering only basic banking services to customers
c) Non-performing assets management strategy
d) Exclusive use of digital banking channels
9. What is the role of Core Banking Solutions (CBS) in banking operations?
a) Streamlining and automating various banking processes
b) Enhancing customer convenience through mobile banking apps
c) Facilitating international money transfers
d) Providing financial advice and investment services
10. Which of the following is a challenge associated with the implementation
of Core Banking Solutions (CBS)?
a) Limited availability of digital banking channels
b) Higher cost of technology infrastructure
c) Decreased operational efficiency
d) Reduced customer satisfaction
4.19 FEATURES AND BENEFITS OF CBS
1. Integrated Banking Operations: CBS offers integration of various banking

functions, including account management, deposits, loans, payments, and customer
relationship management. It provides a centralized platform where all customer data
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and transactions are stored and managed. This integration allows banks to streamline
their operations, eliminate data redundancies, and ensure consistency across all
branches and channels. It enables real-time data processing, immediate updates to
account balances and seamless transfer of funds between accounts. Integrated banking
operations through CBS enhance operational efficiency, reduce manual errors, and
improve overall productivity.
2. Customer-Centric Services and Convenience: CBS enables banks to offer
customer-centric services and enhanced convenience to their customers. With CBS,
customers can access their accounts and perform transactions from any branch, ATM,
internet banking, or mobile banking platform. They can view their account balances,
transaction history, and statements in real time. CBS also enables personalized
services, such as customized account preferences, targeted product offerings, and
tailored communication. By leveraging customer data available through CBS, banks
can provide proactive customer support, timely notifications, and personalized
banking experiences. The convenience and flexibility offered by CBS enhance
customer satisfaction and loyalty.
4.20 IMPLEMENTATION AND CHALLENGES OF CBS
1. Steps Involved in CBS Implementation: The implementation of CBS typically

involves the following steps:
a. Requirement Analysis: Banks need to assess their existing systems, identify their
operational needs and goals, and define the scope of CBS implementation.
b. System Selection: Banks evaluate different CBS software solutions available in
the market and select the one that aligns with their requirements and future growth
plans.
c. Data Migration: Banks need to migrate their existing data from legacy systems to
the new CBS platform. This process involves data extraction, cleansing,
transformation, and loading into the CBS database.
d. Customization and Configuration: Banks customize and configure the CBS
software to align with their specific workflows, products, and services. This
includes defining parameters, workflows, access controls, and integrating with
external systems, if required.
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e. Testing and Training: Banks conduct extensive testing to ensure the accuracy
and reliability of the CBS system. They also provide training to their staff to
familiarize them with the new system and its functionalities.
f. Go-Live and Post-Implementation Support: Once the CBS system is ready,
banks switch to the new system and start operating on the CBS platform. Post-
implementation support is provided to address any issues, optimize performance,
and ensure a smooth transition.
2. Challenges and Risks in CBS Adoption: CBS adoption poses certain challenges and
risks that banks need to address:
a. Technological Challenges: Implementing CBS requires robust IT infrastructure,
including hardware, software, and network capabilities. Banks need to ensure that
their systems can handle the increased data processing and transaction volumes.
Upgrading existing infrastructure and ensuring compatibility with the CBS
software can be a significant challenge.
b. Data Security and Privacy: CBS involves the centralized storage and
management of sensitive customer data. Banks must implement stringent security
measures to protect customer information from unauthorized access, data
breaches, and cyber threats. Compliance with data privacy regulations, such as
GDPR (General Data Protection Regulation), is crucial.
c. Change Management: CBS implementation brings significant changes to the
bank's operations, processes, and workflows. Managing change, training staff, and
ensuring their readiness to adapt to the new system is essential. Resistance to
change and inadequate training can hinder the successful implementation of CBS.
d. Cost and Return on Investment: CBS implementation involves substantial
financial investments, including software licenses, hardware upgrades, data
migration, training, and ongoing maintenance costs. Banks need to carefully
evaluate the costs and expected benefits to ensure a positive return on investment.
e. Operational Disruptions: During the transition to CBS, there is a risk of
operational disruptions. Banks need to carefully plan the migration process to
minimize disruptions to customer services. This includes ensuring smooth data
migration, conducting thorough testing, and providing sufficient training to staff
members.
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f. Regulatory Compliance: CBS implementation requires banks to adhere to

regulatory guidelines and compliance requirements. Banks must ensure that the
CBS system meets regulatory standards, such as anti-money laundering (AML)
and know-your-customer (KYC) regulations. Failure to comply with these
regulations can result in penalties and reputational damage.
g. Vendor Selection and Management: Choosing the right CBS vendor is crucial
for successful implementation. Banks need to assess the vendor's track record,
reputation, support services, and scalability of the software. Additionally,
effective vendor management is essential throughout the implementation and post-
implementation phases.
Despite these challenges, the benefits of CBS adoption outweigh the risks. CBS streamlines
banking operations, improves customer service, enables real-time information access, and
enhances overall efficiency. It allows banks to offer a wide range of services through multiple
channels, providing convenience to customers. Successful CBS implementation requires
careful planning, collaboration with stakeholders, effective change management, and ongoing
monitoring and maintenance to ensure its seamless operation and maximize its benefits.
4.21 NBFCS AND ITS TYPES
Non-Banking Financial Companies (NBFCs) are financial institutions that offer various
banking services and financial products, similar to traditional banks, but they do not hold a
banking license. NBFCs play a crucial role in the financial system by providing credit,
investment opportunities, and other financial services to individuals and businesses.
There are several types of NBFCs, each catering to specific financial needs and activities.
Here are some common types of NBFCs:
1. Asset Financing NBFCs: These NBFCs primarily engage in financing assets such as
vehicles, machinery, equipment, or other tangible assets. They provide loans for the
purchase of these assets and offer lease financing options as well.
2. Loan Companies: Loan companies focus on providing loans and credit facilities to
individuals and businesses. They offer various types of loans, including personal
loans, business loans, consumer loans, and housing loans.
3. Investment Companies: Investment companies deal with investing in various
financial assets such as stocks, bonds, mutual funds, and other securities. They pool
funds from investors and manage portfolios to generate returns.
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4. Infrastructure Finance Companies (IFCs): IFCs specialize in financing

infrastructure projects such as roads, bridges, power plants, telecommunications, and
other similar ventures. They play a vital role in supporting the development of
infrastructure in the country.
5. Microfinance Institutions (MFIs): MFIs focus on providing financial services to
low-income individuals and small businesses who typically do not have access to
traditional banking services. They offer microloans, microinsurance, and other
financial products tailored to the needs of the economically disadvantaged.
4.22 COMPARISON BETWEEN BANKS AND NBFCS
While both banks and NBFCs operate in the financial sector and offer financial services,
there are several key differences between them. Here's a comparison between banks and
NBFCs:
1. Regulatory Framework: Banks are regulated by the central bank or the banking
authority of the country, such as the Reserve Bank of India (RBI). They are subject to
stringent regulatory requirements, including capital adequacy norms, reserve
requirements, and liquidity ratios. NBFCs, on the other hand, are regulated by the RBI
but with a more flexible regulatory framework compared to banks.
2. Deposit-Taking: Banks have the authority to accept deposits from the public, which
is a core function of banking. They offer savings accounts, current accounts, fixed
deposits, and other deposit products. NBFCs, in general, are not allowed to accept
demand deposits from the public. However, certain types of NBFCs, known as
Deposit-taking NBFCs (NBFC-Ds), are authorized to accept deposits subject to
specific conditions.
3. Credit Creation: Banks have the unique ability to create credit by accepting deposits
and providing loans. They can create money through the process of fractional reserve
banking. NBFCs, on the other hand, do not have the authority to create credit. They
raise funds from various sources, including banks, financial institutions, debenture
holders, and the public, and then lend those funds to borrowers.
4. Access to Central Bank Facilities: Banks have direct access to central bank
facilities, such as borrowing from the central bank's discount window or availing
themselves of liquidity support during financial crises. NBFCs, on the other hand, do
not have direct access to such facilities and rely on interbank borrowing or alternative
sources of liquidity.
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5. Services Offered: Banks provide a wide range of services, including deposits, loans,
credit cards, trade finance, foreign exchange services, wealth management, and
investment banking. NBFCs specialize in specific financial activities, such as lending,
leasing, hire purchase, investment, or asset management. They focus on niche areas
and cater to specific customer segments or industries.
It's important to note that while NBFCs and banks differ in certain aspects, both play
important roles in the financial ecosystem. Here are a few additional points of comparison:
6. Capital Requirements: Banks have higher capital requirements compared to NBFCs.
This ensures that banks have a strong financial base to support their operations and
absorb potential losses. NBFCs, while subject to capital adequacy norms, generally
have lower capital requirements, allowing them to be more nimble in terms of their
operations and risk appetite.
7. Risk Management: Banks are required to have comprehensive risk management
frameworks in place, including credit risk, market risk, liquidity risk, and operational
risk. They are also subjected to regular stress tests and assessments to ensure their
stability and ability to withstand adverse economic conditions. NBFCs have risk
management systems as well, but the regulatory requirements are often less stringent
compared to banks.
8. Public Trust: Banks, being heavily regulated and having a long-standing presence,
often enjoy a higher level of public trust and confidence. Customers tend to perceive
banks as more secure and reliable due to the deposit insurance provided by regulatory
authorities. NBFCs, on the other hand, may face challenges in establishing and
maintaining public trust, particularly those that do not accept deposits.
9. Branch Network: Banks typically have a wide network of branches, providing
physical access to customers in various locations. This allows for personal interaction
and a range of banking services at multiple locations. NBFCs generally have a smaller
branch network or may operate through a centralized office, relying more on
technology-driven platforms and digital channels for service delivery.
10. Lending Flexibility: NBFCs often have more flexibility in terms of lending practices
compared to banks. They can design customized loan products, offer quicker loan
approvals, and cater to specific customer segments that may not meet the stringent
criteria of banks. This flexibility allows NBFCs to fill gaps in the credit market and
meet the diverse financing needs of individuals and businesses.
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In summary, while banks and NBFCs share similarities in offering financial services, their
differences lie in regulatory frameworks, deposit-taking abilities, credit creation, access to
central bank facilities, and the range of services provided. Understanding these distinctions is
crucial for individuals and businesses to make informed decisions regarding their financial
needs and preferences. Both banks and NBFCs contribute to the overall growth and stability
of the financial system, complementing each other's roles in serving the diverse requirements
of the economy.
4.23 SUMMARY
In this lesson, we will delve into the subject of Financial Markets & Institutions, focusing on
the crucial role of banks in the economy. We explored topics such as Non-Performing Assets
(NPA), Risk Management in Banks, the need for and importance of Universal Banking, Core
Banking Solutions (CBS) and compared banks with Non-Banking Financial Companies
(NBFCs).
4.24 ANSWERS TO IN TEXT QUESTIONS
1. c) Non-Performing Asset 7. a) Limited risk exposure due to

diversification
2. d) Prompt interest payments
8. a) Integration of various banking systems
3. c) Potential capital erosion
into a centralized platform
4. a) Reserve Bank of India (RBI)
9. a) Streamlining and automating various
5. b) Asset Reconstruction Company banking processes
(ARC)
10. b) Higher cost of technology
6. a) Offering a wide range of financial infrastructure
services under one roof
1. Explain the role of banks in the financial market and discuss their importance in
facilitating economic growth and stability. Provide examples to support your answer.
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2. Discuss the concept of Non-Performing Assets (NPA) in banks. Identify and analyze
the main reasons for the accumulation of NPAs and explain their impact on banks and
the broader economy.
3. Compare and contrast the functions and operations of commercial banks,
development banks, and cooperative banks. Highlight their target customers and the
specific services they provide. Provide real-world examples to illustrate your points.
4. Describe the principles and practices of risk management in banks. Discuss the
components of a risk management framework and explain their significance in
ensuring the stability and resilience of banking institutions. Provide examples of risk
mitigation strategies used by banks.
5. Explore the concept of universal banking and its historical development. Discuss the
benefits and challenges associated with universal banking, including synergies,
diversification advantages, and regulatory considerations. Provide insights into the
impact of universal banking on the Indian financial sector.

McGraw Hill.
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LESSON 5
FINANCIAL MARKETS
Ms. Jasmit Kaur
Sri Guru Gobind Singh College of Commerce
University of Delhi
Email-Id: jasmitkaur@sggscc.ac.in
STRUCTURE

5.2 Introduction
5.3 Role and Importance of Financial Markets
5.4 Types of Financial Markets
5.5 Linkages between Economy and Financial Markets
5.6 Integration of Indian Financial Markets with Global Financial Markets
5.8 Merchant Bank: Role and Functions
5.9 Listing and delisting of corporate stocks
5.11 Summary
5.12 Glossary
● Aims to develop understanding of basics of financial markets and its types.

● Give a fundamental knowledge on various ways of raising money from the primary
markets.
● Demonstrate knowledge and understanding of corporate listing and delisting process.
● Provide an introduction to the foreign exchange markets and how it works.
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5.2 INTRODUCTION
Financial Markets is a place which provides a platform for sale and purchase of financial
assets such as shares, bonds, derivatives, etc. Financial Markets serve as a link between the
savers/investors/lenders and borrowers that meet short-term and long-term financial
requirements of household and corporate sector through efficient mobilization and allocation
of money. Financial Markets facilitate transfer of money from surplus units to deficit units to
make it productive and hence, generate more capital for the economy. Here investors are
surplus units and business enterprises are deficit units. Business enterprises need
money/capital to grow and to expand their production thus, financial market plays an
important role in building the capital and production of goods and services in the economy.
5.3 ROLE AND IMPORTANCE OF FINANCIAL MARKETS
The role and importance of financial markets are not limited to just providing an avenue for
the sale and purchase of financial instruments. The Financial markets play a prominent role in
capital formation and the effective allocation/utilization of money in the economy.
List of functions performed by financial markets are as follows:
Price Determination: Demand and supply factors of the financial asset help to determine
their price. When a financial security is available in the financial market, it gets traded by
buyers and sellers. Investors are the supplier of the capital, while business enterprises are in
need of the funds. Thus, the interaction between these two participants and market factors
provides a mechanism for determining the price of the security.
Mobilization of savings: For an economy to be developing it is important that money should
not sit idle and directing towards its most effective use. An Economy doesn’t grow if the
savings are not put to its productive use. Financial markets help to mobilize these savings
from being idle with households, institutions, and banks to business enterprises and corporate
industry requiring capital/funds for investment in their various projects.
Ensures liquidity: Financial markets provide an easy platform where one can buy or sell
financial assets easily at any point in time. Financial assets that buyers and sellers trade in the
financial markets have high liquidity. Investors can easily sell financial assets at any time and
convert them into cash whenever they require money.
Saves time and money: Financial markets serve as an easy platform for buyers and sellers
where they can find each other with no effort or waste of time. Also, financial markets
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provide complete information regarding financial assets about their price, cost of transaction,
availability etc. This results in lower transaction costs and fees. Moreover, investors and
companies do not need to spend money for getting any information.
5.4 TYPES OF FINANCIAL MARKETS
Fig 5.2: Types of Financial Markets

Money Markets
The money market is the market to trade in money market instruments. Money market
instruments are short term instruments. Money markets facilitate constant flow
of cash between governments, corporations, banks and financial institutions. Borrowing and
lending in this market is for a term as short as overnight and no longer than a year. These
markets support industries to accomplish their working capital requirements by circulating
short-term funds in the economy. In India, money markets serve an essential objective of
providing liquid cash to borrowers and fund providers for a small period of time, while
keeping a balance between the demand and supply of short-term funds. The important money
market instruments in India are call money, commercial papers, certificates of deposit,
treasury bills etc.
Features of money market:

• It is a market for short-term funds.
• The maturity period is up to one year.
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• It trades with assets/instruments that can be transformed into cash easily.

• The main participants of the money market are the Commercial Banks, Non-banking
financial companies and Central Bank, etc.
• Most popular Money Banking instruments are Treasury Bills, Commercial Bills,
Certificates of Deposit and Commercial Paper.
Capital Markets
Capital markets are the markets in which securities with maturities of greater than one year
are traded. The most common capital market securities include stocks, bonds etc. The funds
are used for productive purposes and to create wealth in the economy in the long-term.
Therefore, capital market deals in financial instruments that are long term securities. In this
market, the buyers use funds for longer-term investment. The nature of the capital market is
risky, and it connects the surplus units with the deficit units. A capital market is an organized
market in which both individuals and business entities buy and sell equity and debt securities.
Features of Capital Markets
• It is designed to be an efficient way to enter into purchase and sale transactions.
• It unites entrepreneurial borrowers and savers.
• It deals with long-term investments.
• Agents are required in these markets.
• It is controlled by government rules and regulations.
• The Capital Market instrument involves both the auction market (primary market) and
dealer market (secondary market).
Base Money Market Capital Market
Concept It is a market for trade in short term It is a market for trade in long term
securities securities.
Market Nature Both unorganized and organized Capital markets are usually organized
in nature.
Instruments Call money, treasury bills, Bonds, Debentures, Shares etc.
involved certificate of deposits, commercial
paper etc.
Participants Banks, government, corporations Banks, government, corporations,
etc. stock exchange, brokers, retail
investors, foreign investors,
insurance companies etc.
Market Liquidity Highly liquid Less liquid
Risk Low Risk High Risk
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Maturity of Instruments mature within a year Instruments take longer time to attain
Instruments maturity
Objective To achieve short term credit To achieve long term credit
requirements of the trade requirements of the trade.
Purpose Increasing liquidity of funds in the Stabilizes economy by increase in
economy savings.
Return on Low in money markets High in capital markets
investment
Primary Markets and Secondary Markets

The primary market is the part of the capital market that deals with the issuance and sale of
equity-backed securities to investors directly by the issuer. Investors buy securities that were
never traded before. Primary markets create long-term instruments through which corporate
entities raise funds from the capital market. It is also known as the New Issue Market (NIM).
Since the securities are issued directly by the company to its investors, the company receives
the money and issues new security certificates to the investors. The primary market plays the
crucial function of facilitating the capital formation within the economy. The securities issued
at the primary market can be issued in face value, premium value, and at par value. Once
issued, the securities typically trade on a secondary market i.e., stock exchange.
The secondary market, also called the aftermarket and follow-on public offering. It is the
financial market in which previously issued financial instruments such as shares, bonds etc
are bought and sold. The term "secondary market" is also used to refer to the market for
any used stock or assets, or an alternative use for an existing product or asset where the
customer base is the second market. The secondary market for a variety of assets can vary
from loans to stocks, from fragmented to centralized, and from illiquid to very liquid. The
major stock exchanges are the most visible example of liquid secondary markets of publicly
traded companies. Exchanges such as Bombay Stock Exchange, National stock exchange
provide a centralized, liquid secondary market for investors who own stocks that trade on
these exchanges. Most bonds and loans are traded over the counter (OTC) or by phoning the
broker or dealer.
Base Primary Market Secondary Market
Concept It is market for new It is market for trading of
securities. issued securities.
Another Name New Issue Market (NIM) After market.
Type of Purchasing Direct Indirect
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Financing It provides funds to It does not provide funding

corporate for expansion and to the enterprises.
diversification.
Number of times a security Only once Multiple times
can be sold
Buying and selling Buying and selling is Buying and selling is only
between company and between the investors.
investors
Profit on the sale of shares Companies issuing the Investors gets the profit on
securities makes profit. the sale of shares.
Intermediary Underwriters Brokers
Price Fixed Fluctuating
IN-TEXT QUESTIONS
1. _______ is a link between savers & borrowers, helps to establish a link

between savers & investors
(a) Marketing
(b) Financial market
(c) Money market
(d) None of these
2. Which of the following is the function of financial market?

(a) Mobilization of savings
(b) Price fixation
(c) Provide liquidity to financial assets
(d) All of the above
3. _________ is the organisations, institutions that provide long term funds.

(a) Capital market
(b) Money market
(c) Primary market
(d) Secondary market
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5.5 LINKAGES BETWEEN ECONOMY AND FINANCIAL

MARKETS
There is a strong positive association between financial markets and economy of the nation
because financial sector is an important determinant for economic growth and development.
Efficient and sound financial system channels funds to its most productive use which are
beneficial for sustainable development. Financial markets direct the flow of savings and
investment funds in the economy in an efficient way which facilitate the accumulation of
capital and production of various goods and services. The combination of well-developed
financial markets, financial institutions, financial products and instruments suits the needs of
borrowers and lenders and therefore the overall economy.
Exploring a link between financial markets and economic growth has been the focus of
academics, researchers and policy makers. It is particularly important for developing
countries to design appropriate economic policies. There seems to be a consensus on the roles
and contribution of financial markets in promoting economic growth. Financial markets
facilitate the mobilization of savings and allocation of funds to productive investment
opportunities by helping investors find financing needs. But the opposite view also exists
which means that financial development follows economic growth. Lack of financial
institutions and financial markets in the underdeveloped countries indicates a lack of
sufficient demand for products and services. As economy grows the demand for goods and
services increases and as a result the role of financial market also expands to facilitate the
same. A stable economic framework promotes positive relationship between financial
markets and economic growth, thus reduces vulnerability to financial crisis.
5.6 Integration of Indian Financial Markets with Global Financial

Markets
In integrated financial markets, domestic investors can buy foreign financial assets and
foreign investors can buy domestic financial assets. The economies that are fully integrated
into world financial markets, financial assets with identical risk should command the same
expected return, regardless of location. A large number of Indian companies are getting
involved in exporting their products to global markets, also raising funds by listing on foreign
stock exchange (NYSE, London Stock exchange and NASDAQ etc). Therefore, share price
movements of these companies are more likely to be affected by the growth and development
in the world economy.
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Financial Markets across the world are showing a lot of short-term volatility (frequent rise or
fall in stock prices) mainly driven by news and events in the global financial markets. For
example, news or rumours related to economic recession in USA, soft/hard landing and
estimation of losses due to collapse of banks in USA, rise in global commodities prices,
fluctuation in global crude oil prices etc. Whenever any negative news triggered from the US
financial markets it triggers a tsunami in global financial markets especially in short term.
There are some fundamental reasons why global financial markets, especially the Indian
stock market behave in a volatile manner based on developments in global financial markets.
Indian economy is increasingly exposed to global financial markets post liberalization in the
1990s. India is seeing fast economic growth in last few years and large capital inflows into
Indian financial market from across the world. Investment decisions of these funds are driven
and depend on the development/events in foreign financial markets, or their own domestic
markets. As a result, Indian financial markets are getting more and more integrated with
movement in global financial markets. Market analysts track and talk about these global
developmental events and global financial market movements very closely.
Rapid development in technology (especially in the last one decade) is another major reason
of linking the various financial markets across the world. Internet has enabled the investors to
virtually trade/invest in any financial market across the world.
Public Issue or Initial Public Offer (IPO): Under this method, company issues a prospectus
to the public inviting offers for subscription. The investors who are interested in the securities
apply for the securities they are willing to buy, and advertisements are issued in the leading
newspapers. Companies typically go public to raise huge amount of capital in exchange for
securities. Once a private company is convinced about the need to become a public company,
it kick-starts the process of IPO. Companies which want to go public follow a process that
exchanges adhere to. The IPO process is quite complicated and entire IPO process is
regulated by the ‘Securities and Exchange Board of India (SEBI)’. This is to check the
likelihood of a scam and protect the interest of the investors. Procedure for raising capital
through an IPO is as follows:
Hire an investment Bank: A company seeks guidance from a team of under-writers or
investment banks to start the process of IPO. More often than not, they take services from
more than one bank. The team will study the company’s current financial situation, work with
their assets and liabilities, and then they plan to cater to the needs of funds. An underwriting
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agreement is signed which will have all the details of the deal, the fund amount that will be
raised, and the securities that will be issued.
Register with SEBI: The Company and the under-writers file the registration statement,
which comprises of all the financial data and business plans of the company. The company
also have to declare how the Company is going to utilise the funds it will raise from the IPO
and about the securities of public investment. If the registration statement is compliant with
the stringent guidelines set by the SEBI and ensures that the company has disclosed every
detail a potential investor should know, then it gets a green signal.
Draft the Red Herring Document: The directors of the company need to file an initial
prospectus which includes the details of the price estimate of the shares and other details
regarding the IPO. It is known as the Red Herring Prospectus because it contains the warning
that it is not the final prospectus.
Go on a road show: Before the IPO goes public, this happens over an action-packed two
weeks. The mangers of the Company travel around the country marketing the upcoming IPO
to the potential investors. The agenda of the marketing includes presentation of facts and
figures, which creates the most positive interest.
Pricing the IPO: Based on whether Company wants to float a Fixed Price IPO or Book
Building Issue, the price or price band is fixed. A fixed price IPO will have a fixed price in
the order document, and the book building issue will have a price band within which an
investor can bid. The number of shares offer for sale is decided. The Company should also
decide the stock exchange to list their shares. The Company asks the SEBI to announce the
registration statement so that purchases can be made.
Available to Public: After the IPO price is finalized, the stakeholders and under-writers work
together to decide how many shares every investor will receive. Investors will usually get full
securities unless it is oversubscribed. The shares are credited to their demat account and
refund is given if the shares are oversubscribed. Once the securities are allotted, the stock
market will start trading the Company’s IPO.
Kind of Intermediaries involved:
Merchant Banker: Merchant Bankers are the most crucial intermediaries among all. From
drafting a prospectus to listing the company’s securities at the recognized stock exchange,
they assist a company throughout. Merchant Bankers checks and verifies all the information
provided in the prospectus, by carrying out due diligence for all the details that the prospectus
provides. After that, they issue a certificate to the SEBI.
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Underwriters: Underwriters are required to subscribe to the unsubscribed shares of a

company. Therefore, underwriters come into play when there is a situation of under
subscription of shares.
Registrar and Share Transfer Agent: The Registrar and the Share Transfer Agent decide
the basis for allotment to the share application received from the public. Underwriters are
required to subscribe to the unsubscribed shares of a company. Therefore, underwriters come
into play when there is a situation of under subscription of shares.
Stockbrokers and Sub Brokers: The Stockbrokers and Sub Brokers receive a commission
from the Issuer Company for inviting the public to subscribe to the shares offered by it.
Depositories: Depositories hold securities in dematerialized (DEMAT) form for the
shareholders. In India, there are two main depositories, CDSL (Central Depository Securities
Limited) and NDSL (National Securities Depository Limited).
Book Building Process: When a company wants to raise money, it plans to offer its stock to
the public. Companies all over the world use either fixed pricing or book building as a
mechanism to price their shares. Over the period of time, the fixed price mechanism has
become obsolete and book building has become the de-facto mechanism used in pricing
shares while conducting an initial public offer (IPO). Book Building is basically a process
used in Initial Public Offer (IPO) for efficient price discovery. If the company is not sure
about the exact price at which to market its shares, it can decide a price range instead of an
exact figure. During the period for which the IPO is open, bids are collected from investors at
various prices, which are above or equal to the floor price. The offer price is determined after
the bid closing date. This process of discovering the price by providing the investors with a
price range and then asking them to bid on it is called the book building process.
It is considered to be one of the most efficient mechanisms of pricing securities in the
primary market. This is the preferred method which is recommended by all major stock
exchanges and as a result is followed in all major developed countries in the world. The
introduction of book-building in India was done in 1995 following the recommendations of
an expert committee appointed by SEBI. The committee recommended and SEBI accepted in
November 1995 that the book-building route should be open to issuer companies, subject to
certain terms and conditions. In January 2000, SEBI came out with a compendium of
guidelines, circulars and instructions to merchant bankers relating to issue of capital.
In this method, the company does not fix up a particular price for the shares, but instead gives
a price range, e.g., Rs. 80 to 100. When bidding for the shares, investors have to decide at
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which price they would like to bid for the shares, e.g., Rs. 80, Rs. 90 or Rs. 100. They can bid
for the shares at any price within this range. Based on demand and supply of the shares, the
final price is fixed. The lowest price (Rs. 80) is known as the floor price and the highest price
(Rs. 100) is known as cap price. The price at which the shares are allotted is known as cut off
price.
The entire process begins with the selection of the lead manager, an investment banker whose
job is to bring the issue to the public. The lead manager and the issuing company fix the price
range and the issue size. Next, syndicate members are hired to obtain bids from the investors.
The issue is kept open for 5 days. Once the offer period is over, the lead manager and issuing
company fix the price at which the shares are sold to the investors.
Q. DEF ltd wants to raise Rs 700 crores by issuing shares of the face value of Rs 10
each. The company appointed a Merchant Banker who has approached the investing
public to help him in the book building process in a price band of Rs 100-120 per
share. Assuming there are only five investors applying for the Company’s share and
following are the quotes.
Investor Price quoted Amount of Investment (Rs in crores)
A 100 320
B 105 370
C 110 160
D 115 280
E 120 330
Calculate: (i) The price at which merchant banker will issue the shares of the
company to investors. (ii) The allotment value (in Rs) of each investor.
Solution:
Investor Price quoted (P) Weight (W) WxP
A 100 320 32,000
B 105 370 38,850
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C 110 160 17,600
D 115 280 32,200
E 120 330 39,600
TW = 1460 Total WP = 1,60,250
The weightage average shall be = Total WP

Total W
= 1,60,250 = 109.760
1,460
The price at which merchant banker will issue the shares = Rs 109.76
Allotment will be as follows:
Investor Allotment Value (in crores)
A NIL
B NIL
C (17,600/89,400) x 700 = 138
D (32,200/89,400) x 700 = 252
E (39,600/89,400) x 700 = 310
Offer for Sale: An Offer for Sale is a mechanism where promoters in a listed company sell
their shares directly to the public in a transparent manner. This mechanism was first
introduced in the market by SEBI in 2012. Through this process, promoters in public
companies can sell their shares and reduce their holdings from publicly listed companies.
This is a simpler way for public companies to sell shares and get capital compared to other
options such as IPO. The promoters are the sellers and bidders can include market
participants such as individuals, companies, qualified institutional buyers and foreign
institutional investors. The option benefits issuers by reducing the time taken to raise funds as
they otherwise have to follow a long procedure that includes issuing a draft prospectus and an
application process involving a lot of formalities.
Private Placement: It is a non-public offering and a funding round of securities which are
sold not through a public offering, but rather through a private offering, mostly to a small
number of chosen investors. There are minimal regulatory requirements for a private
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placement as compared to an IPO. It is an alternative to an initial public offering (IPO) for a

company seeking to raise capital for expansion. Investors invited to participate in private
placement programs include wealthy individual investors, banks and other financial
institutions, mutual funds, insurance companies, and pension funds. The firm does not have
to provide a prospectus to potential investors as detailed financial information may not be
disclosed. The private placement of companies can be done under two subcategories (i)
preferential allotment/issue (ii) qualified institutional placement.
Preferential Issue: This is the fastest way for a company to raise capital. A preferential
issue is an issue of shares or convertible securities by listed or unlisted companies to a select
group of investors on a preferential basis. It is neither a rights issue nor a public issue. When
an unlisted company goes for preferential allotment the rules of the Companies Act, 2013
will apply. In preferential issue, allotment of shares is made to some other persons who are
given “preference” over existing members. The offer can be made to any person whether they
are equity shareholders and employees of the company or not. Whereas in case of private
placement, offer is made to specified investors to invest their funds. They are not the
members of the company.
Qualified Institutional Placement: (QIP) is a capital-raising tool, primarily used in India
and other parts of southern Asia, whereby a listed company can issue securities to a qualified
institutional buyer (QIB). Apart from preferential allotment, this is the only other speedy
method of private placement whereby a listed company can issue securities to a select group
of persons. QIP scores over other methods because the issuing firm does not have to undergo
elaborate procedural requirements to raise this capital. The Securities and Exchange Board of
India (SEBI) introduced the QIP process through a circular issued on May 8, 2006, to prevent
listed companies in India from developing an excessive dependence on foreign capital. The
placement document is placed on the websites of the stock exchanges and the issuer, with
appropriate disclaimer to the effect that the placement is meant only QIBs on private
placement basis and is not an offer to the public. QIBs are those institutional investors who
are generally perceived to possess expertise and the financial muscle to evaluate and invest in
the capital markets.
Rights Issue: Cash-strapped companies can turn to rights issues to raise money when they
really need it. In these rights offerings, companies grant shareholders the right, but not the
obligation, to buy new shares at a discount to the current trading price. The discounted price
will stand for a specified time frame, after which it is returned to normal. A company would
offer a rights issue in order to raise capital. Troubled companies typically use rights issues to
pay down debt, especially when they are unable to borrow more money. However, not all
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companies that pursue rights offerings are in financial trouble. Even companies with clean
balance sheets may use rights issues. These issues might be a way to raise extra capital to
fund expenditures designed to expand the company's business, such as acquisitions or
opening new facilities for manufacturing or sales. If the company is using the extra capital to
fund expansion, it can eventually lead to increased capital gains for shareholders.
Private Equity: Private equity (PE) refers to capital investment made into companies that are
not publicly traded. A source of investment capital, private equity (PE) comes from high-net-
worth individuals (HNWI) and firms that purchase stakes in private companies or acquire
control of public companies with plans to take them private and delist them from stock
exchanges. A private-equity investment will generally be made by a private-equity firm,
a venture capital firm or an angel investor. A private equity fund is a collective investment
scheme used for making investments in various equities and debt instruments. They are
usually managed by a firm or a limited liability partnership. The tenure (Investment horizon)
of such funds can be anywhere between 5-10 years with an option of annual extension. One
key feature of private equity funds is that the money which is pooled in for the purpose of
fund investment is not traded in the stock market and is not open to every individual for
subscription. Since private equity funds are not available to everyone, the money is usually
raised from institutional investors (HNIs & Investment Banks) who can afford to invest large
sums of money for longer time periods. A team of investment professionals from a particular
private equity firm raise and manage the funds, where they utilise this money for raising new
capital, future acquisitions, funding startups or new technology, investing in other private
companies or making the existing fund stronger. Private equity funds represent an excellent
opportunity for a high rate of return.
Employee Stock Option: Employee stock options are commonly viewed as an internal
agreement providing the possibility to participate in the share capital of a company, granted
by the company to an employee as part of the employee’s remuneration package. Regulators
and economists have since specified that ESOs are compensation contracts. Most of the
companies use employee stock options plans to retain, reward, and attract employees, the
objective being to give employees an incentive to behave in ways that will boost the
company's stock price. The employee could exercise the option, pay the exercise price and
would be issued with ordinary shares in the company. As a result, the employee would
experience a direct financial benefit of the difference between the market and the exercise
prices. Employee Stock Options in India has gained immense popularity in the recent time.
Infosys, one of the earliest companies to offer ESOPs, created millionaires of employees such
as drivers, are very well known.
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Venture capital (VC): It is a form of private equity financing that is provided by venture
capital firms or funds to startups, early-stage, and emerging companies that have been
deemed to have high growth potential or which have demonstrated high growth (in terms of
number of employees, annual revenue, scale of operations, etc). Venture Capital is a
financing tool for companies and an investment vehicle for wealthy individuals and
institutional investors. Wealthy investors like to invest their capital in startups with a long-
term growth perspective. This capital is called venture capital and the investors are called
venture capitalists. It is a way for companies to receive money in the short term and for
investors to grow wealth in the long term. Venture Capitals tend to focus on emerging
companies and such investments are risky as they are illiquid, but also have the potential to
provide impressive returns if invested in the right venture. A venture capital firm can finance
a company by equity participation and capital gains, participating in debentures and also
extending conditional loans to the firms.
Disinvestment: Divestment or disinvestment means selling a stake in a company, subsidiary
or other investments. Businesses and governments resort to divestment generally as a way to
pare losses from a non-performing asset, exit a particular industry, or raise
money. Governments often sell stakes in public sector companies to raise revenues. In recent
times, the central government has used this route to exit loss-making ventures and increase
non-tax revenues. The Indian government started divesting its stake in public-sector
companies in the wake of a change of stance in economic policy in the early 1990s —
commonly known as 'Liberalisation, Privatisation, Globalisation'. This has helped the Centre
pare its fiscal deficits. The new economic policy initiated in July 1991 clearly indicated that
PSUs had shown a very negative rate of return on capital employed. Inefficient PSUs had
become and were continuing to be a drag on the Government’s resources turning to be more
of liabilities to the Government than being assets. Many undertakings traditionally
established as pillars of growth had become a burden on the economy. In relation to the
capital employed, the levels of profits were too low. Of the various factors responsible for
low profits in the PSUs, the following were identified as particularly important:
Price policy of public sector undertakings
Under–Utilisation of capacity
Problems related to planning and construction of projects.
Problems of labour, personnel and management
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5.8 Merchant Bank: Roles and Functions
Merchant banks offer financial services to wealthy individuals and corporations. They
underwrite securities and raise funds. They do not provide basic banking services and the
focus is on providing financial services and advice to the corporates, therefore earn from the
fee paid for advisory services. Merchant banking can be defined as a skill-oriented
professional service provided to fulfil financial needs in lieu of adequate consideration in the
form of fee for their services. Role and functions performed by merchant banks are:
1. Provide funds to companies — This includes loans and funds for startup companies.
They decide how much money a company requires for their business proposals. They
also help their clients raise funds through the stock exchange and other activities.
Merchant banks act as a foundation for small scale companies in terms of their
finances.
2. Underwriting — Banks agree to provide money to their clients in case the issue is
not fully subscribed. This is very important for clients to ensure that the bank/ NBFC
will help them raise money. In case they would incur losses, the bank will pay them
for the losses.
3. Manage their portfolios — the bank look into the company’s financial assets and do
the computation of credits and debits to ensure not to incur any losses. They also
provide services to check on the liquidation of assets to track the income made by
these companies and study how they can make it better.
4. Offering corporate advisory — they offer expert advises related to allocation and
utilization of funds to starting companies to expand further. This advice involves
financial aid to ensure that the company will be successful and will not have any
problems along the way.
5. Managing corporate issues — they help companies to incorporate securities
management and serve as an intermediary bank in transferring capitals and funds.
5.9 Listing and Delisting of Corporate Stocks
Listing of Companies denotes permission granted by a stock exchange to a company to trade

its particular securities (e.g., equity shares, debentures etc.) on the stock exchange. Whereas,
delisting of corporate stocks refers to the removal of a company's shares from listing on the
stock exchanges, either voluntarily or involuntarily.
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Listing means the admission of securities of a company to trading on a stock exchange. It

becomes necessary when a Public Limited Company wants to issue shares or debentures to
the public. When securities are listed on a stock exchange, the company has to comply with
the requirements of the exchange.
Advantages of corporate listing for the company are:
1) The company enjoys concessions under direct tax laws as such companies are known as
companies in which public are substantially interested resulting in lower rate of income-
tax payable by them.
2) The company gains national and international importance by its share value quoted on the
stock exchanges.
3) Financial institutions and banks extend term loan facilities in the form of rupee currency
and foreign currency loan.
4) It helps the company to mobilize resources from the shareholders through ‘Rights Issue’
for programs of expansion and modernization without depending on the financial
institutions in line with the Government policies.
5) It ensures wide distributions of shareholding thus avoiding fears of easy takeover of the
organization by others.
Advantages of corporate listing to Investors:
1) Since the securities are officially traded, liquidity of investment by the investors is well
ensured.
2) Rights entitlement in respect of further issues can be disposed of in the market.
3) Listed securities are well preferred by bankers for extending loan facility
4) Official quotations of the securities on the stock exchanges corroborate the valuation
taken by the investors for purposes of tax assessments under Income-tax Act, Wealth- tax
Act etc.
5) Since securities are quoted, there is no secrecy of the price realization of securities sold
by the investors.
6) The rules of the stock exchange protect the interest of the investors in respect of their
holdings.
7) Listed companies are obliged to furnish unaudited financial results on the quarterly basis.
The said details enable the investing public to appreciate the financial results of the
company in between the financial periods.
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8) Takeover offers concerning the listed companies are to be announced to the public. This
will enable the investing public to exercise their discretion on such matters.
Delisting of corporate stocks
Delisting involves removal of listed securities of a company from a stock exchange where it
is traded on a permanent basis. Delisting curbs the securities of the delisted company from
being traded on the stock exchange. It can be done either on voluntary decision of the
company or forcibly done by SEBI on account of some wrongdoing by the company. In order
to list securities on the stock exchange, there are certain guidelines laid out by the market
regulator SEBI that a company is required to follow. In case the company fails to do so, then
SEBI takes the action which generally leads to delisting of the company from the stock
exchange. Delisting can be broadly classified into two types:
Voluntary delisting: It occurs when the listed company decides to delist its securities from
the stock exchange. The reason for such an action can be the below-par performances of the
securities on the exchange or a merger/acquisition of the listed company with another.
Delisted shares refer to the shares of a listed company that has been removed from stock
exchange permanently for buying and selling purposes. That means delisted shares will no
longer be traded on the stock exchanges – National Stock Exchange (NSE) and Bombay
Stock Exchange (BSE). The process of delisting of securities for any company is governed by
the Securities and Exchange Board of India (SEBI).
Compulsory delisting: Compulsory delisting: As per the Securities Contract Regulation Act
and the Securities Contract (Regulation) Rules, 1957, a company's securities will be
mandatorily delisted if:
1) The company's director has been convicted for non-compliance with the rules and
regulations of the Depositories Act and SEBI Act. Also, the company should have
incurred a loss of Rs.1 crore or more.
2) The company's shares are being traded irregularly for the previous three years.
3) The company's trading activities have been halted for more than six months.
4) The company has been experiencing losses for three straight years, and the company's
liabilities are exceeding its assets and the stakeholders' equity combined.
In financial sense, each type of delisting of shares – voluntary or involuntary delisting- will
impact the investor who owns these shares.
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The foreign exchange market is a global decentralized or over the counter (OTC) market for
the trading of currencies. It is also called forex or currency market. This market determines
foreign exchange rates for every currency. It includes all aspects of buying, selling and
exchanging currencies at current or determined prices. It is the largest market in terms of
trading volume in the world. The participants in the market are the international banks. The
foreign exchange market works through financial institutions and operates on several levels
and involves in large quantities of foreign exchange trading. Most foreign exchange dealers
are banks and sometimes it is called the "interbank market". The foreign exchange market
assists international trade and investments by enabling currency conversion.
The value of one currency is determined by its comparison to another currency via the
exchange rate. The major currencies traded most often in the foreign exchange market are the
euro (EUR), United States dollar (USD), Japanese yen (JPY), British pound (GBP) and the
Swiss franc (CHF) etc. The foreign exchange market has a huge trading volume representing
the largest asset class in the world leading to high liquidity. Foreign currency trading is
conducted without a central exchange, but instead is traded over the counter (OTC). Unlike
other markets, this decentralization allows traders to choose from a large number of different
dealers or brokers and the means to compare prices buying or selling.
Types of Foreign Exchange Markets
There are three types of forex markets: the spot forex market, the forward forex market, and
the futures forex market.
Spot Forex Market: The spot market is the immediate exchange of currencies at the current
exchange rate and on the spot. This is the largest portion of the forex market and involves
buyers and sellers from the corporates and individuals exchanging currencies.
Forward Forex Market: The forward market is an agreement between the buyer and the
seller to exchange currencies at an agreed-upon price at a predetermined date in the future.
No exchange of actual currencies takes place at present. The forward market is often used for
hedging purposes by the corporates and individuals.
Futures Forex Market: The future market is similar to the forward market that there is an
agreed price at an agreed date. The primary difference is that the futures market is regulated
and happens on an exchange. Futures are also used for hedging.
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Features:
 There are fewer rules than in other markets and investors need not to follow the strict
standards or regulations found in other markets.
 There are no clearing houses and no central bodies to oversee the forex market.
 Most investors need not to pay the traditional fees or commissions as compared to
other markets.
 The market is open 24 hours a day, one can trade at any time of day to participate in
the market.
 There are no set limits on leverage and one can help magnify losses and profits.
5.11 SUMMARY
Financial Markets facilitate transfer of money from surplus units to deficit units to make it
productive and hence, generates more capital for the economy. The role and importance of
financial markets are not limited to just providing an avenue for the sale and purchase of
financial instruments. Price determination, mobilization of savings, ensures liquidity are
some of the functions of the financial markets. There are broadly four types of financial
markets: money markets, capital markets, debt markets and currency markets. The money
market is the market to trade in short term instruments and support the industries to
accomplish their working capital requirements by circulating short-term funds in the
economy. Capital markets are the markets for long-term securities and the funds will be used
for productive purposes and to create wealth in the economy. There is a strong positive
association between financial markets and economy of the nation. Efficient and sound
financial system channels funds to its most productive use which are beneficial for
sustainable development.
There are many ways by which money can be raised in the primary markets. The primary
markets instruments include initial public offer, private placement, private equity, rights
issue, bonus issue, disinvestment and venture capital. Merchant banks offer financial services
to wealthy individuals, corporations and underwrite securities, raise funds etc. Listing of
Companies denotes permission granted by a stock exchange to a company to trade its
particular securities on the stock exchange. It helps the company to mobilize resources from
the shareholders through for programs of expansion and modernization without depending on
the financial institutions in line with the Government policies. In order to list securities on the
stock exchange, there are certain guidelines laid out by the market regulator SEBI that a
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company is required to follow. In case the company fails to do so, then SEBI takes the action
which generally leads to delisting of the company from the stock exchange. Delisting can be
broadly classified into two types: compulsory delisting and voluntary delisting.
5.12 GLOSSARY
Business Enterprises: An enterprise in a business organization or a corporation engaged in

commercial, industrial and professional activities.
Economy: A system of inter-related production and consumption activities that determine
the allocation of resources within a group.
Financial Assets: An asset which gets its value from a contractual right or ownership claim
for example Cash, stocks, bonds, mutual funds, and bank deposits etc.
Financial Institutions: Business entities that provide services as intermediaries for different
types of financial monetary transactions.
Investor: A person or organization that puts money into financial schemes, property, etc.
with the expectation of achieving a profit.
Prospectus: A document published by a company provides details about an investment
offering to the public.
1. What are financial markets? What functions do they perform? How would an
economy be worse off without them?
2. Discuss the importance of financial intermediation in the financial system.
3. Explain why the money market is so important in the economy.
4. Discuss the differences between the Money and Capital Markets, and the types of
securities trade in those markets. Give examples.
5. What does primary markets mean? How does the company raise fund in the primary
market?
6. What do you mean by capital markets? Also, explain its types with examples.
7. What do you mean by corporate listing? What advantages do the company get by
listing its shares on the stock exchange.
8. Explain the concept and advantages of initial public offer.
9. Explain the concept and process of venture capital with examples.
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10. Why do companies have to delist its share from the stock market? What are its
implications?
11. Explain the types of delisting of corporate stocks from the stock market in detail.
12. Explain the concept and process of issue of shares through a book building process
with example.
13. Write a short note on the following:
b. Disinvestment
c. ESOPs
d. Rights Issue
e. FOREX
f. Offer for Sale
14. Distinguish between:
g. Venture capital and private equity
h. Money markets and capital markets
i. Primary markets and secondary markets
j. Private placement and preferential allotment
k. Corporate listing and delisting of corporate stocks.
l. Direct quote and indirect quote
m. Futures and forward contracts

McGraw Hill.
 https://zerodha.com/varsity/
 https://www.nseindia.com/products-services/indices-investible-weight-factors
 https://www.nseindia.com/products-services/about-etfs
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LESSON 6
TYPES OF MUTUAL FUND SCHEMES
Imaran Ahmad
Associate Professor
University of Delhi
Email-Id: Ahmad.imran367@gmail.com
STRUCTURE

6.2 Introduction
6.3 Types of Mutual Fund schemes
6.3.1 Open ended, Close ended and Interval funds
6.3.2 Domestic Funds and offshore funds
6.3.3 Growth funds, Income funds and Balanced funds
6.3.4 Equity Fund Schemes
6.3.5 Debt Fund Schemes
6.3.6 Gilt Funds
6.3.7 Money Market Mutual Funds (MMMFs)
6.3.8 Equity Linked Saving Schemes (ELSS)
6.3.9 Index Funds
6.3.10 Sectoral Funds
6.3.11 Ethical Funds
6.3.12 Load and No-load Funds
6.3.13 Fund of Funds
6.3.14 Systematic Investment Plan (SIP)
6.3.15 Systematic Withdrawal Plan (SWP)
6.3.16 Systematic Transfer Plan (STP)
6.3.17 Exchange Traded Funds (ETFs)
6.4 Multiple-Choice Questions
6.5 Answers
6.6 Summary
6.7 Glossary
6.9 References
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At the end of studying the course material, the learner will be able to:
● Understand the classification of mutual funds on the basis of operations, investment
objectives and others.
● Identify main features related to various mutual fund schemes.
● Differentiate between open-ended, close-ended and interval funds.
● Understand the concept of entry load and exit load and evaluate its impact on the
return of investors.
● Discuss the money market mutual funds and capital market mutual funds.
● Illustrate the benefits of Systematic Investment Plan (SIP)
6.2 INTRODUCTION
Mutual funds provide better return to investors at minimum risk. Mutual funds issue units to
the investors in proportion to the funds contributed by the investors. These mutual funds offer
different types of schemes on the basis of investment, operations and type of income
distribution.
Mutual fund schemes are of different types and invest in a wide range of securities. Some
invest in short term debt instruments while others in long term investments. Some invest in
equities only while others invest in combination of debt and equities.
The various Mutual fund schemes provide following benefits:
1. Regular return
2. Capital appreciation
3. Tax benefits
4. Steady flow of income
6.3 TYPES OF MUTUAL FUND SCHEMES
The schemes floated by mutual funds can be grouped into three broad categories based on
their operations, investment objectives and others. Fig 8.1 depicts the detailed classifications
of mutual funds in India.
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CLASSIFICATION OF MUTUAL FUNDS
Classification 1. Open-ended Funds

2. Close-ended Funds
By
3. Interval Funds
Operation
1. Growth Fund
2. Balanced Fund
3. Income Fund
Classification 4. Money market Fund
5. Gilt Funds
By
6. Floating Rate Funds
Investment 7. Treasury management Funds
8. High yield Debt Funds
Objectives
9. Fixed Maturity Plan
10. Monthly Income Plan
11. Sector Funds
1. Index Fund
2. Tax Saving Fund
3. Exchange Traded Fund
4. Gold ETF
5. Fund of Funds (FoF)
6. Quantitative Fund
Others 7. Assured Return Scheme
8. Arbitrage Fund
9. Load/Unload Fund
10. Lifestyle Fund
Fig 8.1: Classifications of Mutual Funds in India

Some of these schemes have been explained below:
6.3.1 Open-ended, Close-ended and Interval Funds
Open Ended Funds: Open-ended funds are available for subscription and repurchase on a
continuous basis. There is no fixed maturity. It does not specify any period of redemption.
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Investors have the option to buy and sell units at pre-determined price i.e., Net Assets Value
(NAV) which is declared on a daily basis. The NAV changes daily based on the prices of
stocks in the market. There is no limit on maximum amount the investor can invest in these
funds. The essential feature of open-ended scheme is the liquidity. They increase liquidity of
the investors as the units can be bought and sold continuously. The fund’s past performance
is available in the case of open-ended funds.
Open-ended funds do not have to be listed on the stock exchange and can also offer
repurchase soon after allotment. Investors can enter and exit the scheme any time during the
life of the fund. The corpus of fund increases or decreases, depending on the purchase or
redemption of units by investors.
Close-ended Funds: Close-ended fund is the fund where investment is locked in for a
specified period only. Investors can subscribe only during the New Fund Offer (NFO) and
redemption can take place only after the lock in period is over. After initial offering,
subsequent sale and purchase take place only in secondary market. The market prices of these
funds are determined by the market forces of demand and supply.
Close-ended schemes have a fixed corpus and a stipulated maturity period ranging between
two to three years. The NAV of close ended schemes are disclosed generally on weekly basis.
Basis Open-ended Close-ended
Buy-in- Investors can buy in or buy out at Investors can buy in only during a
period anytime limited period
Investment These are perpetual funds with no The investment tenure is between 3
tenure fixedmaturity to 5 years
Listing These are not listed on any stock They are listed on recognized stock
exchange exchange
Trading The fund houses manage the trading The units are traded on the stock
ofthe units exchanges they are listed on
No of shares No limit Limited and fixed

issued
Interval Funds: Interval funds provide the perfect mix of both close-ended funds and open-
ended funds. These funds can be listed on stock exchanges or various fund houses may allow
redemption during specified time period at on-going NAV.
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6.3.2 Domestic Funds and Off-Shore Funds

Domestic Funds: These Funds are available for subscription by investors of the country of
origin only. They mobilise funds from a particular geographical locality like a country or
region. The market is limited and confined to the boundaries of a nation in which the fund
operates. They invest only in the securities which are issued and traded in the domestic
financial markets.
Off-shore Funds: These Funds are to be subscribed abroad and provides forex to the capital
market. It is based in an offshore location. It provides investment exposure to the
international markets. They also provide some tax benefits as well. They attract foreign
capital for investment in the country of the issuing company. Such mutual funds can invest in
securities of foreign companies. They open domestic capital market to international investors.
CASE STUDY
Raghav is 31, newly married and a successful director in the Indian film industry.
Right from his struggling days, Raghav always saved a part of his income and
invested in safe instruments like fixed deposits. However, during the internet boom
in early 2000, he successfully invested in equities and mutual funds. Raghav thought
that he was always well-diversified but when the internet stock bubble burst in 2002,
he lost the majority of his stock portfolio. A major mistake he made was that even
though he was diversified, he invested only in tech stocks. Currently, Raghav suffers
from the asthma and thus he is not willing to participate in the equity market at all.
He now misses the high return that his portfolio had earned during the internet boom
days. He has come to you to seek your suggestions to help his portfolio generate
higher returns.
6.3.3 Growth Funds, Income Funds and Balanced Funds

These Funds mainly focuses on capital appreciation and also provide dividend benefits to the
investors. It is suitable for investors having medium to long term investment opportunities.
The large proportion of the fund is invested in equity and equity linked instruments. They
invest most of the corpus in equity shares with significant growth potential and offer higher
return to investors in the long run. There is no assurance or guarantee of returns. These
schemes are usually close ended and listed on stock exchanges.
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Income Funds: The funds which provide regular income in the form of dividends to the
investors is known as Income Funds. It usually invests in fixed income investments such as
bonds, debentures, government securities and commercial paper etc. These funds are less
risky whereas capital growth is less. The aim of income funds is to provide safety of
instruments and regular income to investors. The return as well as the risk are lower in
income funds as compared to growth funds.
Balanced Funds: These kinds of funds invest in both equity and debt. They provide both
capital appreciation and regular income. They divide their investment between equity shares
and fixed bearing instruments in such a proportion that the portfolio is balanced. Their
exposure to risk is moderate and they offer a decent rate of return. The portfolio usually
comprises companies with good profit and dividend track records. The NAVs of such funds
are likely to be less volatile compared to pure equity funds.
6.3.4 Equity Funds Schemes
Under these schemes, funds are invested in equity shares only. Equity securities represent
ownership claims on a company’s assets. The degree of risk under these schemes are high.
However, these funds diversify the investments in different shares of companies to reduce the
risk. Since risk is high, equity funds schemes may give high returns. These schemes may be
income schemes or growth schemes.
Equity funds are riskier compared to debt funds and they can be further classified on the basis
of their investment strategy as diversified, aggressive, growth, value and sector funds.
Example of equity funds are index funds, diversified funds, arbitrage funds, large cap funds,
small cap funds, midcap funds, sector funds and equity linked saving schemes.
Diversified Equity Funds: These funds invest in equity shares and hold a diversified equity
portfolio. Their performance is linked to the performance of the stock market. The various
categories of Diversified Equity Funds are:
a) Large cap funds: They make investments in share of big companies with market
capitalization of more than ₹1000 crore.
b) Mid cap funds: They make investments in share of companies that have a market
capitalization between ₹500 crore and ₹1000 crore. They have huge potential to grow
big.
c) Small cap funds: They invest in small companies with a market capitalisation of up
to ₹500 crore. They have ability to grow faster and potential of providing high returns.
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6.3.5 Debt Funds Schemes

Under these schemes the funds are invested in debt securities. Debt securities are financial
assets that entitle the security holder to a regular interest payment. Debt schemes are
generally income scheme. Debt funds are characterized as low risk and high liquidity
investments. Debt fund schemes may be in the form of government securities wherein the
funds are invested in government securities only. Debt funds invest in government securities,
money market instruments, corporate debt instruments and floating rate bonds. Examples of
debt funds are liquid/money market funds, income funds, gilt funds, fixed maturity plans and
floating rate funds. Debt fund schemes can be of short term or long-term period, depending
on investment horizon.
Short Term Debt Funds: These funds provide a high degree of liquidity and reasonable
returns. They invest in short term debt and money market instruments. They are primarily
made up of corporate bonds.
Long Term Debt Funds: They invest in long term government dated securities and
corporate bonds.
6.3.6 Gift Funds
Under these schemes, the funds are invested in government securities only. These funds have
low return and low risk. Risk averse investors prefer to invest in these schemes. Government
securities include central government dated securities, state government securities and
treasury bills. These schemes give better returns than direct investments in these securities
through investing in various government securities yielding differentiated returns.
SBI Magnum Gilt Fund, ICICI Prudential Gilt Fund, Axis Gilt Fund, Nippon India Gilt
Securities Fund and Edelweiss Government Securities Fund are some of the gilt funds in
India.
6.3.7 Money Market Mutual Funds (MMFs)
Under these schemes, the funds are invested in highly liquid investment instruments such as
treasury bills, certificate of deposits, commercial papers and interbank call money. They are
set up with the objective of investing in money market instruments. These fund schemes are
part of short-term pooling arrangement of funds. Low risk and moderate income are the main
features of these schemes. They do not carry either interest rate risk or entry or exit loads. It
is favourable for those who want to invest their surplus funds for shorter periods. Corporates
invest in these funds to park their short-term surplus funds.
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UTI Money Market fund, Tata Money Market funding India Liquid Fund etc are some of the
examples of these funds.
6.3.8 Tax Saving or Equity Linked Saving Schemes (ELSS)
These schemes are designed to avail tax exemptions to investors. They help individual
investor in their tax planning. They are entitled to tax benefit under Section 80C of the
Income tax Act. These are diversified schemes investing in shares of blue-chip companies.
Returns are linked to the returns of the stock market. Investment in these schemes carry a
lock in period of 3 years before the end of which funds cannot be withdrawn. They fall in
high risk and high return category. Due to fixed tenure, these funds are free from the pressure
of redemption and performance during a short time. It facilitates an opportunity to make
investments in schemes that is market linked.
Bank of India Tax Advantage Fund, Kotak Tax Saver Fund, DSP tax Saver Fund, Mirae
Asset Tax Saver Fund etc are some of the major tax saving funds in India.
6.3.9 Index Funds
These funds replicate the performance of a stock market index or a particular segment of the
stock market. The funds collected are invested in the shares forming the Stock exchange
Index. They do not actively traded stocks throughout the year. They offer many benefits to
the investors. The investor is indirectly able to invest in a portfolio of a blue-chip stock that
constitutes the index. The funds are allocated on the basis of proportionate weight of different
shares in the underlying Index. They offer diversification across a various sector. There is
low cost of management. These schemes provide moderate risk, moderate return and well
diversified portfolio. It is favourable for long term investors.
In India, an index fund reflects the major market index like NIFTY or SENSEX by investing
all the stocks that comprise in proportions equal to the weightage of those stocks in the index.
The S&P 500 index, the Russell 2000 Index and the Wilshire 5000 Total market Index are
few examples of market indexes that index funds may seek to track.
Nippon India Index S&P BSE Sensex, HDFC Index S&P BSE Sensex fund, IDFC Nifty50
Index, Tata Nifty 50 Index Fund, Motilal Oswal Nifty Midcap 150 Index Fund, UTI Nifty
200 Momentum 30 index Fund are some of the examples of index fund in India.
6.3.10 Sectoral Funds
They invest their funds to a specified segment or sector of the economy such as energy, real
estate, banking, Information technology, healthcare, FMCG etc. These funds allocate capital
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in a specified particular industry. They generate high returns if the particular sector performs
well. They focus on only one sector of the economy. They limit diversification. As these
funds do not allow diversification, the risk is more in comparison to other well diversified
portfolio. These funds are also known as Thematic Funds. It is favourable for investors who
have already decided to invest in a particular sector.
IDFC Infrastructure Fund, SBI magnum COMMA Fund, Nippon India Power and Infra Fund,
Mirae Asset great Consumer Fund, Franklin Build India Fund are some of the examples of
Sectoral fund in India.
6.3.11 Ethical Funds
Ethics is a branch of philosophy that involves systematic study of human actions from the
point of view of its rightfulness or wrongfulness. Values, norms, principles, and beliefs are
some of the tools used to showcase ethical actions.
Ethical funds restrict their investment activity to companies operating ethically. It focuses on
issues like labour treatment, employee’s relation, animal welfare, environmental issues,
manufacturing weapons etc. It caters to the investors who want to behave in a socially
responsible way.
6.3.12 Load and No-load Funds
A load fund is the one that levies a fixed percentage of NAV as entry or exit fees. A fee is
charged by the fund to meet the various expenses such as administrative, advertisement etc. A
No load fund is one which does not charge any fee during entry or exit. All transactions are
done at NAV.
Entry Load is a sales charge that the investors pay when they buy some units of a mutual fund
scheme. This charge reduces the amount of their investment in fund. It is also called as Front-
end Load or Sales Load. Schemes that do not charge a load are called ‘No Load’ schemes.
Exit Load is the amount of money that the investor needs to pay to the mutual fund
companies when intend to exit from a scheme. It is calculated as a percentage of NAV rather
than the amount invested by investors. It is also called as ‘Repurchase’ or ‘Back-end’ Load.
6.3.13 Fund of Funds
Fund of funds invests in other mutual funds and offers return to investors. It enables
diversification at two stages. The first stage is achieved by the Mutual funds which invest in
various securities and second stage results when FoFs invests in various MFs. This enables
the investors to obtain diversity in risk allocation.
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A Fund of Funds (FOF) scheme invests in a combination of equity and debt mutual fund
schemes available in the market. The fund manager changes the percentage of equity and
debt allocation based on the market view.FOF becomes useful for those who want to invest in
different MFs but do not have time or inclination to track their performance. There can be
sectoral FOFs which focus on industry or geographic sector investments.
6.3.14 Systematic Investment Plan (SIP)
A SIP is an easy and convenient way to invest money in mutual funds. An investor is
required to invest a certain pre-determined amount at a regular interval. The investor can
invest smaller amounts in instalments rather than at once. Based on the market value of
investment the mutual fund will allocate a certain number of units. The additional units are
purchased at the market rate i.e., prevailing NAV and added to the unit holder’s account. Cost
averaging and Compounding are the two benefits of investing in SIP. It is suitable for an
investor who is willing to invest regularly. It is the method of investing in a mutual fund.
SIP is the flexible method allowing investors to invest in a disciplined manner over long
term. SIP has following benefits:
a) Cost Averaging: The NAV of the mutual fund schemes is volatile. The units
available to the investor over a longer period would be based on the average NAV. If
NAV falls, an investor will get more units at lower rates and in case of increase in
prices, an investor will get lesser units. Thus, SIP may bring down the average unit
price in long run. SIP helps reducing the average cost per unit and helps an investor to
take advantage of market fluctuations and thereby reduces the risk.
b) Compounding: An investor can invest regularly at fixed interval in small amount, or
he can accumulate these small savings and invest at yearly interval. For example: He
may invest 1000 every month or 1200 at the end of the year. He continues this process
for 5 years at the rate of 10% interest. In the first case he will get more interest as
compared to the second one.
Thus, SIP is the disciplined and easy mode of investment that have the potential to deliver
attractive returns over a long term.
6.3.15 Systematic Withdrawal Plan (SWP)
It is a facility provided by a fund house to its unitholders to withdraw from the scheme on a
regular interval. It is suitable for those who wants a regular income from their investments. It
allows investors to meet their short-term goals and access their money to meet expenses. It is
available in two options:
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a) Fixed Withdrawal: fixed amount is withdrawn on monthly or quarterly basis

b) Appreciation Withdrawal: certain fixed proportion of the appreciated amount is
withdrawn on monthly or quarterly basis.
6.3.16 Systematic Transfer Plan (STP)
If the investor desires to transfer money from one scheme to another, then the plan available
is known as STP. It enables an investor to switch or transfer a fixed amount of money at
regular intervals from his fixed income scheme investments to designated equity and
balanced schemes. It is similar to SIP, except that in a SIP the investment flows from a bank
account into the fund and here it flows from one scheme to another.
6.3.17 Exchange Traded Funds (ETF)
Exchange Traded Funds (ETFs) is a basket of securities that are tradeable at a stock
exchange. They are listed on a stock exchange and are traded as any other listed security.
They are organised as unit trusts and are similar to index mutual funds but are traded more
like a stock. ETF provides investors a fund that closely tracks the performance of the index
with the ability to buy and sell on an intra-day basis. A security firm creates an ETF by
depositing a portfolio of shares in line with an Index selected. The security firm creates units
against this portfolio of shares. These units are sold to the retail investors.
ETFs are a hybrid of open-ended mutual funds and listed individual stocks. They do not sell
their shares directly to investors for cash. The shares are offered to investors over the stock
exchange.
The ETF portfolio once created does not change. In case of mutual funds, the portfolio may
change. The market value of the units of ETF changes in line with the Index automatically.
The ETFs have all the benefits of indexing such as diversification, low cost and transparency.
As the funds are listed on the exchange, costs of distribution are much lower, and the reach is
wider. They are passive index funds and due to passive fund management, these funds charge
lesser fees as compared to other funds.
ETFs offer following advantages:
1. ETFs bring the trading and real time pricing advantages of individual stocks to mutual
funds.
2. ETFs are simple to understand and hence they can attract small investors.
3. ETFs can be used to arbitrate effectively between index futures and spot index.
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4. ETFs provide the benefits of diversified index funds.

5. ETFs is passively managed and hence have higher NAV against an index fund of the
same portfolio.
6. Financial institutions can use ETFs for utilising idle cash, managing redemptions,
modifying sector allocations and hedging market exposure.
ACTIVITY
Make the comparison of Exchange Traded Fund (ETF) with Open-ended
Fund (OEF) and Close-ended Fund (CEF) on the basis of following
parameters:
1. Fund Size
2. NAV
3. Liquidity provider
4. Sale Price
5. Availability
6. Portfolio Disclosure
6.4 GOLD EXCHANGE TRADED FUNDS
Gold Exchange Traded Funds track closely the price of physical gold. These are a listed
security backed by allocated gold held in a custody of a bank on behalf of investors. Investing
in Gold ETF provides the benefit of liquidity and marketability. There are no physical gold
transactions, hence the owners of these funds do not bear any carrying cost. A gold ETF has
an underlying asset as a specific quantity of gold. The market price of gold ETF unit moves
in tandem with the price of the actual gold.
6.4.1 Multiple Choice Questions
1. SIP is a
a. Method of regular investment
b. Name of a mutual fund
c. Brand of a tea stock
d. Method of one-time investment
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2. SIP stands for

a. Systematic Investment Plan
b. Simple Investment Plan
c. Simplified Investment Programme
d. Single Investment Plan
3. The ................. is the market value of the securities that mutual funds have purchased
minus any liabilities per unit.
a. Net Asset Value
b. Book Value
c. Gross Asset value
d. Net Worth Value
4. What is an open-ended mutual fund?
a. It is the one that has an option to invest in any kind of security
b. It has units available for sale and repurchase at all times.
c. It has an upper limit on its NAV
d. It has a fixed fund size
5. In funds, the money is invested primarily in short term or very short-term instruments
e.g., T-Bills, CPs etc.
a. Growth Funds
b. Income Funds
c. Liquid Funds
d. Tax-Saving Funds (ELSS)
6. ................ ended fund are highly liquid.
a. Close
b. Open
c. Old
d. New
7. Which of the following is a risk associated with debt fund?
a. Less volatile
b. Unsafe Investment
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c. Fixed Return
d. Tax Efficient
8. Which of the following is not true for Index Funds?
a. These funds invest in the shares that constitute a specific index
b. The investment in shares is in the same proportion as in the index
c. These funds take only the overall market risk
d. These funds are not diversified
9. In which of the following do debt funds not invest?
a. Government debt instruments
b. Corporate Paper
c. Financial Institutions bonds
d. Equity of private companies
10. Investment in ...................... is best suited for investors with moderate risk appetite.
a. Large-cap funds
b. Mid cap funds
c. small cap funds
d. Multi cap funds
1. (a) 6. (b)
2. (a) 7. (3)
3. (a) 8. (3)
4. (b) 9. (3)
5. (3) 10. (3)
6.6 SUMMARY
1. Open ended schemes are those schemes where investors can redeem and buy new units
all throughout the year as per their convenience at NAV-related prices.
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2. Close ended schemes are open for subscription only for a specified period and have a
fixed corpus.
3. Equity linked saving schemes are diversified tax saving schemes with a lock-in period
of 3 years.
4. Index fund scheme means a mutual fund scheme that invests in securities in the same
proportion as an index of securities.
5. Index funds replicate the portfolio of a particular index such as the BSE Sensex or the
S&P CNX Nifty.
6. A Fund of funds scheme invests in schemes of the same mutual fund of other mutual
funds.
7. Gilt funds invest exclusively in government securities.
8. Schemes that charge a load (a percentage of NAV for entry or exit) are known as Load
Fund.
9. Exchange Traded Funds are index funds listed and traded on stock exchange.
10. Gold Exchange Traded Fund is a listed security backed by allocated gold held in a
custody of a bank on behalf of investors.
11. An investor may put in a fixed sum of money each month, over a period of time
regardless of the mutual fund’s unit price. This mode of investment is known as
Systematic Investment Plans (SIPs).
12. A Systematic withdrawal plan (SWP) enables an investor to take out money of a fund
account in a regular interval, without getting exposed to timing risk.
13. If an investor transfers a fixed amount of money or appreciation on the unit value in one
scheme to another at regular intervals for profit booking or exposure to a new asset
class, it is known as Systematic Transfer Plan.
6.7 GLOSSARY
Bond: A loan security(instrument) issued by Government or a private sector company to

raise funds. It is redeemable at maturity.
Capital Market: Financial Market in which financial assets with a term to maturity of more
than one year are traded.
Commercial paper: A type of money market instrument. It represents unsecured promissory
notes of large and financially sound companies.
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Debenture: A bond that may or may not be secured by specific property. It is written
acknowledgment of a debt.
Derivatives: Those securities which derive their value from some underlying asset
Diversification: The process of adding securities to a portfolio in order to reduce the
portfolio’s unique risk and thereby, the portfolio’s total risk.
Dividend: cash payments made to stockholders by the company.
Equity: Refers to equity shareholders’ wealth- equity share capital plus reserves and surplus.
Equity Share Capital: It is the capital other than preference share capital.
Gilt or gilt edged: refers to government securities. These are considered to be risk free and
have low yield.
Listed security: A security that is traded on an organised security exchange.
Liquidity (or marketability): The ability of investors to convert securities to cash at a price
similar to the price of the previous trade in the security.
Market risk (or Systematic Risk): The portion of a security’s total risk that is related to
moves in the market portfolio and hence cannot be diversified away.
Money market: Financial market in which financial assets with a term of maturity of one
year or less are traded.
Net Asset value: The market value of an investment company’s assets less any liabilities
divided by the number of shares outstanding.
Optimal portfolio: The feasible portfolio that offers an investor the maximum level of
satisfaction.
Risk: The uncertainty associated with the end of period value of an investment.
Secondary market: The market in which securities are traded that have been issued at some
previous point of time.
Share: the smallest part of the total share capital of a company. It has a distinctive number
and a par value.
1. Briefly explain the different types of mutual funds classified based on their operations
and investment objectives.
2. What are the types of mutual fund schemes prevalent in India? Give details.
3. What is the Systematic Investment Plan (SIP) and what are the benefits of SIP?
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4. What do you mean by entry load and exit load? How do these affect the return to
investors?
5. Distinguish between:
a. Income and Growth funds.
b. Open-ended and Close-ended funds
c. Load and No-load funds
d. Money market and capital market funds.
6. What do you mean by close-ended mutual fund? How it can be converted into an open-
ended fund?
7. Explain ETF. What are the pros and cons of ETF as compared to an open-ended mutual
fund?
8. Write short notes on the following:
a. Exchange Traded Fund
b. Net Asset value
c. Load Fund
d. ELSS
e. Ethical Fund
6.9 REFERENCES
 As per APA style (APA Manual 6th Edition to be referred)

 Marek, M. W., Chew, C. S., & Wu, W. C. V. (2021). Teacher experiences in
converting classes to distance learning in the COVID-19 pandemic. International
Journal of Distance Education Technologies (IJDET), 19(1), 89-109.
 As per APA style (APA Manual 6th Edition to be referred)

 Marek, M. W., Chew, C. S., & Wu, W. C. V. (2021). Teacher experiences in converting
classes to distance learning in the COVID-19 pandemic. International Journal of Distance
Education Technologies (IJDET), 19(1), 89-109.
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LESSON 7
CAPITAL MARKET
Ravi Yadav
Assistant Professor
Shaheed Bhagat Singh College
University of Delhi
Email-ryadav782ry@gmail.com
STRUCTURE

7.3 Security market regulations and Role of the market regulator
7.4 Capital market instruments and Services
7.11 Summary
7.12 Glossary
7.15 References/Suggested Readings
After reading this lesson, students will be able to:

● Understand the overview of the Capital Market
● Compare between Primary and Secondary Markets
● Illustrate the importance of security market regulations.
● Analyze the evolution of India's capital markets.
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● Acquaint with specific regional stock exchanges in India and international stock
exchanges.
● Describe the development of Indian Stock Indices
● Appraise the benefits and impact of demutualization.
● Evaluate the major instruments traded in stock markets.
Capital markets are financial markets where investors and businesses trade long-term debt
and equity instruments. These markets offer a platform for investors to profit from their
investments and for businesses to raise funds through the sale of securities.
The primary and secondary markets are the two main parts of the capital markets. While
existing assets are traded among investors on the secondary market, new securities are first
issued and sold to investors on the primary market.
Debt securities, like bonds, indicate a loan to a corporation, whereas equity securities, like
stocks, represent ownership in a company. These securities are bought by investors who want
to profit from their investments through capital growth, dividends, or interest payments.
Capital markets play a pivotal role in the global economy by enabling businesses to secure
vital capital, thereby driving economic growth and fostering job creation. Additionally, they
offer a variety of investment options to investors, ranging from less risky fixed-income
securities to riskier shares and alternative assets.
In general, capital markets play a crucial role in the economy by facilitating the transfer of
capital between investors and businesses and fostering the expansion and advancement of the
world economy.
7.2.1 Primary Market
New securities are first issued and sold on the primary market. The new issue market is
another name for businesses raising capital by offering their securities to retail or institutional
investors. The primary market is essential to the economy because it makes it easier for
corporations to raise capital for things like business growth and investments.
The primary market plays several significant responsibilities.
1. Capital Formation: Through the sale of new securities to the general public or
institutional investors, businesses can raise money in the primary market. The money
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raised can be put to other uses, such as research and development or corporate
expansion.
2. Price Discovery: Based on market supply and demand, corporations can determine
the price of their securities on the primary market. Companies can identify the best
price for their assets with the use of the price discovery process.
3. Investor protection: The primary market provides regulatory monitoring to make
sure that the securities provided by businesses are disclosed correctly and that
customers have access to the information they need to make informed investment
decisions.
4. Liquidity: By issuing fresh securities that can be exchanged on the secondary market,
the primary market adds liquidity to the securities market.
5. Economic growth: By providing capital for businesses to expand and add jobs, the
primary market is essential to economic growth.
In general, the primary market plays a crucial role in the operation of the capital markets and
the economy. It promotes economic expansion and development by giving businesses access
to cash while safeguarding investors and promoting a fair and open market. Here are some
common primary market instruments:
1. Initial Public Offering (IPO): An IPO is the first sale of shares by a private company
to the public. It allows the company to raise funds and become publicly traded.
Investors can purchase shares at the initial offering price.
2. Follow-on Public Offering (FPO): A follow-on public offering occurs when a
publicly traded company issues additional shares to raise capital. It enables the
company to raise funds from the public by issuing new shares.
3. Rights Issue: A rights issue is an offering of new shares to existing shareholders of a
company. It provides them with the right to purchase additional shares at a discounted
price. Companies use rights issues to raise capital from their current shareholders.
4. Private Placement: Private placement involves the sale of securities to a specific
group of investors, such as institutional investors, private equity firms, or high-net-
worth individuals. It allows companies to raise capital without going through the
public offering process.
5. Debt Issuance: Companies and governments issue debt securities in the primary
market to raise funds. Debt instruments include bonds, debentures, and notes.
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Investors who purchase these securities become creditors of the issuer and receive
periodic interest payments and the repayment of principal at maturity.
6. Preference Shares: Preference shares, also known as preferred stock, are equity
securities that provide preferential treatment to shareholders in terms of dividend
payments and asset distribution. Companies issue preference shares to raise capital
from investors who prefer a fixed dividend payout and priority in case of liquidation.
These primary market instruments serve as avenues for companies and governments to raise
capital, and investors can participate in these offerings to acquire shares or debt securities at
the initial offering price.
7.2.2 Secondary Market
The secondary market, commonly referred to as the stock market or the stock exchange, is an
area of the capital market where investors can buy and sell existing assets. The secondary
market engages in the trading of previously issued securities, such as stocks and bonds, as
opposed to the primary market, which entails the sale of fresh securities.
The secondary market fulfills several crucial functions.
1. Liquidity: By providing a platform for investors where they may readily purchase and
sell securities, the secondary market offers liquidity to investors. This makes it possible
for investors to easily and rapidly turn their assets into cash.
2. Price Discovery: Based on market demand and supply, investors can set the price of
assets on the secondary market. This ensures that investors can purchase and sell assets at
a fair price and aids in the establishment of fair pricing for securities.
3. Investment Possibilities: A variety of investment possibilities are available to investors
on the secondary market. Stocks, bonds, and mutual funds are just a few examples of the
many assets available to investors, each of which offers a distinct level of risk and
reward.
4. Capital Efficiency: By enabling investors to transfer assets from one owner to another,
the secondary market encourages capital efficiency. This lessens the need for businesses
to issue brand-new securities to obtain capital, which may be expensive and time-
consuming.
5. Corporate governance: By enabling investors to cast ballots on significant issues
including the election of directors and the approval of significant corporate activities, the
secondary market plays a crucial role in corporate governance.
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Overall, the secondary market is a crucial part of capital markets because it gives investors a
place to purchase and sell securities and makes it possible for capital to be allocated
effectively. Additionally, it encourages responsibility and transparency in corporate
governance, assisting in ensuring that businesses are answerable to their shareholders.
The Indian capital market, which comprises stock exchanges, brokers, traders, and investors
that buy and sell shares in India, includes the secondary market as a significant component.
The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), which are
overseen by the Securities and Exchange Board of India (SEBI), are the two primary stock
exchanges in India.
Recent years have seen a tremendous expansion of the Indian secondary market, making it a
desirable location for investors interested in the Indian economy. The following are some
significant aspects of the Indian secondary market:
1. Diverse Investment Opportunities: Investors can invest in a variety of securities,
including mutual funds, equities, and bonds, in the Indian secondary market. Investors
have a wide range of options, including those in the technology, healthcare, energy, and
financial services sectors.
2. Enhanced Transparency: The SEBI has put in place several regulations, such as the
need that brokers and businesses to disclose certain information, to enhance transparency
in the Indian secondary market. This has enhanced the market's overall integrity and
increased investor trust.
3. Strong Regulatory Framework: As the main regulator of the Indian secondary market,
the SEBI has put in place several safeguards to safeguard investors and guarantee honest
business practices. Additionally, the SEBI has put laws and regulations in place to stop
fraud, insider trading, and other illicit actions.
4. Participation of Retail Investors Growing: In recent years, the participation of retail
investors has grown significantly in the Indian secondary market. The availability of
inexpensive investment options, enhanced investor education, and increasing awareness
are a few reasons for this.
5. Growing Importance of Technology: With the emergence of mobile applications and
online trading platforms, the Indian secondary market has embraced technology. Investors
now find it simpler to access the market and transact in securities as a result.
Overall, the secondary market is a crucial part of capital markets because it gives investors a
place to purchase and sell securities and makes it possible for capital to be allocated
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effectively. Additionally, it encourages responsibility and transparency in corporate

governance, assisting in ensuring that businesses are answerable to their shareholders.
7.3 Security market regulations and role of the market regulator
7.3.1 Introduction:
The securities market is a crucial component of the global financial system, facilitating the
buying and selling of various financial instruments such as stocks, bonds, derivatives, and
commodities. To ensure fair and efficient operations, the securities market is subject to
regulations overseen by market regulators. In India, the securities market is regulated by
several regulatory bodies, primarily the Securities and Exchange Board of India (SEBI).
I. Importance of Security Market Regulations:
Security market regulations serve several essential purposes, including:
1. Investor Protection: Regulations aim to safeguard the interests of investors by
ensuring they have access to accurate information, preventing fraud and manipulation,
and promoting fair trading practices. By establishing disclosure requirements,
enforcing insider trading laws, and prohibiting market abuse, regulations create a
level playing field for investors and instill confidence in the market.
2. Market Integrity: Regulations are designed to maintain market integrity by
preventing illegal activities and maintaining fair and transparent trading practices.
They establish rules for market participants, such as brokers, exchanges, and listed
companies, to prevent market manipulation, insider trading, and other fraudulent
practices. By maintaining integrity, regulations help foster trust and credibility in the
market.
3. Market Stability: Regulations play a vital role in ensuring the stability of security
markets. They establish mechanisms to manage systemic risks, monitor market
activities, and prevent excessive volatility. Through measures such as circuit breakers,
margin requirements, and position limits, regulators aim to mitigate risks and
maintain market stability, thereby protecting the broader financial system.
II. The Role of Market Regulator:
A market regulator is an independent government or non-governmental organization tasked
with overseeing and enforcing security market regulations. The specific roles and
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responsibilities of market regulators may vary across jurisdictions, but they generally include
the following:
Objectives of SEBI:
SEBI has the following key objectives:
a. Protecting the interests of investors in securities.
b. Promoting the development and regulation of the securities market.
c. Regulating and supervising market intermediaries.
d. Preventing fraudulent and unfair trade practices in the securities market.
e. Promoting investor education and awareness.
Key Functions of SEBI:
SEBI performs various functions to achieve its objectives. These functions include:
a. Regulation and supervision: SEBI formulate regulations and guidelines to regulate
various segments of the securities market, such as stocks, bonds, derivatives, and
mutual funds. It also supervises market intermediaries, including stockbrokers,
depositories, and credit rating agencies.
b. Investor protection: SEBI strives to protect the interests of investors by
implementing measures to prevent fraud, insider trading, and market manipulation. It
ensures that investors receive accurate and timely information to make informed
investment decisions.
c. Market development: SEBI undertakes initiatives to develop and promote the
securities market by introducing new products, encouraging innovation, and attracting
domestic and foreign investments. It also facilitates the listing and trading of
securities on stock exchanges.
d. Enforcement and adjudication: SEBI have the authority to investigate and take
action against entities involved in market misconduct or violation of regulations. It
can impose penalties, issue warnings, and initiate legal proceedings to safeguard
market integrity.
e. Investor education and awareness: SEBI aims to enhance investor knowledge and
awareness through educational initiatives, seminars, workshops, and awareness
campaigns. It promotes financial literacy and encourages investors to make informed
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Other Regulatory Bodies:

Apart from SEBI, other regulatory bodies play a significant role in regulating specific
segments of the securities market in India. These include:
a. Reserve Bank of India (RBI): Regulates the bond market, money market
instruments, and foreign exchange transactions.
b. Insurance Regulatory and Development Authority (IRDA): Regulates the
insurance sector, including insurance companies’ investments in securities.
c. Pension Fund Regulatory and Development Authority (PFRDA): Regulates the
pension sector, including investments made by pension funds.
7.4 Capital market instruments and services
Financial goods and services that are exchanged on the capital market are referred to as
capital market instruments and services. Businesses and governments can raise long-term
cash on the capital market by selling securities to investors. Stocks, bonds, and derivatives
are the three basic categories of capital market instruments. Investors can purchase and sell
stocks, which represent ownership in a firm, on the stock market. In contrast, bonds are a type
of debt issued by governments or businesses to raise money. Financial products known as
derivatives derive their value from an underlying asset or security.
Asset management, investment banking, and brokerage are all examples of capital market
services. While investment banking services assist corporations in raising money by
underwriting securities and providing financial advice, brokerage services make it easier for
clients to acquire and sell securities on their behalf. Asset management services include
managing client investment portfolios to maximize returns and lower risks. By giving
governments and companies a way to raise long-term capital and enabling individuals to
invest their savings in a variety of financial instruments, the capital market plays a critical
role in promoting economic growth.
7.4.1 Key Market Players
The capital market is a complicated and fiercely competitive financial market comprising
several participants, each crucial to the market's operation. Issuers, investors, intermediaries,
and regulators make up the majority of market participants in the capital market. Key
participants in the capital market include stock exchanges, banks, investment banks,
brokerage houses, asset management organizations, and insurance companies. Companies can
list their securities and enable trading on stock exchanges. By advising on financial matters
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and underwriting securities, banks and investment banks assist businesses in raising
financing. Brokerage businesses aid in the purchasing and selling of securities by acting as a
middleman between buyers and sellers. Companies that manage assets for customers provide
portfolio management services to maximize returns. Investors can obtain risk management
services from insurance providers. Investor interests are protected by regulators like the
Securities and Exchange Board of India (SEBI), which keep an eye on how the capital market
operates and ensure fair and transparent trading practices. The major market participants
cooperate to ensure that the capital market operates effectively and efficiently, giving
companies and governments a way to raise long-term money and enabling investors to make
investments.
Since gaining independence in 1947, India has witnessed significant evolution and growth in
its capital markets. The journey of India's capital markets can be divided into several phases,
each marked by key reforms, regulatory changes, and market developments. Here's an
overview of the evolution of India's capital markets since independence:
1. Initial Years (1947-1980):
 The Bombay Stock Exchange (BSE) was established in 1875 and continued to
play a crucial role in India's capital market post-independence.
 In the early years, the capital markets were relatively underdeveloped, with
limited participation and regulatory oversight.
 The Industrial Policy Resolution of 1956 emphasized state control and regulated
the corporate sector, which impacted the growth of private enterprises and capital
markets.
 The Controller of Capital Issues (CCI) was established in 1947 to regulate the
issuance of securities and determine their pricing.
2. Economic Liberalization and Structural Reforms (1980s-1990s):
 In the 1980s, India embarked on a path of economic liberalization and initiated
structural reforms to open up the capital markets.
 The Securities and Exchange Board of India (SEBI) was established in 1988 as
the regulatory authority for the securities market, bringing transparency and
investor protection.
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 The process of computerization and electronic trading began in the early 1990s,
replacing the open outcry system.
 The National Stock Exchange (NSE) was established in 1992, introducing screen-
based trading and fostering competition in the market.
 The introduction of the Depository system in 1996 facilitated the electronic
settlement of trades, replacing the cumbersome physical share certificates.
3. Foreign Investment and Market Integration (2000s):
 India gradually opened its capital markets to foreign investment, attracting foreign
institutional investors (FIIs) and promoting capital inflows.
 The introduction of Foreign Institutional Investor (FII) and Qualified Foreign
Investor (QFI) routes allowed foreign investors to participate in the Indian
markets.
 The integration of Indian markets with global exchanges gained momentum with
the listing of Indian companies as American Depository Receipts (ADRs) and
Global Depository Receipts (GDRs).
 The introduction of the Derivatives segment in 2000 expanded the product
offerings and provided risk management tools to market participants.
4. Strengthening Regulatory Framework and Investor Protection (the 2010s onwards):
 SEBI implemented several reforms to strengthen the regulatory framework,
enhance transparency, and protect investor interests.
 The introduction of Real Estate Investment Trusts (REITs) and Infrastructure
Investment Trusts (InvITs) in 2014 provided avenues for investment in the real
estate and infrastructure sectors.
 The launch of the Unified Payments Interface (UPI) in 2016 revolutionized digital
payments and facilitated seamless transactions in the capital markets.
 SEBI introduced initiatives like Direct Market Access (DMA), algorithmic trading
regulations, and tightened insider trading norms to promote fair and efficient
markets.
5. Technology and Innovation (ongoing):
 The advent of technology and digitalization has transformed India's capital
markets, with online trading platforms and mobile applications making investing
accessible to a wider audience.
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 Fintech innovations, such as robo-advisory services, peer-to-peer lending

platforms, and crowdfunding, are emerging as alternative investment avenues.
 The growth of startups and the emergence of the Indian unicorn ecosystem have
also attracted investor attention, leading to increased venture capital and private
equity investments.
IN-TEXT QUESTIONS
1. Which regulatory body oversees the stock exchanges in India?
a. National Stock Exchange (NSE)
b. Bombay Stock Exchange (BSE)
c. Securities and Exchange Board of India (SEBI)
d. Reserve Bank of India (RBI)
2. Which regulatory body in India is responsible for regulating the insurance
sector?
a. SEBI b. RBI
c. IRDA d. PFRDA
3. Which of the following is an example of a primary market instrument?
a. Stock exchange b. Mutual fund
c. Initial Public Offering (IPO) d. Derivatives contract
Regional stock exchanges in India play a significant role in facilitating securities trading at a
local level and contribute to the overall development of the Indian stock market.
Regional stock exchanges are stock trading platforms that operate at a local or regional level
within specific geographical areas in India. Their primary purpose is to enable securities
trading, including stocks, bonds, and other financial instruments, within their designated
regions.
Key Characteristics:
a. Local Focus: Regional exchanges concentrate on serving investors and companies
within their specific regions, fostering local participation and economic growth.
b. Listing Requirements: They often have relaxed listing norms compared to national
exchanges, making it easier for small and medium-sized enterprises (SMEs) to get
listed.
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c. Trading Mechanisms: Regional exchanges employ various trading mechanisms,

including electronic trading platforms, traditional outcry systems, or a combination of
both.
Examples of Regional Stock Exchanges in India:
Calcutta Stock Exchange (CSE):
a. Established in 1908, the CSE is one of the oldest stock exchanges in India.
b. Located in Kolkata, West Bengal, it serves as a crucial trading platform for businesses
and investors in Eastern India.
c. CSE has played a pivotal role in promoting SME listings and fostering regional
capital formation.
Madras Stock Exchange (MSE):
a. Founded in 1937, the MSE is another prominent regional stock exchange.
b. Based in Chennai, Tamil Nadu, it serves as a vital financial market for investors and
companies in South India.
c. The MSE has historically focused on facilitating trading for small-scale and mid-scale
enterprises.
Cochin Stock Exchange (CSE):
a. Founded in 1978, the CSE operates in Kochi, Kerala, serving as a major stock
exchange in the region.
b. It has contributed significantly to the growth of the local capital market, particularly
for businesses in Kerala.
Market Size and Significance:
Regional Exchange Market Share:
a. While regional exchanges have witnessed a decline in recent years, they continue to
provide liquidity and trading opportunities to local investors.
b. Their market share is relatively smaller compared to national exchanges such as the
Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Impact on Regional Economies:
a. Regional exchanges play a vital role in supporting the economic development of their
respective regions by providing capital access to local businesses.
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b. They help generate employment, foster entrepreneurship, and contribute to the growth
of small and medium-sized enterprises.
Regulatory Changes and Challenges:
a. In recent years, regulatory changes have aimed to streamline the operations and
governance of regional stock exchanges.
Challenges such as low trading volumes, competition from national exchanges, and
technological advancements have prompted the consolidation and restructuring of some
regional exchanges
International stock exchanges play a vital role in the global financial landscape, providing
platforms for trading securities from various countries and facilitating cross-border
investment opportunities.
International stock exchanges are platforms that facilitate the trading of securities from
different countries, allowing investors to access a wide range of international investment
opportunities. These exchanges enable the listing and trading of stocks, bonds, and other
financial instruments from companies located outside their domestic jurisdiction.
Key Characteristics:
a. Global Reach: International exchanges attract listings from companies across
multiple countries, promoting global diversification for investors.
b. Regulatory Framework: They operate under the regulatory jurisdiction of the
countries where they are located and often have stringent listing requirements to
ensure investor protection and market integrity.
c. Trading Mechanisms: International exchanges utilize electronic trading systems,
allowing seamless trading across different time zones and facilitating efficient price
discovery.
Examples of International Stock Exchanges:
New York Stock Exchange (NYSE):
a. Established in 1792, the NYSE is the largest and most prestigious stock exchange
globally.
b. Located in New York City, United States, it serves as a primary platform for trading
U.S. and international stocks.
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c. The NYSE operates under the oversight of the U.S. Securities and Exchange
Commission (SEC).
London Stock Exchange (LSE):
a. Founded in 1801, the LSE is one of the oldest and most influential stock exchanges
worldwide.
b. Situated in London, United Kingdom, it is known for its diverse range of listings,
including companies from various sectors and countries.
c. The LSE operates under the regulatory framework of the UK Financial Conduct
Authority (FCA).
Tokyo Stock Exchange (TSE):
a. Established in 1878, the TSE is the primary stock exchange in Japan and one of the
largest in Asia.
b. Located in Tokyo, it serves as a major platform for trading Japanese and international
stocks.
c. The TSE operates under the supervision of the Japan Financial Services Agency
(FSA).
IN-TEXT QUESTIONS
4. What is the role of stock exchanges in the capital market?

a. Underwriting securities for corporations
b. Managing client investment portfolios
c. Facilitating the buying and selling of securities
d. Providing financial advice to investors
5. Which stock exchange played a crucial role in India's capital market post-
independence?
a. National Stock Exchange (NSE)
b. Bombay Stock Exchange (BSE)
c. Controller of Capital Issues (CCI)
d. Securities and Exchange Board of India (SEBI)
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Introduction:
Demutualization refers to the transformation of a traditional member-owned stock exchange
into a corporate entity owned by shareholders. This shift from a member-owned structure to a
shareholder-owned model brought forth a new era of efficiency and transparency in India's
capital markets.
The need for demutualization:
Up till 1990, Indian stock exchanges functioned under a system where trading rights were
restricted to members or brokers who owned and operated the exchange. This traditional
structure faced inherent limitations as a result of the control over the capital markets which
was concentrated in a few hands. The need to enhance competitiveness, improve governance,
and align with global standards necessitated a transformation. The demutualization of stock
exchanges served as a step towards this transformation, encouraging reforms and
modernization across the entire ecosystem. By separating ownership and trading rights, the
demutualization process removed conflicts of interest and paved the way for independent
decision-making, stronger regulatory oversight, and enhanced accountability.
Impact:
Demutualization fostered investor confidence and attracted domestic and foreign investments.
The transition to a shareholder-owned structure led to technological advancements, leading to
the emergence of electronic trading platforms and algorithmic trading. These developments
not only improved liquidity but also boosted market efficiency and price discovery.
From a governance standpoint- the stock exchanges implemented transparent rules and
regulations, along with increased disclosure requirements and enhanced investor protection.
As a result, retail investors gained access to better information as well as a level playing field,
enabling them to make informed investment decisions.
Simultaneously, the introduction of new trading instruments, such as futures and options,
facilitated risk management and provided investors with a broader array of investment
opportunities. Additionally, the demutualization process encouraged the establishment of
specialized exchanges, such as commodity exchanges and currency exchanges, broadening
the scope and depth of India's financial markets. In addition, the integration of trading
platforms, information sharing, and joint initiatives fostered cross-border investments and
enhanced liquidity. Indian stock exchanges gained recognition and attracted international
investors, further solidifying the country's position as a global financial hub.
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Conclusion:
The demutualization of stock exchanges in India marked a turning point in the evolution of
the country's capital markets. This transformation has successfully led to a new era of growth,
efficiency, and transparency. The stock exchanges, now owned by shareholders, have become
key drivers of economic development, providing a platform for capital formation, fostering
investor confidence, and facilitating efficient price discovery.
To monitor the performance of the stock market in India, several stock indices are employed.
The BSE Sensex and the NSE Nifty are the two indices that are most often watched.
The oldest stock market index in India is the BSE Sensex, commonly referred to as the
Bombay Stock Exchange Sensitive Index. It was established in 1986 and monitors the market
capitalization-based performance of the top 30 companies listed on the Bombay Stock
Exchange. Only shares that are available for trading on the market are taken into account
when calculating the index because it uses the free-float market capitalization methodology.
The index's base year is 1978–1979, and its base value is 100.
The top 50 businesses listed on the National Stock Exchange based on market capitalization
are tracked by the NSE Nifty, sometimes referred to as the National Stock Exchange Fifty,
which was introduced in 1996. Nifty likewise uses the free-float market capitalization
approach for calculation, just like the BSE Sensex. The index's base year is 1995, and its base
value is one thousand.
In addition to these two indices, India has several other indices that monitor the performance
of various industries and market sectors. The BSE Bankex, BSE Auto Index, BSE Healthcare
Index, Nifty IT Index, and Nifty Bank Index are a few of these indices.
These indices are calculated using a similar technique as the BSE Sensex and NSE Nifty,
which bases their calculations on the market capitalization of the stocks that make up the
index. However, depending on the index, different stocks may meet different particular
criteria for inclusion and exclusion.
Full Market Capitalization
The number of outstanding shares is multiplied by the market price of the company's shares
in this method to obtain the weighted index scripts. The index's weightage would be higher,
and its influence would be greatest for the share with the highest market capitalization.
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Market capitalization for all companies will be totaled at the end, giving the index its final
value.
The entire number of shares currently held by the company's shareholders, including shares
held by institutional investors and restricted shares owned by the company's executives and
insiders, is referred to as the number of shares outstanding. This approach is used by the S&P
500 index in the USA.
Total Market Capitalization = Number of Shares Outstanding * Share Market Price
Free Float Market Capitalization
The proportion of shares that are accessible for trading on the market is known as free float. It
does not include shares that are limited under employee stock option plans, shares that are
held by company officers and insiders, or shares that the government holds as a strategic
investment. Based on the percentage of shares that are in free float, companies included in the
index are given free float factors. From 0.05 to 1.0 is the free float range. The following steps
are used to compute the value of the index using this method:
The formula for Float-free market capitalization is = the total number of free float shares *
share market price * free float factor.
Add the Market value of every company in the index as determined by step 1's calculations.
Use the formula below to determine the index value.
Index Value is calculated as follows: Base Index Value * (Current Free Float Market
Capitalization of Index / Base Free Float Market Capitalization of Index)
Both the BSE and NSE adopt the free float market capitalization method.
Source: www.bseindia.com
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Price Weighted Index

Each stock has an impact on the index according to its share price when an index is
calculated using a price-weighted technique. By summing the values of each stock in the
index and dividing them by the total number of stocks, one can determine the index's value.
Stocks with higher prices are given more weight, which has a bigger impact on the index's
performance. This approach is used by the Dow Jones Industrial Average.
Equal Weighted Index
Using this approach will result in an equal % weighting for each stock in the index.
Therefore, each stock has an equal impact on the overall value of the index. This approach is
utilized by the Kansas City Board of Trade (KCBT).
1. Stocks (Equities): Stocks represent ownership in a company and are traded on stock
exchanges. Investors can buy and sell shares of publicly listed companies. Examples
include shares of companies such as Reliance Industries, State Bank of India, etc.
2. Derivatives: Derivatives are financial contracts whose value derives from an underlying
asset. The derivatives segment on Indian exchanges includes futures and options
contracts. Examples include Nifty 50 futures and options, stock futures, etc.
3. Commodities: The Multi Commodity Exchange (MCX) of India, National Commodity
and Derivate Exchange Limited (NCDEX) facilitates trading in commodities such as
precious metals, agricultural harvest, crude oil, commodity derivatives, etc.
4. Currencies: Indian exchanges offer trading in currency derivatives, allows investors to
trade and speculate on foreign exchange rates. Currency futures and options in India are
available in INR/X pairs where “X” are major currencies of the world such as USD,
EUR, etc.
5. Exchange Traded Funds (ETFs): Exchange-traded funds (ETFs) are investment funds
that are traded on stock exchanges, similar to individual stocks. Exchange-traded funds
(ETFs) are widely available in India and have become popular investment options
among investors. The Securities and Exchange Board of India (SEBI) regulates ETFs,
which are traded on major stock exchanges such as the National Stock Exchange (NSE)
and the Bombay Stock Exchange (BSE). Examples include NIFTYBEES (a mutual fund
that follows the Nifty 50 Index), GOLDBEES (a fund that holds various gold
instruments and tracks the price of gold)
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Before investing in an exchange-traded fund (ETF), it is crucial to consider the following

factors:
Investment Objective: Clarify your investment goals and determine how the ETF aligns
with those objectives. Decide whether you seek long-term growth, income generation,
diversification, or exposure to a specific sector or asset class.
 ETF Strategy and Index: Evaluate the ETF's investment strategy and the index it aims
to track. Understand the index's composition, methodology, and how closely the ETF
replicates its performance. Ensure that the index aligns with your investment approach
and risk tolerance.
 Expense Ratio: Review the ETF's expense ratio, which reflects the annual cost of
owning the fund. Lower expense ratios are generally preferred as they can have a
significant impact on long-term returns.
 Liquidity: Assess the liquidity of the ETF by examining its average trading volume
and bid-ask spreads. Sufficient liquidity ensures that you can buy or sell shares
without significantly affecting prices. Higher liquidity enhances trading convenience.
 Tracking Error: Understand the ETF's historical tracking error, which measures its
deviation from the index it aims to track. Lower tracking error indicates a closer
correlation with the index's performance.
 Diversification: Consider the level of diversification provided by the ETF. Evaluate
the number of holdings and the concentration of assets within the fund. A well-
diversified ETF can help mitigate risks associated with individual securities.
 Performance and Historical Data: Review the ETF's historical performance across
various periods. However, remember that past performance does not guarantee future
results. Consider historical data alongside other factors.
 Risk Factors: Assess the risks associated with the ETF, such as market volatility,
sector-specific risks, interest rate risks (applicable to bond ETFs), or geopolitical
risks. Understand the potential downsides and evaluate how they align with your risk
tolerance.
 Tax Implications: Consider the tax implications of investing in the ETF. Understand
how dividends, capital gains, and distributions are treated for tax purposes. Some
ETFs may offer more tax-efficient structures than others.
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 Prospectus and Fund Documents: Thoroughly read the ETF's prospectus and other
fund documents to gain a comprehensive understanding of its objectives, risks,
expenses, and other pertinent information. This information will facilitate an informed
investment decision.
6. Government securities: Certain government securities such as Sovereign Gold Bonds
(SGBs) and long-term government bonds, as well as treasury bills (T-bills), can be
bought and sold on exchanges.
7. Corporate debt: Companies can issue debt to the public in the form of debentures and
can be traded on exchanges.
IN-TEXT QUESTIONS
6. Which market participant is responsible for managing client investment
portfolios?
a. Stock exchanges b. Banks
c. Asset management organizations d. Insurance companies
7. An investor can sell their ETF shares:
a. Only at the end of regular market hours
b. Only through direct negotiation with the ETF issuer
c. Only through a redemption process with other investors
d. At any time during market hours like a stock
8. ETFs have much lower expense ratio than traditional mutual funds. True
or False?
7.11 Summary
The text provides an overview of various aspects related to the capital market and securities
market in India. It begins by introducing the Securities and Exchange Board of India (SEBI)
as the principal regulatory agency governing the Indian securities market. SEBI's goals
include safeguarding investor interests, promoting market growth, regulating intermediaries,
preventing fraud, and enhancing investor education. The concept of the capital market is then
explained, highlighting the trading of long-term debt and equity instruments between
investors and businesses. Primary markets are described as the issuance of new securities to
raise capital, while secondary markets facilitate the trading of existing securities. Debt
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securities, such as bonds, and equity securities, such as stocks, are explained in terms of loans
to corporations and ownership in companies, respectively. The importance of capital markets
in capital formation, economic growth, and providing investment options is emphasized. The
text further explores primary and secondary markets, noting their roles in capital formation,
price discovery, investor protection, liquidity, and economic growth. Common primary
market instruments are outlined, including IPOs, FPOs, rights issues, private placements, debt
issuances, and preference shares. Secondary markets, represented by stock exchanges, are
highlighted for providing liquidity, price discovery, investment opportunities, and
contributing to corporate governance. The Indian secondary market is characterized by
diverse investment opportunities, transparency, a strong regulatory framework, retail investor
participation, and technological advancements. The text concludes by explaining the types of
instruments traded on Indian exchanges, such as stocks, derivatives, commodities, currencies,
and ETFs, which offer diversification and liquidity.
7.12 Glossary
Demutualization of Exchanges- the transformation of a traditional member-owned stock

exchange into a corporate entity owned by shareholders.
Derivatives: Derivatives are financial contracts whose value derives from an underlying
asset.
Diversification: The process of adding securities to a portfolio to reduce the portfolio’s
unique risk and thereby, the portfolio’s total risk.
Equity: Equity represents ownership in a company and is traded on stock exchanges.
Equity Share Capital: It is capital other than preference share capital.
Exchange Traded Funds (ETFs): Exchange-traded funds (ETFs) are investment funds that
are traded on stock exchanges, similar to individual stocks.
Free Float Market Capitalization- The proportion of shares that are accessible for trading
on the market is known as free float.
Listed security: A security that is traded on an organized security exchange.
Secondary market: commonly referred to as the stock market or the stock exchange, is an
area of the capital market where investors can buy and sell existing assets.
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1. C) SEBI
2. C) IRDA
3. C) IPO
4. C)Facilitating the buying and selling of securities
5. B) BSE
6. C) Asset management organizations
7. D) At any time during market hours like a stock
8. A) True
1. What is a capital market? How does it aid economic growth? What are the functions
of the capital market?
2. Compare and contrast the primary market and the secondary market in terms of their
purpose, participants, and activities.
3. Discuss the key participants in the secondary market and their roles, including
investors, brokers, market makers, and regulatory bodies.
4. What are the services provided by a stock exchange? What are the distinctive features
of stock markets in India?
5. What is the concept of demutualization in the context of stock exchanges? Explain the
transition from a mutual organization to a demutualized exchange.
6. Describe the role and significance of international stock exchanges in the global
financial system.
7. Discuss how international stock exchanges facilitate cross-border capital flows and
enhance global market integration.
8. Compare and contrast the market capitalization-weighted index methodology with
other alternative weighting schemes, such as price-weighted indices and equal-
weighted indices. Analyze the advantages and limitations of each approach.
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7.15 REFERENCES/ SUGGESTED READINGS

McGraw Hill.
 https://zerodha.com/varsity/
 https://www.nseindia.com/products-services/indices-investible-weight-factors
 https://www.nseindia.com/products-services/about-etfs
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LESSON 8
TRANDING MECHANISM ON EXCHANGES
Dr. Sharif Mohd.
Email-Id: smohd2991@gmail.com
STRUCTURE

8.2 Introduction
8.3 Trading Mechanism on the Stock Exchanges
8.3.1 Types of Securities
8.3.2 Types of Delivery
8.3.3 Margin and Margin Trading
8.3.4 Book Closure and Record Date
8.3.5 Trend Line and Trading Volume
8.4 Clearing and Settlement Procedure in the Stock Exchanges
8.4.1 Trading
8.4.2 Clearing
8.4.3 Settlement
8.4.4 Rolling Settlement
8.5 NSE: Trading and Settlement
8.5.1 Settlement & Clearing of Equities
8.6 Summary
8.7 Glossary
8.8 Answers to In-text Questions
8.10 References
Stock exchanges are used as an indicator of a country's economic health. It is the capital
market's most active and well-organized segment, especially in developing nations like India.
The students will be able to comprehend various stock exchange, stock exchange operations,
trading and settlement at the NSE, clearing mechanisms, and settlement of equities after
completing this lesson.
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8.2 INTRODUCTION
The markets where the buying and selling of securities takes place are called stock
exchanges. A secondary market is one where securities are exchanged that have already
undergone an initial public offering (IPO) in the primary market and were made available to
the public. These securities must be listed there in order to be traded on the stock exchange.
Most trading takes place on the secondary market. Both the debt and equity markets make up
the secondary market. The secondary market offers the average investor an effective platform
for trading his assets. Investors are given the chance to sell their shares whenever they need
to.
The Board of Directors or Council of Management, which is made up of elected brokers and
government and public representatives selected by SEBI, supervises the operation of the
stock exchanges. The boards of stock exchanges have the authority to enact and uphold rules,
bylaws, and regulations that apply to all of its participants. People who are financially stable
and have the necessary experience or knowledge in the stock market are typically granted
membership in stock exchanges. They must pay an annual fee to SEBI, who controls and
regulates their membership enrolment. A "broker" is a stock exchange participant who is
authorised to act both on behalf of and in his own name. Only through members may a non-
member transact in securities. A broker may also use a sub-broker, whom he may designate
as part of the registration process.
8.3 TRADING MECHANISM ON THE STOCK EXCHANGES
The stock exchanges are important institutions that facilitate the issuance and selling of
various securities. Every area of the capital market activity revolves on it. People with
savings would be unlikely to invest in corporate securities without the stock exchange
because there wouldn't be any liquidity for them (buying and selling facility). As a result,
public corporate investments would have been less.
Thus, stock exchanges serve as a marketplace for the purchase and sale of securities while
also providing their liquidity for the benefit of investors. The stock markets serve as the
capital market's hub and are a good indicator of how the country's economy is doing overall.
In the stock market, investors and traders use their brokers to connect to the exchanges and
place buy or sell orders there. Based on their company's position, market value, and
significance, a group of 50 NSE stocks and 30 BSE stocks are chosen to be included in a
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weighted formula that calculates the index's "worth." The National Stock Exchange, or NSE,
is India's top stock exchange. The world's fourth largest, it (based on equity trading volume).
It was the first stock exchange in India to offer a screen-based trading system, and it is
situated in Mumbai. The NSE was originally created with the intention of bringing
transparency to the Indian market system and it ultimately succeeded in meeting its
objectives pretty successfully. The NSE successfully provides services including trading,
clearing, and the settlement in debt and stocks to domestic and foreign investors with the
assistance of the government. Compared to the NSE, the Bombay Stock Exchange is much
older. Asia's first stock exchange was there. The BSE is the fastest stock exchange in the
world, with trades being completed in under 6 microseconds.
In the stock market, securities are traded using the settlement basis, spot basis, and cash basis
methods.
"Cash" shares or "B" category shares are the names given to shares of companies that aren't
on the spot list. They can only be traded on a cash basis or a delivery basis; settlement basis is
not an option. In the case of cash basis trading, the actual delivery of securities and payment
must be made on or before the specified settlement date.
For spot trading, the actual delivery of the securities to the buying broker must occur within
48 hours after the contract. On receipt of the securities, the buyer is anticipated to pay the
seller promptly. Any security may be traded on a spot basis or a cash basis, regardless of
whether it is on the specified list or the cash list.
8.3.1 Types of Securities
Securities that are traded on stock exchanges can be categorised as follows:
(1) Listed cleared Securities: Also known as securities that have been played by the Board on
the list of cleared securities and have been permitted for trading on the exchange after
meeting all listing conditions.
(2) Authorized Securities: When the stock exchanges where they are not listed permit them to
be traded, the securities listed on certain of the recognised stock exchanges are referred to
as permitted securities. If appropriate clauses are present in the stock exchanges'
regulations, this licence will be granted.
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ACTIVITY
Due to the large number of companies listed on stock exchanges, it is quite difficult
to monitor every stock and evaluate the market performance simultaneously. As a
result, stock exchange indexes are useful in determining the worth of a particular
sector of the stock exchange. Majorly Sensex, also called BSE 30 and NSE Nifty or
NIFTY 50 are the market indexes where well-established and financially sound
companies are listed, you’re needed. You must visit the BSE and NSE websites and
review their performance over the previous ten years.
8.3.2 Types of Delivery

Spot delivery, hand delivery, and special delivery are some types of deliveries at stock
exchanges. When securities must be delivered and paid for on the same day or the following
day, the delivery is referred to as spot delivery. If the delivery and payment are to be made on
the delivery date established by the stock exchange authorities, the delivery is considered to
have been done by hand.
A special delivery is one that must take place after the time frame set by the stock exchange
authorities for delivery.
8.3.3 Margin and Margin Trading
A margin is a portion of the value of a stock transaction that is paid in advance. how much
credit a broker or lender gives a consumer to buy stocks.
In order to reduce speculative trading in shares that causes price volatility in securities, SEBI
established margin trading.
In this sense, "initial margin" refers to the minimal sum that the client must deposit with the
broker prior to making the actual purchase. It is computed as a percentage of the transaction
value. The balance money may be advanced by the broker in order to fulfil all settlement
requirements.
The term "maintenance margin" refers to the minimal sum that a client must have on deposit
with the broker and is determined as a percentage of the market value of the assets based on
the closing price of the previous trading day.
The broker must initiate margin calls right away if the amount deposit in the client's margin
account is less than the necessary maintenance margin. However, the client cannot be given
any further exposure based on a rise in the market value of the securities.
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If the client doesn't deposit the checks the day after the day the margin call was issued,
doesn't satisfy the margin calls the broker has made, or if the check has been returned unpaid,
the broker may liquidate the securities.
The brokers may also sell the securities if, during the time between making the margin call
and receiving payment from the client, the customer's deposit in the margin account (after
subtracting mark-to-market losses) is 30% or less of the securities' most recent market value.
On or before 12 Noon the following day, the broker must provide the stock exchange with
information regarding gross exposure, including the name of the client, unique identification
number, name of the scrip, and, if the broker has borrowed money in order to provide margin
trading facilities, the name of the lender and the amount borrowed.
The market is informed by stock exchanges of the scripwise gross outstanding in margin
accounts with all brokers. Next the close of business the following day, the website will make
these disclosures about margin trading conducted on any given day accessible.
Margin trading therefore serves as a check on clients' propensity to manipulate markets by
placing orders with brokers without having enough funds or securities to support the
transactions transaction. Trading on margin will also put a stop to short sales and short
purchases. The decrease in the aforementioned consumer tendencies lowers price volatility on
the stock exchange and gives regular investors stability.
8.3.4 Book Closure and Record Date
Book closure is the routine closing of the company's membership register and transfer books
in order to keep track of the shareholders' entitlement to dividends, bonuses, right shares, and
other share-related rights. Record date refers to the day that a company's books are closed in
order to identify the stockholders who should receive dividends, proxies, etc. Book closure is
required in order to pay dividends and create rights or bonus issues. At least seven days
before to the start of the book closure, the registered company must publish a notice of it in a
newspaper. The participants whose names are listed in the registry members as of the final
day of book closure are eligible to receive dividend, right, or bonus share benefits, as
appropriate.
8.3.5 Trend Line and Trading Volume
A price line is regarded as established when share prices move consistently in one direction
over an extended period of time. The trend is referred to as BULLISH when it moves upward
and BEARISH when it moves downward. A bear market is a weak or declining market where
sellers predominate. In contrast, a bull market is a market that is rising with lots of buyers and
few sellers.
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Reactions are secondary movements that momentarily revert the upward trend. Rallies are
movements that momentarily revert the downward trend. It is referred to as a trend reversal
when an upward trend shifts downward.
Trading volume determines whether a price increase or decrease is in line with the general
trend. In the same way that high trading volume is based on rising prices, it is also associated
with falling prices. They represent, respectively, BULLISH and BEARISH trends.
The amount of BULLISH interest in various scrips is indicated by their net turnover and
outstanding positions, which are combined with trading volume to determine the intensity of
the phase, whether BULLISH or BEARISH. The daily turnover of important stocks will
significantly increase during BULL phases, whereas BEAR phases will see the opposite.
IN-TEXT QUESTIONS
8. Which of these is a stock exchanges function?
a. The function of an economic barometer
b. Securities valuation
c. Promoting savings and investments
d. All of the above
9. What quantity of companies make up the Sensex (Stock Exchange SensitiveIndex)?
a. 20 b. 30 c. 50 d. 100
10. With margin trading, you can purchase securities with ....................... money.
a. lending b. borrowing c. spending d. avoiding the situation and
11. Based on what? NIFTY and SENSEX are calculated.
a. Free-Float capitalization
b. Market capitalization,
c. Authorised share Capital
d. Paid-up capital
12. The exchange rate between two currencies is known as
the spotexchange rate.
a. For delivery later
b. For delivery in the future at a specific location
c. For prompt delivery
d. None of the preceding
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8.4 CLEARING AND SETTLEMENT PROCEDURE IN THE STOCK

EXCHANGE
There are always buyers and sellers in the stock market. Thus, another trader sells the shares
when someone purchases a certain number of them. Only after the buyer receives the shares
and the seller receives payment is this transaction considered settled. A secondary market
transaction happens in three stages:
Let's examine the procedure in greater detail.
Figure 8.1: Three phases of a secondary market transaction (source: Author Complied)
8.4.1 Trading
Shares in a specific company are purchased and sold during stock trading. There are
numerous trades going on at once in the stock market. An electronic order matching system is
used by the stock exchanges to match "buy" and "sell" orders from various traders. Each
trade is carried out in this way. Take stock "X" as an example, which is trading on the stock
exchange. For this stock, the buy and sell orders are as follows:
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Figure 8.2: Buy and sell matching system in stock exchanges (source: Author Complied)
Here, the priciest buy prices are compared to the cheapest sell prices that are currently
offered, and whenever the buy price is less than or equal to the best sell price that is currently
offered, a match is made. This is known as market depth and naturally depends on the various
quantities that are available for both buys and sells.
Therefore, even though a particular price might result in a match, the buy order will still not
be fully traded if there is not enough quantity available at the seller side at that price.
The brokerages that gather orders from various investors and transmit them to the stock
exchanges, most likely the two most well-known exchanges in India — the Bombay Stock
Exchange and the National Stock Exchange, and the Bombay Stock Exchange (NSE).
Brokerages serve as a middleman in this process between the investor and the stock
exchange.
Figure 8.3: The procedure for trading in stock exchanges (source: Author Complied)
 Creating a Demat Account: A demat account needs to be opened by the investor.
Because the securities will be kept in the demat account, this will happen.
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 Choice of Broker: Only authorised brokers may be used by investors to purchase or

sell securities. The broker through whom the trades will be placed must be chosen by
the investor.
 Obtaining a Special Client Number: Each investor has a special ID. Through this
ID, the trades are tracked. The depository provides this client ID.
 Entering the Scrip's ISIN: Each security has a distinct 12-digit ISIN of its own. It
serves as the security's identification number. When placing the trade, the investor
must include the ISIN of the security.
 Placing of the Order: Investors must confirm their orders for the securities they wish
to purchase or sell.
 Finishing the Contract Note: The broker sends the client a contract notes for each
trade.
 Trading Transaction Settlement: The settlement process involves both parties. In a
purchase transaction, money is paid, and the security is obtained; in a sale transaction,
the opposite occurs. The BSE and NSE settlement occur on T+2 days, or two working
days following the transaction days.
8.4.2 Clearing
The clearing procedure starts after a trade is executed and two orders match. Identification of
the security that belongs to the buyer and the amount that belongs to the seller is known as
clearing. 'Clearing houses' oversee the entire process. These are separate organisations. But in
the actual market environment, traders frequently engage in multiple transactions. The
clearing house thus recognises all transactions and determines the net sum or net securities
owed to the trader.
8.4.3 Settlement
The importance of acting is to satisfy the financial commitments noted in the clearing step.
This includes settling the transaction for the buyers and sellers. Therefore, the transaction is
complete once the buyer receives the security, and the seller receives the money. You will
encounter two different types of settlements when investing in equity, and they are as
follows:
 Spot settling: The rolling settlement principle of T+2 is immediately followed by this
type of settlement.
 In-front settlement: When you agree to settle the trade at a later time—which could
be T+5 or T+7—this settlement is applicable.
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8.4.4 Rolling Settlement

In a rolling settlement, the trade is settled over the course of several days. With this type of
settlement, trades are concluded after the second working day after being settled in T+2 days.
This period does not include Sunday, Saturday, bank holidays, or exchange holidays. A trade
will therefore be closed on a Thursday if it is made on a Tuesday. Similar to this, if you
purchase shares of stock on Friday, you must pay the broker on that day, but the shares will
be credited to your account the following Tuesday. On the day your trades are settled, you are
regarded as the shareholder of record. The equity settlement day is crucial for dividend-
seeking investors. If the purchaser desires to collect a profit before the record date in order to
settle the trade and receive a dividend from the company.
All intervening holidays, such as bank holidays, exchange holidays, Saturdays, and Sundays,
are disregarded when calculating the settlement day. Trades made on Monday are typically
settled on Wednesday, those made on Tuesday are typically settled on Thursday, and so forth.
All open positions at the end of the day must automatically result in payment or delivery 'n'
days later under rolling settlement. Rolling settlement trades are currently settled on a T+2
basis, where T is the trade day. For instance, a trade made on Monday must be settled by
Wednesday (considering two working days from the trade day).
There is no difference for intraday traders due to rolling settlement. There would be no
change for institutional investors, who are already prohibited from competing. For small-
scale investors who take leveraged positions over the course of one night or more that roll
over settlement. T+2 days are used for the pay-in and pay-out of funds and securities.
The day that sellers deliver sold securities to the exchange and buyers make funds for
purchased securities available to the exchange is known as pay-in day. On pay-out day, the
exchange delivers the securities purchased to the buyers and gives the sellers the money for
the securities sold. Currently, the pay-in and pay-out occur on the second working day
following the execution of the trade on the exchange, or T+2 rolling settlement.
When a business announces a record date or book closure, for that security, the exchange
establishes a no-delivery period. Only trading in the security is allowed during this time.
These trades, however, are only finalised after the no-delivery period has passed. To make
sure that the investor's entitlement to the corporate benefit is identified clearly, this is done.
The exchange puts securities up for auction when a trading member fails to deliver securities
on the pay-in day. This guarantees that the securities are received by the buying trading
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member. The Exchange gives the purchasing trading member the necessary quantity that it
has purchased in the auction market.
Table 8.1: Settlement Cycle for Rolling Settlement (Source: www.icsi.edu)
Trading Rolling settlement T
Clearing Custodial confirmation and delivery generation T+1 working days
Settlement Securities and funds pay-in and pay-out T+2 working days
Post settlement Auction T+3 working days
Bad delivery reporting T+4 working days
Auction settlement T+5 working days
Rectified bad delivery pay-in and pay-out T+6 working days
Re-bad delivery reporting and pick up T+8 working days
CASE STUDY
Impact of Index Futures Trading on Spot Market: A case study of India Sathya
Swaroop Debasish conducted study on the effect of futures trading on the underlying
Indian stock market's volatility and operational efficiency in 2009 using a sample of
specially selected individual stocks. The study specifically investigates whether trading
in Indian index futures has significantly changed the spot price volatility of the
underlying stocks and how trading in Indian index futures has impacted market/trading
efficiency. An extensive time frame from June 1995 to May 2009 is used to examine
the impact of the introduction of futures trading. In order to determine whether the
introduction of index futures trading has significantly changed the volatility and
efficiency of stock returns, this study employed an event study methodology. The
research contrasts before and after futures trading are implemented in the stock indices,
spot price volatility varies. He found an association between reduction spot price
volatility and decreased trading efficiency in the underlying stock market following the
introduction of Nifty index futures trading in India. The findings of his study appear to
suggest that, at least in the short term, there is a trade-off between the benefits and
expenses related to the introduction of derivatives trading. For the purpose of market
stabilisation, the market would have to pay a certain price, such as a reduction in
market efficiency. He goes on to say that an ideal derivatives market policy would be
one that would maintain market stability without impairing market efficiency in the
underlying spot market.
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IN-TEXT QUESTIONS
13. Which of the following could cause a stock market to suddenly lose value?
a. Terrorist attack
b. Major corporation declaring bankruptcy worldwide recession.
d. All of the above
14. Which system is used to settle cash market transactions in the current environment?
a. T day b. T+1
c. T+5 d. T+2
15. Who handles stock market securities transfers electronically?
a. RBI, b. Depositories,
c. Clearing Agencies, d. SEBI,
16. The phrase "Bulls and Bears" is related to
a. Speculator b. Import and Export
c. Banking d. Marketing
17. Which of the following is the mode of settlement of securities where in the transfer
of securities and funds happen simultaneously?
a. Delivery versus Payment (DvP),
b. Clearing Corporation of India Ltd. (CCIL)
c. None of the listed options
d. All of the Above
8.5 NSE: TRADING AND SETTLEMENT
Fully automated screen-based trading was made available by NSE for the first time in India.
It employs a cutting-edge, fully computerised trading system created to provide investors
with a secure and convenient way to invest across the country. The National Exchange for
Automated Trading (NEAT) system used by the NSE is a fully automated screen-based
trading system that adheres to the idea of an order-driven market.
The National Securities Clearing Corporation Limited (NSCCL), a wholly owned subsidiary
of the National Stock Exchange of India Limited, is responsible for clearing and settling
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trades made on the NSE's capital market platform. This company promptly completes the
settlement without postponement or delay. It functions. on behalf of the clearing participants
from and to Mumbai's central clearing centres and regional clearing centres. Through the
automated system of the clearing corporation, it was the first organisation to begin pre-
delivery verification to find bad papers like fake or forged certificates or lost and stolen share
certificates. A facility is offered to lend/borrow securities and money at market- determined
rates, allowing for the efficient and on-time delivery of securities. This corporation provides
clearing and settlement services for other exchanges in addition to Index Futures. It is
affiliated with National Securities Depository Limited (NSDL) and Central Depositories
Services (India) Limited (CDSL).
On a netted basis, rolling segment trades are cleared and settled. The Exchange/Clearing
Corporation occasionally specifies trading and settlement times. At the conclusion of each
trading period, the deals that were completed are netted, and the settlement obligations for
that settlement period are calculated. It is decided to use a multilateral netting procedure to
calculate the net settlement obligations.
In a rolling settlement, each trading day is regarded as a separate trading period, and trades
are netted to determine the day's net obligations. Settlement obligations result from every
deal, including trade-for-trade and limited physical market transactions, which are settled on
a trade-for-trade basis.
Figure 8.4: Trading and settlement process on NSE (Source: https://www.edelweiss.in)

 1: Trading information from Exchange to NSCCL (real-time and end of day trade
file).
 2: The NSCCL notifies the clearing members/custodians who have returned the form
of the details of the completed trade. NSCCL applies multilateral netting and
establishes obligations based on the affirmation.
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 3: Downloading of the obligation and payment-in advice of funds/assets.

 4: Directing clearing banks to release funds by the pay-in deadline.
 5: Directing depository institutions to make securities available through pay-in- time.
 6: Pay-in of securities (NSCCL advises depository to credit its account and debit the
pool account of custodians/CMs and depository follows this advice).
 7: Funds are paid in (NSCCL advises clearing banks to credit their accounts and debit
the custodians'/CMs' accounts)
 8: Security payout (NSCCL suggests depository join credit pool) debit its account and
the depository does it on behalf of custodians/CMs)
 9: Funds are paid out (NSCCL advises clearing banks to credit custodians'/CMs'
accounts and debit their accounts.
 10: Through DPs, the Depository notifies the Custodians/CMs.
 11: Custodians/CMs are informed by clearing banks.
8.5.1 Settlement & Clearing of Equities
According to the settlement cycles of various sub-segments in the Equities segment, NSCCL
performs clearing and settlement duties. The clearing corporation's clearing function aims to
determine what counter parties owe and what on the settlement date, counter parties are
expected to receive. Settlement is a two-way process in which title to funds, securities, or
other assets is legally transferred on the settlement date.
Additionally, NSCCL has developed a system to deal with a number of exceptional
circumstances, such as security gaps, problematic deliveries, business objections, and auction
outcomes. Eight clearing banks have been appointed by NSCCL to offer banking services to
trading members, and connectivity with both depositories has been established for electronic
settlement of securities. The clearing process of determining obligations, followed by
settlement to discharge those obligations.
Trading members and custodians are the two different types of clearing members in the
NSCCL. If the custodians confirm the obligation to NSCCL, the trading members may
transfer it to them. All trades whose obligations the trading member proposes to transfer to
the custodian are sent, for confirmation, to the custodian by NSCCL. The custodian must
confirm these trades on a basis of T + 1 days.
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When the aforementioned tasks are finished, NSCCL begins performing its clearing function.
The obligations of counter parties are determined using the multilateral netting concept. A
clearing member would therefore have separate pay-in and pay-out obligations for funds and
securities. In order for members to fulfil their obligations on the settlement day (T+2), their
pay-in and pay-out obligations for funds and securities are therefore determined at the latest
by T + 1 day and forwarded to them.
The following sub-segments of the Equities segment are served by NSCCL for the clearing
and settlement of trades:
 All trades carried out in the Rolling/Book entry segment.
 Each and every transaction made in the Limited Physical Market segment.
IN-TEXT QUESTIONS
11. Which of the following factors causes changes in the Sensex?
a. Fiscal policy b. Monetary policy
c. Instability in politics d. All of the above
12. The main responsibilities of NSCCL are risk management and trade clearing and
settlement.
a. Untrue b. True
13. Who settles trades made on the NSE?
a. NSDL b. Members clearing
c. SEBI d. NSCCL
14. Who transfers the securities that are available in the members' accounts to the
NSCCL?
a. Clearing banks b. Custodians
c. cleaning members d. Depositories
15. What entity coordinates the funds settlement between Clearing Members and
NSCCL?
a. Clearing banks b. Depositories
c. Cleaning members d. NSE
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8.6 SUMMARY
The stock exchange is a vital institution that makes it easier to issue and sell different kinds
of securities. Every aspect of the capital market activity revolves around it. People with
savings would be unlikely to invest in corporate securities without the stock exchange
because there wouldn't be any liquidity for them (buying and selling facility). As a result,
public corporate investments would have been less. There are two types of securities traded
on stock exchanges: listed cleared securities and permitted securities. Settlement is the
process of netting transactions, actual delivery of securities and transfer deeds, and payments
of the agreed upon amount. The National Stock Exchange of India Limited's wholly owned
subsidiary, National Securities Clearing Corporation Limited, was established to carries out
clearing and settlement of trades made on the National Stock Exchange's capital market. The
BOLT and NEAT systems are now used by the member-brokers at BSE &NSE to enter
orders to buy or sell securities from Trader Work Stations (TWSs). Thus, stock exchanges
serve as a marketplace for the purchase and sale of securities while also ensuring their
liquidity for the benefit of investors.
8.7 GLOSSARY
Trend Line: when share prices move consistently in one direction over an extended period of
time.
Margin: A margin is a portion of the value of a stock transaction that is paid in advance
Bear Market: A weak or falling market characterized by the dominance of sellers.
Bull Market: A rising market with abundance of buyers and relatively few sellers.
Cash Market: A market for sale of security against immediate delivery, as opposed to the
futures market.
Clearing: Settlement or clearance of accounts, for a fixed period in a Stock Exchange.
Daily Margin: The amount that has to be deposited at the Stock Exchange on a daily basis
for the purchase or sale of a security. This amount is decided by the stock exchange.
Jobber: Member brokers of a stock exchange who specialize, by giving two-way quotations,
in buying and selling of securities from and to fellow members. Jobbers do not have any
direct contact with the public, but they serve the useful function of imparting liquidity to the
market.
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Spot Delivery: If the delivery of and payment for securities are to be made on the same day
or the next day.
Algorithmic Trading: With the increasing trend amongst capital market players of
generating orders through automated execution logic.
Settlement: To fulfil the financial obligations identified in the clearing step. This involves
the transaction settlement for the buyers and sellers.
8.8 ANSWERS TO IN-TEXT QUESTIONS
1. All of the above 9. Speculator

2. 30 10. Delivery versus Payment (DvP)
3. Borrowing 11. All of the above
4. Free-Float capitalization 12. TRUE
5. For prompt delivery 13. NSCCL
6. All of the above 14. Depositories
7. T + 2 15. Clearing Banks
8. Depositories
1. Which organisations participate in clearing and settlement? List the steps taken in the
settlement process and explain any two.
2. How do transaction cycles work? Explain with the help of a diagram,
3. Discuss the rolling settlement process for the settlement of securities.
4. Discuss the framework for borrowing and lending securities.
5. What is rolling settlement? How are trades cleared and settled in the stock market?
8.10 REFERENCES
 H. R. Machiraju (2009). The Working of Stock Exchanges in India (3rd ed.). New
Delhi New Age International.
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 Dhankar, R.S. (2019). Clearance and Settlement Process in Capital Markets and
Investment Decision Making., New Delhi, Springer, Retrieved from,
https://doi.org/10.1007/978-81-322- 3748-8_2.
 ICSI (2017). Capital Markets and Securities Laws, Retrieved from, www.icsi.edu.
 H. R. Machiraju (2009). The Working of Stock Exchanges in India (3rd ed.) New
Delhi, New Age International.
 Vanita Tripathi and Neeti Panwar (2019) Investing In Stock Markets (4th ed.). New
Delhi, Taxmann Publications.
 Rustagi, R.P. (2021). Investment Management: Theory & Practice. New Delhi, Sultan
Chand & Sons
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LESSON 9
MONEY MARKET AND DEBT MARKET
Monika Saini
Assistant Professor
P.G.D.A.V. College(M)
Email-Id: monikasaini@pgdav.du.ac.in
STRUCTURE

9.2 Introduction
9.3 Money Market: Meaning, Role, and Participants in money markets.
9.3.1 Meaning of Money Market
9.3.3 Role of Money Market
9.4.3 Participants in Money Markets
9.4 Segments of Money Markets
9.5 Call Money Markets
9.6 Repo and Reverse Repo
9.7 Treasury Bill Markets
9.8 Certificate of Deposit
9.9 Commercial Paper
9.10 Debt Market: Introduction and Meaning
9.11 Primary Market for Corporate Securities in India
9.12 Issue of Corporate Securities
9.13 Secondary market for government/debt securities (NDS-OM)
9.14 Auction process
9.15 Corporate Bonds and Government Bonds
9.16 Retail Participation in Money and Debt Market-RBI Retail Direct platform
9.17 Evaluation of Debt Market in India
9.18 Summary
9.19 Glossary
9.22 References
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After reading this chapter the students should be able to:

 Understand the concept of money market.
 Develop the understanding of different segments and participants in the money
market.
 Evaluate the importance of various instruments of money market.
 Enhance the knowledge of debt market.
 Understand primary and secondary markets for corporate, government and debt
securities.
 Differentiate between government and corporate bonds.
 Analyse the importance of retail participation in Money and Debt Market
9.2 INTRODUCTION
Financial system also known as financial sector is very crucial for the economic development
of any economy. The financial sector of a country includes financial institutions, financial
markets, financial instruments, and financial services. The financial system or financial sector
also consists of the procedures and practices adopted in the financial markets. Financial
markets can be organised or unorganised. Financial market is a platform or a marketplace
where sale and purchase of assets like, bonds, stocks, derivatives, commodities, and foreign
exchange take places. Broadly, we can categorise these markets in following types:
 Stock Market
 Bond or Debt Market
 Commodities Market
 Derivatives Market
In recent years, financial markets are growingly impacted by financial innovations, modern
technologies, Fintech, expansion of domestic markets in global world and steps taken by
regulators to make financial markets work in transparent and efficient manner.
The most important role of any financial system is to mobilise the savings of corporates,
individuals, or government in the form of monetary funds or assets and invest them in
productive channels. These financial transactions are facilitated by financial intermediaries.
These intermediaries can be Capital Market intermediaries and Money Market intermediaries.
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Figure 9.1: Role of Financial Markets
People with excess available Funds People with Shortage
Facilitates
Transfer of
Funds
9.3 MONEY MARKET: MEANING, ROLE, AND PARTICIPANTS IN

MONEY MARKETS
Money Market and Capital Market are the two categories of financial markets. Both these
markets help in transfer of monetary assets to businessmen and producers. The main
difference between these markets is based on period of instruments used. Capital market is a
market of long-term instruments, as it deals in long term claims i.e., maturity period of more
than one year. Money market is a market of short-term instruments which deals in short term
claims of maturity period of less than one year.
According to Shri Deepak Mohanty, Executive Director, RBI (2012), “Money Market can be
defined as a market for short term funds with maturities ranging from overnight to one year
and includes financial instruments that are considered to be close substitutes of money.”
The primary role of the money market is to provide a source of short-term funding to banks,
corporations, and governments. Participants in the money market include banks, corporations,
governments, and other financial institutions. They use the money market to borrow or lend
funds for a short period, usually less than one year, to meet their short-term funding needs.
Banks are the most active participants in the money market as they use it to manage their
daily liquidity requirements. Governments use the money market to fund their short-term
deficits and manage their cash flow needs. Corporations use the money market to finance
their short-term working capital needs or to invest excess funds. Other financial institutions
like mutual funds, insurance companies, and pension funds also participate in the money
market to earn short-term returns on their investments.
9.3.1 Meaning of Money Market
The money market refers to a financial market where short-term financial instruments with
high liquidity are traded. These instruments include treasury bills, commercial papers,
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certificates of deposit, and other securities with maturities of one year or less. The money
market plays a crucial role in the overall financial system as it provides a platform for short-
term borrowing and lending. It helps in maintaining liquidity in the financial system and
promotes efficient allocation of funds. The interest rates in the money market are used as a
benchmark for other short-term interest rates, which influences the cost of borrowing and
lending in the broader economy. Two important segments of Money Market are: Organised
sector and unorganised sector. In unorganised market, the transactions are more informal and
less structured. They are outside the ambit of regulatory framework. These transactions do
not take place at well- structured exchanges. On the other hand, organised market’s
transactions include inter-bank transactions and transactions between organised and
structured institutes like insurance companies, mutual funds etc.
Figure 9.2 Structure of Indian Money Market

Before the setup of Reserve Bank of India, Indian Money market was mainly unorganised
and un-developed. Large part of the money market was controlled by the government.
Reserve bank of India and Securities and Exchange Board of India are the important
regulators in the Indian Money Market. Some of the major reforms in the money market
includes, borrowing of the government at prevailing market rates, pegging of interest rates to
Bank Rate. For the development of money market, Reserve Bank of India formulated a
working group, chaired by Shri Narayanan Vaghul in September 1986. The group
recommended-
 Introduction of new negotiable instruments
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 Rates and Prices to be decided by market forces and not administered.

 Increase the participants in the money market.
 Setting up of autonomous public limited company, which would deal in money
market instruments.
Following table highlights the major developments in the money market in India.
Table 9.1: Major Developments in Money Market since the 1990s
YEAR DEVELOPMENT
April, 1997 Ad hoc treasury bills were abolished
June, 2000 Adoption of Full-fledged LAF (Liquidity Adjustment Facility)
2003 Introduction of CBLO (collateralized borrowing and lending obligation)

for corporate and non-bank participants
October, 2004 Minimum maturity period of CP (Commercial Papers) was shortened
April, 2005 Prudential limits on exposure of banks and PDs to call/notice market and
maturity of CD (Certificates of Deposit) was gradually shortened.
August, 2005 Call money market was transformed into pure inter-bank market
April, 2007 State Government securities were made eligible for LAF operations
March, 2010 Repo allowed in Corporate Bonds
July, 2010 Reporting platform for secondary market transactions in CPs and CDs
were operationalized.
November, Screen based negotiated system for dealing in call/notice and term
2012 money markets was operationalized in 2006 and reporting of such
transactions were made compulsory through NDS-CALL in November
2012.
Source: Reserve Bank of India
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9.3.2 Role of Money Market

The money market plays a crucial role in the overall financial system. Some of the important
roles of the money market are:
1. Source of short-term funding: Money market is a market for short term funds. The
money market provides a source of short-term funding to banks, corporations, and
governments. It allows them to borrow funds for a short period, usually less than one
year, to meet their short-term funding needs.
2. Maintaining liquidity: The financial instruments in money market can be easily
converted into cash. The money market helps in maintaining liquidity in the financial
system. Participants can easily buy or sell short-term securities in the money market
to meet their cash flow needs. This promotes efficient allocation of funds and helps in
stabilizing the financial system.
3. Benchmark for interest rates: The interest rates in the money market are used as a
benchmark for other short-term interest rates. It influences the cost of borrowing and
lending in the broader economy. Therefore, the money market plays a critical role in
setting interest rates in the economy.
4. Risk management: The money market provides participants with an opportunity to
manage their short-term cash positions and risk. By investing in short-term securities
with low credit and market risk, participants can manage their risk and earn a return
on their investments.
5. Investment opportunities: The money market provides an opportunity for investors
to earn short-term returns on their investments. Participants can invest in low-risk and
liquid securities like treasury bills, commercial papers, and certificates of deposit to
earn short-term returns.
9.3.3 Participants in Money Markets
The participants in the money market are diverse, and they include banks, corporations,
governments, other financial institutions, non-financial institutions, and individuals. They use
the market to manage their short-term funding needs, invest excess funds, earn short-term
returns, and manage risk.
1. Banks: Banks are the most active participants in the money market. They use the
market to borrow funds for a short-term period to manage their daily liquidity needs.
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2. Corporations: Corporations participate in the money market to finance their short-

term working capital needs or to invest excess funds.
3. Governments: Governments use the money market to fund their short-term deficits
and manage their cash flow needs.
4. Other financial institutions: Other financial institutions like mutual funds, insurance
companies, and pension funds also participate in the money market to earn short-term
returns on their investments.
5. Non-financial institutions: non-financial institutions like companies, municipalities,
and state governments also participate in the money market to borrow or lend funds
for a short-term period.
6. Individuals: High net worth individuals can also participate in the money market by
investing in money market funds, which are mutual funds that invest in short-term
securities.
9.4 SEGMENTS OF MONEY MARKETS

Money Market in India can be divided into two parts:
1. Organised Segment
2. Unorganised Segment
Organised Segment: The organised segment consists of commercial and other banks, non-
banking financial institutions and cooperative societies. Inter-Bank Loan Market is also a part
of organised segment of money market. These intermediaries have extended their operations
in rural India as well to help and facilitate agricultural activities.
Characteristics of organised money market are:
1. Commercial banks dominate the organised money market. Their operations are
regulated by the Reserve Bank of India.
2. It is governed by complex rules and rigid procedures which may lead to non-
fulfilment of requirements of borrowers.
3. Due to low rate of interest on deposits, there is shortage of loanable funds.
Unorganised Segment: The unorganised segment of money market includes money lenders,
Nidhis, Chit Funds and Indigenous bankers. They lent money to those borrowers who cannot
borrow from the organised segment of money market. This market is characterised by
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informal terms and conditions, high interest rates for borrowers and flexible procedures. The
size of unorganised sector is not easy to estimate due to lack of data and proper reporting.
This segment is unstructured segment and over a period, the need of this sector is decreasing.
IN-TEXT QUESTIONS
13. The ____________ market refers to the market where short-term debt securities
are issued and traded.
14. Commercial paper is an example of a ____________ term debt instrument.
9.5 CALL MONEY MARKET

Call Money Market is a segment of the money market where funds are borrowed or lent
on an overnight basis, meaning for duration of one day. The call money market is an
interbank market where banks borrow and lend funds to each other to manage their short-
term liquidity needs.
In the call money market, banks can borrow or lend funds for a period of one day, but the
transaction can be rolled over if required. The interest rate in the call money market is
generally low and fluctuates based on the demand and supply of funds.
The call money market is an important component of the money market as it allows banks
to manage their daily liquidity needs efficiently. Banks may need to borrow funds on an
overnight basis to meet their daily cash reserve requirements or to fund unexpected
payment obligations. On the other hand, banks with excess cash can lend their funds on an
overnight basis to earn a small return on their investment.
The Reserve Bank of India (RBI) plays a crucial role in regulating the call money market
in India. The RBI sets the liquidity framework and interest rates in the market to maintain
stability and ensure the smooth functioning of the financial system.
9.6 REPO AND REVERSE REPO
Repurchase agreements (Repos) and Reverse Repurchase agreements (Reverse Repos) are
financial instruments that are commonly used in the money market.
A Repo is an agreement between two parties where one party sells a security to the other
party with an agreement to repurchase the security at a specified price and date in the future.
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In other words, it is a short-term borrowing arrangement where the seller of the security
agrees to buy it back later, usually within a few days to a few weeks. The buyer of the
security provides funds to the seller in exchange for the security, and the funds are typically
invested in other short-term instruments.
Reverse Repo is the opposite of a Repo. In a Reverse Repo, one party purchases a security
from another party with an agreement to sell it back at a specified price and date in the future.
In this case, the buyer of the security provides funds to the seller, and the seller provides the
security as collateral. The seller agrees to buy back the security later, usually within a few
days to a few weeks, and the buyer earns interest on the funds provided.
Repos and Reverse Repos are used by banks, corporations, and governments to manage their
short-term liquidity needs. For example, a bank may use a Repo to borrow funds to meet its
daily liquidity requirements, while a corporation may use a Reverse Repo to earn interest on
its excess funds.
The interest rates in the Repo and Reverse Repo markets are influenced by factors such as the
demand and supply of funds and the prevailing interest rates in the broader economy. The
rates in the Repo and Reverse Repo markets also serve as a benchmark for other short-term
interest rates in the economy.
Repo and Reverse Repo transactions are commonly used in money markets to manage short-
term liquidity needs and are often used by central banks to implement monetary policy.
9.7 TREASURY BILLS MARKET
Treasury Bills (T-bills) are short-term debt securities issued by the government to finance its
short-term borrowing needs. T-bills are sold at a discount to their face value, and the
difference between the purchase price and the face value represents the interest earned by the
investor.
The Treasury bill market is a segment of the money market where T-bills are traded between
investors, including banks, corporations, and individuals. T-bills are issued with maturities
ranging from a few days to 52 weeks, and investors can buy them in denominations as low as
Rs. 1000.
The T-bill market is highly liquid, and investors can buy or sell T-bills on any business day.
The price of T-bills is determined by demand and supply of funds in the market, and the
interest rates in the T-bill market are closely watched by investors as they reflect the
prevailing short-term interest rates in the economy.
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The Reserve Bank of India (RBI) conducts regular auctions of T-bills to raise funds on behalf
of the government. The RBI sets the minimum price at which it is willing to sell T-bills and
investors bid for the T-bills at a discount to the face value. The bids with the lowest yield are
accepted, and investors receive the T-bills at the discounted price.
Investors in the T-bill market include banks, mutual funds, insurance companies, and
individuals. Banks and other financial institutions use T-bills to manage their short-term
liquidity needs, while individuals and corporations use T-bills as a safe and secure investment
option with low credit risk.
14 days T-Bills are issued at discount, and we can
calculate yield on these bills with the help of DO YOU KNOW?
following formula: What are the various websites
that give information on G-Secs?
RBI financial market watch -
https://rbi.org.in/scripts/financialm
where; arketswatch.aspx
Y= Yield on T-Bill This website offers links to
FV= Face Value of the Bill information about G-Sec pricing on
the NDS-OM, money market, and
P= Purchase Price other G-Sec information like
outstanding shares, etc.
m=Maturity period.
Following can participate in auctions of 14 days and 91 days TBs on non-

competitive basis.
1. Any person
2. Firm
3. Company or Corporate Body
4. Institutions
5. State Governments
6. Non- Government Provident funds which are regulated by PF Act, 1925
and Miscellaneous Provisions Act, 1952
9.8 CERTIFICATE OF DEPOSIT
A Certificate of Deposit is a time deposit issued by banks, financial institutions, and other
authorized dealers. It is a promissory note issued at a discount to face value and has a fixed
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maturity date, usually ranging from 1 month to 1 year. CDs are considered a safe and low-
risk investment option as they are insured by the Deposit Insurance and Credit Guarantee
Corporation of India (DICGC) up to Rs. 5 lakhs per depositor per bank.
For example, if a bank issues a 6-month CD with a face value of Rs. 1 lakh and an interest
rate of 6%. An investor can purchase this CD at a discounted price of Rs. 97,000, and at
maturity, the investor will receive Rs. 1 lakh, earning an interest of Rs. 3,000.
9.9 COMMERCIAL PAPER
Commercial Paper, on the other hand, is an unsecured promissory note issued by corporations
to raise short-term funds from the money market. CPs have a maturity period ranging from 7
days to 1 year and are usually issued by high credit-rated companies. The interest rate on CPs
is determined by market conditions and the creditworthiness of the issuer.
For example, let's say a company issues a 90-day CP with a face value of Rs. 10 lakhs and an
interest rate of 6%. An investor can purchase this CP at face value and at maturity, the
investor will receive Rs. 10 lakhs, earning an interest of Rs. 15,000.
CDs and CPs are both considered low-risk investment options as they are issued by credit-
worthy institutions, have short-term maturities, and are highly liquid. They are often used by
investors, including banks, mutual funds, and corporations, to park their short-term funds and
earn a relatively higher interest rate than traditional savings accounts or fixed deposits.
Note: Click on the link to see Do’s and Don’ts for dealing in G-Securities:
https://www.rbi.org.in/Scripts/FAQView.aspx?Id=79#BOX1
9.10 DEBT MARKET: INTRODUCTION AND MEANING
The debt market refers to the market where debt securities are bought and sold. Debt
securities are financial instruments that represent a loan made by an investor to a borrower,
such as a government or a corporation. These securities include bonds, notes, and bills, and
they typically have a fixed interest rate and a maturity date. The debt market is an important
source of financing for governments and corporations, and it provides investors with a way to
earn a fixed income.
Two categories of Indian Debt Market can be:
1. Government Securities Market
2. Bond Market
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9.11 PRIMARY MARKET FOR CORPORATE SECURITIES IN INDIA
The primary market for corporate securities in India is where companies issue new securities
to raise funds from investors for the first time. The primary market is an important source of
capital for companies and allows them to expand their business, undertake new projects, and
meet their working capital requirements.
In India, the primary market for corporate securities is regulated by the Securities and
Exchange Board of India (SEBI) and the Companies Act, 2013. Companies can raise funds
from the primary market through Initial Public Offerings (IPOs), Follow-on Public Offerings
(FPOs), and Rights Issues.
The primary market for corporate securities in India is the market where new securities are
issued by companies to raise capital. The primary market is an important source of funding
for companies and provides investors with an opportunity to invest in new securities. The
Securities and Exchange Board of India (SEBI) regulates the primary market and ensures that
companies comply with the rules and regulations related to the issuance of securities. The
types of securities that can be issued in the primary market include equity shares, preference
shares, debentures, and bonds. The primary market is also known as the new issue market.
IPOs are the most common way for companies to raise funds from the primary market. In an
IPO, the company issues new shares to the public and raises capital for the first time. The
shares are offered at a price determined through a book building process or through a fixed-
price mechanism.
Follow-on Public Offerings (FPOs) are similar to IPOs, except that they are offered by
companies that are already listed on the stock exchange. FPOs allow companies to raise
additional capital from the market by issuing new shares to the public.
Rights Issues are another way for companies to raise funds from the primary market. In a
Rights Issue, the company offers existing shareholders the right to purchase additional shares
at a discounted price. This allows companies to raise funds without diluting the ownership of
existing shareholders.
Investors in the primary market include institutional investors such as mutual funds,
insurance companies, and banks, as well as retail investors. Retail investors can apply for
shares in an IPO or FPO through the book-building process or through the online application
process provided by brokers.
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9.12 ISSUE OF CORPORATE SECURITIES
The issue of corporate securities refers to the process by which companies raise funds from
the market by issuing securities such as equity shares, preference shares, debentures, and
bonds. The issue of corporate securities is an important source of funding for companies and
allows them to raise capital for various purposes such as expansion, acquisition, and debt
refinancing. Investors can participate in the issue of corporate securities through the primary
market and earn returns by investing in securities that have the potential to appreciate over
time.
The process of issuing securities involves several steps and is regulated by securities market
regulators such as the Securities and Exchange Board of India (SEBI) in India.
The process of issuing corporate securities typically involves the following steps:
1. Appointment of intermediaries: Companies appoint intermediaries such as
investment bankers, underwriters, and lead managers to manage the issue and ensure
compliance with regulations.
2. Due diligence: The intermediaries conduct due diligence to ensure that all legal and
regulatory requirements are met and that the financial statements and disclosures are
accurate and complete.
3. Pricing: The intermediaries determine the pricing of the securities based on market
conditions, demand, and supply. The pricing can be determined through a book
building process or a fixed price mechanism.
4. Registration with regulators: The Company registers the securities with regulators
such as SEBI and files a prospectus or offer document with the Registrar of
Companies (RoC) for public disclosure.
5. Public offer: The securities are offered to the public through an Initial Public
Offering (IPO), Follow-on Public Offering (FPO), or Rights Issue.
6. Allotment and listing: The securities are allotted to investors who have applied for
them and are then listed on the stock exchange for trading.
9.13 SECONDARY MARKET FOR GOVERNMENT/DEBT

SECURITIES (NDS-OM)
The secondary market for government/debt securities in India is regulated by the Reserve
Bank of India (RBI) and operates through a platform called the Negotiated Dealing System-
Order Matching (NDS-OM). The NDS-OM is an electronic platform that facilitates the
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trading of government securities, treasury bills, and other debt securities issued by
government and corporate entities.
The secondary market for government/debt securities plays an important role in the economy
as it allows investors to buy and sell securities after they have been issued in the primary
market. This provides investors with liquidity and enables them to manage their portfolios by
buying and selling securities as per their investment strategy.
The NDS-OM platform operates on a quote-driven system, where market participants such as
banks, primary dealers, and institutional investors can place bids and offers for securities. The
system matches bids and offers based on the price and quantity and execute trades
automatically.
The secondary market for government/debt securities also allows investors to trade in
derivatives such as interest rate swaps, forwards, and options. These derivatives allow
investors to manage their interest rate risk and hedge against adverse market movements.
The RBI regulates the secondary market for government/debt securities through various
measures such as setting the policy rates, conducting open market operations, and regulating
the participation of market participants. The RBI also issues guidelines for the settlement of
trades, which is done through the Clearing Corporation of India Ltd. (CCIL).
The secondary market for government/debt securities in India operates through the NDS-OM
platform, which facilitates the trading of government securities, treasury bills, and other debt
securities issued by government and corporate entities. The market provides investors with
liquidity and enables them to manage their portfolios. The RBI regulates the market through
various measures to ensure its smooth functioning.
Figure 9.3: National Stock Exchange’s Negotiated Trade Reporting Platform

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9.14 AUCTION PROCESS
Auctions are an important mechanism used by the government and corporate entities to issue
securities in the primary market. The auction process involves the issuance of securities
through a competitive bidding process, where investors submit their bids for a specified
quantity of securities at a certain price. Let's take an example of a treasury bill auction in
India to understand the process in detail.
The Treasury bills auction in India is conducted by the Reserve Bank of India (RBI) on
behalf of the Government of India. The auction process for treasury bills involves the
following steps:
1. Announcement of auction: The RBI announces the auction date and the details of the
treasury bills to be issued. This includes the maturity date, the auction date, the
minimum amount to be bid, and the cut-off yield.
2. Submission of bids: The eligible participants such as banks, primary dealers, and
institutional investors submit their bids electronically through the RBI's electronic
platform called the E-Kuber.
3. Review of bids: The RBI reviews the bids and determines the cut-off yield, which is
the highest yield at which all the bids are accepted.
4. Allotment of securities: The RBI allots the securities to the successful bidders at the
cut-off yield. Bidders who bid at a higher yield than the cut-off yield do not receive
any allotment.
Let's take an example to illustrate the auction process. Suppose the Government of India
wants to issue a 91-day treasury bill worth Rs. 10,000 crores. The RBI announces the auction
date, and the details of the treasury bill as follows:
● Auction date: 1st May 2023
● Maturity date: 1st August 2023
● Minimum amount to be bid: Rs. 1 crore
● Cut-off yield: 4.50%
On the auction date, eligible participants submit their bids electronically through the E-Kuber
platform. The RBI reviews the bids and determines the cut-off yield to be 4.50%. The
securities are then allotted to the successful bidders at the cut-off yield. Suppose the total bids
received for the treasury bill are Rs. 20,000 crores. The RBI would allot the securities to the
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successful bidders at the cut-off yield of 4.50%, up to the amount of Rs. 10,000 crores.
Bidders who bid at a higher yield than 4.50% would not receive any allotment.
IN-TEXT QUESTIONS
1. Treasury bills are issued by the ____________.
2. The interest rate charged by banks for short-term loans to each other is known as
the ____________ rate.
9.15 CORPORATE BONDS AND GOVERNMENT BONDS
Corporate bonds and government bonds are both types of debt securities issued by companies
and governments in India to raise funds. However, there are some key differences between
these two types of bonds.
Government bonds, also known as sovereign bonds, are issued by the central and state
governments in India to fund their operations and various developmental projects. These
bonds are less risky than corporate bonds because they are backed by the full faith and credit
of the government. As a result, government bonds typically offer lower yields than corporate
bonds.
Corporate bonds, on the other hand, are issued by companies in India to finance their
operations, expand their businesses, or undertake other investment activities. These bonds are
generally considered to be riskier than government bonds because they are not guaranteed by
the government and are subject to the creditworthiness of the issuing company. As a result,
corporate bonds typically offer higher yields than government bonds to compensate for the
additional risk.
In India, both government and corporate bonds can be traded on the stock exchange and
purchased by investors. The Reserve Bank of India (RBI) regulates the issuance and trading
of both types of bonds.
Investors in India can choose to invest in government bonds or corporate bonds depending on
their investment objectives, risk tolerance, and financial goals. Government bonds are
generally considered to be safer investments, while corporate bonds offer the potential for
higher returns but come with higher risks. It's important for investors to carefully evaluate
their options and assess the risk-reward trade-off before investing in either type of bond.
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9.16 RETAIL PARTICIPATION IN MONEY AND DEBT MARKET-

RBI RETAIL DIRECT
The RBI Retail Direct platform is an initiative by the Reserve Bank of India (RBI) to
encourage retail participation in the government securities and money market instruments.
The platform was launched in January 2021 and allows retail investors to invest in treasury
bills, government bonds, and other money market instruments directly from the RBI.
Before the launch of RBI Retail Direct, retail investors could only invest in government
securities through mutual funds or exchange-traded funds. The RBI Retail Direct platform
eliminates the need for intermediaries and allows investors to invest directly in government
securities at the prevailing market prices.
Fig 9.4: RBI Retail Direct Platform

To invest in government securities through the RBI Retail Direct platform, investors must
have a bank account with a bank that is a member of the RBI's core banking solution (CBS)
network. Investors can register on the platform by providing their PAN and other KYC
details. Once registered, investors can place their bids for government securities and money
market instruments through the platform.
The minimum investment amount on the platform is Rs. 10,000, and investors can invest in
multiples of Rs. 1,000 thereafter. The platform also provides investors with the flexibility to
invest in government securities with different maturities, ranging from 91 days to 40 years.
Retail participation in the money and debt market through the RBI Retail Direct platform is
expected to increase as it provides a transparent and efficient mechanism for retail investors
to invest in government securities. The platform also provides investors with an opportunity
to diversify their investment portfolio and earn competitive returns.
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The Reserve Bank of India (RBI) has introduced the RBI Retail Direct platform to enable
retail investors to invest in government securities (G-Secs) and treasury bills (T-bills)
directly. This platform is a part of the RBI's efforts to deepen the bond market in India and
promote retail participation in the debt market.
The RBI Retail Direct platform is an online platform that allows retail investors to invest in
government securities and treasury bills in a convenient and hassle-free manner. Retail
investors can access the platform through the RBI's website and invest in G-Secs and T-bills
using their savings bank account.
Some key features of the RBI Retail Direct platform are:
1. Minimum investment: Retail investors can invest in G-Secs and T-bills with a
minimum investment of Rs. 10,000.
2. Online access: The platform is available online, and investors can invest and manage
their investments from the comfort of their homes.
3. Competitive yields: The RBI offers competitive yields on G-Secs and T-bills,
providing investors with a safe and attractive investment option.
4. Direct investment: The platform allows retail investors to invest directly in G-Secs
and T-bills, eliminating the need for intermediaries such as brokers and mutual funds.
5. Secure and transparent: The platform is secure and transparent, with all transactions
being recorded and tracked on the platform.
9.17 EVALUATION OF DEBT MARKET IN INDIA
The debt market in India has seen significant growth and development in recent years. Here
are some key points to evaluate the debt market in India:
1. Size and growth: The size of the debt market in India has grown significantly over
the years, with the outstanding amount of corporate bonds and government securities
standing at around Rs. 90 trillion as of 2021. The debt market has also seen a growth
in the number of issuers and investors.
2. Diversification: The debt market in India is diverse, offering various instruments
such as government securities, corporate bonds, commercial papers, certificates of
deposits, and more. This diversification has attracted a wide range of investors, from
retail investors to institutional investors.
3. Regulatory framework: The regulatory framework for the debt market in India has
been strengthened over the years, with the Securities and Exchange Board of India
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(SEBI) and the Reserve Bank of India (RBI) playing an important role in regulating
the market. This has improved investor confidence and brought transparency to the
market.
4. Liquidity: The liquidity in the debt market in India has improved, with the
introduction of electronic trading platforms such as NDS-OM and the National Stock
Exchange (NSE). This has made it easier for investors to buy and sell debt
instruments and has improved the market's efficiency.
5. Credit rating: The credit rating system in India has improved, with agencies such as
CRISIL, ICRA, and CARE providing investors with reliable credit ratings of issuers.
This has helped investors make informed investment decisions and has reduced the
credit risk associated with investing in debt instruments.
IN-TEXT QUESTIONS
True/False
5. Money market securities have longer maturities compared to debt market
securities.
6. Money market instruments are highly liquid and have low default risk.
7. Treasury bonds are examples of money market instruments.
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9.18 SUMMARY
A bond is a type of financial instrument in which an investor lends money to a borrower,

generally a corporation or government, who then borrows the money for a certain length of
time at a fixed or variable interest rate. Companies, communities, states, and sovereign
governments can raise money by selling bonds to support a range of initiatives and
endeavours. Owners of bonds are the issuer's creditors or debt holders.
The Indian money and debt market plays a crucial role in the country's financial system,
providing a platform for various participants to borrow, lend, and invest in short-term and
long-term debt instruments. It encompasses a wide range of financial instruments and serves
as a vital component of India's overall capital market.
The money market in India consists of both organized and unorganized sectors. The
organized sector comprises various institutions such as the Reserve Bank of India (RBI),
commercial banks, non-banking financial companies (NBFCs), and primary dealers. These
institutions facilitate the borrowing and lending of funds for short periods, typically up to one
year. Prominent money market instruments include Treasury Bills (T-Bills), commercial
paper, certificates of deposit, and repurchase agreements (repos).
Treasury Bills, issued by the Government of India, are short-term debt instruments with
maturities ranging from 91 days to 364 days. They are highly liquid and serve as a means for
the government to manage its short-term borrowing requirements. Commercial paper is
another widely used money market instrument that enables corporations to raise short-term
funds directly from investors. Certificates of deposit (CDs) are issued by banks and financial
institutions to raise funds from individuals and corporate investors for specified periods.
On the other hand, the Indian debt market focuses on long-term debt instruments and
government securities. It provides a platform for companies, financial institutions, and the
government to raise funds for longer durations. The debt market includes corporate bonds,
government bonds, debentures, and other fixed-income instruments. These instruments are
traded in the primary market and the secondary market, allowing investors to buy, sell, or
hold them based on their investment objectives.
The Indian debt market has witnessed significant growth in recent years, driven by various
reforms and initiatives by regulatory bodies like the Securities and Exchange Board of India
(SEBI) and the RBI. Efforts to deepen the debt market, improve market infrastructure,
enhance transparency, and promote investor participation have led to increased liquidity and
efficiency in the market.
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Investors in the Indian money and debt market include institutional investors, such as banks,
insurance companies, mutual funds, and pension funds, as well as individual retail investors.
These participants engage in the market to earn returns on their investments, manage
liquidity, and diversify their portfolios.
Overall, the Indian money and debt market is a dynamic and evolving ecosystem that plays a
vital role in channelling funds between borrowers and lenders, facilitating efficient capital
allocation, and contributing to the overall economic growth of the country. Continuous efforts
to develop and strengthen this market are crucial to ensure its effectiveness, liquidity, and
stability, benefiting both market participants and the broader economy.
9.19 GLOSSARY
● E-Kuber: E-Kuber is an electronic platform introduced by the Reserve Bank of India

(RBI) for the centralized accounting and settlement of government securities. It is an
online system that facilitates the issuance, auction, settlement, and management of
government securities in India. E-Kuber provides a secure and efficient platform for
various participants, including the RBI, commercial banks, primary dealers, and
institutional investors, to conduct transactions and maintain records related to
government securities. It aims to streamline the process of government debt
management and enhance transparency and efficiency in the Indian debt market.
● RBI Retail Direct Scheme: Retail Direct Scheme is a one-stop solution to facilitate
investment in Government Securities by individual investors. Under this scheme
individual retail investors can open a Gilt Securities Account – “Retail Direct Gilt
(RDG)” account with RBI. Using this account, retail investors can buy and sell
government securities through the online portal – https://rbiretaildirect.org.in.
● STRIPS: Separate Trading of Registered Interest and Principal of Securities, refers to
securities that are formed by separating the cash flows associated with a conventional
G-Sec. These cash flows include the semi-annual coupon payments and the final
principal payment received from the issuer. Essentially, STRIPS are Zero Coupon
Bonds (ZCBs) but are created by dividing existing securities. It's important to note that
STRIPS differ from other securities in that they are not issued through auctions.
● Primary Dealers: Financial institutions authorized by the RBI to participate in the
primary market for government securities. Primary dealers act as market makers,
helping in the distribution and underwriting of government securities.
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● Credit Rating Agencies: Independent agencies that assess the creditworthiness of debt
issuers and assign ratings based on their analysis. These ratings provide an indication of
the issuer's ability to meet its financial obligations and help investors in making
9.20 ANSWERS TO IN-TEXT QUESTIONS
1. Money 9. False
2. Short 6. True
3. Government 7. False
4. Interbank
1. An investor is interested in investing in Indian government securities. What are the

different types of government securities available in the Indian debt market, and what
factors should the investor consider while making an investment decision?
2. For its working capital needs, a business organisation must raise short-term financing.
Describe the procedure and alternatives the organisation must raise money through the
Indian money market.
3. A bank wants to engage in the Indian money market since it has extra liquidity. Identify
the many money market instruments that are accessible to the bank and the variables
that it should consider when choosing the best instrument for investment.
4. A government treasury department wants to manage its short-term cash flows
efficiently. Outline the role of Treasury Bills (T-Bills) in the Indian money market and
how they can be used for liquidity management by the government.
5. An individual wants to invest in fixed income securities with regular income and low
risk. Compare the features and benefits of investing in bank fixed deposits, post office
schemes, and government securities in the Indian context.
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9.22 REFERENCES
 Association, A. S. (july 2017). India's Debt Market: The way forward.

 India, T. C. (2023). CCIL Debt Market Quarterly.
 India, T. I. (n.d.). Money Market Operations.
 Natarajan, E. G. (2016). Financial Markets and Services. Mumbai: Himalaya
Publishing House Pvt. Ltd.
 Schou-Zibell, S. W. (2008). India’s Bond Market—Developments and Challenges
Ahead. WORKING PAPER SERIES ON REGIONAL ECONOMIC INTEGRATION
NO. 22.
 Financial Markets and Institutions - L. M. Bhole

 The Economics of Money, Banking and Financial Markets- Frederic S. Mishkin and
Apostolos serletis
 Module on Debt Markets by BSE, Source: BSE Website-www.bseindia.com
 Modules by ICSI and ICAI
 RBI reports and CCIL website
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LESSON 10
OTHER MARKETS
Dr. Neerza
Assistant Professor
Department of Commerce
PGDAV College (Morning)
University of Delhi
Email-Id: neerza@pgdav.du.ac.in
STRUCTURE
10.2 Introduction
10.3 Fund-Based and Fee-Based Markets
10.4 Regulatory Issues in Such Markets
10.6 Alternative Financial Instruments and Services
10.7 Evaluation of Financial Markets in India
10.8 Key Market Players
10.9 Summary
10.10 Glossary
10.11 Answers to Intext Questions
10.13 References

● To develop basic understanding of fee-based and fund-based services.
● To know about regulatory issues and the importance of market regulators.
● To learn about various alternative financial instruments and services.
● To evaluate various financial markets and learn about the key market players.
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10.2 INTRODUCTION
Financial services sector is the primary driver of economic growth in a country. India has
witnessed a growing demand for financial services across different income groups. Rising
household incomes, approval of 100% FDI for insurance intermediaries, significant
penetration in rural areas, growth in the wealth management sector, rapid expansion in
fintechs, forthcoming initiatives like digital rupee, digital gold investment options, etc. may
be the driving force behind such significant evolution of financial services industry. With
advances in the digital finance, millions of people in India can now settle payments and
transfer funds with just few taps on their smartphones. Covid-19 further accelerated this trend
of usage of contactless digital payment systems across the country. Commercial banks,
insurance companies, non-banking financial companies (NBFCs), co-operatives, pension
funds, mutual funds, real estate brokers and other financial entities comprises the diversified
financial services sector in India. With robust banking and insurance sector, India’s financial
services industry is expected to maintain the growth momentum in the coming years.
According to International Monetary Fund (IMF), a financial service may be described as a
process to acquire a financial good. For instance, taking a mortgaged loan to buy a house.
Financial sector consists of diverse financial service providers. Financial services may also be
known as financial intermediation where the purpose is to mobilize money from savers and
provide to those who are in need of it. However, a bank or an NBFC may offer two different
types of products/services: fund-based and fee-based. Loans are categorised as fund-based
products whereas selling a mutual fund or an insurance policy are classified as fee-based
products. A financial intermediary/institution may provide one or both types of services.
1. Fund-based: Fund-based markets include traditional services such as loans,
mortgages and investment in stocks, bonds, derivatives, commodities and real estate
markets. Therefore, any revenue generated through lending or investing money and
earning interest, dividend or capital gain, is fund-based revenue. So, fund-based
revenue is the revenue earned by charging interest/fee on the funds lent/invested.
2. Fee-based: Fee-based markets include industries like financial advisory, wealth
management, legal services, accounting, consulting, and asset management. Instead of
deploying funds or making investments, revenue is generated in the form of
fees/commission charged for providing professional expertise or some specific
services.
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Fee-based and fund-based market in India offer individuals, businesses and institutional
investors a wide range of financial services and investment alternatives to raise capital.
Various market participants including financial institutions, investors, advisors and regulatory
bodies contribute to the growth and advancement of these markets while complying with the
rules/regulations and ensuring investor protection.
10.3 Fund-based and fee-based markets
10.3.1 Fund-based markets

In India, fund-based markets consist of activities related to lending and borrowing of funds
which facilitate the flow of capital from among lenders and borrowers. The following are the
key segments in fund-based markets.
 Money Market: In this market, short-term funds are lent and borrowed for a period
of up to one year. It deals in instruments like treasury bills, commercial papers,
certificates of deposit and other short-term government securities. This market
provides a platform for banks, corporations/businesses and various financial
institutions to manage their short-term funding requirements.
 Capital Market: Capital market looks after the long-term borrowing and lending of
funds/capital. It consists of primary and secondary markets. In primary markets,
securities are issued for the first time whereas follow-on issues are made in secondary
markets. While in primary markets, companies and government raise funds by issuing
shares, bonds, debentures, etc. Buying and selling already issued securities take place
in the secondary markets. National Stock Exchange (NSE) and Bombay Stock
Exchange (BSE) are the two most popular secondary markets in India.
 Debt Market: Corporate bonds, government securities, debentures, and other fixed-
income securities are the various debt instruments issued and traded in the debt
market in India. Borrowers are able to raise funds using debt securities and investors
are able to earn fixed income through such instruments.
 Foreign Exchange Market: Trading of different currencies takes place in the foreign
exchange market. Individuals, businesses/corporate houses, banks and financial
institutions convert one currency into another for the purpose of trade, investment,
speculation, etc.
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 Mutual Funds: Such institutions invest the money pooled from variety of investors in
a diversified professionally managed portfolio of securities. They offer various
investment schemes like equity-based, debt-based, hybrid funds and thematic funds.
 Venture Capital and Private Equity: Venture capitalists and Private Equity funds
invest in companies (public or private) that are in early or late stage or established
firms. They provide capital in exchange for acquiring a controlling stake in the target
company. Often the companies receiving funding are innovative, technology oriented
and/or looking for growth/expansion opportunities.
 Real Estate Investment Trusts (REITs): REIT is a kind of investment vehicle
through which individuals can invest in real estate assets without directly owning or
managing them. REITs invest the money pooled from several investors in a portfolio
of real estate properties such as residential and commercial buildings, hotels, various
infrastructural projects, etc. Their primary source of income is rental income from
properties.
Sometimes banks and financial institutions also lend and borrow funds from each other in
order to meet their liquidity and statutory requirements. Such borrowing and lending forms
part of interbank market. All the above fund-based markets play a significant role in growth
and development of the economy by way of facilitating flow of funds, providing investment
capital formation opportunities.
10.3.2 Fee-based markets
In India, fee-based market provides goods or services in exchange for a charge in the form of
fee or commission or payment. Some key segments of the fee-based market in India may
include:
 Advisory Services: Experts and advisors provide professional services to individuals
and businesses helping them make informed decisions. For instance, management
consultants offer assistance in optimising the businesses processes, enhancing the
operational efficiency, developing effective strategies for growth, improving
performance and implementing change in the organisation. Advisory services may
include assistance in regulatory compliance, mergers and acquisitions, income tax,
estate tax planning, cybersecurity, and software implementation. It may also involve
guidance on business strategy formulation, market research, organisational
restructuring, risk management, investment management, etc. Investment related
advisory services are provided to investors by individual advisors, wealth
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management companies, financial institutions, etc. It helps investors to assess their

needs and make suitable investment choices. Insurance related advisory services
include making people aware about the various insurance products and helping them
buy suitable policies as per their needs.
 Financial Planning: It involves assessing the existing financial position, setting
financial goals/objectives, formulating a budget, building funds for contingencies,
adopting strategies to save and invest efficiently, insurance and retirement planning,
and reviews the financial plans while incorporating necessary changes over time. In
financial planning, professionals and/or companies help individuals and corporates by
providing expert guidance and customized solutions.
 Wealth Management: Personalized services such as investment/portfolio
management, estate and tax planning, retirement planning, risk management, wealth
transfer and other customised services are provided to individuals/families with high-
net-worth. It is usually offered by financial institutions like banks, investment firms
and wealth management companies. A specialised wealth manger or a team of
experts/professionals work closely with the clients and support them in their wealth
management decisions.
 Investment Banking: Investment banks play a significant role in the growth of the
economy. They act as intermediary between those who are in need of capital and
those who are looking to deploy their capital in anticipation of returns. Investment
banks provide advisory services to businesses, governments, and other entities. They
help companies in raising capital by issuing stocks, bonds and debentures. They assist
businesses in identifying potential targets/buyers, carrying out the due diligence,
negotiating deal terms, valuation and completing the merger and acquisition process.
In addition, investment banks act as underwriters; provide financial advice to clients
on financial restructuring and corporate finance; producing research reports and
analysis on market trends, industry, companies, etc. Lastly, they provide risk
management advice to clients helping them mitigate/manage financial risks by
protecting them against adverse movements in the market.
Above segments are of great relevance in the context of financial sector in the economy.
However, in general, the fee-based market may also include services from important non-
financial sectors like education and training, healthcare, professional services, government
services, telecommunications, software, entertainment, and so on. Sometimes services are
also provided free of charge or at subsidized rates by the government, especially in the public
education and healthcare.
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10.4 Regulatory issues in such markets

In India, fee-based and fund-based markets experience various regulatory issues required to
be addressed by market regulators for smooth, fair and transparent working of the financial
system. Focussing on these regulatory concerns protects the interest of investors and brings
market integrity into the system. Some of the major regulatory issues in such markets are
mentioned below:
 Disclosure and transparency: Market regulators often want financial intermediaries
and service providers in fee-based markets to share relevant information with clients,
regarding fees, commissions, any potential conflicts of interest, risks associated with
the investment products, etc. Likewise, in fund-based markets, issuers are required to
disclose accurate and timely information to the investors, leading to transparency.
 Investor protection: In order to protect the interest of investors, market regulators
establish various rules and regulations to safeguard investors from any kind of
fraudulent activities, misrepresentation, or market manipulation. In this regard, market
regulators emphasis on fair dealing practices, and setting up mechanisms for investors
for resolving their disputes.
 Licensing and registration: The market regulators have made it mandatory for
intermediaries, like brokers, investment advisors, and asset managers, to obtain
appropriate licenses and/or registrations to operate in fund-based and fee-based
markets. Such licenses often accompany certain regulatory obligations and demand
compliance from the intermediaries. This leads to investor protection and efficiency in
the markets.
 Reserve Bank of India (RBI) Regulations: RBI sets the guidelines, rules and
regulations for various fee-based and fund-based services including Know Your
Customer (KYC), Capital Adequacy Norms and Fair Practices Codes. RBI requires
that financial institutions should verify the identity and address of their customers
before providing financial services. This prevents or minimises money laundering and
fraud. RBI requires that banks and NBFCs must maintain capital adequacy ratios to
avoid the possibility of becoming insolvent. Lastly, as per the fair practices code,
banks and NBFCs ensure transparency and fairness in their dealings with customers.
 Consumer Protection Regulations: As per the Consumer Protection Act, 2019
consumers are empowered to seek remedies for any deficiencies in the financial
services provided, unfair practices adopted or for any misrepresentation or misleading
information in advertisements.
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 Insurance Regulatory and Development Authority of India (IRDAI): IRDAI sets

guidelines and regulations with respect to licensing, solvency, customer protection,
distribution practices, etc. for the insurance intermediaries, companies and other
entities.
 Securities and Exchange Board of India (SEBI) Regulations: SEBI has laid down
stringent regulations for investment advisers, mutual fund managers and others,
related to registration requirements, code of conduct, and disclosure norms. These
guidelines aim to protect customers and ensure that they received quality investment
advice.
 Anti-money laundering (AML) and counter-terrorism financing (CTF):
Regulators levy strict AML and CTF regulations to prevent illegal activities and any
acts of money laundering in fee-based and fund-based markets. Regulators require
that financial institutions must build robust customer due diligence system, report any
suspicious transactions/activities, and follow/comply with know-your-customer
(KYC) regulations.
Additionally, market regulators prevent insider trading, market manipulation and ensure a
level playing field for all market participants. Indian financial markets are diverse, deep and
wide. Regulatory concerns discussed above may not represent the all the issues in the fee-
based and fund-based markets. However, the regulatory landscape is continuously evolving,
and it becomes imperative for financial institutions and investors to remain updated with the
new regulations and comply with them.
Fig 10.1: Regulatory Issues in Fee-based and Fund-based Markets in India
IN-TEXT QUESTION
1. Market regulators ensure___
a) Disclosure and transparency of information to investors
b) Attainment of licensing and registration of market participants
c) Existence of grievance redressal mechanism to resolve disputes
d) All of above.

Fee-based and fund-based services in India are primarily regulated by the following market
regulators:
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 Securities and Exchange Board of India (SEBI): SEBI oversees and maintains
integrity, stability, and transparency in the securities market in India. It regulates and
supervises stock exchanges, brokers, mutual funds, investment advisors, portfolio
managers, etc. and vested with the authority to take any legal action against violations
of laws and regulations in such markets. It operates under Ministry of Finance, India.
The primary objectives of SEBI are investor protection, building investor confidence,
promoting a fair, transparent and efficient markets, regulating intermediaries
(stockbrokers, merchant bankers, portfolio managers, etc.), preventing insider trading,
and promoting investor education and awareness.
 Reserve Bank of India (RBI): RBI is the central bank of India responsible for
regulation and supervision of financial system of the country. RBI has important roles
and responsibilities such as formulation and implementation of the monetary policy,
issue and management of currency notes, granting licenses to banks, setting prudential
norms and ensuring compliance, managing and regulating foreign exchange reserves,
banker to the government, promoting financial inclusion, overseeing banking
activities and so on. For instance, RBI regulates non-banking financial companies
(NBFCs) engaged in fee-based and fund-based activities, like asset management,
wealth management, and financial advisory services.
 Insurance Regulatory and Development Authority of India (IRDAI): IRDAI is
the regulatory body which regulates and oversees the insurance sector. It supervises
the activities of insurance intermediaries, companies and other entities in the sector. It
lays down the regulations and guidelines for insurance companies and intermediaries
engaged in fee-based and fund-based insurance products, like unit-linked insurance
plans (ULIPs) and other investment-linked insurance products. IRDAI is also
responsible for formulation of policies and entire regulatory framework for the
various market participants in the insurance industry. It undertakes various efforts to
approve insurance products/services, ensure customer protection, promote growth,
ensure stability in the insurance sector, curb fraudulent practices, and maintaining
stability.
 Pension Fund Regulatory Development Authority (PFRDA): It is the regulatory
body for pension funds and the national pension system (NPS) in our country.
PFRDA lays down the investment guidelines/regulations; and monitors the activities
various market participants including pension fund managers, custodians, and others
in the fee-based and fund-based pension market. It has established a grievance
redressal mechanism to protect the interest of the pension subscribers.
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 Forward Markets Commission (FMC): Multi Commodity Exchange (MCX) and

National Commodity and Derivatives Exchange (NCDEX) are the facilitators trading
in commodity futures and options in India. FMC was the regulatory body for these
commodity exchanges. However, it was merged with SEBI in 2015. Therefore, SEBI
regulates the commodity derivative market in India since then.
Existence of these regulatory bodies makes the Indian financial system robust, transparent
and stable. They issue regulations, monitor/supervise the market activities, ensure compliance
of laws and protect the interest of investors/customers in the fee-based and fund-based
markets. They are pillars of integrity, fairness and efficient financial ecosystem of the
country.
10.6 Alternative financial instruments and services

In India, alternative financial instruments and services market is experiencing exponential
growth, offering diverse investment opportunities beyond the traditional avenues. Alternative
investments are assets that do not fall in the category of conventional investment classes like
stocks, bonds or cash. The following are the examples of alternative financial instruments and
services in India:
 Mutual Funds: Mutual funds are defined as the investment vehicles that allow
pooling of money from multiple investors to invest in a well-diversified portfolio of
multiple securities such as stocks, bonds, or money market instruments. They provide
the investors an opportunity to invest in a variety of asset classes and while gaining
the benefits of professional management.
 Exchange-Traded Funds (ETFs): ETFs are investment funds traded on stock
exchanges, representing a basket of securities that represent and replicate an index,
sector, commodity, or other assets. ETFs enable both diversification as well as
liquidity, and thus allow the investors to have exposure to specific markets or
investment themes.
 Real Estate Investment Trusts (REITs): REITs are the investment vehicles that
enable investors to invest in real estate properties that generate income. They provide
an option to the investors to participate in the real estate market without directly
owning these properties. REITs are listed and traded on stock exchanges.
 Peer-to-Peer Lending (P2P): P2P lending platforms connect the borrowers to the
lenders, bypassing traditional financial institutions. Individuals or businesses seeking
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loans can access funds from multiple lenders, while the investors can earn interest on
the money they lend.
 Alternate Investment Funds (AIFs): AIFs are privately pooled investment vehicles
that invest in diverse assets, including private equity, venture capital, real estate,
infrastructure, and hedge funds. AIFs are regulated by SEBI and provide investors
access to alternative asset classes.
 Crowdfunding: Crowdfunding platforms allow individuals or businesses to raise

funds from a large number of people. This is done typically through online platforms.
crowdfunding can have multiple ends uses, including start-up ventures, social or
creative projects, and charitable / philanthropic activities.
 Microfinance Institutions (MFIs): MFIs provide financial services, such as small

loans, savings / Deposits, and insurance, to the individuals or small businesses who do
not have access to traditional banking services. MFIs support entrepreneurship and
promote financial inclusion at the grassroots level.
 Robo-Advisory Services: These highly automated platforms leverage technology and
algorithms to provide investment advice and portfolio management services to their
customers. They typically offer low-cost and easy to use investment solutions, making
investing more accessible to the retail investors.
 Online Trading Platforms: Online trading platforms (websites and mobile apps)
provide individuals with easy access to various constituents of financial markets i.e.,
stocks, commodities, and currencies. These platforms offer real-time market data,
research tools, and enable execution of trades from anywhere.
 Digital Wallets and Payment Apps: Digital wallets and payment apps enable
individuals to make cashless transactions, transfer funds, and make payments for
goods and services electronically.
These alternative financial instruments and services provide investors and consumers with
a wide range of choices to meet their investment goals, access capital, and diversify their
portfolios. However, the regulations as well as the accessibility to these instruments and
services vary widely.
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10.7 Evaluation of financial markets in India

Our country has a diverse and vibrant financial market landscape offering investment avenues
for individuals and businesses. The following are the key financial markets in India:
 Stock Market: Over the years, the Indian stock market has transformed tremendously
having positive implications for traders, investors, companies, and stock exchanges.
Stock market enables corporates to raise capital for their businesses through public
issue. Stock market also facilitates mobilization of funds from investors who have
them lying idle (investors) to others who need funds i.e., corporates. In a recent panel
discussion at Mint India Investment Summit 2023, various experts vouched for
expensive valuations of the Indian stock market in comparison to other markets in the
last five years. There are 23 stock exchanges in India, however, the Indian stock
market is primarily represented by the Bombay Stock Exchange (BSE) and National
Stock Exchange (NSE). Shares, derivatives, commodities, currencies and exchange
traded funds (ETFs) are various instruments traded on these stock markets. BSE is
one of the oldest stock exchanges in Asia. BSE is known for its benchmark indices,
the most popular is Sensex. It is regulated by Securities and Exchange Board of India
(SEBI) and operates on an electronic trading system-BOLT. It provides a liquidity,
transparency and a regulated environment for all the market participants. NSE is one
of the leading stock exchanges in our country and known for its benchmark index,
Nifty50. NSE’s electronic trading platform National Exchange for Automated Trading
(NEAT) facilitates efficient and transparent trading.
Various factors affect the working of stock markets in India. The overall health of the
country’s economy indicated by GDP, interest rates, government policies and reforms
affect the general investor sentiment and market performance. Financial performance
in terms of revenue growth, profitability, etc. may drive the stock prices of listed
companies. Positive/negative sentiment and market psychology in general affect the
stock market movements. In addition, industry trends, regulatory environment, market
valuations, international trade policies, etc. significantly drive the stock market
movements. Stock market is always subject to volatility and investing in it is usually
risky. However, with the help of financial advisors, professionals and in-depth
research, one can exploit profitable opportunities with an acceptable level of risk.
 Debt Market: India's debt market encompasses various types of debt securities-both
government and corporate debt instruments. Debt market is also called the
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bond/fixed-income market where debt securities are traded. A debt security indicates
a loan made by investor to government, corporations or some other entity, in
exchange for regular interest payment and principal repayment at the time of maturity.
Government debt market involves trading of bonds and other debt instruments issued
by government. They are low-risk investment and play a crucial role in financial
government expenditures and management of fiscal policies. Corporate debt market
involves trading of bonds and other debt instruments issued by corporations such as
corporate bonds and debentures. It helps companies to raise funds for expansion,
meeting working capital needs, debt refinancing, etc. Both SEBI as well as RBI
regulate the debt market in India.
Debt market is affected by various factors including interest rates, credit rating,
government policies and regulations, market infrastructure, economic factors, global
factors and so on. For instance, changes in the interest rates such as policy rates
determined by the RBI affect the pricing of and yield on debt securities. Investors
often rely on the ratings given to debt issuers by the rating agencies, to weigh the
creditworthiness and risk involved in the debt instrument. Fiscal measures taken by
the government, taxation policies, borrowing programs all have significant impact on
the pricing of government bonds and other debt securities. Strong economic
fundamental, market liquidity, transparency in the trading/settlement systems,
international interest rates and geopolitical events, etc. are other important factors
shaping the growth and development of debt markets.
 Commodity Market: Indian commodity market in India provides a platform for
trading in essential goods and raw material. Here, investors trade in various
commodities like gold, silver, crude oil, agricultural products and base metals. Multi
Commodity Exchange (MCX), National Commodity and Derivatives Exchange
(NCDEX) and Indian Commodity Exchange (ICEX) are the major commodity
exchanges in India. Commodity trading provides protection against price fluctuations
and also facilitate speculative trading. Commodity market contributes significantly
towards the country’s GDP. Commodity exchanges provide a well-regulated platform
for trading, ensures fair pricing, facilitate spot and derivative trading, and offers
opportunities for efficient risk management. This market is regulated by SEBI in India
thereby maintaining integrity, investor protection and confidence. Volatility in the
commodities affect the price movements in this market, however, government has
implemented various initiatives to support it. This is evident from increased
participation of various stakeholders, over the years, in the commodity market.
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 Currency Market: In India, currency market also known as foreign exchange

market, is an important part of the country’s financial system. The currency market
facilitates trading of currencies and is regulated by RBI. The central bank actively
participates in the currency market through buying/selling of foreign exchange
reserves. This way RBI ensures stability in the exchange rate which facilitates
international trade, attracts foreign investments and brings macroeconomic stability.
In the currency market, Indian rupee mainly trades against the US dollar, influenced
by interest rate differences, inflation, geopolitical events, global industry/economic
trends, etc. Retail traders, commercial and foreign banks, institutional investors, and
various corporate entities are the major market participants in this segment. The
currency market is essential for facilitating remittances from Indian citizens working
abroad, impacts the country’s foreign exchange reserves, liquidity, and meeting
various obligations. Lastly, volatile international currency markets, global
uncertainties and various macroeconomic conditions affect our country’s currency
market.
 Mutual Funds: A mutual fund manager invest the pooled money of different
investors in a portfolio of securities generating lucrative returns which are passed
back to the investors. Investing in mutual funds provide benefits such as
diversification, professional management, return potential, flexibility and liquidity,
variety of investment alternatives, option of systematic investment plan (SIP),
affordability, transparency and so on. The mutual fund industry has witnessed
significant growth over the years on account of increase participation from investors,
availability of various fund options, robust regulatory environment and strong &
significant performance by some mutual funds. Mutual funds offer various types of
schemes including equity, debt, hybrid and others.
 Insurance Market: Insurance market in India has evolved significantly over the
years. More information and awareness, rising incomes and favourable government
policies, all have contributed to the expansion of this sector. Intense competition
among domestic and foreign insurance companies has resulted in availability of
wide/diverse range of insurance products including life insurance, health insurance,
property insurance, travel insurance and others. In India, Insurance Regulatory and
Development Authority of India (IRDA) regulates the insurance market. IRDA plays
a crucial role in ensuring consumer protection, maintaining stability and integrity, and
promoting transparency in the insurance market. Insurance penetration in India is still
on the lower side, therefore, efforts are made to create more awareness about the
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importance of insurance for individuals and corporations in the country. Now

customers can purchase and manage insurance policies on various online platforms or
using mobile applications. Multiple distribution channels for insurance products
provide customers with options and convenience. Pradhan Mantri Jeevan Jyoti Bima
Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), Pradhan
Mantri Fasal Bima Yojana (PMFBY), Ayushman Bharat (Pradhan Mantri Jan Arogya
Yojana) (AB PMJAY) are among various other government flagship initiatives
providing life, personal accident, crop insurance, hospitalization care coverage to
individuals at affordable premiums. Consistent efforts are being made to expand the
reach of insurance market in rural areas also where customised insurance products are
issued to people from low-income groups. To conclude, the insurance market in India
is experiencing significant upward growth becoming the sixth-largest insurance
market, posing many challenges as well as opportunities for further development.
 Alternative Investment Market: Alternative investment market in India includes
private equity (PE) funds, venture capital (VC) funds, angel investors, seed funding,
crowd funding, real estate investment trusts (REITs), infrastructure investment trusts
(InvITs) and other alternative investment funds. Alternative investment market
provides opportunities to raise capital for small and medium sized companies.
Depending on the investor’s risk-return profile, the alternative assets are given 10 to
33% weightage in the overall portfolio. Initially, the investment base in alternative
assets was narrow as investments were made primarily in real estate and private
equity. However, the base has become broader now with the emergence of pooling
vehicles such as real estate investment trusts (REITs), infrastructure investment trusts
(InvITs), etc. Also, markets such as the US, Singapore, UK, etc. have many
investment options for liquid alternatives, whereas India has relatively few options.
The VC space in India is witnessing more interest from investors as today’s customer
is moving to online purchase from offline spending. This is leading to significant
growth in new-age businesses. Alternative investment segment is one of the fastest
growing industry in India because of various reasons: alternative investments have no
direct correlation with stock market, they allow investors to invest passively
leveraging the expertise of experienced fund professionals, provide options which can
generate 8-10% cash return annually, they are less volatile, not only provide
investment options to HNWIs but also to people from average salary group, and with
rising disposable incomes people are ready to explore new segments for investment
offering better returns. Merchant debt/factoring (businesses loans provided to
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established companies), private equity healthcare investment, artificial intelligence,

real estate, etc. are the top alternative segments in the industry. This market is
regulated by SEBI.
Investors should do extensive research, take calculated risks, seek professional advice before
investing in these markets. Various regulatory bodies such as SEBI, RBI, IRDAI, etc. also
exist to facilitate investor protection, maintaining market integrity and ensuring fair practices
in these markets.
IN-TEXT QUESTIONS
2. In India, stock markets ___
a. comprise of BSE and NSE
b. trading of shares, derivatives, commodities, currencies and ETFs
c. provides a liquidity, transparency and a regulated environment
d. All of these.
3. Alternative investment market includes____
a. Private Equity and Venture Capital b. Angel investors and Seed Funding
c. REITs and InvITs d. All of these
In India, the financial markets involve a wide range of key players: regulatory bodies, various
exchanges, financial intermediaries/institutions and others. The following are some of the key
market players participating in different financial markets:
 Stock Market
o Stock exchanges: There are 23 stock exchanges in India, however, the Indian stock
market is primarily represented by the Bombay Stock Exchange (BSE) and National
Stock Exchange (NSE). BSE and NSE are the oldest and largest stock exchanges,
respectively. Shares, derivatives, commodities, currencies and exchange traded funds
(ETFs) are various instruments traded on these stock markets.
o Stockbrokers: They are professional individual or financial institutions, and
brokerage firms facilitate buying and selling of securities on behalf of investors.
They are the intermediaries between the buyers and the sellers while executing the
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transactions. Stockbrokers provide investment advice, offer portfolio management

services, conduct/analyse company financials, industry trends and market
performance, comply strictly with the rules and regulations of the regulatory bodies
and government, and build relationships with their clients while keeping them
informed and updated.
o Depositories: Depositories facilitate holding, transfer and settlement of securities.
There are two depositories in India: National Securities Depository Limited (NSDL)
and Central Depository Services Limited (CDSL). NSDL is the first and largest
depository offers electronic holding and transaction services for various types of
securities. CDSL is the second-largest depository provides electronic custody and
transfer services for a wide range of securities.
 Debt Market
o Bond Issuers: They are the entities that issue bonds of different types with the
purpose of raising funds for financing their current or potential projects and meeting
working capital needs. Bond issuers are mostly government (central and state),
banks, and corporations.
o Underwriters: Underwriters include investment bankers, brokerage firms, online
bond platforms, and other firms that help issuers sell bonds in primary and secondary
markets.
o Bond Purchasers: They are the ones who buy the debt in the market, known as the
bond holders. When they purchase a bond, they become a creditor/lender to the
issuer.
o Reserve Bank of India (RBI): RBI formulates the monetary policies and regulates
the debt market in India. Primarily the regulations are in the areas of money market
instruments, NBFCs and private placement.
o Securities and Exchange Board of India (SEBI): SEBI regulates all corporate
bonds, both public sector undertakings and private sector as well as those listed on
the stock exchange issued either by government or financial institutions. SEBI
ensures transparency and investor protection in the debt market.
o Primary Dealers (PDs): They are the financial institutions that are authorized by the
RBI to participate in auction of government securities and also facilitate trading in
the secondary market.
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o Credit Rating Agencies: Credit rating agencies evaluate the creditworthiness of the
bond issuers as well as the various debt instruments issued by them. It helps in
determining the probability of debt repayment. Credit Rating Information Services of
India Limited (CRISIL), ICRA Limited (formerly Investment Information and Credit
Rating Agency of India Limited), CARE Ratings Limited (formerly Credit Analysis
and Research Limited), India Ratings and Research Private Limited (a subsidiary of
Fitch Ratings), Brickwork Ratings India Private Limited and SME Rating Agency of
India Limited (SMERA) are various credit rating agencies in India. The credit ratings
provided by various agencies help the investors, lenders, and other market
participants to make informed decisions.
 Commodity Market
o Commodity and Derivative Exchanges: Multi Commodity Exchange (MCX) is the
country’s leading and largest commodity futures exchange. It facilitates online
trading of commodity derivatives under the regulations of SEBI. National
Commodity and Derivatives Exchange (NCDEX) is an online commodity exchange
that specializes in agricultural commodities. Life Insurance Corp. of India (LIC),
NSE, and the National Bank for Agriculture and Rural Development (NABARD)
have stakes in NCDEX. Barley, wheat, and soybeans are among the leading
agricultural commodities that are traded on these stock exchanges.
o Producers and consumers of physical commodities: In the commodity derivatives
market, they are the largest participants. These participants use futures and options
contracts to hedge against price fluctuations/risks related to their physical
commodities. While producers use such contracts to lock in a selling price,
consumers use these contracts to lock in a buying price for the raw materials.
o Speculators: They are individuals or organisational investors who engage in the
trading of futures and options contracts. They invest solely for the purpose of making
profit from price movements and do not have any direct interest in the underlying
commodities.
o Intermediaries: They are banks, brokers and other entities registered with SEBI
acting as intermediaries and facilitating commodity trading for investors. As
intermediaries they provide market related information, help participants enter into
contracts, and carry out the settlement process while delivering the contracts to
buyers.
o Warehousing Companies: Warehousing entities offer storage facilities for the
commodities while meeting quality and delivery standards.
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 Currency or Foreign Exchange Market

o Commercial banks and investment banks are the major players in the currency
markets in India. It is important to note that the greatest volume of currency is traded
in the interbank market. In interbank market all sizes of banks electronically trade
currency with each other. Banks either engage in forex transaction on behalf of their
clients or carry out speculative trades themselves to profit from currency
fluctuations.
o Central bank is another important participant in the currency market. It affects the
currency rates through their interest rate policies and conduct of open market
operations. It manages and stabilize competitiveness of the country’s economy.
o Hedge funds and investment managers are another group of participants in the
currency market. They trade currency on behalf of their clients such as pension fund
houses. They may also engage in speculative trading.
o Exporters, Importers and Corporations: These market participants are often involved
in foreign trade, sending receiving foreign currencies, hedging currency risks, etc.
 Mutual Funds
o Sponsor: The mutual fund company’s promoter is called the sponsor. The sponsor
establishes a mutual fund either independently or in collaboration with another
company. The main purpose of establishing a mutual fund is to earn money through
fund management. The company managing the fund (investment manager) and
offering investment products to investors is known as Asset Management Company
(AMC).
o Trustees: Trustees are independent entities which act as guardians to investors. They
ensure compliance with due diligence and authorise all the mutual funds floated in
the market.
o AMC: It manages funds and charges a small fee for that. It is responsible for
planning and launching/floating various mutual fund schemes. AMCs arrange the
initial amount and manages the funds for investors.
o Custodian: All the securities purchased by AMC, in the name of Trust, are kept
safely with a custodian in dematerialised form.
o Registrar & Transfer Agent: Registrar & Transfer agent is someone who has the
responsibility of maintaining investor records, processing transactions, and providing
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investor services, removing units when redemption is requested, processing dividend

payments and so on.
o Distributors and Financial Advisors: They are the intermediaries which facilitate
distribution mutual fund products and giving investment advice/guidance to the
mutual fund investors.
 Insurance Market
o Insurance companies: They are the primary participants in the insurance market
offering various types of life insurance, health insurance, motor insurance, etc. LIC,
ICICI Prudential, HDFC Life, New India Assurance, SBI Life, and private sector
insurers like Bajaj Allianz, Tata AIG, and ICICI Lombard are the major insurance
companies in India.
o Insurance agents and brokers: They act as intermediary between customers and
the insurance companies. They help customers in identifying their insurance needs,
suggesting and help them choose the suitable insurance policies, and facilitate the
documentation and premium payment/collection process. Marsh India, Aon India,
and Willis Towers Watson are some of the insurance agents in India.
o Insurance aggregators: It refers to the online platforms that allow people to
compare and purchase different insurance policies. Policy bazaar, Acko, Insurance
dekho are examples of insurance aggregators in India. They help customers evaluate
various policies and make informed decisions.
o Reinsurance companies: They provide insurance coverage to the insurance
companies. Insurance companies transfer some of their financial risk assumed to
reinsurance companies against premium payments. Reinsurance companies help
insurance companies to reduce/manage their risks, thereby ensuring stability and
financial strength in the insurance sector.
o Third-party administrators: Such entities manage the claims and provide
administration services on behalf of insurance companies. TPAs look after the
documentation, settlement, and management of insurance claims, thereby ensuring a
smooth process for both insurers as well as policyholders.
All the above market players contribute significantly towards the proper functioning and
growth of the financial sector in India. Presence of these players in the industry ensures that
all the market participants, even the investors are well-aware of their roles and
responsibilities.
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IN-TEXT QUESTIONS
4. Key player (s) in the insurance market is/are ___
a) Asset Management Company (AMC)
b) LIC and New India Assurance
c) Hedge Funds
d) Multi Commodity Exchange (MCX)
10.9 SUMMARY
 Fee-based markets include industries like financial advisory, wealth management,
legal services, accounting, consulting, and asset management.
 Fund-based markets include activities of traditional banking services such as loans,
mortgages and investment in stocks, bonds, derivatives, commodities and real estate
markets.
 Fee-based and fund-based markets experience various regulatory issues like
disclosure and transparency, investors protection, licensing and registration, RBI
regulations, Consumer Protection Regulations, SEBI Regulations, and Anti-money
laundering (AML) and counter-terrorism financing (CTF) regulations.
 Fee-based and fund-based services in India are primarily regulated by Securities and
Exchange Board of India (SEBI), Reserve Bank of India (RBI), Insurance Regulatory
and Development Authority of India (IRDAI), and Pension Fund Regulatory
Development Authority (PFRDA).
 India has a diverse range of alternative financial instruments and services including
Mutual Funds, Exchange-Traded Funds, Real Estate Investment Trusts (REITs), Peer-
to-Peer Lending (P2P), Alternate Investment Funds (AIFs), Crowdfunding,
Microfinance Institutions (MFIs), Social Impact Bonds, Infrastructure Investment
Trusts (InvITs) and Robo-Advisory Services.
 The key financial markets in India are stock market, debt market, commodity market,
currency market (or foreign exchange market), mutual funds, insurance market and
alternative investment market.
 In India, the financial markets involve a wide range of key players: regulatory bodies,
various exchanges, financial intermediaries/institutions and others.
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10.10 GLOSSARY
FDI Foreign Direct Investment
NBFCs Non-Banking Finance Companies
IMF International Monetary Funds
REITs Real Estate Investment Trusts
AML Anti-Money Laundering
CTF Counter-Terrorism Financing
KYC Know Your Customer
RBI Reserve Bank of India
SEBI Securities and Exchange Board of India
IRDAI Insurance Regulatory and Development Authority of India
PFRDA Pension Fund Regulatory and Development Authority
NPS National Pension System
NCDEX National Commodity and Derivatives Exchange Limited
MCX Multi Commodity Exchange of India Limited
FMC Forward Markets Commission

ETFs Exchange-Traded Funds
P2P Peer-to-Peer Lending
AIFs Alternative Investment Funds
MFIs Microfinance Institutions
InvIT Infrastructure Investment Trusts
SIBs Social Impact Bonds
BSE Bombay Stock Exchange
NSE National Stock Exchange
BOLT Bombay Online Trading System
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NEAT National Exchange for Automated Trading

GDP Gross Domestic Product
ICEX Indian Commodity Exchange

SIP Systematic Investment Plan
PMJJBY Pradhan Mantri Jeevan Jyoti Bima Yojana

PMSBY Pradhan Mantri Suraksha Bima Yojana
PMFBY Pradhan Mantri Fasal Bima Yojana
AB PMJAY Ayushman Bharat Pradhan Mantri Jan Arogya Yojana
PE Private Equity
VC Venture Capital
HNWIs High-Net Worth Individuals
NSDL National Securities Depository Limited
CDSL Central Depository Services Limited
CRISIL Credit Rating Information Services of India Limited
ICRA Investment Information and Credit Rating Agency
CARE Credit Analysis and Research Limited
SMERA SME Rating Agency of India Limited

SMEs Small and Medium Enterprises
LIC Life Insurance Corporation of India
NABARD National Bank for Agriculture and Rural Development
AMC Asset Management Company
1. (d) All of these. 2. (d) All of these.

3. (b) LIC and New India Assurance
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1. What do you understand by fee-based and fund-based markets? Discuss its
components.
2. Describe the role of fee-based and fund-based services in the Indian financial markets.
3. Discuss the common regulatory concerns that regulators and authorities on in fee-
based and fund-based markets in India.
4. Identify the primary market regulators in fee-based and fund-based markets.
5. Alternative investment market offers diverse range of financial instruments and
services to investors and consumers. Please elaborate.
6. Discuss and evaluate the major financial markets in India.
7. Every segment of the Indian financial market has key market participants. Please
explain in detail.
10.13 REFERENCES
 https://www.ibef.org/industry/financial-services-india
 https://www.imf.org/external/pubs/ft/fandd/2011/03/basics.htm
 https://economictimes.indiatimes.com/wealth/borrow/five-smart-things-to-know-
about-fee-and-fund-based-products/articleshow/47840937.cms?from=mdr
 https://www.imf.org/external/pubs/ft/fandd/2021/07/india-stack-financial-access-and-
digital-inclusion.htm
 https://www.motilaloswal.com/blog-details/the-transformation-of-the-indian-stock-
market/20404
 https://static.nseindia.com/s3fs-public/2019-06/Basics_of_finmkts.pdf
 http://shodh.inflibnet.ac.in:8080/jspui/bitstream/123456789/5552/2/02_synopsis.pdf
 https://www.bseindia.com/downloads1/PPT1_IntroductiontoSecuritiesMarkets.pdf
 https://www.ibef.org/industry/insurance-sector-india
 https://economictimes.indiatimes.com/markets/stocks/news/how-to-invest-
strategically-in-alternative-funds-in-india/articleshow/97094503.cms#
 https://www.financialexpress.com/market/cafeinvest/why-young-investors-are-
attracted-towards-alternative-investment-options/2932967/
 https://aifpms.com/alternative-investment-funds-aif/
 https://online.hbs.edu/blog/post/types-of-alternative-investments
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 https://www.forbes.com/sites/forbesbusinesscouncil/2023/02/09/the-top-five-
alternative-investment-sectors-in-2023/?sh=5f4ac47b400f
 https://economictimes.indiatimes.com/markets/bonds/learn-with-etmarkets-these-are-
4-key-players-in-the-bond-market/articleshow/93314522.cms?from=mdr
 https://www.mcxindia.com/about-us
 https://www.icicidirect.com/ilearn/currency-commodity/articles/participants-in-
commodity-derivatives-
market#:~:text=The%20participants%20in%20the%20commodity,stability%20of%20
the%20commodity%20markets.
 https://www.icicidirect.com/ilearn/stocks/articles/how-does-currency-trading-work-
in-
india#:~:text=Commercial%20and%20Investment%20banks%20are,traded%20in%2
0the%20interbank%20market
 https://www.taxmann.com/post/blog/mutual-funds#organisation-structure-of-mutual-
funds-in-india
 www.rbi.org.in
 www.sebi.gov.in
 https://irdai.gov.in
 www.pfrda.org.in
 www.fmc.gov.in
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LESSON 11
EXTERNAL MARKET
Gurdeep Singh
Assistant Professor
Department of Finance and Business Economics
University of Delhi
Email-Id: g.swork@yahoo.com
STRUCTURE
11.2 Introduction
11.3 Overview of External Financial market
11.4 International capital flows
11.5 Capital Account convertibility
11.6 International financial instruments
11.7 International financial centres
11.8 Selection of Sources of Funds
11.9 Summary
● Understand the external financial market.

● Explain the role of international financial centres.
● Understand the need of studying international capital flows.
● Describe the concept of capital account convertibility.
11.2 INTRODUCTION
The origins of today's international markets may be traced back to the 1960s, when rich
Europeans as well as other people sought high-quality dollar-denominated bonds in order to
hold their assets outside of their own nations. Avoiding taxes in their home countries and
protecting themselves from the depreciating value of domestic currencies were the two
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driving forces behind these investors. Withholding tax was levied on the bonds that were then
available for purchase. Furthermore, the ownership of the bonds had to be registered.
Eurobonds denominated in US dollars were created to deal with these concerns. Because
these were issued in bearer forms, no record of ownership was kept, and no tax was withheld.
Additionally, prior to 1970, the International Capital Market was primarily concerned with
debt financing, with companies primarily raising equity funding through domestic markets.
This resulted from the restrictions on foreign equity investments that were in place in a
number of countries at the time. Investors preferred to participate in domestic issues of shares
due to potential risks associated with foreign equity issues, either due to foreign currency
exposure or due to regulatory limits on such investments. India has made a small but
noticeable presence in international financial markets. Since 1991-1992, there has been a
complete shift in market sentiment. Bank borrowings, syndicated loans, floating rate notes,
bonds, and lines of credit have been the conventional methods of financing funds abroad.
Although there were a few instances of private businesses, access to the foreign capital
markets was primarily through debt instruments and was primarily restricted to financial
institutions and public sector entities. Since March 1992, when the government initially
permitted a small number of Indian companies to enter the global equity market, numerous
Indian businesses have been successful in following the equity or equity-related route.
11.3 OVERVIEW OF EXTERNAL FINANCIAL MARKET

A multinational corporation must decide on a specific source of funding for the investment
project, or a combination of sources, before finalizing the project for foreign investment. In
this case, it should be pointed out that a multinational company places itself in a better
position than a domestic firm in terms of obtaining funding. A domestic company typically
receives funding from domestic sources. It can get funding from the global financial market,
but it is not as easy as it is for a multinational company.
External financial markets intermediate by moving savings from investors and lenders to
those wanting to invest in assets that they believe will deliver future returns. Assets are
exchanged across national borders between citizens of several financial centres in
international financial transactions. Regardless of where the savings are generated,
international financial market act as reservoirs of savings and channel them to the most
effective use. Financial markets perform three crucial tasks. The price of the traded assets is
determined by the process of price discovery. The first task begins with interactions between
buyers and sellers in the markets for price discovery. Giving investors a way to sell financial
assets is the second method the financial markets ensure liquidity. Lastly, the financial
markets lower the cost of information and transaction. International financial markets can be
split into money and capital markets, just like domestic financial markets. Assets issued or
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sold in the money markets often have a relatively short maturity, say less than a year.
Instruments with a maturity of more than one year or those without a clear maturity are dealt
with in capital markets. There is a symbiotic relationship between both primary and
secondary markets in domestic as well as international financial markets. International
financial markets have been divided into five markets owing to the development and quick
growth of swaps and the globalization of equity markets: lending by financial institutions, the
foreign currency market, the issuance and trading of tradable debt instruments, the issuance
and trading of tradable equity securities, and internationally arranged swaps. In order to
protect against the risk of loss resulting from fluctuations in both foreign exchange and
interest rates, derivative instruments are exchanged in both organized exchanges and over-
the-counter marketplaces. With the exception of interest rate swaps, the majority of
derivatives are short-term in nature.
11.4 INTERNATIONAL CAPITAL FLOWS

The movement of financial assets for investments, management of businesses, or commercial
trade is referred to as capital flows. Individual investors put their money to work by investing
it in a variety of securities, such as mutual funds, stocks, and bonds. Investment capital,
operational expenditures, and research and development spending are all examples of internal
cash flow movements. On a larger scale, a government controls the flow of funds by
allocating tax revenue to various projects and activities and by trading goods and services for
other nations' currencies and goods. The financial aspect of global trade is referred to as
international capital flows. When a good is imported, a physical good enters the importing
nation and money enters the nation that exported the good. If foreign investors choose to
purchase assets there, money may be able to flow back into the importing nation. The concept
of international capital flow is based on the movement of financial capital across borders.
Capital is moving nearly everywhere one looks, from individuals to enterprises to national
governments.
Budgets for capital investment are evaluated at the company level as part of the monitoring
process for growth objectives. In the meantime, federal budgets are based on spending plans.
Commercial real estate is frequently considered by businesses as part of their ordinary
business operations to provide a site for manufacturing activities. Furthermore, many people
regard the purchase of real estate as an investment that may create cash through rental
services.
International capital movements have numerous advantages. The capacity to transfer
financial resources across borders creates a fantastic potential for economies to thrive. Global
money flows enable startups to launch their products and existing businesses to develop and
invest in new ventures.
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Increased aggregate demand is one of the benefits of foreign capital flows. As more loanable
funds become available in the economy as a result of capital inflows, interest rates will fall.
Borrowing would be cheaper as a result, allowing investors to borrow money and invest in
new ventures. Increasing aggregate demand raises the economy's potential output and reduces
unemployment. Another significant benefit of foreign money flows is that it promotes
technical advancement.
Capital flows are financial asset transfers between multinational entities. Bank deposits,
equity securities, loans, debt securities, and other financial assets may be included. Capital
outflows are usually caused by economic uncertainty in a country, whereas high capital
inflows imply a strengthening economy. Many governments place limits on the cross-border
movement of financial capital. Capital controls is the term given to such restrictions. For
example, sanctions can be imposed that prohibit investment in a foreign business. Tariffs,
taxes, and volume restrictions are some examples. Capital controls can be imposed to prevent
foreign investment in the country or to ban domestic investors from investing in specific
countries. Economic welfare is reduced as a result of the constraints.
Increased global capital flows are mostly positive for enhanced international capital, credit,
and risk allocation, but this process is not without threats to global financial stability.
Increased international capital flows are advantageous as long as they contribute to more
effective credit and capital allocation.
IN-TEXT QUESTIONS
1. What are the three crucial tasks performed by financial markets?
a) Price discovery, providing liquidity, and lowering the cost of information and
transaction
b) Protecting assets, issuing financial instruments, and managing businesses
c) Providing liquidity, lowering taxes, and Protecting assets
d) None of the above
2. What are capital flows?
a) The movement of physical goods across borders
b) The movement of political power across borders
c) The movement of financial assets for investments, management of businesses, or
commercial trade
d) The movement of people across borders
3. Why derivative instruments used for in international financial markets?
a) To increase the risk of loss resulting from fluctuations in foreign exchange and
interest rates
b) To fund government projects
c) To protect against the risk of loss resulting from fluctuations in foreign exchange
and interest rates
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11.5 CAPITAL ACCOUNT CONVERTIBILITY
The current and capital accounts make up the balance of payments account, which is a list of
all transactions that take place between a nation and the rest of the world. While the capital
account is largely concerned with the cross-border movement of capital through investments
and loans, the current account is primarily concerned with the import and export of goods and
services. The capacity to freely exchange rupees into other internationally recognized
currencies and vice versa, whenever one makes payments, is referred to as current account
convertibility. Similarly, capital account convertibility denotes the ability to perform
investment transactions without constraint. It is also known as capital asset liberation. In
layman's words, full capital account convertibility allows for the exchange of local currency
for foreign currency with no limit on the amount. This is done so that local businesses can
readily do transnational commerce without having to exchange foreign money for small
transactions. Capital account convertibility is primarily used to govern changes in ownership
of foreign or domestic financial assets and liabilities.
Normally, this would imply that there are no limitations on the number of rupees that an
Indian resident may change into foreign currency in order to purchase any foreign asset. The
same goes for the NRI relative who wants to buy a property in India and is free to bring in
any amount of dollars. In the past three decades, India has made significant progress in
allowing capital account transactions, and it now enjoys partial convertibility.
The term "Capital Account Convertibility" (CAC) refers to the removal of all restrictions on
the transfer of capital from India to other nations throughout the world.
 It leads to a fair distribution of income levels in India.
 It facilitates the unrestricted conversion of foreign currency into Indian currency.
 It permits unrestricted capital movement from foreign investors into a nation.
 It facilitates easy access to hawala money.
 It aids to control the foreign exchange market's volatility.
 It enables investment in foreign markets easily.
 It makes it easier to access the large funds that are available through the global financial
market.
The Fully Accessible Route (FAR), which allows non-residents to invest in specific
government securities without any restrictions, was recently introduced. Along with other
recent actions. the end-user restrictions have been loosened, and the foreign portfolio
investment limits in the Indian debt markets have been raised in an effort to further
streamline the external commercial borrowing framework. India's decision to open its capital
account with prudence was hailed after the currency crisis in East Asian nations in 1997
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showed the difficulties brought on by the potent combination of massive current account
deficits, reliance on short-term capital flows, and the fluctuating pattern of these flows. Even
nations with ostensibly stable fiscal situations have had currency crises and swift exchange
rate decline when the economic environment changes, according to a report on fuller capital
account convertibility published by the SS Tarapore group in 2006. The majority of currency
crises, according to the report, are caused by sustained exchange rate overvaluation, which
results in unmanageable current account deficits. The current account deficit widens as a
result of excessive exchange rate appreciation, which renders exporting industries
unprofitable and greatly increases the competitiveness of imports. As a result, it indicates that
clear fiscal consolidation is required to lessen the likelihood of a currency crisis. The freedom
with which a country's currency is converted into any other foreign currency such as the US
dollar, British pound, or Euro, and back again is referred to as capital account convertibility.
It refers to the ability to swap domestic financial assets for international financial assets at
market exchange rates. The unrestricted capital movement would eventually emerge from full
capital account convertibility. Due to the unfavourable current account situation—India had a
sizable current account deficit—the Indian rupee was not granted complete capital account
convertibility. The government wanted to make sure that imports of essential goods and
commodities could be made with foreign currency at a lower cost.
IN-TEXT QUESTIONS
4. Which of the following is a primary goal in choosing funding sources for multinational
companies?
a) Using more short-term capital b) Minimize the effective cost of funds
c) Increasing the debt-equity ratio d) None of the above
5. What is a key consideration for multinational companies when raising funds for fluctuating and
permanent current assets?
a) Using more long-term capital b) Using more Short-term capital
c) Balance Short-term and long-term liabilities d) None of the above
6. What is a key factor that impacts the choice of funding sources for multinational companies?
a) The company's location b) Interest rates and currency fluctuations
c) The company's industry d) None of the above
7. Recommend funding source for fluctuating current assets in multinational companies.
a) Short-term capital b) Long-term capital
c) Equity financing d) None of the above
8. What is the difference in the approach of conservative and aggressive finance managers in
choosing funding sources for multinational companies?
a) Conservative finance managers prefer more Euro notes, while aggressive finance managers
prefer more international bonds
b) Conservative finance managers prefer more long-term capital, while aggressive finance
managers prefer more short-term capital
c) Conservative finance managers prefer more host country norms, while aggressive finance
managers prefer more parent company norms
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11.6 INTERNATIONAL FINANCIAL INSTRUMENTS

Instruments Available in Global Financial Markets
International funding can be divided into two basic groups, just like domestic capital
structuring. There are two types of financing:
 Equity financing
 Debt financing
Equity, straight debt, and hybrid instruments are among the numerous types used to raise
finance abroad.
Debt Instruments
The practice of issuing bonds to fund international capital movements has been around for
over 150 years. Foreign bond issuers, mostly governments and railway corporations, made
use of the London market to raise financing in the nineteenth century.
International bonds are generally classified into two types.
Foreign Bonds: Non-resident entities issue bonds in the domestic market denominated in
domestic currency. Yankee Bonds are bonds issued by non-US entities in domestic markets
of the US and are denominated in dollars, Samurai Bonds are bonds denominated in yen and
issued by non-Japanese entities in the domestic market of Japan. In a similar way currency
sectors in other foreign bond markets have unique names, such as the Matador Spanish
Peseta, the Rambrand Dutch Guilder, etc.
Eurobonds: When the United States was aiding European countries in recovering from the
wreckage of World War II through the Marshall Plan, the term "Euro" first surfaced in the
fifties. Eurodollars were the name given to dollars used outside of the US. In this sense, a
currency that is not issued by its home country is referred to as a Euro. Thus, 'Eurobonds'
refer to bonds issued and sold outside of the currency's home country. A bond issued in the
United Kingdom that is denominated in dollars is known as a Euro (dollar) bond. and a Yen-
denominated bond issued in the United States is a Euro (Yen) bond. Companies who want to
issue securities with shorter maturities have the option of doing so in the European Markets.
Medium-Term Notes (MTNs), Note Issuance Facilities (NIF), and Commercial Paper (CP)
are the three most significant varieties. When Euro-Commercial Paper is issued, it is
unsecured, has a maximum maturity of one year, and is not underwritten. NIFs (Note
Issuance Facilities) are underwritten and have a maximum maturity of one year. The Multiple
Component Facility (MCF), a version of NIF, allows a borrower to access money in several
ways as part of the larger NIF program. These choices, which include the ability to select the
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maturity, currency, and interest rate basis, are known as banker's acceptances and short-term
advances. On the contrary, Medium-Term Notes are issued for maturities of more than a year
with a range of tranches dependent on the preferred maturities and are not underwritten.
Under comparable conditions, a usual CP program permits a number of note issues in
accordance with the maturity of the overall program. Euro Loans, which serve as borrowings
in the international capital markets, which are essentially bank loans to businesses in need of
long- and medium-term financing. Club loans and syndicated loans are essentially the two
unique methods of arranging syndicated credits that have evolved in Euromarkets. A private
agreement between lending banks and a borrower is the Club Loan. The term "club loan"
refers to a loan that is advanced by a group of lending institutions when the borrower and
lender are well-known to one another, and the loan amounts are small. However, a full-
fledged public mechanism for coordinating a loan transaction exists in Syndicated Euro
Credit. With a vast network of institutions taking part in the transaction around the world, it is
recognized as an essential component of the financial market process. Syndicated loans
typically have maturities of seven years, with shorter-term deals having maturities of three to
five years.
Equity Instruments
International Capital Markets until the end of the 1970s relied on debt financing, while
corporate entities raised equity primarily in domestic markets. This was brought on by the
restrictions on international equity investments that many nations had up until that point. Due
to potential risks associated with overseas equity offerings, such as those related to exposure
to foreign currencies or concerns about national regulatory constraints on such investments,
inventors also opted to invest in domestic equity issues. Many domestic economies
underwent liberalization and globalization in the early 1980s. Through the issuance of an
intermediate instrument known as a "Depository Receipt," issuers from developing nations
that do not allow the issuance of equity shares denominated in dollars or other foreign
currencies can now access international equity markets. The beneficial interest in shares
issued by a firm is represented by a Depository Receipt (DR), which is a negotiable
certificate issued by a depository bank. These shares are deposited with a local "custodian"
that the depository has designated; the custodian then issues receipts for the deposit of the
shares.
Depository Receipts are referred to as a Global Depository Receipt (GDR), an American
Depository Receipt (ADR), and an International Depository Receipt (IDR) depending on the
placements planned. The number of shares represented by each Depository Receipt in the
domestic markets is stated. The GDRs and domestic shares are often convertible or may be
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redeemed in nations with capital account convertibility. This suggests that a shareholder in an
equity company may deposit the required amount of shares in order to receive a GDR, and
vice versa. There is no foreign exchange risk for the corporation up until the Global
Depository Receipts (GDRs), American Depository Receipts (ADRs), and International
Depository Receipts (IDRs) are converted, also the holder cannot exercise any voting rights.
These kinds of instruments are perfect for companies that desire to have a sizable shareholder
base and a global presence. The company will list on the designated stock exchange, ensuring
that the instrument has liquidity.
Quasi-Instruments
After a certain period of time, these instruments are converted into equity at the investor's or
the company's discretion and cease to be regarded as debt instruments. These include
warrants, foreign currency convertible bonds (FCCBs), etc. Warrants are typically offered in
conjunction with other debt instruments as a sweetener. FCCBs are legally obligated to make
payments at a predetermined coupon rate. With the opportunity to convert into shares at the
investor's discretion, it has more flexibility. The conversion price for FCCB is very similar to
the share's trading price on the stock exchange. Additionally, the business may include a call
option at the issuer's discretion to acquire FCCBs before to maturity. For investment in
Europe, there is an issue of a Euro Convertible Bond. It is an outside-of-the-domestic
market quasi-equity issue that allows the holder the opportunity to convert the instrument
from debt to equity. The ability to convert Euro Convertible Bonds into GDR is a modern
feature. The issuing company often favours a GDR even though the investor would prefer the
convertible bond as an instrument for investment. Interest is paid in US dollars up until
conversion, and bond redemption is likewise completed in US dollars. During the convertible
life, the conversion option may be used by the investor at any time or at predefined intervals.
A stipulated number of shares are issued to the investor upon conversion of the convertible
bond.
IN-TEXT QUESTIONS
9. Consider the following statements in relation to Capital Account Convertibility (CAC):
(1) It alludes to the removal of restrictions on the transfer of capital from India to other
nations around the world
(2) It results in an equitable distribution of income levels in India
(3) It aids in the effective distribution or appropriation of foreign capital in India
Pick the correct response from the statements given above:
a) 1 & 2 b) 2 & 3
c) 1 & 3 d) 1,2 & 3
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11.7 INTERNATIONAL FINANCIAL CENTRES

IFC stands for International Financial Centre. The IMF defines these large full-service
international centres as having sophisticated settlement and payment systems that support
significant domestic economies, deep market liquidity, a variety of funding sources and uses,
and legal and regulatory frameworks that are sufficient to protect the integrity of principal-
agent relationships and supervisory functions. IFCs typically lend long-term to non-residents
and borrow short-term from non-residents. The IMF cited New York City, London, and
Tokyo as examples.
A financial centre, also known as a financial hub, is a site where there is a concentration of
people involved in banking, asset management, insurance, or the financial markets, along
with venues and supporting services. Financial intermediaries like brokers and banks,
institutional investors (like investment managers, insurers, pension funds, and hedge
funds), and issuers (like governments and businesses) are all examples of potential
participants. Even though many transactions happen over the counter (OTC), or directly
between participants, trading activity can occur on sites like exchanges and involve clearing
houses. Companies that provide a wide range of financial services, such as those connected to
mergers and acquisitions, corporate actions, or public offerings, or that participate in other
fields of finance, such as hedge funds, private equity, and reinsurance, usually operate in
financial centres.
Rating agencies and the supply of allied professional services, particularly legal counsel and
accounting services, are examples of ancillary financial services. The largest International
Financial Centre (IFC) and fintech hub in the world is located in Lower Manhattan, New
York City's Financial District, which includes Wall Street. One of the oldest financial centres
was the City of London also known as the Square Mile. One of the biggest international
financial centres in the globe is London. The majority of Regional Financial Centres and
International Financial Centres are full-service financial centres having direct access to
sizable capital pools and are located in major worldwide cities. Offshore Financial Centres, as
well as some Regional Financial Centres, concentrate on tax-driven services such as tax-
neutral vehicles, corporate tax planning tools, and shadow banking or securitisation, and can
include smaller areas.
11.8 SELECTION OF SOURCES AND FORMS OF FUNDS

In order to accomplish its goals, a corporation selects a particular source or kind of finance.
Among the primary goals are minimizing the effective cost of capital, aligning the obtained
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capital to the desired debt-to-equity and current obligations to long-term liabilities ratios, and
avoiding onerous legal and administrative formalities.
Minimisation of Cost of Funds: The choice of funding sources is taken with the goal of
minimizing the cost of capital. The interest rate and fluctuations in the value of the borrowed
currency or the exchange rate are two further factors that affect how much the funds really
cost.
Kbf = (1 + rf) (1 + Ef) - 1 represents the effective cost of borrowing in a foreign market,
whereas Ef is the change in the exchange rate, the foreign market interest rate is expressed as
rf and Kbf is the effective cost of borrowing in a foreign market. For instance, if interest rates
are 14% in New York and 12% in London, respectively, and the value of growth in the pound
sterling is expected to be 4%, then.
The effective cost of borrowing in pounds would be:
= (1 + 12/100) (1 + 4/100) - 1
= (1.12 x 1.04) - 1
= 0.1648 or 16.48% (0.1648 x 100)
A company with global operations will borrow in this case from the New York money market
even if London's money market offers a cheaper interest rate. The weighted average of the
effective borrowing costs across several currencies is determined if the company borrows
from numerous financial markets. If the movement of the values of many currencies has a
negative correlation, the effective cost of overall borrowing is going to be lower. The cost
may rise if the correlation coefficient is positive. In order to lower the effective cost of total
borrowing, the firm takes into account both the projected change in currency value and the
correlation coefficient of the anticipated fluctuations in currency value of several currencies.
Borrowing in Compliance with Norms for Capital Structure: Another funding issue is
largely about minimizing the cost of capital, not by picking the currency of borrowing, but by
adhering to capital structure norms. The weighted average cost of capital will go down when
the debt-equity ratio in the capital structure increases, according to the net income approach.
The cost of debt is lower than the cost of equity since it is tax deductible. The overall cost of
capital decreases with the proportion of the less expensive form of capital in the capital
structure. Miller and Modigliani, on the other hand, believe that regardless of changes in the
debt-equity ratio, the weighted average cost of capital stays the same because as the debt ratio
rises, the risk that equity investors must bear also rises. Due to the significant differences
between these two methods, a third method has been developed, according to which the
weighted average cost of capital tends to rise after the debt-to-equity ratio reaches a specific
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level (sharan, 1991). Every time a multinational company has to raise money, it does so by
combining debt and equity in a way that lowers the cost of capital. However, because of its
highly diversified cash flow across numerous nations, the multinational corporation is better
positioned than a domestic firm to support a greater debt ratio. The capital structure norms of
677 companies across 9 industries and 23 countries are examined in the study by Sekely and
Collins (1988), which reveals that the debt ratio can vary depending on economic, social,
cultural, and political factors. Because of these differences, different countries have different
capital structure norms. The debate over whether affiliates of a company with global
operations should adhere to host country norms or parent company principles is a crucial one.
If the norms in the home nation and the host country are the same, there is no issue; but, if
they are not, it becomes a matter of vital importance. Capital structure requirements are in
line with the host government's monetary and financial policy if they abide by local norms in
the host country. They help assess the return on equity investment in relation to regional
rivals in a particular industry. However, when it comes to adhering to the worldwide target
debt ratio adhered to by the parent firm, the rules are more suited to maximizing total profit.
Identifying an ideal maturity: A company with global operations prefers to raise money
from the international financial market while maintaining a healthy balance between short-
term and long-term obligations. There is no uncertainty surrounding the financing of fixed
assets because it is done so using long-term capital. The ideal balance between long-term
capital and short-term capital is crucial when it comes to the financing of current assets.
According to the widely accepted practice, short-term capital should be used to fund the
variable element of current assets while long-term capital should be used to fund the assets
that are permanent. Profitability and liquidity are truly being traded off here. Long-term
capital is less profitable even though it is more liquid. On the other side, short-term capital is
less liquid yet does not significantly reduce profitability. However, a conservative finance
manager will use more long-term capital. If he/she is aggressive the usage of short-term
capital is significant. As a result, whenever a multinational company seeks funding, it
considers the ideal trade-off between short-term capital and long-term capital.
Avoidance of Legal and Procedural Formalities: Any business seeking funding does not
want to go through too many procedural formalities. International bond issues are far more
intricate than Euro note issues. The borrowing strategy may only be established within the
constraints of applicable county laws and regulations. The borrower cannot issue an
instrument even though it is economically viable when the government forbids it. For
instance, before to 1992, the Indian Government had forbidden Indian companies from
issuing Euro Convertible bonds or Euro equities securities.
266 | P a g e

IN-TEXT QUESTIONS
10. Which of the following does not constitute a benefit of full capital account
convertibility?
a) Encourages import
b) Easy access to forex
c) Boosts exports
d) Promotes international commerce and capital flows between nations
11. A net flow of capital, into one's country, in the form of increased purchases of
domestic assets by foreigners and/or decreased holdings of foreign assets by
domestic residents is known as
a) Financial inflow b) Financial transaction
c) financial outflow d) None of the above
12. According to Miller and Modigliani's theory, what remains the same
regardless of changes in the debt-equity ratio?
a) The cost of equity
b) The weighted average cost of capital
c) The cost of debt
13. What is a potential risk associated with full capital account convertibility?
a) It can reduce unemployment in India
b) It can promote technical advancement in India
c) It can carry a significant risk of capital outflows and exchange rate
volatility
d) It can lead to a fair distribution of income levels in India
11.9 SUMMARY
External financial markets intermediate by moving savings from investors and lenders to
those wanting to invest in assets that they believe will deliver future returns. Assets are
exchanged across national borders between citizens of several financial centres in
international financial transactions. There is a symbiotic relationship between both primary
and secondary markets in domestic as well as international financial markets. International
capital movements have numerous advantages. The capacity to transfer financial resources
267 | P a g e

MBA
across borders creates a fantastic potential for economies to thrive. Global money flows
enable startups to launch their products and existing businesses to develop and invest in new
ventures. Increased aggregate demand is one of the benefits of foreign capital flows. As more
loanable funds become available in the economy as a result of capital inflows, interest rates
will fall. Borrowing would be cheaper as a result, allowing investors to borrow money and
invest in new ventures. Increasing aggregate demand raises the economy's potential output
and reduces unemployment. Another significant benefit of foreign money flows is that it
promotes technical advancement. Capital account convertibility is a feature of a country's
financial regime that focuses on the capacity to freely or at market-determined exchange rates
conduct transfers of local financial assets into foreign financial assets. It is also known as
capital asset liberation. In layman's words, full capital account convertibility allows for the
exchange of local currency for foreign currency with no limit on the amount. The IMF
defines these large full-service international centres as having sophisticated settlement and
payment systems that support significant domestic economies, deep market liquidity, a
variety of funding sources and uses, and legal and regulatory frameworks that are sufficient
to protect the integrity of principal-agent relationships and supervisory functions. The full-
service financial hubs that comprise International Financial Centres, as well as a number of
Regional Financial Centres, are situated in large worldwide cities and have direct access to
sizeable capital pools.
IN-TEXT QUESTIONS
14. What is the difference between full and partial capital account convertibility
(CAC)?
a) Partial CAC only allows for limited capital movement, while full CAC has
no restrictions
b) Partial CAC is only granted to countries with a current account surplus,
while full CAC has no such requirement
c) Partial CAC is only allowed under certain situations, while full CAC has no
restrictions
d) Partial CAC allows for unlimited capital movement, while full CAC has
restrictions
15. Which of the following is a potential risk associated with full capital account
convertibility?
a) Increased capital inflows b) Increased capital outflows
c) Reduced exchange rate volatility d) None of the above
268 | P a g e

11.10 ANSWER TO IN-TEXT QUESTIONS
1 a) Price discovery, providing liquidity, 8 b) Conservative finance managers prefer

and lowering the cost of information and more long-term capital, while aggressive
transaction. finance managers prefer more short-term
2 c) The movement of financial assets for capital.
investments, management of businesses, 9 a) 1 & 2
or commercial trade 10 a) Encourages import.
3 c) To protect against the risk of loss 11 a) Financial inflow
resulting from fluctuations in foreign
exchange and interest rates. 12 b) The weighted average cost of capital
4 b) Minimize the effective cost of funds. 13 c) It can carry a significant risk of
capital outflows and exchange rate
5 c) Balance Short-term and long-term volatility.
liabilities
14 a) Partial CAC only allows for limited
6 b) Interest rates and currency capital movement, while full CAC has no
fluctuations restrictions.
7 a) Short-term capital 15 b) Increased capital outflows
1. What is the essence of the external financial market.

2. What is the meaning of international capital flows?
3. What are the International financial centres and also explain its role.
4. What is meant by capital account convertibility?
 Khan, M. Y. (2018). Indian Financial System. Chennai: McGraw-Hill Education

 Vij, M., & Dhawan, S. (2017). Merchant Banking and Financial Services. Delhi:
McGraw-Hill Education
 Madura, J. (2016). Financial Markets and Institutions. USA: Cengage Learning
 Fabozzi, F. J., Modigliani, F. P., & Jones, F. J. (2010). Capital Markets – Institutions
and Instruments. Delhi: PHI Learning
269 | P a g e

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Department of Distance and

Master of Business Administration (MBA)

BBA-FIA (DSC-8), Semester – III, Course Credit - 4

© Department of Distance & Continuing Education, Campus of Open Learning,

© Department of Distance and Continuing Education

© Department of Distance & Continuing Education, Campus of Open Learning,

Corrections/Modifications/Suggestions proposed by Statutory Body,

© Department of Distance & Continuing Education, Campus of Open Learning,

Lesson 2 : Introduction to Financial Intermediation……………………………..38

Lesson 3: Depository Institution Of Banking……………………….………..........58

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3.9 Evaluation of banking sector

Lesson 5: Financial Markets………………………………………………………..128

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5.7 Primary Market Instruments

Lesson 6: Types of Mutual Fund Schemes……………..…………………………150

Lesson 7: Capital Market ……………………………………………………….….167

Lesson 8: Trading Mechanism of Exchanges…………………………………….190

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Lesson 9: Money Market And Debt Market…………………….…………….…..208

Lesson10: Other Markets……………………………………………………….......231

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10.6 Alternative Financial Instruments and Services

Lesson 11: External Market………………………………………………………255

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1.1 Learning Objectives

1.1 LEARNING OBJECTIVES

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5. Explore innovative remittance practices and their significance in facilitating efficient

An overview of the Indian financial system

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(ii) Financial Markets

1.3 THE INDIAN FINANCIAL SYSTEM

Components of Indian financial system

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© Department of Distance & Continuing Education, Campus of Open Learning,

© Department of Distance & Continuing Education, Campus of Open Learning,

© Department of Distance & Continuing Education, Campus of Open Learning,

© Department of Distance & Continuing Education, Campus of Open Learning,

of non-tradable financial assets. Shares of stock, debentures, and government and

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1.4 INSOLVENCY AND BANKRUPTCY CODE (IBC)

Insolvency and Bankruptcy Code (IBC)

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2. Insolvency Resolution Process: The IBC establishes a time-bound insolvency resolution

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1.5 PAYMENT BANKS

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Issue Debit Cards. Cannot set up subsidiaries to undertake non-

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Advantages of Payment Banks

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 India Post Payment Bank <Limited

1.6 GOODS AND SERVICES TAX (GST)

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