MODULE II – ROLE OF BANKS IN CAPITAL MARKETS

Banks play an important role in capital markets, which are markets where long-term financial
instruments, such as stocks, bonds, and derivatives, are bought and sold. The primary role of
banks in capital markets is to provide liquidity, facilitate transactions, and manage risk.
Here are some of the specific ways that banks contribute to capital markets:
Underwriting: Banks act as underwriters by purchasing securities from the issuer and then
selling them to investors. This process is called underwriting and allows companies to raise
capital by selling securities to investors.
Market-making: Banks also act as market-makers, providing liquidity to the market by buying
and selling securities on a continuous basis. This helps to ensure that there are buyers and
sellers in the market at all times, which helps to stabilize prices.
Trading: Banks trade securities on behalf of clients, either on an agency basis or as a principal.
Banks also engage in proprietary trading, where they use their own capital to trade securities.
Investment banking: Banks provide investment banking services to clients, such as advising
on mergers and acquisitions, and helping companies to raise capital through debt or equity
offerings.
Risk management: Banks also help clients manage their risk exposure in the capital markets
by providing hedging and risk management products, such as derivatives.
Custodial services: Banks can provide custodial services for securities by holding and
safeguarding them on behalf of clients. This includes providing safekeeping, settlement, and
record-keeping services for securities.
Securities lending: Banks can facilitate securities lending, which involves lending securities
to investors who want to sell them short or use them for other purposes. This can help to
increase liquidity in the market and generate additional revenue for banks.
Research: Banks can provide research and analysis on securities, markets, and industries,
which can help investors to make informed investment decisions.
Overall, banks play a vital role in capital markets by providing liquidity, facilitating
transactions, managing risk, and helping companies to raise capital.

DEPOSITORY
A depository is a financial institution or organization that holds and safeguards assets, such as
securities, bonds, and other financial instruments, on behalf of its clients. The depository may
also facilitate transactions involving these assets, such as buying, selling, and transferring
ownership.
Depositories can take different forms, including banks, stock exchanges, and clearinghouses.
Some common examples of depositories include the Depository Trust Company (DTC), the
Federal Reserve System, and Euroclear.
Depositories play a crucial role in financial markets by providing a secure and efficient means
for investors to hold and trade securities. They help to reduce risk and ensure transparency by
maintaining accurate records of ownership and facilitating the settlement of transactions.
In India, there are two major depositories: National Securities Depository Limited (NSDL) and
Central Depository Services Limited (CDSL). Both NSDL and CDSL are regulated by the
Securities and Exchange Board of India (SEBI) and are responsible for holding and maintaining
electronic records of securities such as equities, bonds, debentures, and mutual funds.
NSDL was established in 1996 and is the first depository in India. It is headquartered in
Mumbai and has branches and depository participants (DPs) across the country. Some of the
major shareholders of NSDL include the Industrial Development Bank of India (IDBI), the
National Stock Exchange (NSE), and the State Bank of India (SBI).
CDSL was established in 1999 and is also headquartered in Mumbai. It has a network of over
589 DPs and more than 1.5 crore investor accounts. Some of the major shareholders of CDSL
include BSE Ltd, State Bank of India (SBI), HDFC Bank, Standard Chartered Bank, and
Canara Bank.
Both NSDL and CDSL have similar functions and services, including account opening,
dematerialization of securities, settlement of trades, pledge and hypothecation of securities, and
transmission of securities. Investors can choose to open an account with either NSDL or CDSL
based on their preference or the services offered by the respective depositories.

IPO PROCESS
The Initial Public Offering (IPO) process involves several stages, including:
Preparing for the IPO: The company selects investment bankers, legal advisors, and auditors
to assist with the IPO. The company also prepares financial statements and prospectus, which
provides details about the company's business, financials, and risks.
Registration with the regulatory authority: The company files a registration statement with
the Securities and Exchange Commission (SEC) or the regulatory authority of the country
where the IPO is taking place. The registration statement includes the prospectus, financial
statements, and other relevant information.
Due diligence: The investment bankers and underwriters conduct due diligence on the
company's business and financials to ensure that the information in the prospectus is accurate
and complete.
Pricing: The investment bankers and underwriters work with the company to determine the
price range for the IPO shares. This is based on market conditions, the company's financials,
and other factors.
Roadshow: The company and its investment bankers conduct a roadshow to market the IPO
to potential investors. This involves meetings with institutional investors, analysts, and other
potential buyers of the IPO shares.
Allocation and distribution of shares: Once the IPO shares are priced, they are allocated to
investors based on their orders. The investment bankers and underwriters then distribute the
shares to the investors.
Listing and trading: The company's shares are listed on a stock exchange, and trading begins.
The price of the shares may fluctuate based on supply and demand, market conditions, and
other factors.
The IPO process can take several months to complete and involves significant costs, including
underwriting fees, legal fees, and other expenses. However, an IPO can provide the company
with access to capital, increased visibility, and a public market for its shares.

ASBA
ASBA stands for "Application Supported by Blocked Amount." It is a process used in India
for making initial public offerings (IPOs) where investors' application money is blocked in
their bank accounts until the shares are allocated to them. ASBA is an alternative to the
traditional IPO application process, where investors had to issue cheques or demand drafts that
were later cleared.
Under the ASBA process, investors can apply for shares in an IPO through their bank accounts,
and the application amount is blocked in their accounts until the IPO is allotted. This process
eliminates the need for investors to issue cheques or demand drafts, which can be time-
consuming and involve additional costs. Once the shares are allotted, the blocked amount is
debited from the investor's bank account, and the remaining balance is made available to them.
The ASBA process is widely used in India for IPOs and has been mandated by the Securities
and Exchange Board of India (SEBI) to make the application process more efficient and secure.

Demat or Dematerialization is the process of converting physical securities such as shares,

bonds, and debentures into electronic format. Dematerialization eliminates the need for
physical certificates, making it easier and more efficient to buy, sell, and transfer securities.
Demat accounts are required to hold and trade securities in electronic form. These accounts are
similar to a bank account and are maintained by Depository Participants (DPs). DPs are entities
authorized by the Securities and Exchange Board of India (SEBI) to offer demat services to
investors.
To open a demat account, investors must submit an account opening form and provide Know
Your Customer (KYC) documents such as PAN card, Aadhaar card, and address proof. Once
the account is opened, investors can buy, sell, and transfer securities electronically.
Some of the benefits of demat accounts include:
Convenience: Demat accounts make it easy and convenient to buy, sell, and transfer securities
from anywhere, at any time.
Safe and secure: Dematerialization eliminates the risk of physical theft, loss, or damage of
securities.
Faster settlement: Settlement of trades in demat accounts is faster compared to physical
securities, which can take several days to settle.
Reduced costs: Demat accounts eliminate the need for stamp duty and other expenses
associated with physical securities.
Automatic corporate actions: Demat accounts automatically reflect corporate actions such as
stock splits, bonuses, and dividends.
Overall, dematerialization has revolutionized the way securities are held, traded, and
transferred, making it easier and more efficient for investors to participate in the capital
markets.
 UNIT III – TYPES OF BANKS & BANKING PRODUCTS

SCHEDULED VS NON-SCHEDULED COMMERCIAL BANKS

In India, banks are classified into two categories based on their status and regulatory
requirements: scheduled banks and non-scheduled banks.
Scheduled banks are banks that are included in the Second Schedule of the Reserve Bank of
India (RBI) Act, 1934. Scheduled banks must fulfill certain criteria such as having a paid-up
capital of at least Rs. 5 crore and a deposit insurance cover provided by the Deposit Insurance
and Credit Guarantee Corporation (DICGC). Scheduled banks are subject to a higher level of
regulation and scrutiny by the RBI.
Some examples of scheduled banks in India include State Bank of India, HDFC Bank, ICICI
Bank, and Axis Bank.
Non-scheduled banks, on the other hand, are banks that are not included in the Second Schedule
of the RBI Act, 1934. Non-scheduled banks do not have to meet the same regulatory
requirements as scheduled banks and are subject to less scrutiny by the RBI.
The main difference between scheduled and non-scheduled banks is that scheduled banks are
subject to higher regulatory requirements and are generally considered to be more reliable and
stable compared to non-scheduled banks. Customers often prefer to bank with scheduled banks
due to the higher level of regulation and deposit insurance coverage provided by DICGC.
Nonetheless, non-scheduled banks also play an important role in providing banking services,
especially in rural and remote areas, and are regulated by the RBI to ensure their stability and
financial soundness.

FUND BASED BANKING PRODUCTS

Fund-based banking products refer to financial products that involve the lending or borrowing
of money. These products are typically offered by banks and other financial institutions to
individuals, businesses, and other organizations. Some common examples of fund-based
banking products include:
Loans: A loan is a financial product that involves the lending of money by a bank or other
financial institution to an individual or organization. Loans can be secured or unsecured and
can be used for a variety of purposes, such as buying a home, financing a business, or paying
for education.
Credit cards: A credit card is a financial product that allows individuals to borrow money up
to a predetermined credit limit. Credit cards are typically used for everyday purchases and can
be paid off in full each month or over time.
Overdraft facilities: An overdraft facility is a financial product that allows individuals or
businesses to withdraw more money than they have in their account, up to a pre-agreed limit.
Overdraft facilities are typically used to cover short-term cash flow issues.
Trade finance: Trade finance is a financial product that involves the lending of money to
support international trade transactions, such as importing or exporting goods.
Working capital finance: Working capital finance is a financial product that involves the
lending of money to support a business's day-to-day operations, such as buying inventory or
paying suppliers.
Asset-based finance: Asset-based finance is a financial product that involves the lending of
money against a business's assets, such as inventory or equipment.
These are just a few examples of fund-based banking products. Banks and other financial
institutions offer a wide range of products to meet the financial needs of individuals and
organizations.

NON-FUND BASED BANKING PRODUCTS

Non-fund based banking products refer to financial products that do not involve the lending or
borrowing of money but rather the provision of guarantees or commitments by banks or other
financial institutions. Some common examples of non-fund based banking products include:
Letter of Credit (LC): A letter of credit is a document issued by a bank that guarantees
payment to a seller on behalf of a buyer. It is commonly used in international trade transactions
to ensure that payment will be made once goods are delivered.
Bank Guarantees: A bank guarantee is a commitment by a bank to pay a certain amount of
money to a beneficiary if the customer fails to fulfill their contractual obligations. Bank
guarantees are often used in construction projects or in the import/export business.
Standby Letter of Credit (SBLC): A standby letter of credit is a document issued by a bank
that serves as a backup payment option in case the customer fails to make payment.
Foreign Exchange Services: Banks provide foreign exchange services to help customers
manage their foreign currency transactions. These services include foreign currency exchange,
currency hedging, and foreign currency accounts.
Credit Cards: Although credit cards are typically considered a fund-based banking product,
they can also be classified as non-fund based products since they provide a line of credit without
any physical transfer of funds.
Merchant Services: Banks also offer merchant services to businesses to help them accept
electronic payments from their customers.
Non-fund based banking products are important for businesses and individuals who need to
mitigate financial risks associated with international trade or other transactions. They are also
useful for businesses who want to offer payment options to their customers without taking on
the risk of lending money themselves.
SMALL FINANCE BANKS
Small finance banks (SFBs) are a category of banks in India that were created with the aim of
providing financial inclusion and extending banking services to underserved and unserved
sections of the population, including small businesses, farmers, micro-enterprises, and low-
income households. The Reserve Bank of India (RBI) issued guidelines for the licensing of
SFBs in 2015, and since then, several SFBs have been established in the country.
Some key features of small finance banks include:
Focus on financial inclusion: The primary objective of small finance banks is to provide
banking services to the unbanked and underserved population, especially in rural and semi-
urban areas.
Small-ticket loans: SFBs focus on providing small-ticket loans to micro and small enterprises,
agriculture, and other priority sectors. These loans are typically smaller in size and shorter in
tenure compared to those offered by commercial banks.
High-interest rates on deposits: SFBs offer higher interest rates on deposits, which makes them
an attractive option for people who are looking for higher returns on their savings.
Technology-driven operations: SFBs leverage technology to deliver banking services and
operate through a network of branches, micro-offices, and banking correspondents.
Financial products: SFBs offer a range of financial products, including savings and current
accounts, fixed deposits, recurring deposits, microloans, and insurance products.
Regulatory framework: SFBs are regulated by the Reserve Bank of India, and they need to
comply with the guidelines issued by the RBI regarding capital adequacy, asset quality, and
other regulatory requirements.
SFBs are expected to play a significant role in promoting financial inclusion in India by
extending banking services to the unbanked and underserved population, and by promoting
entrepreneurship and micro-enterprises in rural and semi-urban areas.

PAYMENT BANKS
Payment banks are a type of financial institution in India that were introduced by the Reserve
Bank of India (RBI) in 2015 with the objective of promoting financial inclusion and digital
banking. Payment banks are a subset of banks that offer only basic banking services such as
savings accounts, deposits, remittances, and bill payments. They are not allowed to provide
loans or issue credit cards.
Some key features of payment banks include:
Digital Banking: Payment banks offer digital banking services to their customers, allowing
them to access their accounts and perform transactions through mobile banking, internet
banking, and other digital channels.
Financial Inclusion: Payment banks are focused on promoting financial inclusion by
extending banking services to the unbanked and underbanked population in India, especially
in rural and remote areas.
Low Transaction Fees: Payment banks charge lower transaction fees compared to traditional
banks, making banking services more affordable and accessible to a larger population.
Tie-ups with other Financial Institutions: Payment banks can form partnerships with other
financial institutions, such as commercial banks, to provide their customers with additional
services such as ATM withdrawals and cash deposits.
Limited Deposit Amounts: Payment banks are allowed to accept deposits only up to a limit of
Rs. 2 lakh per customer. However, they can offer higher interest rates on deposits compared
to traditional banks.
Regulatory Framework: Payment banks are regulated by the Reserve Bank of India (RBI) and
need to comply with the guidelines issued by the RBI regarding capital adequacy, asset
quality, and other regulatory requirements.
Payment banks have the potential to revolutionize the banking industry in India by promoting
financial inclusion, encouraging digital banking, and offering affordable banking services to a
larger population. They are expected to play a significant role in achieving the goal of a
cashless economy in India.

NEO BANKS
Neo banks, also known as digital banks or challenger banks, are financial institutions that
operate exclusively online and offer banking services through mobile apps and other digital
channels. Neo banks are a relatively new phenomenon that emerged in response to the growing
demand for digital banking services and the need to provide customers with a more convenient
and seamless banking experience.
Some key features of neo banks include:
Digital-only operations: Neo banks operate exclusively online, without any physical branches.
Customers can access their accounts and perform transactions through mobile apps, internet
banking, and other digital channels.
User-friendly interface: Neo banks offer a user-friendly and intuitive interface that allows
customers to perform transactions quickly and easily.
Low fees: Neo banks charge lower fees compared to traditional banks, making banking services
more affordable and accessible to a larger population.
Advanced technology: Neo banks leverage advanced technology such as artificial intelligence,
machine learning, and data analytics to provide personalized banking services to their
customers.
Innovative financial products: Neo banks offer innovative financial products such as virtual
debit cards, real-time payment processing, and budgeting tools that are not typically available
from traditional banks.
Limited services: Neo banks typically offer a limited range of banking services, such as savings
accounts, current accounts, and debit cards. They are not allowed to offer loans or credit cards.
Neo banks are disrupting the traditional banking industry by offering a more convenient and
user-friendly banking experience, especially for the tech-savvy younger generation. However,
they also face challenges such as regulatory compliance, customer acquisition, and
profitability. Despite these challenges, neo banks are expected to continue growing and
expanding their services, especially in emerging markets where there is a high demand for
digital banking services.

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