PAN African eNetwork Project

Master of Finance & Control

Financial System
Semester - I

Navneet Saxena
Copyright Amity University
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Money Market
It is a specialised market geared to cater
to the short term needs
It is a market for short-term financial
assets which are near substitutes for
money
These instruments are liquid and can be
turned over quickly at low transactions
cost and without loss
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Characteristics of Money Market

It is basically over the phone market
Dealings in money market may be
conducted with or without the help of
brokers
It is a market for short-term financial assets
that are close substitutes for money
Short term for this purpose is generally
taken as a period upto one year

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Characteristics of Money Market

Financial assets which can be converted
into money with ease, speed, without loss
and with minimum transactions cost are
regarded as close substitutes for money or
near-money
Money market consists of many submarkets, such as, inter-bank call money,
bills rediscounting, treasury bills, etc.
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Objectives of Money Market

It provides an
equilibrating
mechanism for
evening out shortterm surpluses and
deficits

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Objectives of Money Market

The money market provides a focal point
for central bank intervention for influencing
liquidity in the economy
It provides reasonable access to users of
short-term money to meet their
requirements at a realistic price

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Prerequisite for an Efficient Money

Market
Money market should be wide and deep
There should be well-diversified mix of
money market instruments, suited to
different requirements of borrowers and
lenders
There should be active secondary market
in these instruments

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Prerequisite for an Efficient Money

Market
A strong central bank for regulation,
direction and facilitation is essential for a
well organised and developed money
market
A well organised commercial banking
system is an important prerequisite of a
well developed money market

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Importance of Money Market

It is an important source of financing trade
and industry through bills, commercial
papers, etc.
Availability of funds in the money market
and money market interest rates have an
impact on interest rates and resource
mobilisation in capital markets

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Importance of Money Market

Money market offers an avenue to the
commercial banks for investing short-term
surpluses of funds and borrowing for
short-term needs
Money market facilitates effective
implementation of monetary policy of the
central bank of a country

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Importance of Money Market

Money market serves as an important
guide to the government in formulating,
revising and implementing its monetary
policy
Money market offers to the government an
important non-inflationary avenue of
raising short-term funds through bills
which are subscribed by commercial
banks and the public
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Distinction between Money Market

and Capital Market
Money market operations of raising and
deployment of funds are for a short
duration, whereas in capital market these
are for longer duration
Money market is the institutional source of
working capital to the industry, financial
institutions and generally other
corporatised entities
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Distinction between Money Market

and Capital Market
There are large sized participants in
money market. In capital market the
participants are both large as well as small
individual investors
Money market is essentially over the
phone market, whereas capital market
transactions may be on the phone, stock
exchanges, the offices of intermediaries
etc.
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Characteristics, Weaknesses of
Money Market

Existence of Unorganised Money Market

Lack of Integration
Non-emergence of National Market
Disparity in Interest Rates
Limited Bill Market
Overall Shortage of Funds in Money
Market

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Characteristics, Weaknesses of
Money Market

Seasonal Shortage of Funds

Interest Rate Fluctuations
Inadequate Elasticity and Stability
Inefficient and Inadequate Banking
Facilities
Limited Supply of Short-term Instruments
Limited Foreign Funds

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General Characteristics of Money

Market Instruments

Short Duration
High Liquidity
High Safety
Restricted Participants
Large Volume
Deregulated Interest Rate

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Beneficial Features of Money

Market
Money market has various sub-markets
for different instruments
There is a network of large number of
participants which adds greater depth to
the market
The relationship characterising a money
market is impersonal in character

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Beneficial Features of Money

Market
The interplay of forces of demand and
supply minimises the price differential for
assets of similar type
There is a degree of flexibility in the
regulatory framework of money market
Efforts are continuously made for
introducing new instruments and
innovative dealing techniques
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Private Foreign Investment

Foreign collaboration / Foreign Direct
Investment is channelised in the form of
direct contribution to the equity capital of
the company and is akin to domestic
equity invested by the corporate
shareholders
FDI occurs to tap excess returns in foreign
markets
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Private Foreign Investment

Other reasons:
Production overseas may provide
comparative cost advantage in terms of
lower labour and other operating costs
Investment abroad sometimes is virtual
necessity to secure raw materials
International diversification to reduce risks

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Forms of Foreign Investment

Foreign Direct Investment

External Commercial Borrowings
Euro Issues
Indian Depository Receipts
Foreign Institutional Investors Investment
Offshore Funds
Overseas Venture Capital Investment

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External Commercial Borrowings

ECBs refer to commercial loans, in the
form of bank loans, buyers credit,
suppliers credit, securities instrument,
availed from non-resident lenders with
minimum average maturity of 3 years
They can be accessed under two routes:
Automatic and Approval

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Euro Issues
As a part of globalising the Indian
economy after 1991, Indian corporates are
permitted to float their securities in, and
raise funds from, the Euro markets
The two long-term primary instruments of
Euro issues are Foreign Currency Bonds
(FCCBs) and Global Depository Receipts
(GDRs) and American Depository
Receipts (ADRs)
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Indian Depository Receipts

A company incorporated outside India can
issue IDRs [i.e. an instrument in the form
of a depository receipt created by a
domestic depository against its underlying
equity shares]

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Foreign Institutional Investors (FIIs)

Investment
The FII investment in the country is routed
primarily through the capital market /
primary and secondary market securities,
including Government securities
It has to be channelised within the
framework of guidelines from the
Government

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Offshore (Mutual)/ Country Funds

These are mutual funds of a given country
which collect subscription from the
residents abroad
Apart from facilitating transfer of capital of
the host country, they widen the choice of
investment for the individual and investors
abroad

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Overseas Venture Capital

Investments
In recognition of the growing importance of
venture capital as one of the sources of
finances for the Industry, particularly for
the smaller unlisted companies, overseas
venture capital investments are now
allowed

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Mutual Funds
A mutual fund is a vehicle for collective
investment of funds of the investors in the
securities permitted under the regulations
A mutual fund raises resources from the
investors by launching various types of
Unit Schemes and invests the same in
eligible securities and instruments

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Schemes of Mutual funds

The asset management company can
launch any scheme with the prior approval
of the trustees
A copy of the offer document should be
filed with the Board
Advertisement of any scheme shall be
conformation with the advertisement code

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Determination of Net Asset Value

The NAV of a scheme will be calculated as
follows:
(Market value of securities + Accrued
Income + Receivables + Other Assets +
Unamortised Issue Expenses Accrued
Expenses Payables Other Liabilities)
_____________________________
No. of units outstanding of a Scheme
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Benefits of Mutual Funds

The funds mobilised by the Mutual Funds,
largely from small investors, are invested
in corporate securities equities and debt
instruments as per the objectives of the
schemes.
They provide an opportunity to the
investors to indirectly own the corporate
securities
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Benefits of Mutual Funds

Diversification of Risk
Professional Management
Liquidity
Convenience
Tax Benefits

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Open Ended Schemes

In these subscription is made on a
continuous basis
There is no period of maturity and they
continue over time
The MF provides liquidity by repurchasing
the Units
They can be closed if outstanding units fall
below 50% of the original amount
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Close Ended Schemes

They are open for public subscription for a
limited period only
They have a definite period of life
They are transacted at stock exchanges
and provide liquidity to the investors at
market prices
They are terminated at the end of the
specified period
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Types of Schemes

Gilt Schemes
Income Schemes
Balanced Schemes
Growth Schemes
Sector Specific Schemes
Index Schemes
Gold Schemes
Fund of funds

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Types of Schemes
Gilt Schemes: These funds seek to
generate returns through investment in
gilt-edged securities like Central and State
Government Securities
Income Schemes: These schemes aim at
providing a regular income to the unitholders by investing in fixed income
securities like bonds and debentures
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Types of Schemes
Balanced Schemes: To balance income
requirements with growth of capital. The
fund invests in both equity and debt with
moderate levels of risk
Growth Schemes: For investors who aim
to earn the benefits of capital appreciation,
besides regular income. Investments are
largely in equity shares
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Types of Schemes
Sector Funds: They focus on certain
sectors of the economy which have high
potentials for growth. They invest in equity
of such related sector
Index Funds: They are linked to a specific
index of share prices. These funds try to
achieve returns commensurate with that of
the index concerned
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Types of Schemes
Gold Schemes: These funds invest in
gold. They allow investors to buy gold in
electronic form instead of physical gold
Fund of Funds: In this the fund invests its
assets in other Mutual Fund Schemes
rather than buying shares, debentures or
other assets on its own

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Non-Banking Finance Companies

They play an indispensible part in the
Indian financial system, as they
supplement the activities of banks in the
field of deposit mobilisation and lending
They provide finance to activities which
are not served by the organised banking
system

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NBFCs
The merit of NBFCs lies in the higher level
of their customer orientation
They involve lesser pre- or post-sanction
requirements, their services are marked
with simplicity and speed and they provide
tailor-made services to their clients

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NBFCs
They cater to the needs of those
borrowers who remain outside the purview
of the commercial banks as a result of the
monetary and credit policy of the Central
Bank
Marginally higher rates of interest on
deposits offered by NBFCs also attract a
large number of depositors
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Types of NBFCs
Equipment Leasing Company: is a
company which carries on as its principal
business, the business of leasing of
equipments or the financing of such
activity
Hire-Purchase Finance Company: is a
company which carries on hire-purchase
transactions or the financing of such
transactions
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Types of NBFCs
Housing Finance Company: is a company
which carries on as its principal business,
the financing of the acquisition or
construction of houses including the
acquisition or development of plots of land
for construction of house

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Types of NBFCs
Investment Company: means any
company which carries on as its principal
business the acquisition of securities
Loan Company: is a company which
carries on as its principal business, the
providing of finance whether by making
loans or advances or otherwise for any
activity other than its own
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Types of NBFCs
Miscellaneous Non-Banking Company:
(Chit Fund Company) is a company which
collects subscriptions from specified
number of subscribers periodically and in
turn distributes the same as prizes
amongst them.
Any other form of chit or kuri is also
included in this category
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Types of NBFCs
Residuary Non-banking Company: is a
company which receives deposits under
any scheme by way of subscriptions /
contributions and does not fall in any of
the above categories

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Statutory Provisions of RBI Act

Regarding NBFCs
Compulsory registration of NBFCs with the
RBI
The minimum net worth for NBFCs at Rs.
25 lakhs
Maintenance of liquid assets in
unencumbered approved securities
Creation of Reserve Fund to which 20% of
the net profit of the company must be
transferred every year
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Definition of Public Deposits

Fixed, recurring, etc. deposits received
from public, deposits received from
relatives and friends, deposits from
shareholders by a public limited company
and the money raised by issue of
unsecured debentures and bonds to
shareholders and the public

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Regulation over Acceptance of

Deposits
NBFCs having a net worth of less than Rs.
25 lakhs are not allowed to raise public
deposits
If the credit rating of a company falls, it
must adjust deposits within 1 year. This
period may be further extended by the RBI
An NBFC shall be classified as Equipment
Leasing and Hire-Purchase Company
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Regulation over Acceptance of

Deposits
The maximum permissible interest rate on
public deposits is decided by the Central
Bank
NBFCs can pay uniform maximum
brokerage of 2% on deposits for 1 year to
5 years
The period of deposit should not be less
than 12 months and not more than 60
months
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Regulation over Acceptance of

Deposits
All NBFCs accepting public deposits are
required to submit to Reserve Bank
periodical returns and financial statements
Other NBFCs are exempted from this
requirement
NBFCs have been advised to include in
their advertisements that the deposits
collected by them are not insured
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Prudential Norms for NBFCs

NBFCs holding/accepting public deposits
are required to maintain Capital to Risks
Assets Ratio (CRAR)
CRAR is required to be maintained on a
daily basis
It comprises tier I and tier II capital

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Prudential Norms for NBFCs

Tier I Capital is the Core Capital or Net
Owned Funds.
It includes paid up equity capital and free
reserves, as reduced by the amount of
investment in and loans and advances to
subsidiaries and companies in the same
group and other NBFCs in excess of 10%
of owned funds of the registered NBFCs
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Prudential Norms for NBFCs

Tier II Capital includes all quasi-capital like
preference shares, subordinated debt,
convertible debentures etc.
It shall not exceed Tier I Capital
It will include general provisions and loss
reserves and subordinated debt issued
with original tenor of 60 months or more

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RBIs Supervision Over NBFCs

The Department undertakes registration of
NBFCs
The Department also supervises NBFCs
by means of off-site monitoring.
The returns filed by the companies are
analysed by the Department to determine
the quality of performance and adherence
to the prescribed regulatory standards
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Bank Credit to NBFCs

To augment their resources for lending,
NBFCs depend on bank credit
The RBI had in the past prescribed a
ceiling on such bank credit
Bank credit is not allowed to be given to
NBFCs engaged in bill discounting,
investments in shares, debentures etc.

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Norms for NBFCs entry into

insurance
Permitted to enter into insurance business
either as agent or as joint venture
participant
Any NBFC which is registered with the RBI
and has net owned funds of Rs. 2 crore is
permitted to undertake insurance business
as agent of Insurance Companies on fee
basis, without any risk participation

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Norms for NBFCs to become

Banks
It should have a minimum net worth of Rs.
200 crore as per the latest balance sheet
It should not have been promoted by a
large Industrial house
It should have acquired a credit rating of
not less than AAA rating in the previous
year

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Thank You
Please forward your query
To: nsaxena1@amity.edu
CC:
manoj.amity@panafnet.com
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