Introduction

Charectersitics of Financial Services

Intangible Inseparable Customer Orientation Perishable Dyanamism

Functions of Financial Services

Mobilisation of funds Effective employment of funds Provision of need based services Provision of regulation Enhancement of Economic development

Classification of Financial Services

Fund based Services Fee based Services

Types of Financial Services

Leasing Factoring Bills discounting Securitisation Venture Capital Credit Rating Mutual funds

Insurance Credit Cards Merchant Banking Underwriting Portfolio Management Services Forfaiting Derivatives Forex Services

Constituents of Financial Service Sector

Market Participants Financial Service Providers Regulatory Bodies

Constituents of Financial Market

Money Market Capital Market Foreign Exchange Market

Factors affecting the Financial Services and Markets

GDP Rate of Savings Inflation and deflation Business Cycles BOP

Indian Financial System

Financial Sector in Pre liberalisation Period

Unorganised till 1970 s Nationalisation of Banks in 1969 and 1980. Big Finance Companies provides services: LIC ( 1956), GIC ( 1973) UTI ( 1964) IDCI ( 1948), IDBI ( 1964)

 Resources were used for financing fiscal deficit Banking Industry predominantly public in nature Insurance under Monopoly MFs also under Public sector Monopoly Foreign Firms were not permitted to enter the Industry Banks, Pension Funds and Insurance Companies were forced to purchase Govt Secs as their Primary Investments

 Non existent of Financial Derivative Market Insufficient Regulatory Bodies

Post Liberalisation Period

Service Sector Reforms MF Industry was opened to Private Players IRDA Act ( 1999) was enacted. SARFAESI Ordinance 2002 was enacted Regulation of Credit rating Agencies, SEBI(CRA) Regulations 1999 was given. Merchant Banking Regulations, SEBI ( Merchant Bankers) Regulations , 1992 were made. Merchant Bankers to be engaged in Fee based Activity

Capital Market Reforms SEBI was set up in 1988. Depository and share dematerialization systems were introduced Introduction of Online trading Entry of many new instruments Entry norms for capital issues were tightened Disclosure requirements were improved Regulations for Insider trading

Money Market Reforms Phased exit of non banks from the call/ Notice money market started in May 2001. LAF facility replaced the traditional refinance method Development of payment system was strengthened with the introduction of NDS, formation of CCIL and the implementation of RTGS. Free access of non bank participants to various money market participants.

Money Market

Money market means market where money or its equivalent can be traded. Money Market is a wholesale market of short term debt instrument and is synonym of liquidity.. Money Market is part of financial market where instruments with high liquidity and very short term maturities ie one or less than one year are traded.

The Need
Need for short term funds by Banks. Outlet for deploying funds on short term basis Need to keep the SLR as prescribed Need to keep the CRR as prescribed Optimize the yield on temporary surplus funds Regulate the liquidity and interest rates in the conduct of monetary policy to achieve the broad objective of price stability, efficient allocation of credit and a stable foreign exchange market

The Players
Reserve Bank of India Primary Dealers ( SBI DFHI, STCI, Standalone Primary Players, Bank Primary Dealers) Acceptance Houses Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders Individuals, firms, companies, corporate bodies, trusts and institutions can purchase the treasury bills, CPs and CDs.

Structure of Indian Money Market

I :- ORGANISED STRUCTURE 1. Reserve bank of India. 2. DFHI (discount and finance house of India). 3. Commercial banks i. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalised banks ii. Private banks Indian Banks Foreign banks 4. Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

II. UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3. Chits 4. Nidhis III. CO-OPERATIVE SECTOR 1. State cooperative i. central cooperative banks Primary Agri credit societies Primary urban banks 2. State Land development banks central land development banks Primary land development banks

Features of Money Market

It is a market purely for short-terms funds or financial assets called near money. It deals with financial assets having a maturity period less than one year only.

 It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market. The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).

Objective of Money Market

To provide a parking place to employ short surplus funds. term

To provide room for overcoming short term deficits. To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market. To provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost.

Composition of Money Market

Money Market consists of a number of submarkets which collectively constitute the money market. They are, Call Money Market Commercial bills market or discount market Acceptance market Treasury bill market

Instrument of Money Market

A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available. They were Treasury bills Money at call and short notice in the call money market. Commercial bills, promissory notes in the bill market.

New instrument
Now, in addition to the above the following new instrument are available: Commercial papers. Certificate of deposit. Inter-bank participation certificates. Repo instrument Banker's Acceptance Repurchase agreement Money Market mutual fund

Recent development in Money Market

 Integration of unorganised sector with the organised sector  Widening of call Money market  Introduction of innovative instrument  Offering of Market rates of interest  Promotion of bill culture  Entry of Money market mutual funds  Setting up of credit rating agencies  Adoption of suitable monetary policy  Establishment of DFHI  Setting up of security trading corporation of India ltd. (STCI)

Call/ Notice/Term Money Market

Call Money Market

The call money market is an integral part of the Indian Money Market, where the day-today surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money".

Call Money Market

Banks borrow in this market for the following purpose To fill the gaps or temporary mismatches in funds To meet the CRR & SLR mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows.

 Lending on an uncollateralized basis The entities permitted to participate both as lender and borrower in the call/notice money market are Scheduled Commercial Banks (excluding RRBs), Co-operative Banks other than Land Development Banks and Primary Dealers.

 Scheduled commercial banks are permitted to borrow to the extent of 125% ( daily ) and 100% ( Fortnightly) of their capital funds in the call/notice money market ( Tier 1 and Tier 2). Lending 25% ( fortnightly) and 50% ( daily) Co-operative Banks are permitted to borrow upto 2% of their aggregate deposits as end of March of the previous financial year

 Primary Dealers can borrow on average in a reporting fortnight up to 200% of the total net owned funds (NOF) as at end-March of the previous financial year and lend on average in a reporting fortnight up to 25% of their NOF.

Market Participants
All Scheduled Commercial Banks Co operative Banks DFHI STCI The Primary Dealers

Functioning of the Market

Operates 9.30 am to 5.00 pm on Monday to Friday and 9.30 am to 2.30 pm on Saturday. The trades are conducted both on telephone as well as on the NDS Call system Lender Bank issues RBI Cheques Borrowing Bank issues Call money Borrowing Receipts

 Next day, Lending bank returns the Receipt while the borrowing bank repays the amount with Interest by issuing RBI cheques

Transaction through DFHI ( Primary Dealers)

Borrowing Bank inform the fund requirements to DFHI Lending Bank inform the surplus fund available to DFHI A Deal settlement advice is exchanged DFHI issues a Call deposit receipt to the Lender DFHI collects the RBI cheque for the amount lent from the Lending Bank.

 Next day, Lender surrenders the Call deposit receipt Borrower issues the RBI cheque

Transactions on NDS
Screen based Negotiated quote driven system for dealing in call/ notice and term money market ( NDS CALL) has been developed by CCIL. Better price discovery and improved market infrastructure for secondary market settlements

Call Money Rates

In India, the RBI uses repo/bank rate as the ceiling and reverse repo rate as the floor within which the call money rate fluctuates. Interest rate paid on call loans Rates determined by Market till 1973. Increased to a high level of 30 % ( increase bank rate and tight credit policy in 1973) IBA fixed a ceiling on the interest rate, later deregulated in 1989

Between 7 17.7% ( 1993 1996) 4.6 7.75 % ( 2000 06) Average of 7.22, 6.24, 6.34 during 2006 07 Declined to 6.07 in 2007 08 Prevailing call money rate is 8.04 per cent

Reasons for fluctuations

RBI s market operations Asset Liability mismatch in Banks The cyclical phase of Economy Remittances for oil imports Advance tax payments Government Debt Seasonal Demand Stock Market conditions

CBLO Collaterised Borrowing and Lending Obligation

CBLOs are borrowings backed by securities as collateral, issued at discount at redeemed at par. Maturity : 1 90 days

Participants
Banks FIs Insurance Companies Mutual Funds Primary Dealers NBFCs Non Government Provident Funds Corporate units

Repurchase Options ( Repos)

Repurchase agreement Repos or buy back deals are transactions in which one party agrees to sell and repurchase the same security Collateralized lending and borrowing mechanism Repos are generally overnight sale of G Secs Maturity 1 14 days

Commercial Papers

 Promisory Notes issued by large firms with high Credit rating Negotiable Short term Unsecured debt instrument Issued at discount and redeemed at par Maturity 7 days 1 year Credit rating mandatory CP is considered as Working Capital

Parties involved
Issuing Company Issuing and Paying agent Credit rating Agency Investor

The Issuing Company

Highly rated Corporate Borrowers Primary Dealers All India FIs  Tangible net worth not less than 4 crore  Working Capital limit of the company from the banking system not less than 4 crore  Borrowal account classified as Standard asset

The Issuing and Paying Agent

Appointed by the issuing Company Only a Scheduled bank can act as I &P Arranges the payment of the CP on due date

The Credit rating Agency

Minimum Credit rating of the Company issuing CP should be:  CARE PR2 ICRA A2  CRISIL P2

Investors
Individuals Banking Companies Corporate bodies registered or incorporated in India Unincorporated Bodies NRIs FIIs

Maximum amount to be raised

An FI can issue a CP within the overall umbrella fixed by the RBI; i.e the combination of CPs, term money borrowings, term deposits, CDs and Inter corporate deposits should not exceed 100 percent of its NOF

Mode of issue
Physical form Dematerialised form : Issuance and Redemption

Certificate of Deposits

 Introduced by RBI in 1989 Marketable document of title to a time deposit of a bank or any other institution Receipts will be given to the depositor Negotiable , payable either to the bearer or to the order of the depositor Issued at a discount to face value CD issuance only in dematerialised form Min amount Rs 1 lakh and multiples of 1 lakh thereafter

 Minimum and maximum maturity period 7 days and 12 months

Issuers
All Scheduled Commercial Banks ( excluding RRBs) Specified all India FIs

Buyers
Individuals Companies Trust funds NRIs on non repatriation basis Primary dealers

Commercial Bill Market

 Mode of financing Working Capital requirements Banks buys the bill, before it is due and credits the value of the bill after the discount Can be rediscounted at RBI Negotiable instrument

Bill of Exchange
Seller writes the B/E for a specified amount and period of maturity on the buyer Seller is the drawer Buyer the drawee and the Bank/ FI who discounts the bill and make the payment to the drawee immediately

 The drawer or the payee can endorse the bill The person to whom the bill is endorsed is called the endorsee

Direct Discounting of Bill

Letter of Credit backed bill discounting Clean bill discounting Discounting of bill is made available to those parties who have sanctioned limits for that purpose

Classification of Bills
Demand Bills / Sight Bills drawer makes the payment immediately or at sight of the bill Time / Usance Bills Documentary Bills Bills accompanied by documents of title to goods

 Supply Bills Non Negotiable Supplies to the Government Accommodation Bills Not backed by any trade transactions. Drawn to accommodate another person to help his temporary cash requirement Inland Bills Foreign Bills

Government ( Gilt edged ) Securities Market

 Securities that are unconditionally guaranteed by the Government Face value of Rs 100, issued by RBI Coupon payments ( Semi annually) ranging from 5 30 years

Instruments
May be issued at par or at a discount and redeemed at par Coupon payments announced before the date of floatation Dated Securities

 Floating rate Bonds ( FRBs) Zero Coupon Bonds Embedded Bonds Call and put options Capital Indexed Bonds Fixed percentage over the WPI hedge against inflation

 STRIPS Separate trading of Registered Interest and Principal of Securities State Government Secs

The Issuer
Issued by Central Govt., State Govt. and Semi Govt authorities like Corporations and Municipalities

Mode of issue
Physical form SGL form