FINANCIAL ENVIRONMENT OF BUSINESS

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Sub topics covered

Indian Financial system Financial Market – Money & Capital Current trends in Banking

References

Indian Financial System by Bharati V. Pathak

Indian Financial System by M Y Khan Fundamentals of Indian Financial System by

Vasant Desai Financial Institutions and Markets by L M

Bhole

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What is a Financial System?

It implies a set of complex and closely connected or interlinked institutions, agents, practices, markets, transactions, claims, and liabilities in the economy.

The financial system is concerned about these three terms: money, credit and finance

The objective of Financial System is to “supply funds to various sectors and activities of economy in ways that promote fullest possible utilization of resources”

Financial System

Financial System

Savings FinanceInvestme

nt

Capital Formation

Economic Growth

Primary function of financial system is mobilizing savings, their distribution for industrial investment and stimulating capital formation to accelerate the process of economic growth.

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Indian Financial System

Can be broadly classified into organized and unorganized

Organized Financial System comes under the purview of Ministry of Finance, RBI, SEBI and other regulatory bodies

Unorganized Financial System consists of individual money lenders, groups of persons operating as unregistered chit fund, etc

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Components of Organized Financial System Financial Intermediaries

Financial Markets

Financial Instruments

Financial Services

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Indian Financial System - Organized

FinancialIntermediaries Financial Markets

Financial Instruments

FinancialServices

BanksNon BankingInstitutions

MutualFunds

Insurance

Commercial

Co-operative

NBFCs

DevelopmentFinancial

Institutions

DepositorsCredit Rating

Merchant BankingLeasing

Portfolio MgtUnderwritingStock BrokingShares

DebenturesDebt Instruments

Derivatives

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Financial Intermediaries

Banks Commercial - Private, Public & Foreign Cooperative Regional Rural Banks (RRBs)

Non Banking Financial Companies (NBFCs)

Development Financial Institutions (DFIs)

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What is Banking?

 Section 5(l)(b) of the Banking Regulation Act defines "banking" as the accepting, for the purpose of trading or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.  

The essential characteristics of the banking business as defined in section 5(b) of the Banking Regulation Act are:  

acceptance of deposits from the public, for the purpose of lending or investment, repayable on demand or otherwise, and withdrawable by means of any instrument whether a cheque or

otherwise.  From the definition, two important functions of commercial banks

emerge; acceptance of deposits and lending of funds. These two functions are the core activities of banking.

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Commercial Banks v/s Cooperative banks

In India, the Commercial Banks are required to be registered under Banking Regulation Act, 1949. In India, the Co-operative Banks are required to be registered under the Co-operative Societies Act, of the concerned state.

The main objective of a Commercial Bank is to accept deposits from public for the purpose of lending to industry and commerce. The main objective of a Co-operative Bank is to accept deposits from the members and the public for the purpose of providing loans to farmers and small businessmen with a motto of service.

Commercial banks operate over a larger area. Some commercial banks even have branches in foreign countries. The area of operations of Co-operative Banks is limited and mostly confined to State. They do not operate at national level nor international level.

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Commercial Banks v/s Cooperative banks

Commercial Banks provide merchant banking services such as advising the companies regarding the public issue of shares. Co-operative Banks do not provide merchant banking services.

Commercial Banks in India such as Canara Bank, Bank of India, State Bank of India, do operate mutual funds. At present co-operative banks in India do not operate mutual funds.

Commercial banks operates on the commercial principles. They operate to earn a profit. The basis of operations is on co-operative lines, i.e. service to its members and the society.

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RBI’s new banking license discussion paper:

Though the Indian financial system has made impressive strides in resource mobilization, geographical and functional reach, financial viability, profitability and competitiveness, vast segments of the population, especially the underprivileged sections of the society, have still no access to formal banking services.

The Reserve Bank is therefore considering providing licenses to a limited number of new banks. A larger number of banks would foster greater competition, and thereby reduce costs, and improve the quality of service. More importantly, it would promote Financial Inclusion and ultimately support inclusive economic growth, which is a key focus of public policy.

Latest guidelines Minimum capital of Rs 500cr, 49% foreign investment limit,

mandatory listing in 2 yrs are a few of the recommendations. Groups with diversified ownership, sound credentials and integrity that

have a successful track record for at least 10 years shall be eligible to promote banks and RBI may seek feedback on applicants from other regulators and agencies like Income Tax, CBI, Enforcement Directorate, etc. This, in effect, rules out a first-generation entrepreneur setting up a new bank.

RBI has made an exception for promoters with a large exposure to real estate and broking activities as they have inherently riskier businesses model and business culture. The central bank has also looked at the international developments after the financial crisis three years ago where there is a movement for separating banking from proprietary trading and has made a sharp remark on its dissatisfaction with the past experience of brokers on the boards of banks. Accordingly, groups that have significant (10 per cent or more) income or assets or both from such activities, including real estate construction and broking activities taken together in the last three years, shall not be eligible to promote banks.

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Contd..

Foreign Shareholding The aggregate non-resident shareholding from

FDI, NRIs and FIIs in the new private sector banks shall not exceed 49 per cent for the first five years from the date of licensing of the bank. It has added that no non-resident shareholder, directly or indirectly, individually or in groups, will be permitted to hold 5 per cent or more of the paid-up capital of the bank. Currently, foreign shareholding in private sector banks is allowed up to a ceiling of 74 per cent of the paid-up capital.

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Contd..

Corporate Governance At least 50 per cent of the directors should be

totally independent of the promoter/promoter group entities, their business associates and their customers and suppliers.

The bank shall get its shares listed on the stock exchanges within two years of licensing of the bank.

The bank shall be required to maintain a minimum capital adequacy ratio of 12 per cent for a minimum period of three years after the commencement of its operations subject to such higher percentage, as may be prescribed by the RBI from time to time.

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Financial Inclusion Definition The process of ensuring access to

financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at affordable cost. ---- NABARD

What is Financial Inclusion

Credit cards

Insurance

Financialadvice

Affordable

credit

Bank account

Lack of Assets

for collateral

What is Financial Exclusion

No savings

No Insuranc

e

No access to money advice

No affordabl

e credit

No bank account

No assets

Retail Banking

Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so forth.

Universal Banking

Universal Banking is a multi-purpose and multi-functional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and real-estate brokerage) providing both banking and financial services through a single window.

Universal Banking is a superstore for financial products under one roof.

The term 'universal banking' refers to those banks that offer a wide range of financial services, beyond the commercial banking functions like Mutual Funds, Merchant Banking, Factoring, Credit Cards, Retail loans, Housing Finance, Auto loans, Investment banking, Insurance etc. This is most common in European countries.

Advantages of Universal Banking

Economies of Scale. The main advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost, higher output and better products. Many Committees and reports by Reserve Bank of India are in favor of Universal banking as it enables banks to attain economies of scale and scope.

Profitable Diversions. By diversifying the activities, the bank can use its existing expertise in one type of financial service in providing other types. So, it entails less cost in performing all the functions by one entity instead of separate bodies.

Resource Utilization. A bank possesses the information on the risk characteristics of the clients, which can be used to pursue other activities with the same clients. A data collection about the market trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non diversifiablerisk analysis, etc, is useful for other clients and information seekers. Automatically, a bank will get the benefit of being involved in the researching

Easy Marketing on the Foundation of a Brand Name. A bank's existing branches can act as shops of selling for selling financial products like Insurance, Mutual Funds without spending much efforts on marketing, as the branch will act here as a parent company or source. In this way, a bank can reach the client even in the remotest area without having to take resource to an agent.

One-stop shopping. The idea of 'one-stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as its customers.

Prime Lending rate

Interest rate charged by banks to their largest, most secure, and creditworthy customers. This rate is used as a guide for computing interest rates for other borrowers.

The rate is almost always the same amongst major banks. Generally PLR across banks are aligned with those of a few major banks who provide signals for changes in PLR

PLR OF BANKS is based on Bank rate and has positive correlation with it.

Base rate

Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. While each bank may decide its own Base Rate, some of the criteria that could go into the determination of the Base Rate are: (i) cost of deposits; (ii) adjustment for the negative carry in respect of CRR and SLR; (iii) unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office, directors’ and auditors’ fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance; and (iv) profit  margin.

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Base rate

Base Rate System is for the banks to set a level of minimum interest rates charged while giving out the loans.

However, the base rate system will not be applicable for the following type of loans:

Agricultural Loans Loans given to own employees Loans against deposit Export Credit

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Advantages of Base Rate

To avoid sub PLR loans It will bring uniformity in interest rates and

end predatory pricing Banks will now be compelled to tap cost

effective resources, improve operational efficiency, and include profit spread margin and risk premium along with the client’s credibility while determining the base rate.

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Regional Rural Banks (RRBs) The Narsimham committee conceptualized the creation of

RRBs in 1975 as a new set of regionally oriented rural banks, Subsequently, the RRBs were set up through the promulgation of RRB Act1 of 1976.

Their equity is held by the Central Government, concerned State Government and the Sponsor Bank in the proportion of 50:15:35.

RRBs were supposed to evolve as specialised rural financial institutions for developing the rural economy by providing credit to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs.

Over the years, the RRBs, which are often viewed as the small man’s bank, have taken deep roots and have become a sort of inseparable part of the rural credit structure . They have played a key role in rural institutional financing in terms of geographical coverage, clientele outreach and business volume as also contribution to development of the rural economy .

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Regional Rural Banks (RRBs) Maharashtra

Marathwada Gramin Bank Aurangabad-Jalna Gramin Bank Wainganga Kshetriya Gramin Bank Vidharbha Kshetriya Gramin Bank Solapur Gramin Bank Thane Gramin Bank Ratnagiri-Sindhudurg Gramin Bank Gujarat

Dena Gujarat Gramin Bank Baroda Gujarat Gramin Bank Saurashtra Gramin Bank

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Regional Rural Banks (RRBs) Why were they in the news?

The Reserve Bank of India in its discussion paper on grant of bank licences to corporate houses said that if corporate were keen on improving financial inclusions, they could look at taking over some of the weaker RRBs and strengthen them through capital and technology infusion.

Is this likely to happen? There are several impediments. Firstly, the RRB Act will need to be amended. Secondly, there will be resistance from employee unions and state governments. Thirdly, corporates themselves may not be inclined to get into rural banking where the payback may take many more years.

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Current Status (RRBs) The worst appears to be behind the RRBs, a large number of

which were in the red for most of the previous decades. The process of consolidation through amalgamation of RRBs is now almost complete, resulting in a decline in the total number of RRBs to 84 as on August 31, 2009 .

The process of recapitalization of RRBs with negative net worth as on March 31, 2007, is also almost complete, with 27 RRBs fully recapitalized with an amount of Rs 1,796 crore as on July 31, 2009. The assets in the consolidated balance sheets of RRBs have increased by 16.5% in March 2009 to Rs 1.46 lakh crore.

They now open no-frills accounts and issue general credit cards. An RBI working group on technology in RRBs has observed that RRBs could not remain isolated from the technological developments sweeping the banking sector. The group has set a target date of September 2011 for all RRBs to move to a core banking solution platform.

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Non Banking Financial Companies (NBFCs)

It is a financial intermediary in a variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc. They advance loans to the various wholesale and retail traders, small-scale industries and self-employed persons. Thus, they have broadened and diversified the range of products and services offered by a financial sector.

Gradually, they are being recognized as complementary to the banking sector due to their customer-oriented services; simplified procedures; attractive rates of return on deposits; flexibility and timeliness in meeting the credit needs of specified sectors; etc.

The working and operations of NBFCs are regulated by the RBI within the framework of the Reserve Bank of India Act 1934.For the registration with the RBI, a company incorporated under the Companies Act,1956

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NBFCs

Some of the important regulations relating to acceptance of deposits by the NBFCs are:-

They are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months.

They cannot accept deposits repayable on demand. They cannot offer interest rates higher than the ceiling rate

prescribed by RBI from time to time. They cannot offer gifts/incentives or any other additional

benefit to the depositors. They should have minimum investment grade credit rating. Their deposits are not insured. The repayment of deposits by NBFCs is not guaranteed by

RBI.

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NBFCs accepting public deposits Bajaj Auto Finance Ltd. Mahindra & Mahindra Financial Services

Ltd Muthoot Capital Services Ltd. Gujarat Lease Financing Ltd. Maximum NBFCs - A located in

Chandigarh, New Delhi and Kanpur

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Types of NBFCs registered with the RBI

Equipment leasing company:- is any financial institution whose principal business is that of leasing equipments or financing of such an activity.

Loan company:- means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity).

Investment company:- is any financial intermediary whose principal business is that of buying and selling of securities.

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Development Financial Institutions

NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD)

EXPORT IMPORT BANK OF INDIA SMALL INDUSTRIES DEVELOPMENT BANK

OF INDIA (SIDBI) NATIONAL HOUSING BANK (NHB) INDUSTRIAL FINANCE CORPORATION OF

INDIA Ltd (IFCI)

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Indian Financial System - Organized

Financial Markets

Capital Markets Money Markets

EquityMarket

DebtMarket

PrimaryMarket

SecondaryMarket

Derivatives Market

Public IssuePrivate

Placements

NSE, BSE, Regional Exchanges

FuturesOptions

PrimarySegment

SecondarySegment

Call Money

T Bills

CPs

CDs

Commercial Bills

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Functions of Financial Markets

Enabling economic units to exercise their time preference

Separation, distribution, diversification and reduction of risks

Providing information about companies

Enhancing liquidity of financial claims through trading in securities

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Characteristics of Financial Markets Are characterized by a large volume of transactions

and a speed with which financial resources move from one market to another

There is scope of instant arbitrage among various market and types of instruments

Financial Markets are highly volatile and susceptible to panic and distress selling as the behavior of limited group of operators can get generalized

Negative externalities are associated with financial markets. A failure in any one segment of these market may affect many other segments of the market, including the non-financial markets

Domestic financial markets are getting integrated with worldwide financial markets.

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What is Money Market?

It is a market for dealing in financial instruments of short-term nature generally less than a year

It enables raising up of short term funds for meeting temporary shortage of cash and temporary deployment of excess funds for earning returns

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Characteristics of Money Market

It is not a single market but a collection of markets for several instruments

It is a wholesale market of short-term debt instruments

It is dichotomous in nature consisting of organized and unorganized sector Unorganized Sector consisting of Money Lenders, Nidhis, unregistered Chit funds etc.

RBI occupies a strategic position in Indian Money market- acts as a regulator

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Money Market Instruments

Call/Notice Money Inter-Bank Term Money Certificate of Deposits Treasury Bills Inter Corporate Deposits Commercial Papers Commercial Bills Repos

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Call Money Market

The loans made in this market are short-term nature, their maturity varying between one day to a fortnight

When it is borrowed / lent for a day it is called call or overnight money and when it is for more than a day and up to fourteen days it is known as Notice Money

Day to day surplus funds, mostly of banks, are traded. These loans are highly liquid as they are repayable on demand

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Call Money Market

No collateral security is required to cover these transactions

It is basically over the counter market without intermediation of brokers

In view of the short tenure of such transactions, both the borrowers and the lenders are required to have current accounts with the Reserve Bank of India.

Banks borrow in this market for the following purpose To fill the gaps or temporary mismatches in funds To meet the CRR mandatory requirements as

stipulated by the Central bank To meet sudden demand for funds arising out of large

outflows.

Thus call money usually serves the role of equilibrating the short-term liquidity position of banks

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Call Rate Interest rate paid on Call Money / Notice Money

Sensitive to changes in demand – supply of Call Loans

Call Rates are influenced by number of factors:

Liquidity Conditions: Supply side is governed by Deposit Mobilization, Capital

Flows and Reserve Requirements Demand side is governed by tax outflows and

Government borrowing program and seasonal fluctuations Asymmetrical nature of Participants in terms of few lenders

and large borrowers Volatile Forex market conditions (Banks & RBI Intervention)

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ET UPDATE

The Indian overnight cash rate rose on Monday despite a cut in the cash reserve ratio as banks covered reserve needs at the start of a new reporting cycle ahead of payment of advance taxes by companies. The one-day call rate closed at 8.85/8.90, compared with Friday's close of 8.50/8.55 percent for three-day loans.

On Friday, the Reserve Bank of India unexpectedly announced a cut in the CRR, which was a much a sharper-than-expected 75 basis points aimed at infusing liquidity in a cash-starved banking system. The move is estimated to have released 480 billion rupees ($9.6 billion) of liquidity into the banking system.

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ET UPDATE

The overnight cash rates may climb to above 9 percent on advance tax outflows, traders said. Banks' rising demand for funds was evident from borrowings at the RBI's repo counter, which stood at 1.31 trillion rupees, much above the central bank's indicated comfort level of 600 billion rupees of overall liquidity deficit.

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Inter-bank Term Money

Inter bank market for deposits of maturity beyond 14 days and up to three months is referred to as the term money market.

MIBOR –Mumbai Inter bank offer rate MIBOR rates have been used as benchmark rates

for the majority of money market deals made in India.

is disseminated by National Stock Exchange since 1998

NSE disseminates 4 MIBOR rates daily: overnight (1 day), 14-day, 1-month and 3- month and recently 3 days

Thirty three banks and primary dealers are polled on daily basis at 9.30AM for overnight rate and at 11.30AM for term rates.

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'Mumbai Interbank Offered Rate - MIBOR'

The interest rate at which banks can borrow funds, in marketable size, from other banks in the Indian interbank market. The Mumbai Interbank Offered Rate (MIBOR) is calculated everyday by the National Stock Exchange of India (NSEIL) as a weighted average of lending rates of a group of banks, on funds lent to first-class borrowers.

The MIBOR was launched on June 15, 1998 by the Committee for the Development of the Debt Market, as an overnight rate. The NSEIL launched the 14-day MIBOR on November 10, 1998, and the one month and three month MIBORs on December 1, 1998. Since the launch, MIBOR rates have been used as benchmark rates for the majority of money market deals made in India.

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MIBID & MIBOR

Mumbai Inter bank offer rate – to lend Mumbai Inter bank bid rate – to borrow Banks have option to borrow – Repo rate

& MIBID Banks have an option to lend – Reverse

repo & MIBOR Repo & reverse repo rates influence

MIBOR & MIBID and vice versa

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MIBOR on NSE51

Participants in Call Money Market Participants in call/notice money market currently

include banks, development finance institutions, insurance companies and select mutual funds.

Of these, banks can operate both as borrowers and lenders in the market.

But non-bank institutions (such as all-India FIs, select Insurance Companies or Mutual Funds), which have been given specific permission to operate in call/notice money market can, however, operate as lenders only.

It is a completely inter-bank market hence non-bank entities are not allowed access to this market.

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Certificate of Deposit CDs are short-term borrowings in the form of

Promissory Notes having a maturity of not less than 15 days up to a maximum of one year.

These are bearer and therefore freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits

CDs may be issued at a discount on face value

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Features of CD

CDs can be issued by all scheduled commercial banks except RRBs

Minimum period 15 days Maximum period 1 year Minimum Amount Rs 1 lac and in multiples

of Rs. 1 lac CDs are transferable by endorsement CDs can be subscribed by

individuals//companies/funds/trusts/

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Update on CDs & tight liquidity in the banking system

In the last two days, banks have paid 11.35% to 11.60% on the three-month certificate of deposits (CD) –

Traditionally, interest rates on CDs always shoot up in the last month of the fiscal year as most banks make effort to meet their annual resource mobilization target. Also, this week will see outflow of money from banking system to government's account in form of tax payment, estimated in the range of Rs 60,000 crore.

Money market dealers say that if the RBI had not cut the CRR, interest rates would have touched the roof. The three-month CD rate of 11.60% itself is a three-year high. However, some bankers feel that tight liquidity is not temporary.

This is evident from the fact the despite a CRR cut, banks are borrowing heavily from the RBI," T S Srinivasan, general manager in-charge of treasury at IOB, said. On Monday, banks borrowed Rs 131,400 crore and on Tuesday banks borrowed Rs 123,090 crore from the RBI at 8.50% by pledging their g-secs.

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Commercial PaperIt was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Unsecured Promissory note.

Issued by well known companies with strong and high credit rating.

Sold directly by the issuers to investors or through agents like merchant banks and security houses.

Flexible Maturity CP can be issued for maturities between a minimum of SEVEN days and a maximum upto one year from the date of issue.

Eligibility for issue of CP

a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore;

b) (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore

c) and the borrowal account of the company is classified as a Standard Asset by the financing bank/s.

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Rating Requirement

All eligible participants should obtain the credit rating for issuance of Commercial Paper

Credit Rating Information Services of India Ltd. (CRISIL)

Investment Information and Credit Rating Agency of India Ltd. (ICRA)

Credit Analysis and Research Ltd. (CARE)

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To whom issued

CP is issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).

The CP rates are dependent on ratings, a company's standing, and the demand-supply position of the market. Corporate with the highest rating (P1+, PR1+, A1+) who regularly access the commercial paper market are BPCL, HPCL, IPCL, IOC, ACC, Telco, L&T, Tata Coffee, Dabur, IL&FS, M&M Finance, GE Caps, EID Parry, Electro steel Castings, and Ashok Leyland Ltd.

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Update on Commercial Paper

LIC will buy Rs 5000 crore worth of CP to benefit from higher interest rate and also to provide liquidity to corporate.

According to RBI commercial papers fetch 8% to 14.5%

It is a debt instrument used to raise short term funds for meeting working capital needs.

As per RBI data, total outstanding amount in CP at the end of Oct 2011 was Rs1,688 billion

In the new regime, banks will not be allowed to lend below the base rate, and hence, firms will not be able to raise cheap money. The base rate for most banks will be in the range of 8.5-9.5%.

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Update on impact of base rate on Commercial Paper

“Volumes of commercial papers will increase because it will be cheaper for companies to raise money through this route rather than loans from banks,” said Paritosh Kashyap, executive vice-president at Kotak Mahindra Bank Ltd.

Companies issue commercial papers for short-term capital requirements ranging from 15 days to 365 days. The interest rate on commercial papers are linked to the yield on the one-year government bond.

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Inter Corporate Deposits

An Inter-Corporate Deposit (ICD) is an unsecured loan extended by one corporate to another.

The corporate having surplus funds would lend to another corporate in need of funds. This lending would be an uncollateralized basis and hence a higher rate of interest would be demanded by the lender.

Rates on ICD would be higher than those in the Certificate of Deposit (CD) market. The tenor of ICD may range from 1 day to 1 year, but the most common tenor of borrowing is for 90 days.

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Inter Corporate Deposits

ICDs are unsecured, and hence the risk inherent in high. The ICD market is not well organized with very little information available publicly about transaction details.

Existing mainly as a refuge for low rated corporate, this market allows funds surplus corporate to lend to other corporate. Also the better-rated corporate can borrow from the banking system and lend in this market. As the cost of funds for a corporate in much higher than a bank, the rates in this market are higher than those in the other markets.

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Money Market Mutual Funds

These funds invest in short term debt instruments such as Treasury bills, Certificates of deposit, and Commercial Paper.

A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments.

Money market mutual funds are usually rated by the rating agencies.

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Treasury Bills

Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days.

All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.

Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000

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T-Bills

Being a risk free instrument their yields at various maturities serve as a benchmark and help in pricing instruments in market

T-Bill market is RBI’s most preferred tool for intervention to influence liquidity and short term interest rates. Its development is a pre-requisite for effective OMOs

Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills.

Benefits Of Investment In Treasury Bills

No tax deducted at source Zero default risk being sovereign paper Highly liquid money market instrument Better returns especially in the short term Transparency Simplified settlement High degree of tradeability and active

secondary market facilitates meeting unplanned fund requirements.

Primary Dealers & Satellite Dealers

Primary Dealers can be referred to as Merchant Bankers to Government of India, comprising the first tier of the government securities market. Satellite Dealers work in tandem with the Primary Dealers forming the second tier of the market to cater to the retail requirements of the market.

These were formed during the year 1994-96 to strengthen the market infrastructure

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Objectives of Primary Dealers To strengthen the infrastructure in Govt

securities market, including money market

To improve secondary market for govt securities

To make PDs an effective conduit for conducting OMOs

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Primary dealers in market

Stand alone Primary dealers Deutsche Securities (India) Pvt. Ltd ICICI Securities Primary Dealership Limited Morgan Stanley India Primary Dealer Pvt.

Ltd. PNB Gilts Ltd. STCI Primary Dealer Limited

Bank Primary Dealers Bank of Baroda IDBI Bank Ltd Canara Bank Bank of America

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DFHI Discount and Finance House of India (DFHI) was

incorporated by Reserve Bank of India (RBI) along with other Public Sector Banks (PSBs) and All-India Financial Institutions (FIs) under the Companies Act 1956, on March 8, 1988 with an objective of deepening and activating money market

Company started its operation with an initial paid up capital of Rs 100 crore (RBI – Rs 51 crore, PSBs – Rs 33 crore and FIs – Rs 16 crore).

Since November 1995, DFHI is an accredited primary dealer. Now it acts as a market maker, giving two-way quotes and take large positions on its account in government securities

Treasury bills are issued by Reserve bank of India on behalf of the Government of India. Such bills are sold at fortnightly auctions. The Discount House regularly participates in such auctions. Moreover, it provides a ready market to other institutions/individuals to buy or sell the Treasury Bills.

SBIDFHI :We are Primary Dealers- an institution created by RBI to support the book building process in Primary Auctions of Government securities and provide necessary depth and liquidity to the Secondary market in Government Securities.

SBI DFHI LTD is a State Bank of India Group Company with impeccable lineage, created out of the merger in 2004 of the two leading players in the domestic Money and Debt Markets, the RBI promoted Discount & Finance House of India (DFHI) and SBI Gilts Ltd, a subsidiary of India’s largest commercial bank. 

It is a market leader in the Primary Dealer segment of the domestic debt market, with a Net Worth of  Rs.852.69 crores (as on 31st March 2011)

As Primary Dealers, we trade in Fixed Income Securities (Treasury Bills, Government securities, State Development Loans, Non SLR Bonds, Corporate Bonds) and Short Term Money Market instruments (Certificates of Deposit, Commercial Paper, Inter- Corporate Deposits, Call & Notice Money Deposits). We are active in retailing of Government Securities, including small lots, and are the distributors of Mutual Fund products of all leading funds.

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Participants in Money Market

Banks, primary dealers, financial institutions, mutual funds, non-bank financial companies, manufacturing companies, State Governments, provident funds, non-resident Indians, overseas corporate bodies, foreign institutional investors and trusts.

However, participants do not have a uniform status in dealing in different instruments. For instance, financial institutions and mutual funds are allowed only as lenders in the call money market but are permitted to buy and sell CP.

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Functions of Money Market

A focal point of Central Bank (RBI) intervention for influencing liquidity in the economy- A developed money market contributes to an effective monetary policy

To ensure that liquidity and short term interest rates are maintained at the levels consistent with the monetary policy objectives of maintaining price stability

A reasonable access to the users of short-term funds to meet their requirements at realistic / reasonable price / cost

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Link between Money Market and Capital Market

Money Market is the institutional source of working capital to the industry, focus of capital market being on financing fixed investments

Often, FIIs actively involved in the capital market are also involved in the market

Funds raised in the money market are used to provide liquidity for longer term investment and redemption of funds raised in the capital market

In the development process of financial markets, the development of money market typically precedes the development of the capital market

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Introduction to Capital Market

What is Capital Market?

Provided resources needed by medium and large scale industries.

Purpose for these resources Expansion Capacity Expansion Investments Mergers and Acquisitions

Market for long term funds The capital market is the market for securities, where

companies and the government can raise long-term funds.

The capital market includes the equity and Gilt-edged market

Role of Capital Market in India’s Industrial Growth

For Financing Five Year Plans Mobilization of Savings and acceleration

of capital formation Promotion of Industrial growth Raising long term capital Ready and continuous market Proper channelization of funds Provision of a variety of services

Factors contributing to growth of Capital market in India

Establishment of Development banks and industrial financing institutions

Legislative measures Growth of Underwriting Business Growing public confidence Increasing awareness of investment

opportunities Setting up of SEBI Mutual Funds Credit rating agencies

Function

Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose.

Provides opportunities to various class of individuals and entities.

Issue mechanism in Primary Market Funds are mobilized through three ways:

Prospectus (IPO): refer to any document by which a capital is offered to public and upon basis of which the applicants usually subscribe

Rights Issue: Issue of shares in which existing shareholders are given rights to subscribe to new issue on pro-rata basis

Private Placement: direct sale of securities by a company to some select people or institutional investors

Merchant Bankers

Managing of public issue of capital such as determining the type of securities to be issued Draft of prospectus and application forms Appointment of Registrar to deal with share

application and transfers Listing of Securities Arrangement of underwriting Placing of issues Selection of brokers and bankers to the issue Publicity and advertising agent

Underwriters

Agree to take up securities which are not fully subscribed

Make a commitment to get the issue subscribed either by others or by themselves

Underwriters are appointed by issuing companies in consultation with merchant banker

Intermediary Market Role

Stock Exchange Capital Market Secondary Market to securities

Investment Bankers

Capital Market, Credit Market

Corporate advisory services, Issue of securities

Underwriters Capital Market,Money Market

Subscribe to unsubscribed portion of securities

Registrars,Depositories,Custodians

Capital Market

Issue securities to the investors on behalf of the company and handle share transfer activity

Primary DealersSatellite Dealers Money Market Market making in

government securities

Forex Dealers Forex Market Ensure exchange ink currencies

Qualified Institutional Placement

Prior to the innovation of the qualified institutional placement, there was concern from Indian market regulators and authorities that Indian companies were accessing international funding via issuing securities, such as American depository receipts (ADRs), in outside markets. This was seen as an undesirable export of the domestic equity market, so the QIP guidelines were introduced to encourage Indian companies to raise funds domestically instead of tapping overseas markets.

Qualified institutional placement (QIP) is a capital raising tool, primarily used in India, whereby a listed company can issue equity shares, fully and partly convertible debentures, which are convertible to equity shares to a Qualified Institutional Buyer(QIB).

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QIP

This is a speedy method of private placment whereby a listed company can issue shares or convertible 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.

Hotel Leela plans Rs 1000cr QIP to cut debt Dewan Housing Finance Ltd (DHFL) recently

raised Rs 304 crore through a qualified institutional placement (QIP) by issuing 11.9 million shares. This was effectively a 17.5-18 per cent dilution. Several foreign institutional investors like Mirae, GMO and RBS had invested.

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Private placement of debt

A private placement is the sale of bonds or non convertible debentures by companies looking to raise small amounts, typically less than Rs 300 crore, to a small set of investors. A clutch of distributors sells these bonds through word-of-mouth publicity, as regulations don't permit companies to advertise or market these bonds.

Currently, some finance companies like Muthoot, Mannapuram, SREI Finance and HUDCO are offering bonds under the private placement route. And guess what? The rates offered by them are indeed more. Muthoot Finance is offering 12.75% for 18 months and 13% for 26 months. Similarly, Mannapuram Finance is offering 12.5% for 366 days, with an extra 0.5% for senior citizens.

SREI Infra Finance is offering 11.85% for a tenure of five years and three months, while HUDCO is offering a tax-free 8.09% for 10 years and 8.16% for 15 years. "Even though private placements are not advertised or marketed, a detailed prospectus is filed with Sebi and the issue is governed by Sebi guidelines.

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Funds mop-up via debt placements reach Rs 1.64 lakh crore In debt private placements, the companies issue

debt securities or bonds to institutional investors. Indian companies have raised Rs 1.64 lakh crore

through private placement of debentures (NCDs )or bonds primarily led by financial institutions

the funds raised by the private sector fell by 27 per cent to Rs 35,422 crore in this period. However All the government organisations and financial institutions together have accounted for 78 per cent of total funds raised during this year, up from 69 per cent a year ago.

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Contd..

In terms of sectors, financial services segment dominated the market with a 80 per cent share of total funds, followed by power sector with 7 per cent share.

The highest mobilisation through debt private placements during the period was by PFC (Rs 21,563 crore), followed by HDFC (17,285 crore), REC (15,966 crore), NABARD (10,324 crore), IDFC (7,751 crore), LIC Housing (7,235 crore) PGCIL (7,043 crore) and Air India (5,500 crore).

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Thank You

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