Indian Financial System – An Overview?

You are fully aware that business units have to raise short-term as well as long-term funds to meet their working and fixed capital requirements from time to time. This necessitates not only the ready availability of such funds but also a transmission mechanism with the help of which the providers of funds (investors/ lenders) can interact with the borrowers/ users (business units) and transfer the funds to them as and when required. This aspect is taken care of by the financial markets which provide a place where or a system through which, the transfer of funds by investors/lenders to the business units is adequately facilitated. OBJECTIVES After studying this lesson, you will be able to: • explain the concept and functions of financial markets; • state the nature and importance of money market; • state the nature and types of capital market; • distinguish between capital market and money market; • explain the nature and functions of a stock exchange; • state the advantages of stock exchanges from the points of view of companies, investors and society as a whole; • state the limitations of stock exchanges; • explain the concept of speculation and distinguish it from investment; • outline the stock exchanges in India; and • describe the nature of regulation of stock exchanges in India and the role of SEBI. Contain 18.1 Financial market 18.2 Types of financial markets 18.3 Money market 18.3.1 Money market instruments 18.4 Capital market 18.4.1 Primary market 18.4.2 Secondary market 18.5 Distinction between primary market and secondary market. 18.6 Distinction between capital market and money market 18.7 Stock exchanges 18.7.1 Functions of a stock exchange 18.7.2 Advantages of stock exchanges 18.7.3 Limitations of stock exchanges 18.8 Speculation in stock exchanges 18.9 Stock exchanges in India 18.10 Regulations of stock exchanges 18.11 Role of SEBI

An Overview Banking Sectore?

A bank is a financial institution that provides banking and other financial services to their customers. Banks are a subset of the financial services industry and play an important role in the global economies. They are a key player in stimulating economic growth. Banking is an important undertaking. The movement of capital handled by banks allows economies to grow and prosper. Businesses and governments need money to operate, and banks act as intermediaries between the suppliers of funds and users of funds.

Reserve Bank of India?

The Reserve Bank of India is the Central Bank of India, which means it is at the apex of the banking structure of the economy. It is one of the main governing body and regulatory body in India and helps the government in its role as a business facilitator. The RBI was first established on the 1st of April 1935 and nationalized in 1949. The governing of the RBI is done in accord to the RBI Act by the government. Its day to day affairs are take care of the Board of Directors who are chosen by the government.

Types of Customers & Mode of Operation?

TYPE OF CUSTOMERS On the basis of banking nature, Customers can be classified as : 1. Depositors 2. Borrowers 3. TPP 4. NRIs 5. Walkin TYPE OF CUSTOMERS On the Basis of Society customer may be classified as: Gender Male Female Others Age Minor Major Senior Citizen Profession Salaried P&SE Business man Farmer Income Poor Rich HNI Manner Gentle Tough Short Tempered Occupation Employed Unemployed Student House wife.

Banker – Customer Relationship?

BANK- CUSTOMER RELATIONSHIP Banking relationship is a contract between the Bank & the Customer. Therefore, for establishing relationship with the customer, Bank has to ensure that the customer is legally capable of entering into a valid contract & he has applied to the Bank in the proper form (Indian Contract Act, 1872).

Negotiable Instruments?

Negotiable Instruments are written contracts whose benefit could be passed on from its original holder to a new holder. In other words, negotiable instruments are documents which promise payment to the assignee (the person whom it is assigned to/given to) or a specified person. These instruments are transferable signed documents which promises to pay the bearer/holder the sum of money when demanded or at any time in the future.

Retail Banking Products?

Typical retail banking services offered by banks include: Transactional accounts ,Checking accounts (American English) ,Current accounts (British English) ,Savings accounts ,Debit cards ,ATM cards ,Credit cards ,Traveler's cheques ,Mortgages ,Home equity loans ,Personal loans ,Certificates of deposit/Term deposits.

Foreign Exchange Business of Banks?

Foreign Exchange (forex or FX) is the trading of one currency for another. For example, one can swap the U.S. dollar for the euro. Foreign exchange transactions can take place on the foreign exchange market, also known as the Forex Market. The forex market is the largest, most liquid market in the world, with trillions of dollars changing hands every day. There is no centralized location, rather the forex market is an electronic network of banks, brokers, institutions, and individual traders (mostly trading through brokers or banks).

Insurance?

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured. Insurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her property, or from liability for damage or injury caused to a third party.

Security Analysis, Porfolio,Equity, Bond,Mutual Fund?

Security analysis: fundamental analysis, technical analysis, efficient market hypothesis. The returns and risks from investing Markowitz portfolio theory, mean variance approach,portfolio selection-efficient portfolios, the single index model capital asset pricing model,arbitrage pricing theory.Equity analysis & valuation, balance sheet analysis equity valuation models, intrinsic value &market price, the p/e ratio & earnings multiplier approach, price/book value, price/ sales ratio,economic value added , overview of derivatives markets, option markets, option strategies and option valuation forward & future markets, strategies.Types of mutual funds schemes, structure, net asset value, risk and return, performance evaluation models Sharpe model, trey nor model, Jensen model, fame’s decomposition.

Recent Trends in Banking Regulation?

1) Electronic Payment Services – E Cheques 2) Real Time Gross Settlement (RTGS) 3) Electronic Funds Transfer (EFT) 4) Electronic Clearing Service (ECS) 5) Automatic Teller Machine (ATM) 6) Point of Sale Terminal 7) Tele Banking 8) Electronic Data Interchange (EDI)

Marketing of Banking Services?

CONCEPT OF BANK MARKETING Dentifying the most profitable markets now and in future;Assessing the present and future needs of customers; Setting business development goals and making plans to meet them; Managing the various services and promoting them to achieve the plans; Adapting to a changing environment in the market place.

Banking Regulations in India?

The Indian banking sector is regulated by the Reserve Bank of India Act 1934 (RBI Act) and the Banking Regulation Act 1949 (BR Act). ... In addition, the Foreign Exchange Management Act 1999 (FEMA) regulates cross-border exchange transactions by Indian entities, including banks.

MIS & Technology in Banking?

‘A Management Information System is a set of combined procedures that gathers and produces reliable, relevant, and properly organized data that supports the decision making process of an organization. To sum up, it is a group of processes through which data is obtained, sorted, and displayed in a useful way for decision-making purposes.’

International banking?

An international bank is a financial entity that offers financial services, such as payment accounts and lending opportunities, to foreign clients. These foreign clients can be individuals and companies, though every international bank has its own policies outlining with whom they do business.

Bank Management?

n general, bank management refers to the process of managing the Bank's statutory activity. Bank management is characterized by the specific object of management - financial relations connected with banking activities and other relations, also connected with implementation of management functions in banking.

Bank Lending Policies and Procedures?

Making loans is the principal economic function of banks ◦To fund consumption and investment spending by businesses, individuals and units of government. How well a bank performs its lending function has a great deal to do with: ◦Economic health of the region◦Growth of new businesses◦Employment◦Promotion of economic vitality Bank loans conveys information regarding the credit quality of the borrower in the market place.

Micro Financing?

Microfinance is defined as, financial services such as savings accounts, insurance funds and credit provided to poor and low income clients so as to help them increase their income, thereby improving their standard of living.

Risk Management?

Risk management refers to the practice of identifying potential risks in advance, analyzing them and taking precautionary steps to reduce/curb the risk. Description: When an entity makes an investment decision, it exposes itself to a number of financial risks

Rural & Co-Operative Banking?

Rural banking traditionally has serviced the financial needs of people living in remote areas of the United States. Unlike banks located in more populous urban areas, rural banks may have relatively small and specialized customer bases spread over a far greater geographical area. Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world.

DIGITAL BANKING PRODUCTS?

Digital banking is part of the broader context for the move to online banking, where banking services are delivered over the internet. The shift from traditional to digital banking has been gradual and remains ongoing, and is constituted by differing degrees of banking service digitization. Digital banking involves high levels of process automation and web-based services and may include APIs enabling cross-institutional service composition to deliver banking products and provide transactions. It provides the ability for users to access financial data through desktop, mobile and ATM services

CARDS?

A bank card is a payment card issued by a bank. Bank cards let customers access funds in checking or savings accounts or make purchases against a line of credit. ATM cards, debit cards, and credit cards are all considered types of bank card.

EMV technology?

EMV is a payment method based upon a technical standard for smart payment cards and for payment terminals and automated teller machines which can accept them. EMV originally stood for "Europay, Mastercard, and Visa", the three companies which created the standard.

ATM’s?

An automated teller machine (ATM) is an electronic banking outlet that allows customers to complete basic transactions without the aid of a branch representative or teller. Anyone with a credit card or debit card can access cash at most ATMs. ATMs are convenient, allowing consumers to perform quick self-service transactions such as deposits, cash withdrawals, bill payments, and transfers between accounts. Fees are commonly charged for cash withdrawals by the bank where the account is located, by the operator of the ATM, or by both. Some or all of these fees can be avoided by using an ATM operated directly by the bank that holds the account.

CASH DEPOSIT MACHINES?

Cash Deposit Machine. Your dealings in cash are set to become a cakewalk. The Cash Deposit Machine (CDM) is a self-service terminal that lets you make deposits and payment transactions by cash. All successful transactions are immediately credited and customers will be issued an advice slip confirming the transaction.

MOBILE BANKING & INTERNET BANKING?

The biggest difference between the two is their functionality. Internet Banking allows you to conduct online transactions through your PC or laptop and an internet connection. On the other hand, mobile banking can be done with or without internet. Many banks nowadays have their mobile apps for mobile banking. Although, you need to have an internet connection to use such mobile banking apps; banks also offer mobile banking through SMS. So, even if you have a very basic mobile and not a smartphone, you will still be able to use some features of mobile banking through SMS.

POS TERMINALS?

A point of sale terminal (POS terminal) is an electronic device used to process card payments at retail locations. A POS terminal generally does the following: Reads the information off a customer's credit or debit card. Checks whether the funds in a customer's bank account are sufficient.

BRANCHLESS BANKING?

Branchless banking is defined as the delivery of financial services outside conventional bank branches, often using agents and relying on information and communications technologies to transmit transaction details – typically card-reading point-of-sale (POS) terminals or mobile phones.

Virtual Banking?

Virtual Banking (VB) is a strategy of distribution channels which are used to provide financial services and seeks to expand the concept of the traditional bank branch. This is done through the growth and development of technology.

PAYMENT SYSTEMS?

A payment system is any system used to settle financial transactions through the transfer of monetary value. This includes the institutions, instruments, people, rules, procedures, standards, and technologies that make its exchange possible.
Banking Customer Relationship

BANKER CUSTOMER RELATIONSHIP

A banker is the one who gets into debts and creates debts.

  • L. HART – the banker is one who receives money, collects cheques and drafts, for customers, with an obligation to honour the cheques drawn by customers from time to time subject to availability of amounts in the account.
  • Section 3 of NI ACT 1881, and Section 2 of BILL OF EXCHANGE ACT 1882. state that the term banker includes person or corporation or a company acting as banker.
  • Under Section 5 (1) of Banking Regulations of 1949, a banking company is defined as any company which transacts banking business.
  • Under Section 5 (1) B , banking business means accepting for the purpose of landing or investment, deposits of money from the public, repayable on demand or otherwise withdrawable by cheque , draft or otherwise.

CUSTOMER

  • A person who buys goods or services from a shop or a business entity.
  • A person you deal with as a business entity.
  • There is no statutory definition.
  • A person/ company/entity who has an account with a bank is a customer.
  • There is no unanimity as regards to the time period of the dealings.
  • A casual transaction like encashment of a cheque does not entail a person to be customer.
  • The duration of association of the customer with the bank is of no essence.
  • A customer is one who has an account with the bank and to whom the banks undertakes to extend business of banking.

RELATIONSHIP

  • CREDITOR-DEBTOR
  • Relationship between the customer having a deposit account and the banker.
  • Depositor is the lender and the banker is the borrower.
  • Depositor is the creditor and the banker is the debtor.
  • The money handed over to the bank is a debt.
  • The money once deposited in the bank becomes the money of the bank and it is prerogative of the bank to use that money as it deems fit. The depositor remains a creditor that too an unsecured creditor
    • DEBTOR-CREDITOR
  • When the customer avails a loan or an advance then his relationship with the banker undergoes a change to what it is when he is a deposit holder.
  • Since the funds are lent to the customer , he becomes the borrower and the banker becomes the lender.
  • The relation is the debtor- creditor relation, the customer being a debtor and the banker a creditor.
    • BENEFICIARY-TRUSTEE
  • If a customer keeps certain valuables or securities with the bank for safe-keeping or deposits a certain amount of money for a specific purpose, the banker, besides becoming a bailee, is also a trustee. The money or the securities so kept are not at the disposal of the bank. The banker cannot utilize those moneys or securities as he desires since the money does not belong to him.
  • Here there is delivery of goods or securities from one person to the other which amounts to the bailment. As per section 148 of Indian Contract Act 1872, the delivery of goods from one person to the other for some purpose upon the contract that the goods will be returned when the purpose is accomplished.
  • The customer is the bailer and the banker is the bailee.

PRINCIPAL-AGENT

  • Banks provide ancillary services such as collection of cheques, bills etc.They also undertake to pay regularly the electricity bills, phone bills etc.
  • The relationship arising out of these ancillary services is of principal-agent between the customer and the bank.
  • The relationship seizes once the customer dies, becomes insane or becomes insolvent.
  • The proceedes of the cheques sent for collection,which are in transit, not created to the customer account are not the moneys of the banker till such time as they are credited into the customer account.

LESSEE-LESSOR

  • The banks provide safe deposit lockers to the customers who hire them on lease basis. The relationship therefore, is that of lessee and lessor. In certain banks, this relationship is termed as licensee and licensor. The bank leases out the space for the use of clients. The bank is not responsible for any loss that arises to the lessee in this form of transaction except due to negligence of that bank.

INDEMNIFIER- INDEMNIFIED

  • The customer is indemnifier and the bank is indemnified.
  • A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or the conduct of any other person is called a contract of indemnity – section 124 ( Indian Contract Act, 1872). In the case of banking, this relationship happens in transactions of issue of duplicate demand draft, fixed deposit receipt etc. The underlying point in these cases is that either party will compensate the other of any loss arising from the wrong/excess payment.

OBLIGATIONS OF THE BANK

Obligation to honour the cheque

  • Under section 31 of NI Act 1881, the banker is obliged to make payment of the cheque ,with mandate, properly presented, provided there is balance in the account.
  • However, when a garneshee order is served on the banker, the banker may seek refuse under order 21 of code of civil procedure 1908 and the banker may not pay the cheque when such order is served.If a debtor fails to pay the debt to the creditor, the latter may approach a court of law to issue a garneshee order on the banker of his debtor.

OBLIGATIONS OF THE BANK

Obligation to maintain secrecy

  • Section 13 of banking companies Act 1970 stipulates the banks to maintain secrecy of their customers accounts and dealings with them.
  • However there are exceptions.The exceptions are :
  • When law requires
  • When the practices and usages among bankers warrants exchange of information.

RIGHTS OF BANKER

  • Right of general lien- Lien is the right of the creditor to retain the goods and securities owned by the debtor untill the debt due from him is paid.
  • It conferes upon the creditor to retain the securities of the debtor.
  • It does not confer the right to sell.
  • There are two types of liens – General lien and particular lien.
  • Section 171 of Indian contract Act 1872 conferes general lien on bankers.
  • Bankers lien is tantamount to implied pledge. The reason being the banker is bestowed with a right even to sell securities without the intervention of the court.
  • Pledge – Section 172 of Indian contract Act 1872- bailment of goods as security for payment of a debt or performance.

RIGHTS OF BANKER

  • Right of set off – The mutual claims of a debtor and a creditor are adjusted together and only the remainder amount due is payable.
  • Right of appropriation – If the customer has more than one loan account , the customer can direct the repayment of the loan as credit into any other accounts. If there is no specific directions from the customers the banker has a right to appropriate as per his choice.
  • Right to charge interest- As a creditor the banker has right to charge interest on the funds he lends as per the norms and as per the contract.

BANKERS BOOKS EVIDENCE ACT

Despite the fact the banker has to maintain secrecy he has to disclose the accounts and an order from the court.

Earlier the books of accounts were required to be produced in court of law as evidence.

However on the advent of bankers books evidence act 1891.The banker can produce certified copies of the records of the accounts as evidence which are tenable as evidence in court of law.

SPECIAL TYPES OF CUSTOMERS

  • LUNATICS- Under Indian Contract Act , a contract with or by a lunatic is void. The reason being the lunatic being of unsound mind is not competent to comprehend a contract.
  • If the banker without knowing that the person is lunatic opens an account and enters into a contract acting in good faith is protected. But when once he gets a notice of lunacy of a person, he should not entertain any contract either existing or new.
  • DRUNKARDS- Under section 12 of Indian contract act 1872, a sane man who is delirious from favour or who is drunk that he cannot understand the contract, or form rational judgement cannot enter into contract while such delirium or drunkedness lasts.

When a customer who is drunk presents a cheque across a counter the payment must be witnessed.

  • MINORS- Any person under the age of 18 yrs is a minor.

If a court appoints a guardian and the minor is below 18 yrs the minority extends upto 21 yrs.

A minor is not competent to enter into a contract and all the contracts entered in by him are void.

The banker can open an account but he has to be careful that the account will never be allowed to be overdrawn.

The minor can be a partner but cannot be held liable for the liabilities of the partnership.

  • PARTNERSHIP – Section 4 of the Indian Partnership Act 1932, defines partnership as a relationship subsisting between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

While opening an account the partnership letter should be signed by all the partners.

The purpose of the business address, names and other details should be clearly obtained.

The partnership letter and the deed should contain as regards to instructions pertaining to opening a bank account and the operations.

In case of any internal dispute among partners, if any of them gives notice of stoppage of operations, then the account would only be operative by all partners jointly.

Death of the partner deserves the partnership. In order to determine the liability of deceased partner the banker should close the account.

  • COMPANIES – Company is a legal entity and the formation of the company is governed by Companies Act 1956.

While opening an account on company’s name the banker has to ask for:

  • Certifies copies of memorandum and articles of association and certificate of incorporation.
  • Names of the directors
  • Certificate of commencement of business.
  • Copy of resolution appointing the bank as companies bank. And the names of the persons authorized to operate that account along with the signatures.
  • Death of authorized signatories does not demand the stopping of payments since the company is in existence.

TRUSTES- According to Indian Trust Act 1882, trust is an obligation annexed to the ownership of a property, arising out of confidence reposed in and accepted by the person for the benefit of another person.

The person who reposes are declares confidence is called the author of the trust.

The person who accepts the confidence is the trustee. The person for whose benefit the confidence is accepted is

a beneficiary.

The instrument by which the trust is created is the trust deed. Bank has to study the trust deed as regards to the opening and operations of the account.

HINDU UNDIVIDED FAMILY- Where a hindu dies leaving a business, the business is passed onto the legal heads. It becomes HUF property. The members of the family are called Coparceners and eldest male child is the manager or the karta.

The karta has the employed authority to avail loan and execute necessary documents. It binds all the members.

The other members of the family are also required to sign the documents as a precautionary measure even though legally they are bound by the actions of the karta.

JOINT ACCOUNT HOLDERS- A joint account is an account opened by two or more persons , while opening an account the account opening form should be signed by all the account holders.

Instructions for opening an account may be any of the following:

  • Either or survivor
  • Former or survivor
  • Both jointly

Any of them can stop payment of the cheque issued by any bother joint account holder.

The instructions for operations in the account will stand countermanded in case of insanity, insolvency, death of any of the joint holders and the operations in the account will be stopped.

 

PRINCIPLES OF LENDING

  • SAFETY
  • LIQUIDITY
  • PROFITABLE
  • PURPOSE
  • DIVERSIFICATION OF RISK
  • SECURITY
  • SAFETY

THE REPAYMENT DEPENDS UPON :

  1. CAPACITY TO PAY
  • WILLINGNESS TO PAY
  1. INCOME GENERATION

THE THREE ‘C’s ARE CHARACTER, CAPACITY AND CAPITAL

THE THREE ‘R’s ARE RELIABLITY,RESPONSIBILITY AND RESOURCES

 

LIQUIDITY

70% OF THE DEPOSITS ARE DEPOSITS REPAYABLE WITHIN ONE YEAR.SO THE AMOUNT LENT IS TO BE AVAILABLE FOR REPAYMENT OF DEPOSITS.

LIQUIDITY IS THE NATURE OF THE ASSEST TO GET COVERTED INTO CASH.

PROFITABILITY

IN ORDER TO CASRRY ON THE OPERATIONS, TO RUN THWE MACHINERY OF BUSINESS AND AT THE END TO EARN SOMETHING OUT OF THE BUSINESS ACTIVITY IN RETURN FOR THE EFFORTS PUT IN PROFIT IS AIMED AT.

IN VIEW OF VARIOUS LENDING ACTIVITIES AND VARIOUS OBLIGATIONS , A CLEAR CUT PATH IS ENVISIGED KEEPING IN VIEW THE PROFIT FACTOR.

PURPOSE

WHILE LENDING THE PURPOSE OF THE ACTIVITY FOR WHICH THE LOAN IS EXTENDED IS TO BE GIVEN PRIORITY. LOANS FOR UNDESIREABLE AND SPECULATIVE PURPOSES CANNOT BE GRANTED.

DIVERSIFICATION OF RISK

SHOULD NOT LAY ALL THE EGGS IN ONE BASKET. THE LOAN PORTFOLIO SHOULD BE DISTRUBUTED TO DIFFERENT SECTORS, DIFFERENT GEOGRAPHICAL AREAS AND DIFFERENT SPECTRUM OF PEOPLE.

SECURITY

SINCE THE FUNDS THAT ARE LENT TO PUBLIC ARE THE BORROWED FUNDS AND SINCE THEY ARE TO BE PAID ON DEMAND OR OTHERWISE, THE MAIN PRIORITY OF THE BANKER IS THE RELISABILITY OF THE FUNDS LENT. IN ORDER TO SECURE THE FUNDS, IN CASE OF ANY EVENTUALITY, CERTAIN PRECAUTIONS AS REGARDS TO SECURITY ARE TAKEN. THEY ARE KEEP IN MARGIN, RELISABILITY OF SECURITY, ADEQUACY OF THE SECURITY AND FREE FROM ANY ENCUMBERENCE.