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.

INSURANCE

Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.

An entity which provides insurance is known as an insurer, insurance company, insurance carrier or underwriter. A person or entity who buys insurance is known as an insured or as a policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and usually involves something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.

The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured. The amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster. The insurer may hedge its own risk by taking out reinsurance, whereby another insurance company agrees to carry some of the risks, especially if the primary insurer deems the risk too large for it to carry.

Principles

Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be an insurable risk, the risk insured against must meet certain characteristics. Insurance as a financial intermediary is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.

Insurability

Risk which can be insured by private companies typically shares seven common characteristics:

  1. Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbersin which predicted losses are similar to the actual losses. Exceptions include Lloyd’s of London, which is famous for ensuring the life or health of actors, sports figures, and other famous individuals. However, all exposures will have particular differences, which may lead to different premium rates.
  2. Definite loss: The loss takes place at a known time, in a known place, and from a known cause. The classic example is the death of an insured person on a life insurance policy. Fireautomobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place, or cause is identifiable. Ideally, the time, place, and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
  3. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements such as ordinary business risks or even purchasing a lottery ticket are generally not considered insurable.
  4. Large loss: The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses, these latter costs may be several times the size of the expected cost of losses. There is hardly any point in paying such costs unless the protection offered has real value to a buyer.
  5. Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, then it is not likely that the insurance will be purchased, even if on offer. Furthermore, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, then the transaction may have the form of insurance, but not the substance (see the U.S. Financial Accounting Standards Boardpronouncement number 113: “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”).
  6. Calculable loss: There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
  7. Limited risk of catastrophically large losses: Insurable losses are ideally independentand non-catastrophic, meaning that the losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. Capital constrains insurers’ ability to sell earthquake insurance as well as wind insurance in hurricane In the United States, flood risk is insured by the federal government. In commercial fire insurance, it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers or are insured by a single insurer who syndicates the risk into the reinsurance market.

Legal

When a company insures an individual entity, there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include:

  1. Indemnity– the insurance company indemnifies or compensates, the insured in the case of certain losses only up to the insured’s interest.
  2. Benefit insurance – as it is stated in the study books of The Chartered Insurance Institute, the insurance company does not have the right of recovery from the party who caused the injury and is to compensate the Insured regardless of the fact that Insured had already sued the negligent party for the damages (for example, personal accident insurance)
  3. Insurable interest– the insured typically must directly suffer from the loss. Insurable interest must exist whether property insurance or insurance on a person is involved. The concept requires that the insured have a “stake” in the loss or damage to the life or property insured. What that “stake” is will be determined by the kind of insurance involved and the nature of the property ownership or relationship between the persons. The requirement of an insurable interest is what distinguishes insurance from gambling.
  4. Utmost good faith– (Uberrima fides) the insured and the insurer are bound by a good faith bond of honesty and fairness. Material facts must be disclosed.
  5. Contribution – insurers which have similar obligations to the insured contribute in the indemnification, according to some method.
  6. Subrogation – the insurance company acquires legal rights to pursue recoveries on behalf of the insured; for example, the insurer may sue those liable for the insured’s loss. The Insurers can waive their subrogation rights by using the special clauses.
  7. Causa proxima, or proximate cause– the cause of loss (the peril) must be covered under the insuring agreement of the policy, and the dominant cause must not be excluded
  8. Mitigation – In case of any loss or casualty, the asset owner must attempt to keep loss to a minimum, as if the asset was not insured.

Indemnification

To “indemnify” means to make whole again, or to be reinstated to the position that one was in, to the extent possible, prior to the happening of a specified event or peril. Accordingly, life insurance is generally not considered to be indemnity insurance, but rather “contingent” insurance (i.e., a claim arises on the occurrence of a specified event). There are generally three types of insurance contracts that seek to indemnify an insured:

  1. A “reimbursement” policy
  2. A “pay on behalf” or “on behalf of policy”
  3. An “indemnification” policy

From an insured’s standpoint, the result is usually the same: the insurer pays the loss and claims expenses.

If the Insured has a “reimbursement” policy, the insured can be required to pay for a loss and then be “reimbursed” by the insurance carrier for the loss and out of pocket costs including, with the permission of the insurer, claim expenses.

Under a “pay on behalf” policy, the insurance carrier would defend and pay a claim on behalf of the insured who would not be out of pocket for anything. Most modern liability insurance is written on the basis of “pay on behalf” language which enables the insurance carrier to manage and control the claim.

Under an “indemnification” policy, the insurance carrier can generally either “reimburse” or “pay on behalf of”, whichever is more beneficial to it and the insured in the claim handling process.

An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the ‘insured’ party once risk is assumed by an ‘insurer’, the insuring party, by means of a contract, called an insurance policy. Generally, an insurance contract includes, at a minimum, the following elements: identification of participating parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be “indemnified” against the loss covered in the policy.

When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a claim against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to the insurer for assuming the risk is called the premium. Insurance premiums from many insureds are used to fund accounts reserved for later payment of claims – in theory for a relatively few claimants – and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses (called reserves), the remaining margin is an insurer’s profit.

Exclusions

Policies typically include a number of exclusions, including typically:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Types of Insurance

 

 

7 Types of Insurance Business are;

  • Life Insurance or Personal Insurance.
  • Property Insurance.
  • Marine Insurance.
  • Fire Insurance.
  • Liability Insurance.
  • Guarantee Insurance.
  • Social Insurance.

These are explained below.

 

Life Insurance

Life Insurance is different from other insurance in the sense that, here, the subject matter of insurance is the life of a human being.

The insurer will pay the fixed amount of insurance at the time of death or at the expiry of a certain period.

At present, life insurance enjoys maximum scope because life is the most important property of an individual.

Each and every person requires insurance.

This insurance provides protection to the family at the premature death or gives an adequate amount at the old age when earning capacities are reduced.

Under personal insurance, a payment is made at the accident.

The insurance is not only a protection but is a sort of investment because a certain sum is returnable to the insured at the death or the expiry of a period.

General Insurance

General insurance includes Property Insurance, Liability Insurance, and Other Forms of Insurance.

Fire and Marine Insurances are strictly called Property Insurance. Motor, Theft, Fidelity and Machine Insurances include the extent of liability insurance to a certain extent.

The strictest form of liability insurance is fidelity insurance, whereby the insurer compensates the loss to the insured when he is under the liability of payment to the third party.

 

Property Insurance

Under the property insurance property of person/persons are insured against a certain specified risk. The risk may be fire or marine perils, theft of property or goods damage to property at the accident.

 

Marine Insurance

Marine insurance provides protection against the loss of marine perils.

The marine perils are; collision with a rock or ship, attacks by enemies, fire, and captured by pirates, etc. these perils cause damage, destruction or disappearance of the ship and cargo and non-payment of freight.

So, marine insurance insures ship (Hull), cargo and freight.

Previously only certain nominal risks were insured but now the scope of marine insurance had been divided into two parts; Ocean Marine Insurance and Inland Marine Insurance.

The former insures only the marine perils while the latter covers inland perils which may arise with the delivery of cargo (gods) from the go-down of the insured and may extend up to the receipt of the cargo by the buyer (importer) at his go down.

 

Fire Insurance

Fire Insurance covers the risk of fire.

In the absence of fire insurance, the fire waste will increase not only to the individual but to the society as well.

With the help of fire insurance, the losses arising due to fire are compensated and the society is not losing much.

The individual is preferred from such losses and his property or business or industry will remain approximately in the same position in which it was before the loss.

The fire insurance does not protect only losses but it provides certain consequential losses also war risk, turmoil, riots, etc. can be insured under this insurance, too.

 

Liability Insurance

The general Insurance also includes liability insurance whereby the insured is liable to pay the damage of property or to compensate for the loss of persona; injury or death.

This insurance is seen in the form of fidelity insurance, automobile insurance, and machine insurance, etc.

 

Social Insurance

The social insurance is to provide protection to the weaker sections of the society who are unable to pay the premium for adequate insurance.

Pension plans, disability benefits, unemployment benefits, sickness insurance, and industrial insurance are the various forms of social insurance.

Insurance can be classified into 4 categories from the risk point of view.

 

Personal Insurance

The personal insurance includes insurance of human life which may suffer a loss due to death, accident, and disease

Therefore, personal insurance is further sub-classified into life insurance, personal accident insurance, and health insurance.

 

Property Insurance

The property of an individual and of the society is insured against loss of fire and marine perils, the crop is insured against an unexpected decline in deduction, unexpected death of the animals engaged in business, break-down of machines and theft of the property and goods.

 

Guarantee Insurance

The guarantee insurance covers the loss arising due to dishonesty, disappearance, and disloyalty of the employees or second party. The party must be a party to the contract.

His failure causes loss to the first party.

For example, in export insurance, the insurer will compensate the loss at the failure of the importers to pay the amount of debt.

 

Other Forms of Insurance

Besides the property and liability insurances, there are other insurances that are included in general insurance.

Examples of such insurances are export-credit insurances, State employees’ insurance, etc. whereby the insurer guarantees to pay a certain amount at certain events.

This insurance is extending rapidly these days.

 

Miscellaneous Insurance

The property, goods, machine, Furniture, automobiles, valuable articles, etc. can be insured against the damage or destruction due to accident or disappearance due to theft.

There are different forms of insurances for each type of the said property whereby not only property insurance exists but liability insurance and personal injuries are also the insurer.

 

LINKS: https://www.investopedia.com/terms/i/insurance.asp

https://www.policyx.com/motor-insurance/car-insurance.php

https://harrah-assoc.com/7-types-of-insurance-every-business-owner-needs-to-prevent-losses/