Banking and Indian Financial System Part B Q&A || MBA

Banking and Indian Financial System

Part B Q&A:

1. Analyze the assets and liabilities of scheduled commercial banks in India?

Liabilities of Banks:

1. Capital and Reserves:

Together they constitute owned funds of banks. Capital represents paid-up capital, i.e., the amount of share capital actually contributed by owners (shareholders) banks. Reserves are retained earnings or undistributed profits of banks accumulated over their working lives. The law requires that such reserves are built up and that not all the earned profits are distributed among the shareholders.

2. Deposits:

At the present level of financial development in India, banks are the premier financial institution. Deposit mobilisation by them remains the most important (though not the only) form of mobilisation of savings of the public. Therefore, to the extent the promotion and mobilization of savings is a necessary prerequisite for stepping up the rate of economic growth, mobilization by banks in real terms must be given its due weight.

3. Borrowings:

Banks as a whole borrow from the RBI, the IDBI, the NABARD, and from the non-bank financial institutions (the LIC, the UTI, the GIC and its subsidiaries, and the ICICI) that are permitted to lend by the RBI in the inter-bank call money market. Individual banks borrow from each other as well through the call money market and otherwise.

4. Other Liabilities:

They are miscellaneous items of various descriptions such as bills payable, etc. Then there are participation certificates, a new form of issuing banks’ liability about which we study in the next sub-section.

Assets of Banks:

1. Cash:

Cash, defined broadly, includes cash in hand and balances with other banks including the RBI. Banks hold balances with the RBI as they are required statutorily to do so under the cash reserve requirement. Such balances are called statutory or required reserves. Besides, banks hold voluntarily extra cash to meet the day-to-day draws of it by their depositors.

2. Money at Call at Short Notice:

It is money lent to other banks, stock brokers, and other financial institutions for a very short period varying from 1 to 14 days. Banks place their surplus cash in such loans to earn some interest without straining much their liquidity. If cash position continues to be comfortable, call loans may be renewed day after day.

3. Investments:

They are investments in securities usually classified under three heads of (a) government securities, (b) other approved securities and (c) other securities. Government securities are securities of both the central and state government including treasury bills, treasury deposit certificates, and postal obligations such as national plan certificates, national savings certificates, etc. Other approved securities are securities approved under the provisions of the Banking Regulation Act, 1949. They include securities of state- associated bodies such as electricity boards, housing boards, etc., debentures of LDBs, units of the UTI, shares of RRBs, etc.

4. Loans, Advances and Bills Discounted-or Purchased:

They are the principal component of bank assets and the main source of income of banks. Collectively, they represent total ‘bank credit’ (to the commercial sector). Nothing more need be added here, bank advances in India are usually made in the form of cash credit and overdrafts. Loans may be demand loans or term loans.

(a) Cash Credit:

In India cash credit is the main form of bank credit. Under cash credit arrangements an acceptable borrower is first sanctioned a credit limit up to which he may borrow from the bank. But the actual utilization of the credit limit is governed by the borrower’s ‘withdrawing power’. The sanction of the credit limit is based on the overall creditworthiness of the borrower as assessed by the bank.

(b) Overdrafts:

An overdraft, as the name suggests, is an advance given by allowing a customer to overdraw his current account up to agreed limit. The overdraft facility is allowed on only current accounts. The security for an overdraft account may be person shares, debentures, government securities, life insurance policies, or fixed deposits.

(c) Demand Loans:

A demand loan is one that can be recalled on demand. It has no stated maturity. Such loans are mostly taken by security brokers and others whose credit needs fluctuate from day today. The salient feature of a loan is that the entire amount of the loan sanctioned is paid to the borrower in one lump sum by crediting the whole amount to a separate loan account.

(d) Term Loans:

A term loan is a loan with a fixed maturity period of more than one year. Generally this period is no longer than ten years. Term loans provide medium-or long-term funds to the borrowers. Most such loans are secured loans. Like demand loans, the whole amount of a term loan sanctioned is paid in one lump sum by crediting it to a separate loan account of the borrower. Thus, the entire amount becomes chargeable to interest.

2. Explain the different types of capital Market?

1. Primary Market: Primary markets are those types of capital market instruments where new securities are issues on the exchange. Governments, organizations, companies obtain funding thru equity or debt securities. Primary markets, in addition popularly known as IPO (Initial Public Offering). This facilitated helps underwriting groups and investment banks to set the initial price range for an offered security when then sell those securities directly to people. The primary markets tend to be where investors, individuals get very first chance to take part in your brand new securities. The issuing organization or a company then receives funding from sale of securities, and then those funds will be used for business operations as well as expansion.

2. Secondary Market: Secondary markets are those types of capital market instruments where investors choose to buy securities or even assets from other investors rather than buying from the issuing company. Firstly, Securities and Exchange Commission (SEC) registers securities before issuing new securities in Primary market. Secondly, then once new issues of securities are purchased by initial investors they then begin trading of buying and selling securities in secondary market. There are various types of secondary markets where an individual, investor or a company can buy or sell securities from one person to other person. Here is the list of different types of capital market in secondary market available for trading securities. They are:

1. Stock Markets.

2. Bond Markets.

3. Derivatives Markets.

4. Commodity Market.

5. Forex and Inter-bank Market.

6. Third Markets.

7. Fourth Markets.

8. Money Market.

9. OTC (Over the Counter) Market.

10. Cash or Spot Market.

These are some of the most frequently used types of capital market instruments in the financial market. We have added many financial tutorial courses where you can go through in more details according to your interest.

3. Describe the features of Money Market?

Characteristic # 1. A Developed Commercial Banking System:

For a developed money market not only the banking system should be well-developed and organised, but the public should also have banking habits. These two things are complementary. The commercial banks are the most important suppliers of short term funds.

Characteristic # 2. Presence of a Central Bank:

In a developed money market, there is always an apex central bank. It means the central bank is both dejure and defcto the head of money and banking authority. A central bank is the lender of the last report. It means other member banks can borrow from the central bank during emergency. It is because of this reason that it is called guardian of the money market.

Characteristic # 3. Sub-markets:

A developed money market has the most developed and sensitive sub markets. The money market is a group of various sub-markets, each dealing in loans of various maturities. There will be markets for call loans, the collateral loans, acceptances, foreign exchange, bills of exchange and commercial and treasury bills.

Characteristic # 4. Near Money-assets::

In a developed money market, there is a large quantity and variety of financial instruments such as bills of exchange, treasury bills, promissory notes, short dated government bonds, etc. If the number of near money assets is more, the money market will be more developed.

Characteristic # 5. Availability of Ample Resources:

Another feature of a developed money market is the availability of ample resources. A developed money market has easy access to financial resources from both within and outside the country. The London Money Market attracts adequate funds from both sources, i.e., internal and external.

Characteristic # 6. Integrated Interest-rate Structure:

Another feature of a developed money market is that it has an integrated interest rate structure. The interest rates which prevail in different sub-markets are integrated with each other.

Characteristic # 7. Other Factors: There are many other factors which are responsible for the money market to be a developed one. The contributory factors are volume of international trade, bills of exchange, great industrial development, stable political condition, economic crisis, boom, depression, war, absence of discrimination, etc.

4. Describe the Modern functions of Commercial Banks?

Modern Functions of Commercial Bank

  (1) It issues Credit Cards, Debit Cards, Smart Cards etc.

    (2) Changing Cash for Bank deposit and Bank deposits for cash

(3) Providing 24 hours facility of payment through ATM's

(4) Transferring Bank Deposit between individual or companies

(5) Exchanging deposits for bills of exchange government Bond, secure and unsecured promises of trade and industrial units

  (6) Underwriting capital issues

5. Describe the functions of NABARD? (Guide- 18, 19)

The National Bank for Agriculture and Rural Development (NABARD) is one of the prime financial institutions in India which provides developmental credit in rural areas. Its mission is to “promote sustainable and equitable agriculture and rural prosperity through effective credit support, related services, institution development and innovative initiative.” NABARD has a total of 336 District Offices and six training centres in India and a special cell at Srinagar. It has many branches across India with its headquarters at Mumbai.

1. Integrated Rural Development Programme

IRDP is a scheme devised by Government of India for generating self-employment opportunities in the rural sector and for the economic development of rural areas. Banks are advised to extend cheap credit facilities to the people/ group selected under this programme. NABARD then provides refinance to banks. NABARD has accorded high priority to projects envisaged under IRDP. The refinance provided for IRDP accounts for highest share for the support provided for poverty alleviation programmes.

2. Development of Women and Children in Rural Areas

NABARD prepared guidelines for promoting group activities under the programme and provided 100% refinance support.

3. Training-cum-production Centre for Women

NABARD provides grant? To voluntary/development agencies for setting up of centres which aim at providing vocational/entrepreneurship training centres for women exclusively. Some provide marketing-oriented skill to women for upgrading technical and designing skill.

4. Self-Help Group

NABARD has been making efforts to establish linkages between Self-help Group organized by some voluntary agencies for poor people in rural areas and official credit agencies. This would augment the flow of credit for production purposes and reduce their dependence on informal credit sources.

Provision of credit extended under the SHG scheme during the recent past. Under the scheme so far 4.6 lacs SHG from more than 78 lacs poor families have been covered upto March 2002.

5. NABARD also provides refinance to full extent for project taken under National Watershed Development Programme and National Mission of Wasteland Development.

6. Scheme of Monitoring Evaluation and Research Activities

NABARD conducts studies of on-going schemes and completed studies to obtain feedback on performance of these projects. The NABARD has system of District Oriented Monitoring studies in which a cross section of schemes sanctioned in a district to various banks is studied to ascertain the performance of the schemes and to identify constraints in implementation and for initiating appropriate action to remedy them. Annually about 100 such studies are conducted.

7. Vikas Volunteer Vahini Programme

NABARD has been organizing farmers club in association with voluntary agencies in rural areas particularly in tribal areas, which have proved very helpful for credit institutions in extending credit to poor farmers. These clubs, besides creating awareness among weaker sections about the proper utilization of assets and importing modern method of farm technology, are involved in educating the tribal people.

8. External Aid Project

NABARD has been implementing various foreign aided projects. The projects are assisted by World Bank Group, Organisation of Petroleum Exporting Countries Fund for International Development, etc., NABARD actively participates in formulation and implementation of such projects. It is also required to monitor the projects and submit final report to aid agencies.

9. Inspection and Supervision of Co-operative Banks and Regional Rural Banks

NABARD has been entrusted with the responsibility of supervision of Co-operative and Regional Rural Banks. For this purpose, it conducts inspections of Co-operative Banks and Regional Rural Banks. These banks are also to submit periodical information to NABARD for monitoring purposes. NABARD gives its recommendations to RBI with the matter relating to licensing of Co-operative Banks and Regional Rural Banks. The nominees of NABARD on the boards of Co-operative Banks and Regional Rural Banks monitor the working of banks.

10. Human Resource Development (HRD)

NABARD provides assistance and support for the training of staff of other credit institutions engaged in credit dispensation for agriculture and rural development. Training facilities are extended at its two training institutions Bankers Institute for Rural Development (BIRD), and Regional Training Centres (RTCs).

6. Explain the different types of crossing cheques?

Crossing of a cheque is nothing but instructing the banker to pay the specified sum through the banker only, i.e. the amount on the cheque has to be deposited directly to the bank account of the payee. Hence, it is not instantly en-cashed by the holder presenting the cheque at the bank counter. If any cheque contains such an instruction, it is called a crossed cheque. The crossing of a cheque is done by making two transverse parallel lines at the top left corner across the face of the cheque.

Types of Crossing

The way a cheque is crossed specified the banker on how the funds are to be handled, to protect it from fraud and forgery. Primarily, it ensures that the funds must be transferred to the bank account only and not to encash it right away upon the receipt of the cheque. There are several types of crossing

6. General Crossing: When across the face of a cheque two transverse parallel lines are drawn at the top left corner, along with the words & Co., between the two lines, with or without using the words not negotiable. When a cheque is crossed in this way, it is called a general crossing.

7. Restrictive Crossing: When in between the two transverse parallel lines, the words ‘A/c payee’ is written across the face of the cheque, then such a crossing is called restrictive crossing or account payee crossing. In this case, the cheque can be credited to the account of the stated person only, making it a non-negotiable instrument.8. Special Crossing: A cheque in which the name of the banker is written, across the face of the cheque in between the two transverse parallel lines, with or without using the word ‘not negotiable’. This type of crossing is called a special crossing. In a special crossing, the paying banker will pay the sum only to the banker whose name is stated in the cheque or to his agent. Hence, the cheque will be honoured only when the bank mentioned in the crossing orders the same.

9. Not Negotiable Crossing: When the words not negotiable is mentioned in between the two transverse parallel lines, indicating that the cheque can be transferred but the transferee will not be able to have a better title to the cheque.

10. Double Crossing: Double crossing is when a bank to whom the cheque crossed specially, further submits the same to another bank, for the purpose of collection as its agent, in this situation the second crossing should indicate that it is serving as an agent of the prior banker, to whom the cheque was specially crossed.The crossing of a cheque is done to ensure the safety of payment. It is a well-known mechanism used to protect the parties to the cheque, by making sure that the payment is made to the right payee. Hence, it reduces fraud and wrong payments, as well as it protects the instrument from getting stolen or en-cashed by any unscrupulous individual.

7. Explain the benefits of accruing to a country from foreign coobration?

Benefits to developed country

The benefits of foreign collaboration to a developed country are as follows:

1. Foreign collaboration helps a developed country earn good returns on its overall investments made in a domestic country.

2. It also aids a developed country earn a good reputation for providing financial and technical assistance (support) to the developing country.

Benefits to developing country

The benefits of foreign collaboration to a developing country are as follows:

1. Foreign collaboration helps a developing country to get finance, technology, machinery, know-how, management and technical expertise, etc. from a developed country.

2. It also assists a developing country to achieve a faster economic growth.

1. Agreement:

Foreign collaboration is an agreement or contract between two or more companies from different countries for mutual benefit. The collaborating agreement can be between:

a. Domestic and foreign private firm.

b. Domestic and foreign public firm.

c. Domestic Public and foreign private firm.

d. Domestic government and foreign government.

2. Government consent:

Foreign collaboration is now recognized as an important driver of growth in the country. Foreign collaboration requires Government approval, as the collaboration involves partnership between two countries. Some legal formalities are to be fulfilled to enter into a contract. That requires government permission.

3. World integration:

Globalisation means integration of world economy, where the world becomes a single market. Foreign collaboration allows different countries to enter into partnership and reap the benefit. It helps both the developed and developing countries to come together to achieve the common objectives and maintains international peace.

4. Growth of industrial sector:

Foreign collaboration leads to growth of industries of the countries coming into contract. Foreign collaboration develops industries and increases employment opportunities, thereby improving the working conditions of the masses. Foreign collaboration encourages domestic and international entrepreneurs to invest in business activities and accelerates industrial growth.

5. Gives legal Identity:

Foreign collaboration is a legal entity between two or more parties for a particular purpose or venture.

6. Helps to meet out requirements:

As no country in the world is self-sufficient in itself. All countries need to be dependent on each other to meet out the requirements. Interdependence among countries is a common phenomenon these days. Foreign collaboration is very useful in meeting out the deficiencies of the resources and in getting advanced technology with competitive price.

8. Explain how bull, bear and stag operate in capital market to maximise speculative profits?

1. Bull: A bull is an optimistic speculator. He expects a rise in the price of the securities in which he deals. Therefore, he enters into purchase transactions with a view to sell them at a profit in the future. If his expectation becomes a reality, he shall get the price difference without actually taking delivery of the securities.

2. Dear: A bear is a pessimistic speculator who expects a sharp fall in the prices of certain securities. He enters into selling contracts in certain securities on a future date. If the price of the security falls as he expects he shall get the price difference.

3. Stag: A stag is considered as a cautious investor when compared to the bulls or bears. He is a speculator who simply applies for fresh shares in new companies with the sole object of selling them at a premium or profit as soon as he gets the shares allotted.

9. Explain the circumstances under which listed securities of a company may be delisted?

1. The listed company:

o Has incurred losses/its net worth has been reduced to less than its paid-up capital,

o Has failed to comply with the requirements of the listing agreement or provisions of any law,

o Fails to redress investor grievances.

2. The securities of the listed company have not been continuously traded.

3. The listed company/its promoters/directors indulge in insider trading/unfair trade practices in securities.

4. The promoters/its directors/persons in management indulge in malpractices including malpractices in dematerialization of securities in excess of issued securities or delivery of securities which are not listed or for which trading permission has not been given.

5. The addresses of promoters/directors of a company are not known/are false of the company changes its registered office in contravention of the provisions of the Companies Act.

6. Trading in securities of the company has remained suspended for more than 6 months.

7. Shareholding of the company held by the public has come below the limit specified in the listing agreement under SCR Act.

10. Outline the structure of banking systems in India?

A bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides fundamental banking services such as accepting deposits and providing loans. There are also nonbanking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry.

The commonly identified systems are:

Unit Banking

Unit banking is originated and developed in the U.S.A. In this system, small independent banks are functioning in a limited area or in a single town. It has its own board of directors and stockholders. It is also called as “localized Banking”.

Branch Banking

The Banking system of England originally offered an example of the branch banking system, where each commercial bank has a network of branches spread throughout the country.

Correspondent Banking

The correspondent banking system is developed to remove the difficulties in the unit banking system. The smaller banks deposit their cash reserve with bigger banks.

Group Banking

Group Banking is the system in which two or more independently incorporated banks are brought under the control of a holding company. The holding company may or may not be a banking company. Under group banking, the individual banks may be unit banks, or banks operating branches or a combination of the two.

Pure Banking and Mixed Banking

On the basis of lending operations of the bank, banking is classified into:
(a) Pure Banking
(b) Mixed Banking
(a) Pure Banking: Under pure Banking, the commercial banks give only short-term loans to industry, trade, and commerce. They specialize in short-term finance only. This type Of banking is popular in U.K.
(b) Mixed Banking: Mixed banking is that system of banking under which the commercial ban s perform the dual function of commercial banking and investment banking. Commercial banks usually offer both short-term as well as medium-term loans. The German banking system is the best example of mixed Banking.

Relationship Banking

It refers to the efforts of a bank to promote personal contacts and to keep continuous touch with customers who are very valuable to the bank. In order to retain such profitable accounts with the bank or to attract new accounts, it is necessary for the bank to serve their needs by maintaining a close relationship with such customers.

Narrow Banking

A bank may be concentrating only on the collection of deposits and lend or invest the money within a particular region or certain chosen activity like investing the funds only in Government Securities. This type of restricted minimum banking activity is referred to as ‘Narrow Banking’.

Universal Banking

As Narrow Banking refers to restricted and limited banking activity Universal Banking refers to broad-based and comprehensive banking activities.

Regional Banking

In order to provide adequate and timely credits to small borrowers in rural and semi-urban areas, Central Government set up Regional Banks, known as Regional Rural Banks all over India jointly with State Governments and some Commercial Banks.

Local Area Banks

With a view to bringing about a competitive environment and to overcome the deficiencies of Regional Banks, Government has permitted the establishment of one type of regional banks in rural and semi-urban centers under private sector known as “Local Area Banks”.

Wholesale Banking

Wholesale or corporate banking refers to dealing with limited large-sized customers. Instead of maintaining thousands of small accounts and incurring huge transaction costs, under wholesale banking, the banks deal with large customers and keep only large accounts. These are mainly corporate customer.

Private Banking

Private or Personal Banking is banking with people — rich individuals instead of banking with corporate clients. It attends to the need of individual customers, their preferences and the products or services needed by them. This may include all-around personal services like maintaining accounts, loans, foreign currency requirements, investment guidance, etc.

Retail Banking

Retail banking is a major form of commercial banking but mainly targeted to consumers rather than corporate clients. It is the method of banks’ approach to the customers for sale of their products.

11. Explain the role of NABARD in the development of the economy?

It is an apex institution which has power to deal with all matters concerning policy, planning as well as operations in giving credit for agriculture and other economic activities in the rural areas.
it is a refinancing agency for those institutions that provide investment and production credit for promoting the several developmental programs for rural development.
It is improving the absorptive capacity of the credit delivery system in India, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, and training of personnel.
It co-ordinates the rural credit financing activities of all sorts of institutions engaged in developmental work at the field level while maintaining liaison with Government of India, and State Governments, and also RBI and other national level institutions that are concerned with policy formulation.
It prepares rural credit plans, annually, for all districts in the country.
It also promotes research in rural banking, and the field of agriculture and rural development.

12. Explain the various methods of credit control?

I. Quantitative Method:

(i) Bank Rate:

The bank rate, also known as the discount rate, is the rate payable by commercial banks on the loans from or rediscounts of the Central Bank. A change in bank rate affects other market rates of interest. An increase in bank rate leads to an increase in other rates of interest and conversely, a decrease in bank rate results in a fall in other rates of interest.

(ii) Open Market Operations:

Open market operations refer to the sale and purchase of securities by the Central bank to the commercial banks. A sale of securities by the Central Bank, i.e., the purchase of securities by the commercial banks, results in a fall in the total cash reserves of the latter.

(iii) Variable Reserve Ratios:

Variable reserve ratios refer to that proportion of bank deposits that the commercial banks are required to keep in the form of cash to ensure liquidity for the credit created by them.

II. Qualitative Method:

The qualitative or selective methods of credit control are adopted by the Central Bank in its pursuit of economic stabilisation and as part of credit management.

(i) Margin Requirements:

Changes in margin requirements are designed to influence the flow of credit against specific commodities. The commercial banks generally advance loans to their customers against some security or securities offered by the borrower and acceptable to banks.

(ii) Credit Rationing:

Rationing of credit is a method by which the Central Bank seeks to limit the maximum amount of loans and advances and, also in certain cases, fix ceiling for specific categories of loans and advances.

(iii) Regulation of Consumer Credit:

Regulation of consumer credit is designed to check the flow of credit for consumer durable goods. This can be done by regulating the total volume of credit that may be extended for purchasing specific durable goods and regulating the number of instalments through which such loan can be spread. Central Bank uses this method to restrict or liberalise loan conditions accordingly to stabilise the economy.

(iv) Moral Suasion:

Moral suasion and credit monitoring arrangement are other methods of credit control. The policy of moral suasion will succeed only if the Central Bank is strong enough to influence the commercial banks.

Effectiveness of Credit Control Measures:

The effectiveness of credit control measures in an economy depends upon a number of factors. First, there should exist a well-organised money market. Second, a large proportion of money in circulation should form part of the organised money market. Finally, the money and capital markets should be extensive in coverage and elastic in nature.

Extensiveness enlarges the scope of credit control measures and elasticity lends it adjustability to the changed conditions. In most of the developed economies a favourable environment in terms of the factors discussed before exists, in the developing economies, on the contrary, economic conditions are such as to limit the effectiveness of the credit control measures.

13. Explain the role of Money market in the context to growth of Indian Economy?

· PRODUCING INFORMATION AND ALLOCATING CAPITAL The information production role of financial systems is explored by Ramakrishnan and Thakor (1984), Bhattacharya and P fleiderer (1985), Boyd and Prescott (1986), and Allen (1990). They develop models where financial intermediaries arise to produce information and sell this information to savers. Financial intermediaries can improve the ex-ante assessment of investment opportunities with positive ramifications on resource allocation by economizing on information acquisition costs. As Schumpeter (1912) argued, financial systems can enhance growth by spurring technological innovation by identifying and funding entrepreneurs with the best chance of successfully implementing innovative procedures. For sustained growth at the frontier of technology, acquiring information and strengthening incentives for obtaining information to improve resource allocation become key issues.

· RISK SHARING One of the most important functions of a financial system is to achieve an optimal allocation of risk. There are many studies directly analyzing the interaction of the risk sharing role of financial systems and economic growth. These theoretical analyses clarify the conditions under which financial development that facilitates risk sharing promotes economic growth and welfare. Quite often in these studies, however, authors focus on either markets or intermediaries, or a comparison of the two extreme cases where every financing is conducted by either markets or intermediaries. The intermediate case in which markets and institutions co-exist is rarely analyzed in the context of growth models because the addition of markets can destroy the risk-sharing opportunities provided by intermediaries.

· LIQUIDITY Money market funds provide valuable liquidity by investing in commercial paper, municipal securities and repurchase agreements: Money market funds are significant participants in the commercial paper, municipal securities and repurchase agreement (or repo) markets. Money market funds hold almost 40% of all outstanding commercial paper, which is now the primary source for short-term funding for corporations, who issue commercial paper as a lower-cost alternative to short-term bank loans. The repo market is an important means by which the Federal Reserve conducts monetary policy and provides daily liquidity to global financial institutions.

· DIVERSIFICATION For both individual and institutional investors, money market mutual funds provide a commercially attractive alternative to bank deposits. Money market funds offer greater investment diversification, are less susceptible to collapse than banks and offer investors greater disclosure on the nature of their investments and the underlying assets than traditional bank deposits.

· ENCOURAGEMENTS TO SAVING AND INVESTMENT Money market has encouraged investors to save which results in encouragement to investment in the economy. The savings and investment equilibrium of demand and supply of loanable funds helps in the allocation of resources.

· CONTROLS THE PRICE LINE IN ECONOMY Inflation is one of the severe economic problems that all the developing economies have to face every now and then. Cyclical fluctuations do influence the price level differently depending upon the demand and supply situation at the given point of time. Money market rates play a main role in controlling the price line. Higher rates in the money markets decrease the liquidity in the economy and have the effect of reducing the economic activity in the system. Reduced rates on the other hand increase the liquidity in the market and bring down the cost of capital considerably, thereby rising the investment. This function also assists the RBI to control the general money supply in the economy.

· HELPS IN CORRECTING THE IMBALANCES IN ECONOMY. Financial policy on the other hand, has longer term perspective and aims at correcting the imbalances in the economy. Credit policy and the financial policy both balance each other to achieve the long term goals strong-minded by the government. It not only maintains total control over the credit creation by the banks, but also keeps a close watch over it. The instruments of financial policy counting the repo rate cash reserve ratio and bank rate are used by the Central Bank of the country to give the necessary direction to the monetary policy.

· REGULATES THE FLOW OF CREDIT AND CREDIT RATES Money markets are one of the most significant mechanisms of any developing financial system. In its place of just ensure that the money market in India regulate the flow of credit and credit rates, this instrument has emerge as one of the significant policy tools with the government and the RBI to control the financial policy, money supply, credit creation and control, inflation rate and overall economic policy of the State.

· TRANSMISSION OF MONETARY POLICY The money market forms the first and foremost link in the transmission of monetary policy impulses to the real economy. Policy interventions by the central bank along with its market operations influence the decisions of households and firms through the monetary policy transmission mechanism. The key to this mechanism is the total claim of the economy on the central bank, commonly known as the monetary base or high-powered money in the economy.

14. What is a Listing Agreement?

A listing agreement is a document in which a property owner (as principal) contracts with a real estate broker (as agent) to find a buyer for the owner's property. The owner executes the listing agreement to give a real estate broker the authority to act as the owner's agent in the sale of the owner's property, for which the owner agrees to pay a commission. A listing agreement can also cover documentation for a company’s listing of its securities on an exchange, such as the New York Stock Exchange (NYSE).

15. What is Mutual Funds? What are the types of mutual funds?

A mutual fund is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in stocks, bonds and other securities.

(A) ACCORDING TO TYPE OF INVESTMENTS: - While launching a new scheme, every Mutual Fund is supposed to declare in the prospectus the kind of instruments in which it will make investments of the funds collected under that scheme. Thus, the various kinds of Mutual Fund schemes as categorized according to the type of investments are as follows :-

(a) EQUITY FUNDS / SCHEMES

(b) DEBT FUNDS / SCHEMES (also called Income Funds)

(c ) DIVERSIFIED FUNDS / SCHEMES (Also called Balanced Funds)

(d) GILT FUNDS / SCHEMES

(e) MONEY MARKET FUNDS / SCHEMES

(f) SECTOR SPECIFIC FUNDS

(g) INDEX FUNDS

B) ACCORDING TO THE TIME OF CLOSURE OF THE SCHEME : While launching new schemes, Mutual Funds also declare whether this will be an open ended scheme (i.e. there is no specific date when the scheme will be closed) or there is a closing date when finally the scheme will be wind up. Thus, according to the time of closure schemes are classified as follows:-

(a) OPEN ENDED SCHEMES

(b) CLOSE ENDED SCHEMES

Open ended funds are allowed to issue and redeem units any time during the life of the scheme, but close ended funds cannot issue new units except in case of bonus or rights issue. Therefore, unit capital of open ended funds can fluctuate on daily basis (as new investors may purchase fresh units), but that is not the case for close ended schemes. In other words we can say that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open ended schemes but not in case of close ended schemes. In case of close ended schemes, new investors can buy the units only from secondary markets.

C) ACCORDING TO TAX INCENTIVE SCHEMES: Mutual Funds are also allowed to float some tax saving schemes. Therefore, sometimes the schemes are classified according to this also:-

(a) TAX SAVING FUNDS

(b) NOT TAX SAVING FUNDS / OTHER FUNDS

(D) ACCORDING TO THE TIME OF PAYOUT: Sometimes Mutual Fund schemes are classified according to the periodicity of the pay outs (i.e. dividend etc.). The categories are as follows:-

(a) Dividend Paying Schemes

(b) Reinvestment Schemes

The mutual fund schemes come with various combinations of the above categories. Therefore, we can have an Equity Fund which is open ended and is dividend paying plan. Before you invest, you must find out what kind of the scheme you are being asked to invest.

16. What are the features of foreign institutional investors?

· FIIs including mutual funds, pension funds, investment trust, banks, asset management companies, Nominee Company, incorporated/institutional portfolio manager or their power of attorney holder (providing discretionary and non-discretionary portfolio management services) would be welcomed to make investments under the new guidelines. Investment in all securities traded on the primary and secondary markets including the equity and other securities/instruments of companies which are listed/to be listed on the stock exchanges in India including the OTC Exchange of India is permitted.

· A foreign institutional investor is required to take initial permission from the SEBI for entering a market. A foreign institutional investor is having affiliated or subsidiary shall have to take separate registration with SEBI.

· A Foreign institutional Investor shall have to take various permissions under the Foreign Exchange Regulation Act, 1973 from the Reserve Bank of India because of the existence of foreign exchange controls in force. The registration shall be done under the single window approach.

· SEBI registration holds their registration for maximum five years along with the RBI general permission under the FERA, it is also valid for five years and both shall be renewed every after five periods in the future.

· The Foreign institutional investors will have the capacity to move, purchase and acknowledge capital gains on speculations on ventures made through the first corpus exchanged to India under the FERA consent. It might likewise buy in or take off rights offering of offers, contribute on all perceived stock trades through an assigned bank office and would have the capacity to designate a residential caretaker for the authority of the speculation.

· There is a limitation on the volume of investment and it should be minimum or maximum for the purpose of entry of foreign institutional investors in the primary market or secondary market and also lock in the period of outline for the objective of such investment made by the FIIs.

17. What is FDI? Bring out the significance of FDI?

Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company. Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.

1. Increased Employment and Economic Growth

Creation of jobs is the most obvious advantage of FDI. It is also one of the most important reasons why a nation, especially a developing one, looks to attract FDI. Increased FDI boosts the manufacturing as well as the services sector. This in turn creates jobs, and helps reduce unemployment among the educated youth - as well as skilled and unskilled labour - in the country. Increased employment translates to increased incomes, and equips the population with enhanced buying power. This boosts the economy of the country.

2. Human Resource Development

This is one of the less obvious advantages of FDI. Hence, it is often understated. Human Capital refers to the knowledge and competence of the workforce. Skills gained and enhanced through training and experience boost the education and human capital quotient of the country. Once developed, human capital is mobile. It can train human resources in other companies, thereby creating a ripple effect.

3. Development of Backward Areas

This is one of the most crucial benefits of FDI for a developing country. FDI enables the transformation of backward areas in a country into industrial centres. This in turn provides a boost to the social economy of the area. The Hyundai unit at Sriperumbudur, Tamil Nadu in India exemplifies this process.

4. Provision of Finance & Technology

Recipient businesses get access to latest financing tools, technologies and operational practices from across the world. Over time, the introduction of newer, enhanced technologies and processes results in their diffusion into the local economy, resulting in enhanced efficiency and effectiveness of the industry.

5. Increase in Exports

Not all goods produced through FDI are meant for domestic consumption. Many of these products have global markets. The creation of 100% Export Oriented Units and Economic Zones have further assisted FDI investors in boosting their exports from other countries.

6. Exchange Rate Stability

The constant flow of FDI into a country translates into a continuous flow of foreign exchange. This helps the country’s Central Bank maintain a comfortable reserve of foreign exchange. This in turn ensures stable exchange rates.

7. Stimulation of Economic Development

This is another very important advantage of FDI. FDI is a source of external capital and higher revenues for a country. When factories are constructed, at least some local labour, materials and equipment are utilised. Once the construction is complete, the factory will employ some local employees and further use local materials and services. The people who are employed by such factories thus have more money to spend. This creates more jobs.
These factories will also create additional tax revenue for the Government, that can be infused into creating and improving physical and financial infrastructure.

8. Improved Capital Flow

Inflow of capital is particularly beneficial for countries with limited domestic resources, as well as for nations with restricted opportunities to raise funds in global capital markets.

9. Creation of a Competitive Market

By facilitating the entry of foreign organisations into the domestic marketplace, FDI helps create a competitive environment, as well as break domestic monopolies. A healthy competitive environment pushes firms to continuously enhance their processes and product offerings, thereby fostering innovation. Consumers also gain access to a wider range of competitively priced products.

18. Explain the main functions of RBI in India?

1. Issue of Bank Notes:

The Reserve Bank of India has the sole right to issue currency notes except one rupee notes which are issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are declared unlimited legal tender throughout the country. This concentration of notes issue function with the Reserve Bank has a number of advantages: (i) it brings uniformity in notes issue; (ii) it makes possible effective state supervision; (iii) it is easier to control and regulate credit in accordance with the requirements in the economy; and (iv) it keeps faith of the public in the paper currency.

2. Banker to Government:

As banker to the government the Reserve Bank manages the banking needs of the government. It has to-maintain and operate the government’s deposit accounts. It collects receipts of funds and makes payments on behalf of the government. It represents the Government of India as the member of the IMF and the World Bank.

3. Custodian of Cash Reserves of Commercial Banks:

The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash reserves of the commercial banks.

4. Custodian of Country’s Foreign Currency Reserves:

The Reserve Bank has the custody of the country’s reserves of international currency, and this enables the Reserve Bank to deal with crisis connected with adverse balance of payments position.

5. Lender of Last Resort:

The commercial banks approach the Reserve Bank in times of emergency to tide over financial difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of interest.

6. Central Clearance and Accounts Settlement:

Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is easier to deal with each other and settle the claim of each on the other through book keeping entries in the books of the Reserve Bank. The clearing of accounts has now become an essential function of the Reserve Bank.

7. Controller of Credit:

Since credit money forms the most important part of supply of money, and since the supply of money has important implications for economic stability, the importance of control of credit becomes obvious. Credit is controlled by the Reserve Bank in accordance with the economic priorities of the government.

19. Explain Merchant banking in detail?

Merchant Banking is a combination of Banking and consultancy services. It provides consultancy to its clients for financial, marketing, managerial and legal matters. Consultancy means to provide advice, guidance and service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. It helps to expand and modernize the business. It helps in restructuring of a business. It helps to revive sick business units. It also helps companies to register, buy and sell shares at the stock exchange.

Functions of Merchant Banking Organization

1. Portfolio Management: Merchant banks provides advisory services to the institutional investors, on account of investment decisions. They trade in securities, on behalf of the clients, with the aim of providing them portfolio management services.

2. Raising funds for clients: Merchant banking organisation assist the clients in raising funds from the domestic and international market, by issuing securities like shares, debentures, etc., which can be deployed for starting a new project or business or expansion activities.

3. Promotional Activities: One of the most important activities of merchant banking is the promotion of business enterprise, during its initial stage, right from conceiving the idea to obtaining government approval. There is some organisation, which even provide financial and technical assistance to the business enterprise.

4. Loan Syndication: Loan Syndication means service provided by the merchant bankers, in raising credit from banks and financial institutions, to finance the project cost or working capital of the client’s project, also termed as project finance service.

5. Leasing Services: Merchant banking organisations renders leasing services to their customers. There are some banks which maintain venture capital funds to help entrepreneurs.

Merchant Banking helps in coordinating the operations of intermediaries, with respect to the issue of shares like registrar, advertising agency, bankers, underwriters, brokers, printers and so on. Further, it ensures compliance with the rules and regulations, of the capital market.

20. Explain the various types of risks encountered by Commercial banks?

Credit Risks

Credit risk is the risk that arises from the possibility of non-payment of loans by the borrowers. Although credit risk is largely defined as risk of not receiving payments, banks also include the risk of delayed payments within this category. Often times these cash flow risks are caused by the borrower becoming insolvent. Hence, such risk can be avoided if the bank conducts a thorough check and sanctions loans only to individuals and businesses that are not likely to run out of income over the period of the loan. Credit rating agencies provide adequate information to enable the banks to make informed decisions in this regard.

Market Risks

Apart from making loans, banks also hold a significant portion of securities. Some of these securities are held because of the treasury operations of the bank i.e. as a means to park money for the short term. However, many securities are also held as collateral based on which banks have given loans to their customers. The business of banking is therefore intertwined with the business of capital markets. Banks face market risks in various forms. For instance if they are holding a large amount of equity then they are exposed to equity risk. Also, banks by definition have to hold foreign exchange exposing them to Forex risks. Similarly banks lend against commodities like gold, silver and real estate which exposes them to commodity risks as well.

Operational Risks

Banks have to conduct massive operations in order to be profitable. Economies of scale work in the favor of larger banks. Hence, maintaining consistent internal processes on such a large scale is an extremely difficult task. Operational risk occurs as the result of a failed business processes in the bank’s day to day activities. Examples of operational risk would include payments credited to the wrong account or executing an incorrect order while dealing in the markets. None of the departments in a bank are immune from operational risks.

Moral Hazard

The recent bailout of banks by many countries has created another kind of risk called the moral hazard. This risk is not faced by the bank or its shareholders. Instead, this risk is faced by the taxpayers of the country in which banks operate. Banks have become accustomed to taking excessive risk. If their risk pays off, they get to keep the returns. However, if their risk backfires, then the losses are borne by taxpayers in the form of bailouts.

Liquidity Risk

Liquidity risk is another kind of risk that is inherent in the banking business. Liquidity risk is the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw their money. This risk is inherent in the fractional reserve banking system. Therefore, in this system, only a percentage of the deposits received are held back as reserves, the rest are used to create loans. Therefore, if all the depositors of the institution came in to withdraw their money all at once, the bank would not have enough money. This situation is called a bank run. This has happened countless times over the history of modern banking.

Business Risk

The banking industry today is considerably advanced and diversified. Banks today have a wide variety of strategies from which they have to choose. Once such strategy is chosen, banks need to focus their resources on obtaining their strategic goals in the long run.

Reputational Risk

Reputation is an extremely important intangible asset in the banking business. Banks like JP Morgan bank, Chase bank, Citibank, Bank of America etc have all been in the business for hundreds of years and have stellar reputations. These reputations enable them to generate more business more profitably.

Systemic Risk

Systemic risk arises because of the fact that the financial system is one intricate and connected network. Hence, the failure of one bank has the possibility to cause the failure of many other banks as well. This is because banks are counterparties to each other in a lot of transactions. Hence, if one bank fails, the credit risk event for the other banks becomes a reality.

21. Comment on the functioning of primary market and secondary market?

Features and functions of primary market are discussed below. ↓

1. Origination

In primary market, origination means to investigate, evaluate and procedure new project proposals. It initiates before an issue is present in the market. It is done with the help of merchant bankers.

The merchant bankers can be ↓

· banks,

· financial institutions,

· Private investment firms, etc.

In primary market, the preliminary investigation involves a detailed study of economic, financial, legal, technical aspects to ensure the soundness of the project. The second function is performed by sponsoring institutions. They provide advisory service.

Advisory service includes: ↓

· Types of issue,

· Thug,

· Pricing,

· Methods of issue, etc.

2. Underwriting

In primary market, to ensure success of new issue, there is a need for underwriting firms. The company needs to appoint underwriters. They can be banks or financial institutions or specialized underwriting firms.

In primary market, underwriting can be done by a single underwriter or by a group of underwriters. Minimum subscription is guaranteed by underwriters. If the issue is completely subscribed, no liability would be left for the underwriters. If by chance any part of the issue remains unsold, afterwards the underwriter has no option, rather than buying all the unsubscribed shares.

3. Distribution

In primary market, the success of any grand new issue is hinges on the issue is being subscribed by the people. The sale of the securities to the supreme or highest investors is termed as distribution.

Distribution Job is given to brokers and dealers. The brokers or agents maintain direct contact with the supreme investors.

Functions of Secondary Market:

1. Economic Barometer:

A stock exchange is a reliable barometer to measure the economic condition of a country. Every major change in country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy. Stock exchange is also known as a pulse of economy or economic mirror which reflects the economic conditions of a country.

2. Pricing of Securities:

The stock market helps to value the securities on the basis of demand and supply factors. The securities of profitable and growth oriented companies are valued higher as there is more demand for such securities. The valuation of securities is useful for investors, government and creditors. The investors can know the value of their investment, the creditors can value the creditworthiness and government can impose taxes on value of securities.

3. Safety of Transactions:

In stock market only the listed securities are traded and stock exchange authorities include the companies names in the trade list only after verifying the soundness of company. The companies which are listed they also have to operate within the strict rules and regulations. This ensures safety of dealing through stock exchange.

4. Contributes to Economic Growth:

In stock exchange securities of various companies are bought and sold. This process of disinvestment and reinvestment helps to invest in most productive investment proposal and this leads to capital formation and economic growth.

5. Spreading of Equity Cult:

Stock exchange encourages people to invest in ownership securities by regulating new issues, better trading practices and by educating public about investment.

6. Providing Scope for Speculation:

To ensure liquidity and demand of supply of securities the stock exchange permits healthy speculation of securities.

7. Liquidity:

The main function of stock market is to provide ready market for sale and purchase of securities. The presence of stock exchange market gives assurance to investors that their investment can be converted into cash whenever they want. The investors can invest in long term investment projects without any hesitation, as because of stock exchange they can convert long term investment into short term and medium term.

8. Better Allocation of Capital:

The shares of profit making companies are quoted at higher prices and are actively traded so such companies can easily raise fresh capital from stock market. The general public hesitates to invest in securities of loss making companies. So stock exchange facilitates allocation of investor’s fund to profitable channels.

9. Promotes the Habits of Savings and Investment:

The stock market offers attractive opportunities of investment in various securities. These attractive opportunities encourage people to save more and invest in securities of corporate sector rather than investing in unproductive assets such as gold, silver, etc.

22. Comment on any three international financial institution roles in India:

International Monetary Fund (IMF):

The International Monetary Fund, which is briefly called IMF, is one of the twin institutions which were established as a result of discussion among the monetary and financial delegations of the member countries of the United Nations held at Bretton Woods (U.S.A.) in 1944.

Its establishment on 1st March, 1947, is a great landmark in the history of international economic relations, particularly in the monetary field.

Benefits to India from International Monetary Fund’s Membership:

It is good that India joined the IMF. There is no doubt that this membership has been greatly beneficial to India.

(i) International regulation by IMF in the field of money has certainly contributed towards expansion of international trade and thus prosperity. India has, to that extent, benefitted from these fruitful results.

(ii) Large Financial Assistance. Not only indirectly but directly also, her membership has been of great advantage. We know how, in the post-partition period, India had serious balance of payments deficits, particularly with the dollar and other hard currency countries.

(iii) The total figures of borrowings by India from the IMF do not convey the extent of the support that it extended to her. What are of greater significance are the crucial timings of and special circumstances under which such assistance was availed of. Such help was forthcoming when the country was faced with critical foreign exchange situations.

(iv) Aid from World Bank and Other International Financial Agencies. The membership of the IMF has benefited India in yet another important way. India wanted large foreign capital for her various river projects, land reclamation schemes and for the development communications. Since private foreign capital was not forthcoming, the only practicable method of obtaining the necessary capital was to borrow from the International Bank for Reconstruction and Development (i.e. World Bank).

Asian Development Bank (ADB) was established on Dec.19, 1966. The aim of this bank was to accelerate economic and social development in Asia and pacific region. The bank started its functioning on January 1, 1967. Its head quarter is located at Manila, Philippines. Its chairmanship is always given to Japanese and 3 deputy chairmen belong to USA, Europe and Asia.

Functions of Asian Development Bank (ADB)

1. To make loans and equity investments for economic and social development of its developing members countries.

2. To provide for technical assistance for the preparation and implementation of development projects and advisory services.

3. To respond to the request for assistance in coordinating developmental policies and plans in developing member countries.

4. This bank constituted Asian Development Fund in 1974, which provides loans to Asian countries on concessional interest rates.

As a multilateral development finance institution, ADB provides
I. Loans

II. Technical assistance

III. Grants

Its clients are our member governments, who are also our shareholders. In addition, we provide direct assistance to private enterprises of developing member countries through equity investments and loans.

23. Write a note on:

1. Endorsement:

Meaning of Endorsement -

Endorsement means signing at the back of the instrument for the purpose of negotiation. The act of the signing a cheque, for the purpose of transferring to the someone else, is called the endorsement of Cheque. The endorsement is usually made on the back of the cheque. If no space is left on the Cheque, the Endorsement may be made on a separate slip to be attached to the Cheque. There are six Kinds of Endorsement i) Endorsement in Blank / General ii) Endorsement in Full / Special iii) Conditional Endorsement iv) Restrictive Endorsement v) Endorsement Sans Recourse vi) Facultative Endorsement.

Definition of Endorsement -

According to Section 15 of the Negotiable Instruments Act 1881, When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the same, and is called the “endorser”.

Types of Endorsement

· Blank Endorsement – Where the endorser signs his name only, and it becomes payable to bearer.

· Special Endorsement – Where the endorser puts his sign and writes the name of the person who will receive the payment.

· Restrictive Endorsement – Which restricts further negotiation.

· Partial Endorsement – Which allows transferring to the endorsee a part only of the amount payable on the instrument.

· Conditional Endorsement – Where the fulfilment of some conditions is required.

2. Types of crossing:

Types of Crossing

11. General Crossing: When across the face of a cheque two transverse parallel lines are drawn at the top left corner, along with the words & Co., between the two lines, with or without using the words not negotiable. When a cheque is crossed in this way, it is called a general crossing.

12. Restrictive Crossing: When in between the two transverse parallel lines, the words ‘A/c payee’ is written across the face of the cheque, then such a crossing is called restrictive crossing or account payee crossing. In this case, the cheque can be credited to the account of the stated person only, making it a non-negotiable instrument.

13. Special Crossing: A cheque in which the name of the banker is written, across the face of the cheque in between the two transverse parallel lines, with or without using the word ‘not negotiable’. This type of crossing is called a special crossing. In a special crossing, the paying banker will pay the sum only to the banker whose name is stated in the cheque or to his agent. Hence, the cheque will be honoured only when the bank mentioned in the crossing orders the same.

14. Not Negotiable Crossing: When the words not negotiable is mentioned in between the two transverse parallel lines, indicating that the cheque can be transferred but the transferee will not be able to have a better title to the cheque.

15. Double Crossing: Double crossing is when a bank to whom the cheque crossed specially, further submits the same to another bank, for the purpose of collection as its agent, in this situation the second crossing should indicate that it is serving as an agent of the prior banker, to whom the cheque was specially crossed.

The crossing of a cheque is done to ensure the safety of payment. It is a well-known mechanism used to protect the parties to the cheque, by making sure that the payment is made to the right payee. Hence, it reduces fraud and wrong payments, as well as it protects the instrument from getting stolen or en-cashed by any unscrupulous individual.

25. Explain the various loans and advances offered by Nationalised banks to their customers:

1. Demand Loan

In a demand loan account, the entire amount is paid to the debtor at one time, either in cash or by transfer to his savings bank or current account. No subsequent debit is ordinarily allowed except by way of interest, incidental charges, insurance premiums, expenses incurred for the protection of the security etc. Repayment is provided for by instalment without allowing the demand character of the loan to be affected in any way. There is usually a stipulation that in the event of any instalment, remaining unpaid, the entire amount of the loan will become due. Interest is charged on the debit balance, usually with monthly rests unless there is an arrangement to the contrary.

2. Term Loan

When a loan is granted for a fixed period exceeding three years and is repayable according to the schedule of repayment, it is known as a term loan. The period of term loan may extend up to 10 years and in some cases up to 20 years. A term loan is generally granted for fixed capital requirements, e.g. investment in plant and equipment, land and building etc. These may be required for setting up new projects or expansion or modernization of the plant and equipment. Advances granted for purchasing land / building / flat (Apartment house) are term loans.

3. Overdraft

An overdraft is a fluctuating account wherein the balance sometimes may be in credit and at other times in debit. Overdraft facilities are allowed in current accounts only. Opening of an overdraft account requires that a current account will have to be formally opened, and the usual account opening form completed. Whereas in a current account cheques are honoured if the balance is in credit, the overdraft arrangement enables a customer to draw over and above his own balance up to the extent of the limit stipulated.

4. Cash Credit

A cash credit is essentially a drawing account against credit granted by the bank and is operated in the same way as a current account in which an overdraft limit has been sanctioned. The principal advantages of a cash credit account to a borrower are that, unlike the party borrowing on a fixed loan basis, he may operate the account within the stipulated limit as and when required and can save interest by reducing the debit balance whenever he is in a position to do so. The borrower can also provide alternative securities from time to time in conformity with the terms of the advance and according to his own requirements. Cash credits are normally granted against the security of goods e.g. raw materials, stock in process, finished goods. It is also granted against the security of book-debts. If there is good turnover both in the account and in the goods, and there are no adverse factors, a cash credit limit is allowed to continue for years together. Of course a periodical review would be necessary.

5. Bills Purchased

Bills, clean or documentary, are sometimes purchased from approved customers in whose favour regular limits are sanctioned. In the case of documentary bills, the drafts are accompanied by documents of title to goods such as railway receipts or bills of lading (BOL). Before granting a limit, the creditworthiness of the drawer is to be ascertained. Sometimes the financial standing of the drawees of the bills are verified, particularly when the bills are drawn from time to time on the same drawees and/or the amounts are large.

6. Bills Discounted

Usance bills, maturing within 90 days or so after date or sight, are discounted by banks for approved parties. In case a bill, say for Rs. 10,000/- (approx. $223 USD) due 90 days hence, is discounted today at 20% per annum, the borrower is paid Rs. 9,500/- (approx. $211 USD), its present worth. However the full amount is collected from the drawee on maturity. The difference between the present worth and the amount of the bill represents earning of the banker for the period for which the bill is to run. In banking terminology this item of income is called "discount".

26. Describe the distinguishing features of Regional rural banks. What are the reasons of their poor financial position?

1. The area of operation of a rural bank is limited to a specified region which comprises of one or more districts.

2. These banks cannot have a lending rate which is higher than the prevailing lending rate of cooperative credit societies in any particular state.

3. The salary structure of the employees of these banks is fixed in consonance with the salary structure of the employees of the state government, local authorities of comparable level and status in the area.

4. They are public sector banks. The paid-up capital of each bank is Rs. 25 lakhs. 50 percent of the capital is contributed by the Central Government. The concerned state government contributes 15 percent. 35 percent is contributed by the sponsoring public-sector commercial banks.

reasons of their poor financial position:

The Regional Rural Banks (RRBs) have been experiencing an unsatisfactory performance since last few years. Therefore, the RRBs have now become a serious problem for the Indian Banking sector. They are now far from fulfilling purpose for which they were set up some two decades ago.

These RRBs have been incurring heavy losses year after year. In 1990-91, the RRBs incurred a total loss of Rs 92.87 crore, followed by Rs 258.66 crore during 1991-92. In 1993-94, 173 out of the country’s 196 RRBs incurred losses to the tune of Rs 310 crore.

As per the latest data available with the National Bank for Agriculture and Rural Development (NABARD), the total accumulated losses of all Regional Rural Banks, operating in the country are estimated at Rs 2,176 crore as on 31st March, 1996.

It is, therefore, not surprising that these banks, established for the purpose of providing an impetus to rural growth have dismally failed to boost agro-based rural economy. One of the major contributory factors responsible for the mounting losses suffered by the RRBs has been very high overheads; in which a sizeable component is salaries. Employees of RRBs earlier received lower scales of salaries compared to their counterparts in the scheduled nationalized banks.

However, in 1990, with implementation of the National Industrial Tribunal (NIT) Award in case of the employees of the RRBs, the structure of their emoluments was brought at par with that of the staff of the scheduled commercial banks.

The NIT award has enhanced the salary-allowance bill of RRBs by 35 per cent during the last three years, apart from increase in its other concomitant expenditure. Moreover, it also placed on the banks shoulder an arrear burden of Rs 225 crore.

While the annual wage liability of the RRBs has increased substantially, their income was declining rapidly on account of inadequate loan recoveries and scanty profits. Only 23 of the 196 RRBs were making a profit and the rest were all running losses. The aggregate level of loss at the end of March 1994 was Rs 906 crore.

Over the last three years, the credit-deposit ratio of RRBs had also declined from 85.6 in 1989-90 to as low as 68.7 in 1991-92. Further, the increasing number of defaulters has hampered the recycling of cash. In 1992, the loan over dues stood at Rs 1,314 crore.

Due to the constant efforts, at recapitalizing RRBs, at the end of March, 2000, 158 RRBs are posting operating profits. Out of these, 48 RRBs have been able to wipe out their accumulated losses. In view of the importance of RRBs in rural financing, the government has decided to continue with this programme of strengthening the RRBs in the coming years.

27. What do you understand by capital adequacy norms? Give details of such norms prescribed by RBI for commercial banks?

Along with profitability and safety, banks also give importance to Solvency. Solvency refers to the situation where assets are equal to or more than liabilities. A bank should select its assets in such a way that the shareholders and depositors' interest are protected.

1. Prudential Norms

The norms which are to be followed while investing funds are called "Prudential Norms." They are formulated to protect the interests of the shareholders and depositors. Prudential Norms are generally prescribed and implemented by the central bank of the country. Commercial Banks have to follow these norms to protect the interests of the customers. For international banks, prudential norms were prescribed by the Bank for International Settlements popularly known as BIS. The BIS appointed a Basle Committee on Banking Supervision in 1988.

2. Basel Committee

Basel committee appointed by BIS formulated rules and regulation for effective supervision of the central banks. For this it, also prescribed international norms to be followed by the central banks. This committee prescribed Capital Adequacy Norms in order to protect the interests of the customers.

3. Definition of Capital Adequacy Ratio

Capital Adequacy Ratio (CAR) is defined as the ratio of bank's capital to its risk assets. Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR).

Details of such norms prescribed by RBI for commercial banks:

The government is of the view that the Reserve Bank should resort to Basel III norms for capital adequacy in banks rather than the present stricter guidelines which restrict the lending capacity of lenders. Currently, the RBI applies stricter norms and not those specified under Basel III for capital adequacy, leading banks to set aside higher capital for loans. The government has been in favour of alignment of the capital adequacy norms with Basel III norms. The RBI has fixed March 2019 as the deadline to meet capital requirements under the Basel III norms for banks. As per the report, while the Basel framework requires the application of capital standards to all internationally active banks, these have been made applicable in India to all scheduled commercial banks, including banks which are not internationally active.

28. Discuss the refinance policy of NABARD?

NABARD refinancing is a way for banks to get funding in respect of term loan for both Farm Sector and Non - Farm Sector activities for a period of 3-15 years and is released to only eligible institutions viz. SCARDBs, SCBs, Regional Rural Banks or Scheduled commercial banks or any other financial institution, approved by Reserve Bank of India (RBI) as defined under Section 25 of NABARD Act.
NABARD refinance covers wide range of activities like Minor Irrigation, Land Development, Dry Land Farming, Watershed Development, Farm Mechanisation, Plantation & Horticulture, Poultry / Dairy / Other Animal Husbandry Activities, Fisheries, Bio-gas, Forestry, Storage/Market Yard, Non - Farm Sector (Small & Micro Enterprises), Self Help Groups, Self Employed / Professionals, Small Road and Water Transport Operators, Agri-clinics & Agri Business Centres, Financing in Agri Export Zones / Contract Farming/ Organic Farming, Agro Processing, Non-Conventional Energy, Rural Housing, Govt. Sponsored Programmes, etc.
Investment Credit Department has also opened a window for direct lending by way of Co-financing under Section 30 of NABARD Act 1981 for projects involving sunrise technology / national priorities / thrust-areas like agro processing / large outlays / long gestation period / long repayment period. Refinance assistance will be available in respect of the projects which conform to the quality standards laid down by agencies like Warehousing Development and Regulatory Authority, Food Corporation of India, etc. Nabard will undertake on-site and off-site monitoring of schemes throughout the loan period in association with banks.

29. Analyse the factors which have contributed to the growth of NBFC?

Deep understanding of the Customers segment:

NBFC’s have strongly focused on unorganized & Under-served segments of the economy, which led the companies to create a niche for themselves through frequent interactions with their Customer segments & deeply understanding needs. They are ensuring last-mile delivery & enhanced customer experience of products & services.
Customized product offerings by NBFC’s:

Several NBFCs have focused on a limited line (or often a mono-line set of products) to serve the target customer segment. Armed with a thorough comprehension of their target segment, NBFCs have customized product offerings to address unique characteristics of the customer segment and focus on meeting the right needs. Several NBFCs are adopting non-standard pricing models for product lines, in-line with the customer profile and inherent risk of lending.

Leveraging Technology for Improved Efficiency and Enhanced Experience:

The use of technology is helping NBFCs customize credit assessment models and optimize business processes, thereby reducing the time to market and helping improve customer experience. NBFCs are investing in data analytics and artificial intelligence to build robust relationships with their target customer segments.

Wider and Effective reach:

NBFCs are now reaching out to Tier-2, Tier-3 and Tier-4 markets, distributing loans across several customer touch-points, building a connected channel experience, that provides an Omni channel seamless experience with 24/7 sales and service, as the consumers of today evolving and accessing digital media like never before, NBFCs have embarked on new and better ways to engage with the customer.

Co-lending Arrangements:

NBFCs have been tying up with multiple alternative lenders with digital platforms and commercial banks as well, which has been adding to their targeted customer base.

Robust Risk Management:

Given their focus on lending to the sub-prime customer segment, and regulatory disadvantage (SARFEASI, DRT, and capital adequacy requirements) in comparison to commercial bank lenders, NBFCs are ensuring enhanced governance through a proactive, robust and agile risk management model.

30. Comment on the new regulatory framework for NBFC?

1. Requirement of Minimum NOF of Rs. 200 lakh

In view of the increasing complexities of services offered by NBFCs, it shall be mandatory for all NBFCs to attain a minimum NOF of Rs. 200 lakh by the end of March 2017, as per the milestones given below:

Rs. 100 lakh by the end of March 2016

Rs. 200 lakh by the end of March 2017

NBFCs failing to achieve the prescribed ceiling within the stipulated time period shall not be eligible to hold the CoR as NBFCs. It will be incumbent upon such NBFCs, the NOF of which currently falls below Rs. 200 lakh, to submit a statutory auditor's certificate certifying compliance to the revised levels at the end of each of the two financial years as given above

2. Investment grade rating for Asset Finance Companies (AFCS)

Existing unrated Asset Finance Companies (AFCs) to get Investment grade rating by March 31, 2016 else they can not renew existing or accept fresh deposits thereafter. In the intervening period, i.e. till March 31, 2016, unrated AFCs or those with a sub-investment grade rating can only renew existing deposits on maturity, and not accept fresh deposits.

3. Public Deposit Acceptance Limit made uniform to 1.5 times of NOF

The limit for acceptance of deposits reduced for rated AFCs from 4 times to 1.5 times of Net Owned Fund (NOF)

4. Threshold for defining Systematic significance for NBFCs-ND

The threshold for defining systemic significance for NBFCs-ND has been revised NBFCs-ND-SI will henceforth be those NBFCs-ND which have asset size of Rs. 500 crore and above as per the last audited balance sheet. With this revision in the threshold for systemic significance, NBFCs-ND shall be categorized into two broad categories viz.,

i. NBFCs-ND (those with assets of less than Rs. 500 crore) and

ii. NBFCs-ND-SI (those with assets of Rs. 500 crore and above).

5. Aggregation of assets of NBFCs in a group to determine category

The total assets of NBFCs in a group including deposit taking NBFCs, if any, will be aggregated to determine if such consolidation falls within the asset sizes of the two categories (NBFCs-ND or NBFCs-SI). Statutory Auditors would be required to certify the asset size of all the NBFCs in the Group.

6. Enhanced Prudential Norms

Enhanced prudential regulations shall be made applicable to NBFCs wherever public funds are accepted and conduct of business regulations will be made applicable wherever customer interface is involved. The regulatory approach in respect of NBFCs-ND with an asset size of less than Rs. 500 crore will be as under:

(i) They shall not be subjected to any regulation either prudential or conduct of business regulations viz., Fair Practices Code (FPC), KYC, etc., if they have not accessed any public funds and do not have a customer interface.

(ii) Those having customer interface will be subjected only to conduct of business regulations including FPC, KYC etc., if they are not accessing public funds.

(iii) Those accepting public funds will be subjected to limited prudential regulations but not conduct of business regulations if they have no customer interface.

(iv) Where both public funds are accepted and customer interface exist, such companies will be subjected both to limited prudential regulations and conduct of business regulations.

7. Asset Classification-Non Performing Assets to be in line with Banks

At present, an asset is classified as Non-Performing Asset when it has remained overdue for a period of six months or more for loans; and overdue for twelve months or more in case of lease rental and hire purchase instalments, as compared to 90 days for banks. In the interest of harmonisation, the asset classification norms for NBFCs-ND-SI and NBFCs-D are being brought in line with that of banks, in a phased manner ending 31^stMarch, 2018

8. Provisioning for Standard Assets

At present, every NBFC is required to make a provision for standard assets at 0.25% of the outstanding. On a review of the same, the provision for standard assets for NBFCs-ND-SI and for all NBFCs-D, is being increased to 0.40% in a phased manner ending 31/03/2018.

9. Credit / Investment Concentration Norms for AFCs

The credit concentration norms for AFCs are now being brought in line with other NBFCs. This will be applicable with immediate effect for all new loans excluding those already sanctioned. All existing excess exposures would be allowed to run off till maturity.

10. Corporate Governance and Disclosure norms for NBFCs

NBFCs-D with deposits of Rs. 20 crore and above, and NBFCs-ND with assets of Rs. 100 crore and above are advised to consider constituting Nomination Committee to ensure ‘fit and proper’ status of proposed/ existing Directors and Risk Management Committee. Further, NBFCs-D with deposits of Rs. 50 crore and above have been advised to stipulate rotation of partners of audit firms appointed for auditing the company every three years.

11. Three Board Committees

The constitution of the three Committees of the Board and instructions with regard to rotation of partners have now been made applicable to all NBFCs-ND-SI, as also all NBFCs-D. Also the Audit Committee of all NBFCs-ND-SI, as also all NBFCs-D must ensure that an Information Systems Audit of the internal systems and processes is conducted at least once in two years to assess operational risks faced by the company.

12. Fit and Proper Criteria for appointment of Directors

Few additional requirements are being put in place, which shall be applicable to all NBFCs-ND-SI, as also all NBFCs-D, with effect from March 31, 2015.These include there is a fit and proper criteria at the time of appointment of Directors and on a continuing basis. NBFCs shall furnish to the Reserve Bank a quarterly statement on change of Directors certified by the auditors and a certificate from the Managing Director that fit and proper criteria in selection of directors have been followed.

13. Disclosures in Financial Statements – Notes to Account

All NBFCs-ND-SI (as redefined), as also all NBFCs-D shall additionally disclose the following in their Annual Financial Statements, with effect from March 31, 2015:

i. Registration/ licence/ authorisation obtained from other financial sector regulators;

ii. Ratings assigned by credit rating agencies and migration of ratings during the year;

iii. Penalties, if any, levied by any regulator;

14. Off-Site Reporting

NBFCs-ND, with assets less than Rs. 500 crore, including investment companies, shall henceforth be required to submit only a simplified Annual Return

31. Explain:

1. Badla System:

The badla system, which allowed transactions to be carried forward from one trading valan to the next, was banned by the SEBI in March 1994. SEBI was hoping that for the purpose of speculative trading, an internationally accepted system of options and index future trading would replace the indigenously evolved badla system. To call badla trading a kind of forward trading is misleading. Badla is carryover of a transaction and not a forward transaction. While derivative trading (i.e. futures and options trading) is a trading in future risk among different participants in the stock market, mostly used as a hedging device. To have a strong cash market with sufficient liquidity, some element of leveraged (i.e. speculative) trading is necessary. Now this is possible only if the system provides: a) facility to buy shares on margin, and b) facility to sell short. Badla system fell into disrepute because of its faulty implementation and lack of proper monitoring by concerned stock exchange authorities. Particularly, the margins collected were low, allowing excess leveraged trading and not having proper monitoring and surveillance. With proper framing of rules and regulations, chances of its misuse would be reduced considerably; without incurring large efficiency losses associated with financial regulations. These costs associated with financial regulations include both the direct element (the ‘compliance cost’) and the indirect element (i.e. the damage inflicted on the competitiveness, dynamism and innovativeness of the system, the possible reduction in investor choice, the distortions included in market behaviour and business practice etc). Further, regulatory framework should also ensure competitive neutrality among different participants on the stock exchanges.

The "Badla" System or the Carry Forward (CF) System Serves 3 Needs in Share Trading:

Quasi-hedging: If an investor feels that the price of a particular share is expected to go up or come down, he or she can trade in the share without giving or taking delivery of the stock and take advantage of the volatility of the stock.

Stock lending: If the investor wants to short sell without owning the underlying security, he can easily borrow the shares for the broker or stock lender in return of some charge.

Financing mechanism: If the investor wants to buy shares without paying the full consideration, he can borrow money from a financier. A financier can lend money to the investor to buy shares. This system is called "Vyaj Badla" or "Badla Financing".

2. Stock Index Futures:

Index futures are legal agreements to either purchase or sell stocks on a future date, at a specific price. This lets investors speculate on future stock price performance, giving them more leverage, plus access to 24/7 securities trading in highly regulated markets—without actually owning the stock market index that the futures contract covers.

They are:

1. The benefits of the lowest possible transaction costs are attractive.

2. The actual disposing of equity holdings may be made gradually subject to the market conditions.

3. The low commission rate on stock index futures trading and the high level of liquidity in Stock Index Futures market offers the potential for significant savings.

4. The portfolio construction via Stock Index Futures contract offers the specific advantage of actually buying the index i.e. the purchase of Stock Index Futures lead to exposure to all stocks being bought.

5. In Stock Index Future approach of index-fund construction gives an advantage of not reinvestment of dividends as dividends are already priced within the future contract.

6. The Stock Index Futures can considerably take care for investing the funds raised by floating a new scheme with suitable securities at reasonable price without losing time.

7. Stock Index Futures allow the unit holders to liquidate a part of portfolio in case of open-end fund.

8. Stock Index Futures offer an attractive strategy for maintaining the desired stock market exposure of the portfolio at all points of time.

9. Stock Index Futures are strategically used for insuring against market risks.

32. Who are the major participants in the call money market?

1. Central Government:

The Central Government is an issuer of Government of India Securities (G-Secs) and Treasury Bills (T-bills). These instruments are issued to finance the government as well as for managing the Government’s cash flow. G-Secs are dated (dated securities are those which have specific maturity and coupon payment dates embedded into the terms of issue) debt obligations of the Central Government.

These bonds are issued by the RBI, on behalf of the Government, so as to finance the latter’s budget requirements, deficits and public sector development programmes. These bonds are issued throughout the financial year. The calendar of issuance of G-Secs is decided at the beginning of every half of the financial year.

2. State Government:

The State Governments issue securities termed as State Development Loans (SDLs), which are medium to long-term maturity bonds floated to enable State Governments to fund their budget deficits.

3. Public Sector Undertakings:

Public Sector Undertakings (PSUs) issue bonds which are medium to long-term coupon bearing debt securities. PSU Bonds can be of two types: taxable and tax-free bonds. These bonds are issued to finance the working capital requirements and long-term projects of public sector undertakings. PSUs can also issue Commercial Paper to finance their working capital requirements. Like any other business organization, PSUs generate large cash surpluses. Such PSUs are active investors in instruments like Fixed Deposits, Certificates of Deposits and Treasury Bills. Some of the PSUs with long-term cash surpluses are also active investors in G-Secs and bonds.

4. Scheduled Commercial Banks (SCBs):

Banks issue Certificate of Deposit (CDs) which are unsecured, negotiable instruments. These are usually issued at a discount to face value. They are issued in periods when bank deposits volumes are low and banks perceive that they can get funds at low interest rates. Their period of issue ranges from 7 days to 1 year. SCBs also participate in the overnight (call) and term markets. They can participate both as lenders and borrowers in the call and term markets. These banks use these funds in their day-to-day and short-term liquidity management. Call money is an important tool to manage CRR commitments. Banks invest in Government securities to maintain their Statutory Liquidity Ratio (SLR), as well as to invest their surplus funds. Therefore, banks have both mandated and surplus investments in G-Sec instruments. Currently banks have been mandated to hold 25% of their Net Demand and Time Liabilities (NDTL) as SLR. A bulk of the SLR is met by investments in Government and other approved securities.

5. Private Sector Companies:

Private Sector Companies issue commercial papers (CPs) and corporate debentures. CPs are short-term, negotiable, discounted debt instruments. They are issued in the form of unsecured promissory notes. They are issued when corporations want to raise their short-term capital directly from the market instead of borrowing from banks. Corporate debentures are coupon bearing, medium to long term instruments which are issued by corporations when they want to access loans to finance projects and working capital requirements. Corporate debentures can be issued as fully or partly convertible into shares of the issuing corporation. Bonds which do not have convertibility clause are known as non-convertible bonds. These bonds can be issued with fixed or floating interest rates. Depending on the stipulated availability of security these bonds could be classified as secured or unsecured.

6. Provident Funds:

Provident funds have short term and long term surplus funds. They invest their funds in debt instruments according to their internal guidelines as to how much they can invest in each instrument category.

The instruments that Provident funds can invest in are:

(i) G-Secs,

(ii) State Development Loans,

(iii) Bonds guaranteed by the Central or State Governments,

(iv)Bonds or obligations of PSUs, SCBs and Financial Institutions (FIs), and

(v) Bonds issued by Private Sector Companies carrying an acceptable level of rating by at least two rating agencies.

7. General Insurance Companies:

General insurance companies (GICs) have to maintain certain funds which have to be invested in approved investments. They participate in the G-Sec, Bond and short term money market as lenders. It is seen that generally they do not access funds from these markets.

8. Life Insurance Companies:

Life Insurance Companies (LICs) invest their funds in G-Sec, Bond or short term money markets. They have certain pre-determined thresholds as to how much they can invest in each category of instruments.

9. Mutual Funds:

Mutual funds invest their funds in money market and debt instruments. The proportion of the funds which they can invest in any one instrument vary according to the approved investment pattern declared in each scheme.

10. Non-banking Finance Companies:

Non-banking Finance Companies (NBFCs) invest their funds in debt instruments to fulfill certain regulatory mandates as well as to park their surplus funds. NBFCs are required to invest 15% of their net worth in bonds which fulfill the SLR requirement.

11. Primary Dealers (PDs):

The organization of Primary Dealers was conceived and permitted by the Reserve Bank of India (RBI) in 1995. These are institutional entities registered with the RBI.

The roles of a PD are:

1. To commit participation as Principals in Government of India issues through bidding in auctions.

2. To provide underwriting services and ensure development of underwriting and market- making capabilities for government securities outside the RBI.

3. To offer firm buy – sell/bid ask quotes for T-Bills & dated securities and to improve secondary market trading system, which would contribute to price discovery, enhance liquidity and turnover and encourage voluntary holding of government securities amongst a wider investor base.

33. Explain the nature of underwriting function. What are the general responsibilities of underwriters?

An underwriter should:

1. Make all efforts to protect the interests of its clients.

2. Maintain high standards of integrity, dignity and fairness in the conduct of its business.

3. Ensure that it and its personnel will act in an ethical manner in all its dealings with a body corporate making an issue of securities (i.e. the issuer).

4. Endeavour to ensure all professional dealings are affected in a prompt, efficient and effective manner.

5. At all times render high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment.

6. Not make any statement, either oral or written, which would misrepresent (a) the services that the underwriter is capable of performing for its client, or has rendered to any other issuer company; (b) his underwriting commitment.

7. Avoid conflict of interest and make adequate disclosure of his interest.

8. Put in place a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business or where any conflict of interest arises, should take reasonable steps to resolve the same in any equitable manner.

9. Make appropriate disclosure to the client of its possible source or potential in areas of conflict of duties and interest while acting as underwriter which would impair its ability to render fair, objective and unbiased services.

10. Not divulge to other issuer, press or any party any confidential information about its issuer company, which has come to its knowledge and deal in securities of any issuer company without making disclosure to the SEBI as required under these regulations and also to the Board directors of the issuer company.

11. Not discriminate amongst its clients, save and except on ethical and commercial considerations. 12. Ensure that any charge in registration status/any penal action taken by SEBI or any material change in financials which may adversely affect the interests of clients/ investors is promptly informed to the clients and any business remaining outstanding is transferred to another registered person in accordance with any instructions of the affected clients/investors.

13. Maintain an appropriate level of knowledge and competency and abide by the provisions of the SEBI Act, regulations, circulars and guidelines issued by the SEBI. The underwriter should also comply with the award of the Ombudsman under the SEBI (Ombudsman) Regulations, 2003.

14. Ensure that the SEBI is promptly informed about any action, legal proceedings, etc. initiated against it in respect of any material breach or non-compliance by it, of any law, rules, regulations, and directions of the SEBI or of any other regulatory body.

15. Not make any untrue statement or suppress any material fact in any documents, reports, papers or information furnished to the SEBI.

(a) Not render, directly or indirectly any investment advice about any security in the publicly accessible media, whether real-time or non-real-time, unless a disclosure of his interest including its long or short position in the security has been made, while rendering such advice; (b) In case an employee or an underwriter is rendering such advice, the underwriter should ensure that he should disclose his interest, the interest of his dependent family members and that of the employer including their long or short position in the security, while rendering such advice.

17. Not either through its account or their respective accounts or through their associates or family members, relatives or friends indulges in any insider trading.

18. Not indulge in any unfair competition, which is likely to be harmful to the interest of other underwriters carrying on the business of underwriting or likely to place such other underwriters in a disadvantageous position in relation to the underwriter while competing for, or carrying out any assignment.

19. Have internal control procedures and financial and operational capabilities which can be reasonably expected to protect its operations, its clients and other registered entities from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or commissions.

20. Provide adequate freedom and powers to its compliance officer for the effective discharge of his duties.

21. Develop its own internal code of conduct for governing its internal operations and laying down its standards of appropriate conduct for its employees and officers in the carrying out of their duties. Such a code may extend to the maintenance of professional excellence and standards, integrity, confidentiality, objectivity, avoidance of conflict of interest, disclosure of shareholdings and interests, etc.

22. Ensure that good corporate policies and corporate governance is in place.

23. Ensure that any person it employs or appoints to conduct business is fit and proper and otherwise qualified to act in the capacity so employed or appointed (including having relevant professional training or experience).

24. Ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed or appointed by it to conduct business on its behalf.

25. be responsible for the acts or omissions of its employees and agents in respect to the conduct of its business.

26. Ensure that the senior management, particularly decision makers have access to all relevant information about the business on a timely basis.

16. Not be party to or instrumental for (a) certain of false market, (b) price rigging or manipulation, or; (c) passing of unpublished price sensitive information in respect of securities which are listed and proposed to be listed in any stock exchange to any person or intermediary.

Padviksha Blog

Banking and Indian Financial System Part B Q&A || MBA

Liabilities of Banks:

1. Capital and Reserves:

2. Deposits:

3. Borrowings:

4. Other Liabilities:

Assets of Banks:

1. Cash:

2. Money at Call at Short Notice:

3. Investments:

4. Loans, Advances and Bills Discounted-or Purchased:

Characteristic # 1. A Developed Commercial Banking System:

Characteristic # 2. Presence of a Central Bank:

Characteristic # 3. Sub-markets:

Characteristic # 4. Near Money-assets::

Characteristic # 5. Availability of Ample Resources:

Characteristic # 6. Integrated Interest-rate Structure:

Types of Crossing

1. Agreement:

2. Government consent:

3. World integration:

4. Growth of industrial sector:

5. Gives legal Identity:

6. Helps to meet out requirements:

Unit Banking

Branch Banking

Correspondent Banking

Group Banking

Pure Banking and Mixed Banking

Relationship Banking

Narrow Banking

Universal Banking

Regional Banking

Local Area Banks

Wholesale Banking

Private Banking

Retail Banking

I. Quantitative Method:

(i) Bank Rate:

(ii) Open Market Operations:

(iii) Variable Reserve Ratios:

II. Qualitative Method:

(i) Margin Requirements:

(ii) Credit Rationing:

(iii) Regulation of Consumer Credit:

(iv) Moral Suasion:

Effectiveness of Credit Control Measures:

1. Increased Employment and Economic Growth

2. Human Resource Development

3. Development of Backward Areas

4. Provision of Finance & Technology

5. Increase in Exports

6. Exchange Rate Stability

7. Stimulation of Economic Development

8. Improved Capital Flow

9. Creation of a Competitive Market

Functions of Merchant Banking Organization

Credit Risks

Market Risks

Operational Risks

Moral Hazard

Liquidity Risk

Business Risk

Reputational Risk

Systemic Risk

1. Origination

2. Underwriting

3. Distribution

Functions of Secondary Market:

1. Economic Barometer:

2. Pricing of Securities:

3. Safety of Transactions:

4. Contributes to Economic Growth:

5. Spreading of Equity Cult:

6. Providing Scope for Speculation:

7. Liquidity:

8. Better Allocation of Capital:

9. Promotes the Habits of Savings and Investment:

International Monetary Fund (IMF):