“In today’s fast-changing environment knowledge was power and power be it regulatory or supervisory – without knowledge was a subject of ridicule.” Dr.Y.V.Reddy Financial System in India- a Brief Overview Dr. Ajit Kumar, AGM & MoF, CAB, PUNE

Financial System?  Financial System encompasses a group of intermediaries which facilitates the flow of funds from the areas of surplus to the areas of deficit. It is a composition of various institutions, markets and laws, practices, money managers, analysts, transactions and claims and liabilities. This facilitates the exchange of financial instruments like deposits and loans, corporate stocks and bonds, government bonds etc.

Financial System

 A financial market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Market

 The place where people and organisations wanting to borrow money are brought together with those having surplus funds is called financial market. It may or may not have a particular physical existence.

Major Intermediaries of Financial System

Intermediaries of Indian Financial System contd...

Segments of Financial Market  Money Market: A market where short term funds are borrowed and lent is called money market. Funds are traded for a maximum period of one year e.g. bills rediscounting, commercial papers, treasury bills etc. It is liquid and provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers.  Short term Money market is the focal point of monetary policy actions.

Bill Market  Bill Market: A commercial bill of exchange is drawn to evidence the commercial transactions between two parties, the buyer and the seller, the seller drawing the bill and the buyer accepting to make payment of the bill on or before the date of maturity. The seller may get the bill discounted with his banker.

Comercial Paper Market  Commercial Paper Market: CP is an unsecured money market instrument issued in the form of promissory notes. Corporates, PDs and select FIs are eligible to issue CP. It was introduced in  Corporates issuing CP should have (a) a minimum tangible net worth to the extent of Rs.4.00 cr.

Commercial Paper…  (b) company has been sanctioned working capital limit by bank/s or all-India FI/s; and (c) the borrowal account of the company is classified as Standard Asset.  This is issued at a discount to face value in multiples of Rs.5.00 lakh.The CPs can be issued for a maturity period ranging from 7 days to one year.

Commercial Paper  All eligible participants are required to obtain the credit rating from either CRISIL or ICRA or CARE or the FITCH Ratings India Pvt. Ltd. and must have the prescribed minimum credit rating.  An FI can issue CP within the overall umbrella limit fixed by the RBI, i.e. issue of CP together with other instruments (term money borrowing, term deposit, CDs, ICDs) should not exceed 100% of its net owned funds as per the latest B/S.

Certificate of Deposit  It is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period.  CDs can be issued by (i) SCBs excluding RRBs and LABs(ii) Select all-India Fis to raise short term resources.  Banks- Any amount  FIs-within the overall umbrella limit fixed by…

Certificate of Deposit ..RBI (not to exceed 100% of its NOF).  Minimum amt of CD- Rs.1.00 lakh.  Maturity- not one year.  Issued on a discount on face value.  Banks req. to maintain CRR/SLR on CDs.  Bank’s can not buy back their own CD before maturity and can not grant loans against CD.

Treasury Bills  Treasury Bills: These are a kind of finance bills (do not reflect any trade transaction), which are in the nature of promissory notes, issued by the government under discount for a fixed period, not exceeding one year. TBs were first issued in India in October 1917 aimed at raising resources for financing the First World War.

Call & Notice Money Market  Call Money Market: This market deals with extremely short-period uncollateralised loans. Funds are borrowed or lent for a day (overnight).  Notice Money: When money is borrowed for more than a day and up to 14 days, it is called as “Notice Money” market.  Transactions on a call money market are generally conducted over the telephone. Lenders issue RBI cheque in favour of the borrowing bank.

Limit on Call lending/ borrowing PartcipantBorrowingLending SCBs Not to exceed 100% Of capital fund on a fortnightly basis.(125%) Not to exceed 25% of their capital fund on ½ mnly basis (50%) Co-op Bk. Not to exceed 2% of the deposit on day-to day basis. No Limit PDs Not to exceed 200% of NOF on fortnightly basis Not to exceed 25% of NOF FI/MF/InsNot permitted Completely phased out w.e.f. Aug 6,2005

Forex Market  A market for the purchase and sale of foreign currencies is called a ‘foreign exchange market’. It is the largest market in the world and is a 24 hour market. The daily turnover of the market stands at about 2 trillion dollars, with at least 80% of all the deals being represented by transactions for the purpose of earning profit from gambling on the exchange rate differences.  The forex market is an over the counter market and there is no single market place.

Forex Market- Types of transactions  Spot Transactions: An inter-bank transactions whereby the purchase of foreign exchange, and delivery and payment for the same takes place between banks on the following second business day is referred to as ‘spot transaction’ and the rate quoted in such transaction is called ‘spot rate’. The date of settlement is known as value date.  Forward Transaction: Where a specified amount of one currency is exchanged for a specified amount of another currency at a future value …

Forex Market- Types of transactions  …date is known as‘forward transaction’.Under this transaction exchange rate is determined at the time of agreement.The rate quoted is called as ‘forward rate’, normally quoted for value dates of one, two,three, six and twelve months.  Swap Transaction: The simultaneous sale and purchase of a given amount of foreign exchange for different value dates is referred to as ‘swap transactions’.

Derivatives  Derivatives are fundamentally contingent contracts/ instruments whose values are derived from some underlying instruments like currency, bonds, stock indices, interest rates, commodities etc. There are generally three main players involved in a derivative transaction: Hedgers, Traders and Speculators.  Derivatives perform an important economic function of price discovery.

Types of Derivatives  Foreign exchange derivatives (forward, foreign exchange swap, currency swap, currency options)  Interest rate derivatives (forward rate agreement, interest rate swap, interest rate options, interest rate caps/ floor/ collar)  Equity and stock index derivatives

Types of Derivatives  Commodity derivatives  Credit derivatives (credit default swap, credit linked notes)  What are futures?  What is option?  Types of Option:

Types of Option  European Option: The option which can be exercised by the buyer only on the date of maturity is called European option.  American Option: This can be exercised on any working day before the maturity date.  The price agreed to by the buyer with the seller is known as strike price.

Derivatives  For a buy option:  If S.P.=Current Price,It is at the money call  If Strike Price< C.P., It is in the money call  If S.P.>C.P., It is out of the money call  THE REVERSE WILL APPLY FOR PUT OPTION.

Thank You for your kind attention.