MONEY AND BANKING
Narsimhan Committee on banking sector reforms 1991 (Narsimhan 1) and 1998 (Narsimhan 2).
SIDBI: (small Industries Development Bank of India): became operational in 1990, it is principal financial institution for promotion, financing and development of industries in small scale sector.
EXIM bank (Export Import Bank): it was established for financing, facilitating and promoting foreign trade in India.
National Housing Bank (NHB): Established in 1988, it was setup as wholly owned subsidiary of RBI, and is apex institution of housing finance in India.
NABARD (National Bank for Agriculture & Rural Development): Came in existence in 1982, it provides credit for promotion of Agriculture, small-scale Industries, Cottage & Village industries, Handicraft etc.
ADB (Asian Development Bank): Established in 1966, it is headquartered at Manila. It aims to promote economic & social progress of its developing member countries.
Term Loans: Bank advance for a specific period repaid with interest by regular periodical payments. Another common form of Loan facility on a customers current account at a bank permitting him to overdraw up to an agreed limit is called overdraft.
National Equity Fund Scheme: Launched in 1987 by SIDBI it provides equity assistance to tiny small scale units. SIDBI & Government contribute 50:50 share.
Net Asset Value (NAV): It is capital employed in the business & calculated as value of fixed assets plus current less current liabilities.
EXIM Bank (Export Import Bank) of India: Set up in 1982 financing, facilitating and promoting foreign trade in India. It also manages finances of other 3rd world countries.
Rural Infrastructure Development Fund (RIDF): Set up in 1995 to assist government & corporations in quick completion of ongoing projects relating to irrigation, water management etc. Banks having shortfall in priority sector lending are required to contribute to RIDF.
v AS per Banking Regulation act, 1999, CRR has to be between 3 to 15%.
v 1st bank in India – Oudh commercial Bank (1881) (with Indian participation).
v Oldest existing Bank – PNB (1894).
v 1921 – Presidency Banks of Bombay, Madras & Calcutta were merged to from Imperial bank.
v Imperial bank renamed SBI in 1955.
v RBI can print & issue currency noted of 2 Re & above Min of finance enjoys right to issue wins & notes up to RE Denomination.
v 1969 – It major banks with deposits > Rs 50 Crore nationalized 6 more nationalized in 1980 – which had deposits > 200 Crore.
v But it is the responsibility of RBI to pull all notes & coins (even Re 1) into circulation.
v RBI-nationalized on 1 Jan, 1949 Banking Regulation Act passed in Feb 1949.
v NABARD – 14982
- NHB – 1988
- SIDBI - 1990
- (subsidiary of RBI)
- India is founding member of IMF.
Exchange Traded Fund (ETF): It is a mutual fund scheme that is listed on stock exchanges & is traded like common stock.
Gold ETFs are intended to offer investors a means of participating in gold bullion market without necessity of taking physical delivery of gold & facility of buying & selling through stock exchange.
Mutual Funds/Unit Trusts/ Investment Trust: These are investment funds that deploy money of their investors in wide variety of stocks, shares & other instruments.
v They are professional fund mangers, they take security market to common investors who otherwise find it too complex.
v Allow diversification of risk as the money mobilized is spread across the shares/ debentures of various companies.
v They can manage funds at which lower cost than individual investors.
v As large player they ensure orderly development of capital market.
v Refers to any securities trading activity carried out outside stock exchanges.
Negotiated Dealing System (NDS):
It is a electronic platform of RBI, to facilitate dealings in govt securities including treasury bills & money market instrument.
Corporatization of stock Exchanges: Refers to segregation of ownership, management and trading rights, so that brokers, who are traders, cannot manage & own stock exchange. Thus brokers can’t gain at the cost of investors interests. Also they can’t indulge in insider trading to influence behavior of stock market. It means that stock exchanges will be run on sound commercial lines by adopting corporate Governance practices.
Unique Identification Number (UIN): Introduced by SEBI, it is used to identify transactions of market participants & investors.
SEBI has developed MAPIN database about market participants & Investors, to give a UIN to them.
Shared are issued to the public through 2 channels.
v Fixed Price Method:
In this method the issuer is allowed to price the shared as he wished. The basis of price is explained in a offer document.
v Book Building method:
It is the prouss of price discovery used in public offer in which issuer sets base price and a band in which the investor is allowed to bid shares.
v Setup in 1988
v Main Functions:
- To oversee working of stock exchanges
- Regulate merchant banks & mutual banks.
- Register & Regulate intermediaries such as stock brokers
- Web fraudulent & unfair trade practices like insider trading.
- Promote development of healthy capital market.
Share: It is one of the equal parts into which owned capital of a company is divided, acting as a sources of mobilizing fixed capital.
Debentures: These are fixed interest securities issued by limited companies in return for long term loans.
Warrants: These are securities that give the holder a right to subscribe to a share or bond at a given price & from a certain date.
National Stock Exchange: Estb. In 1992, promoted IDBI, SBI, etc. It has two segments one dealing with wholesale debt instruments & other with capital market instruments.
Badla: It was a system of forward trading in shows in Indian stock markets prevalent earlier. The system led to many scams as big brokers could manipulate prices & cause losses to genuine investors. Therefore system of Rolling Settlement has been introduced under which any buyer of a share has to make payment & take delivery of the share on same day.
MIBOR ( Mumbai Inter Bank Offer Rate) & MIBID ( Mumbai Inter Bank Bid Rate) Launched by NSE as reference rates for loans of interbank money market.
BSE-200: Price index launched by BSE, it includes the shares of 200 selected companies Base yr = 1989-90.
Dollar: Price index launched by BSE, it is an index dealing in dollar prices. Base yr = 1989-90.
v Steps taken by SEBI for ensuring Healthy Capital Market.
- Indian companies are allowed to determine their shares prices & premium on share prices freely.
- Shares brokers & sub-brokers have to register themselves with SEBI & thus SEBI has control over them.
- To prevent inside trading, it has separated ownership & management of stock exfchanges. This is called corporatization.
- Control over Mutual funds.
- Control over FII & ban on PNs.
v It is a system in which transfer of securities takes places electronically and no physical transaction takes place.
- to improve & modernize market.
- enhance level of investor protection by eliminating bad deliveries, forgery of shares.
NSDL: (National Securities Depository Ltd) Estb. in 1996 Ist share depository in the country. Encourages “Paperless trading” of securities.
CDSL: ( Central Depository Services Ltd) Estb in 1998, 2nd share depository in the country. Encourages “paperless trading” of securities.
Bank rate – RBI to Bank
If BR ↑-Tight/Dear money policy
If BR ↓ - Easy/ Cheap money policy
CRR - % of amount that a bank must keep with RBI. RBI gives interests.
OMO- Govt Sector – Purchase/Sale by RBI
Gilt edged Securities.
LIBOR- London Inter Bank offer Rate – Interest on Loans by ECBs is benchmarked to LIBOR.
v It is a policy to control and regulate money supply and interest rates, adopted by RBI.
v Instruments of monetary policy are Bank Rate, OMO, CRR, SLR.
- Stability in exchange rate of currency because fluctuation in exchange rate affects foreign trade and investment.
- Maintaining a constant domestic price level. However M.P alone can’t maintain price level because of external factors affecting prices, viz: monsoon, international prices, changes in taste, etc.
- Reducing the impact of sumps and booms.
- Controlling inflation.
- Financial stability by insuring orderly financial market conditions.
Money Market: refers to a mechanism for short term lending and borrowing, where as Capital Market refers to a mechanism for long term lending & borrowing.
Non Banking finance companies (NBFC): It is a non banking institution which is a company and its principal business is receiving of deposits under any scheme or lending in any manner.
Basel II norms for Banks:
v All banks, excluding RRBs, have to migrate to Based II norms by 31st March 2008 as per RBI’s declaration.
v These norms include:
- Banks have to adopt
- standardized approach for credit risks.
- Basic indicator approach for operational risks
- Banks have to adhere to norms relating to
- Minimum capital requirements
- Capital adequacy
- Market discipline.
- Gives 3 options for computing
- Capital requirement for credit risks
- Capital requirement for operational risks.
Capital adequacy: It is a measure of the value of capital owned by the share holders of a financial institution relative to the amount institution has lend out.
Non Performing Assets (NPA). These are loans which are in default for more than 6 Months.
Form Credit Package: Launched by govt. in 2004 for doubling the flow of credit to agriculture in following 3 years.
India Millennium Deposit (IMD) Scheme: Launched by SBI in 2000 for mobilizing money from NRIs & Overseas Corporate Bodies (OPB). It matured in 2005.
Facilities enjoyed by scheduled Commercial banks.
v They become eligible for obtaining debts/loans at bank rate from RBI.
v They get facility of rediscount of 1st class exchange bills from RBI.
Local Area Banks: These banks are established to meet local credit requirements by exploiting local resources.
v Three tier setup of cooperative banks-
- State cooperative bank at apex level in state
- Central cooperative bank at distt level
- Primary Credit Agency at Village level.
v Cooperative Vs Commercial Banks:
- While commercial banks have been estb. by an act of parliament, coop. banks have been constituted by various state acts related to coop. socities.
- Area of operation of commercial banks is entire country while that of coop. banks is state only.
- Coop. banks can’t open their branches abroad.
- Coop. banks work on principle of cooperation while commercial banks work on pure profit basis.
Primary Credit societies.: These societies provide short term credit facilities to agriculture lending period can be extended to 3 years under special circumstances.
Regional Rural Banks: (RRBs): Estb since 1975 their main function is to take banking services to door steps of rural masses having no access to banking services.
IDBI ( Industrial Development Bank of India): Estb in 1964 to provide financial assistance to industrial enterprise and promote institution for promotion, financing & development of SSIs.
SIDBI (Small Industries development Bank of India): Estb in 1990, located at lucknow it is principal financial institution for promotion financing and development of SSIs.
IFCI (Industrial Finance corp. of India) Ltd: Estb in 1948, it aims at arranging medium & long term credit for various companies in India.
ICICI (Industrial Credit and investment corporation of india) Bank: Estb in 1955, it grants short & medium term loans on debentures basis, underiorites issues of shares & debentures etc.
IDFC (Infrastructure Development Finance Company): Setup in 1997 for financing infrastructure Sector in the economy including electricity, roads, railways etc.
LIC (Life insurance corporation): Set up in 1956 after nationalizing existing private insurance companies. It has also entered international insurance market to countries like UK, Fiji, Maritius etc.
Industrial Investment bank of India Ltd. (IIBIL): Estb in 1985 , formerly called IRBI. Basic aim is to revive sick & closed industrial units and to act as reconstruction agency.
Social security Fund (SSF): Set up in 1989-90 by LIC to fund its social security schemes like janashree Bima Yojana, Krishi Shramik Samajik Suraksha Yojana etc.
Insurance Regulatory & Development Authority (IRDA) : Setup in 2000 to protect the interests of holders of insurance policies & to regulate, promote & ensure orderly growth of insurance industry.
Reforms in insurance sector: Insurance sector opened up with the enactment of IRDA act, 1999.
v Aim in India
- to provide social security to as large a population as possible by setting up pension funds of which any person can become a member irrespective of the fact that he is covered under his job or not.
v Therefore Go I launched “Old age security and Income security” (OASIS) to carry out reforms in pension sector. Under OASIS, pension funds would be setup both in public & private sector & will be regulated by PFRDA.
v New Scheme called “Defined pension scheme” based on defined contribution has been launched. Since 2004 for all central govt. employees.
Under this each employee contributes towards pension fund 10% + DA with matching contribution from Govt. Employee not allowed to withdraw this sum before retirement.