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Finance

Static Finance

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Table of Contents
Indian Financial System ........................................................................... 3
Public Finance ......................................................................................... 4
Union Budget.......................................................................................... 4
Measures of Government Deficit ................................................................ 6
Fiscal Responsibility and Budget Management (FRBM) Act .............................. 7
Goods and Services Tax (GST) .................................................................. 7
Financial Market ...................................................................................... 8
Indian Financial Market : Money market ...................................................... 9
Money market instrument-...................................................................... 10
Indian Financial Market : Capital Market.................................................... 12
Stock Exchange .................................................................................... 13
Derivatives ........................................................................................... 14
Trading and Settlement Process ............................................................... 15
Depository ........................................................................................... 15
Securities and Exchange Board of India .................................................... 16
Reserve Bank of India (RBI) and its Functions ............................................ 18
Monetary Policy..................................................................................... 19
Non-Banking Financial Companies (NBFCs) and their types .......................... 20
Financial Inclusion ................................................................................. 21
Insurance Regulatory and Development Authority of India (IRDAI) ................ 23
Some Important Financial Terms- ............................................................ 24
Important Financial Institutions : Facts ..................................................... 29

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What is a Financial System?

The term financial system is a set of inter-related activities/services
working together to achieve some predetermined purpose or goal. It
includes different markets, the institutions, instruments, services and
mechanisms which influence the generation of savings, investment capital
formation and growth.
 The objective of the financial system is to "supply funds to various
sectors and activities of the economy in ways that promote the
fullest possible utilization of resources without the destabilizing
consequence of price level changes or unnecessary interference
with individual desires."
 The financial system is also divided into users of financial services
and providers.

Indian Financial System

The Indian financial system is broadly classified into two broad groups: i)
Organised sector and (ii) unorganised sector.
Organised financial system comprises the following sub-systems:
 Banking system
 Cooperative system
 Development Banking system
 Public sector
 Private sector
 Money markets
 Financial companies/institutions.
Unorganised financial system:
 It comprises of relatively less controlled moneylenders, indigenous
bankers, lending pawn brokers, landlords, traders etc.
 This part of the financial system is not directly amenable to control
by the Reserve Bank of India (RBI).
 There are a host of financial companies, investment companies, chit
funds etc., which are also not regulated by the RBI or the
government in a systematic manner.
Indian Financial System: Major components
 Financial Institutions
 Banking Institutions
 Non-Banking Financial Institutions
 Financial Markets
 Money Market
 Capital Market
 Financial Instruments/Assets/Securities
 Cash Instruments
 Derivative Instrument

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 Financial Services
 Banking
 Wealth Management
 Mutual Funds
 Insurance

Public Finance
Public finance is the management of a country's revenue, expenditures,
and debt load through various government and quasi-government
institutions.
Components of Public Finance-
 Tax collection
 Budget
 Expenditures
 Deficit/Surplus
 National Debt

Union Budget
According to Article 112 of the Indian Constitution, the Union Budget of
a year, also referred to as the annual financial statement, is a
statement of the estimated receipts and expenditure of the government
for that particular year. Union Budget keeps the account of the
government's finances for the fiscal year that runs from 1 st April to 31st
March.

(Source: NCERT)
Union Budget is classified into Revenue Budget and Capital Budget.
Revenue Account
 The Revenue Budget shows the current receipts of the government
and the expenditure that can be met from these receipts.
 Revenue Receipts: Revenue receipts are divided into tax and non-
tax revenues.
 Tax revenues consist of the proceeds of taxes and other duties
levied by the central government.

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 Tax revenues comprise proceeds of taxes and other duties levied by

the Union. Other revenues are receipts of the government mainly
consisting of interest and dividend on investments made by the
government, and fees and receipts for other services rendered by
the government.
Revenue Expenditure
 Revenue expenditure consists of all those expenditures of the
government which do not result in creation of physical or financial
assets.
 It relates to those expenses incurred for the normal functioning of
the government departments and various services, interest
payments on debt incurred by the government, and grants given to
state governments and other parties.
Budget documents classify total revenue expenditure into plan and non-
plan expenditure.
 Plan revenue expenditure relates to central Plans (the Five-Year
Plans) and central assistance for State and Union Territory Plans.
 Non-plan expenditure, the more important component of revenue
expenditure, covers a vast range of general, economic and social
services of the government.
 The main items of non-plan expenditure are interest payments,
defence services, subsidies, salaries and pensions.
 Interest payments on market loans, external loans and from
various reserve funds constitute the single largest component of
non-plan revenue expenditure.
Capital Account
 Capital Budget is an account of the assets as well as liabilities of the
central government, which takes into consideration changes in
capital.
 It consists of capital receipts and capital expenditure of the
government.
Capital Receipts:
 The main items of capital receipts are loans raised by the
government from the public which are called market borrowings,
borrowing by the government from the Reserve Bank and
commercial banks and other financial institutions through the sale
of treasury bills, loans received from foreign governments and
international organisations, and recoveries of loans granted by the
central government.
 Other items include small savings (Post-Office Savings Accounts,
National Savings Certificates, etc), provident funds and net receipts
obtained from the sale of shares in Public Sector Undertakings
(PSUs).

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Capital Expenditure:
 This includes expenditure on the acquisition of land, building,
machinery, equipment, investment in shares, and loans and
advances by the central government to state and union territory
governments, PSUs and other parties.
Capital expenditure is also categorised as plan and non-plan in the budget
documents.
 Plan capital expenditure, like its revenue counterpart, relates to
central plan and central assistance for state and union territory
plans.
 Non-plan capital expenditure covers various general, social and
economic services provided by the government.

Measures of Government Deficit

When a government spends more than it collects by way of revenue, it
incurs a budget deficit.
 Revenue Deficit: The revenue deficit refers to the excess of
government’s revenue expenditure over revenue receipts.
 Revenue deficit = Revenue expenditure – Revenue receipts
 Fiscal Deficit: Fiscal deficit is the difference between the
government’s total expenditure and its total receipts excluding
borrowing.
 Gross fiscal deficit = Total expenditure – (Revenue receipts +
Non-debt creating capital receipts)
 Non-debt creating capital receipts are those receipts which are not
borrowings and, therefore, do not give rise to debt.
 Examples are recovery of loans and the proceeds from the sale of
PSUs. The fiscal deficit will have to be financed through borrowing.
Thus, it indicates the total borrowing requirements of the
government from all sources.
 From the financing side Gross fiscal deficit = Net borrowing
at home + Borrowing from RBI + Borrowing from abroad
 Net borrowing at home includes that directly borrowed from the
public through debt instruments (for example, the various small
savings schemes) and indirectly from commercial banks through
Statutory Liquidity Ratio (SLR).
 Primary Deficit: It is simply the fiscal deficit minus the interest
payments.
 Gross primary deficit = Gross fiscal deficit – net interest
liabilities
 Net interest liabilities consist of interest payments minus interest
receipts by the government on net domestic lending.

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Fiscal Responsibility and Budget Management (FRBM) Act

 Fiscal Responsibility and Budget Management (FRBM) became an
Act in 2003.
 The objective of the Act is to ensure inter-generational equity in
fiscal management, long run macroeconomic stability, better
coordination between fiscal and monetary policy, and transparency
in fiscal operation of the Government.
 FRBM Act provides a legal institutional framework for fiscal
consolidation. It is now mandatory for the Central government to
take measures to reduce fiscal deficit, to eliminate revenue deficit
and to generate revenue surplus in the subsequent years.
 The Act binds not only the present government but also the future
Government to adhere to the path of fiscal consolidation. The
Government can move away from the path of fiscal consolidation
only in case of natural calamity, national security and other
exceptional grounds which Central Government may specify.
 In May 2016, the government set up a committee under NK Singh
to review the FRBM Act. The government believed the targets were
too rigid.
 As per the amended FRBM Act,2018 the Central Government shall
take appropriate steps to ensure that:
 The general government debt does not exceed 60%
 The Central Government debt does not exceed 40% of GDP
by the end of FY 2024-25.

Goods and Services Tax (GST)

 GST is an Indirect Tax which has replaced many Indirect Taxes in
India.
 The Goods and Service Tax Act was passed in the Parliament on
29th March 2017.
 The Act came into effect on 1st July 2017
 Goods & Services Tax Law in India is a comprehensive, multi-
stage, destination-based tax that is levied on every value addition.
 The GST journey began in the year 2000 when a committee was set
up to draft law. It took 17 years from then for the Law to evolve. In
2017 the GST Bill was passed in the Lok Sabha and Rajya Sabha.
On 1st July 2017 the GST Law came into force.
There are 3 taxes applicable under this system: CGST, SGST & IGST.
 CGST: Collected by the Central Government on an intra-state sale
(Eg: transaction happening within Uttar Pradesh)
 SGST: Collected by the State Government on an intra-state
sale (Eg: transaction happening within Uttar Pradesh )
 IGST: Collected by the Central Government for inter-state sale (Eg:
Uttar Pradesh to Uttarakhand)

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Financial Market
 A financial market helps to link the savers and the investors by
mobilizing funds between them. In doing so it performs what is
known as an allocative function.
 It allocates or directs funds available for investment into their most
productive investment opportunity.
 Financial transactions could be in the form of creation of financial
assets such as the initial issue of shares and debentures by a firm
or the purchase and sale of existing financial assets like equity
shares, debentures and bonds.

(Source: NCERT)

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Indian Financial Market : Money market

 The money market is a market for short term funds which deals in
monetary assets whose period of maturity is up to one year.
 These assets are close substitutes for money.
 It is a market where low risk, unsecured and short-term debt
instruments that are highly liquid are issued and actively traded
every day.
 It enables the raising of short-term funds for meeting the
temporary shortages of cash and obligations and the temporary
deployment of excess funds for earning returns.
 The major participants in the market are the Reserve Bank of
India, (RBI), Commercial Banks, Non-Banking Finance
Companies, State Governments, Large Corporate Houses and
Mutual Funds.
 The money market primarily facilitates lending and borrowing of
funds between banks and entities like Primary Dealers (PDs).
 Banks and PDs borrow and lend overnight or for the short period to
meet their short-term mismatches in fund positions. This borrowing
and lending is on unsecured basis.
Municipal Bonds
 In India, municipal bonds are in existence since 1997.
 Municipal bonds are debt obligations issued by public entities that
use the loans to fund public projects such as the construction of
schools, hospitals, and highways.
 Nearly five years ago, Securities and Exchange Board of India
(SEBI) came out with the Issue and Listing of Debt Securities by
Municipalities (ILDM) Regulations and since then seven
municipalities have raised nearly Rs 1,400 crore by issuing their
debt securities, which are commonly known as 'Muni Bonds'.
 SEBI ,in August, 2019 announced relaxation in norms for 'Muni
Bonds' to help smart cities and other registered entities working in
areas of city planning and urban development work like
municipalities to raise funds through issuance and listing of their
debt securities.
 Now, SEBI has decided to allow this route for a larger number of
entities, including special purpose vehicles set up under the central
government's ambitious 'Smart Cities Mission'.
 Under the new norms, SEBI would do away with requirements like
appointment of a monitoring agency, filing of viability certificate or
Detailed Project Appraisal Report, setting up of a separate project
implementation cell, maintenance of 100% asset cover with
specification of resources and mandatory backing of state or central
government.

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Money market instrument-

1. Treasury Bill:
 A Treasury bill is basically an instrument of short-term borrowing by
the Government of India maturing in less than one year.
 They are also known as Zero Coupon Bonds issued by the Reserve
Bank of India on behalf of the Central Government to meet its
short-term requirement of funds.
 Treasury bills are issued in the form of a promissory note. They are
highly liquid and have assured yield and negligible risk of default.
 They are issued at a price which is lower than their face value and
repaid at par. The difference between the price at which the
treasury bills are issued and their redemption value is the interest
receivable on them and is called discount.
 Treasury bills are available for a minimum amount of Rs 25,000 and
in multiples thereof.
Example: Suppose an investor purchases a 91 days Treasury bill with a
face value of Rs. 1,00,000 for Rs. 90,000. By holding the bill until the
maturity date, the investor receives Rs. 1,00,000. The difference of Rs.
10,000 between the proceeds received at maturity and the amount
paid to purchase the bill represents the interest received by him.

2. Commercial Paper:
 Commercial paper is a short-term unsecured promissory note,
negotiable and transferable by endorsement and delivery with a
fixed maturity period.
 It is issued by large and creditworthy companies to raise short-
term funds at lower rates of interest than market rates. It usually
has a maturity period of 15 days to one year.
 The issuance of commercial paper is an alternative to bank
borrowing for large companies that are generally considered to be
financially strong.
 The original purpose of commercial paper was to provide short-
terms funds for seasonal and working capital needs.

3. Call Money:
 Call money is short term finance repayable on demand, with a
maturity period of one day to fifteen days, used for inter-bank
transactions.
 Commercial banks have to maintain a minimum cash balance
known as cash reserve ratio.

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 The Reserve Bank of India changes the cash reserve ratio from time
to time which in turn affects the amount of funds available to be
given as loans by commercial banks.
 Call money is a method by which banks borrow from each other to
be able to maintain the cash reserve ratio.
 The interest rate paid on call money loans is known as the call rate.
 It is a highly volatile rate that varies from day-to-day and
sometimes even from hour-to-hour.
 There is an inverse relationship between call rates and other short-
term money market instruments such as certificates of deposit and
commercial paper.
 A rise in call money rates makes other sources of finance such as
commercial paper and certificates of deposit cheaper in comparison
for banks raise funds from these sources.
 Where money is borrowed or lend for period between 2 days and 14
days it is known as ‘Notice Money’. And ‘Term Money’ refers to
borrowing/lending of funds for period exceeding 14 days.
Certificate of Deposit:
 Certificates of deposit (CD) are unsecured, negotiable, short-term
instruments in bearer form, issued by commercial banks and
development financial institutions.
 They can be issued to individuals, corporations and companies
during periods of tight liquidity when the deposit growth of banks is
slow but the demand for credit is high.
 They help to mobilise a large amount of money for short periods.
Commercial Bill:
 A commercial bill is a bill of exchange used to finance the working
capital requirements of business firms.
 It is a short-term, negotiable, self-liquidating instrument which is
used to finance the credit sales of firms.
 When goods are sold on credit, the buyer becomes liable to make
payment on a specific date in future.
 The seller could wait till the specified date or make use of a bill of
exchange.
 The seller (drawer) of the goods draws the bill and the buyer
(drawee) accepts it. On being accepted, the bill becomes a
marketable instrument and is called a trade bill.
 Trade bills can be discounted with a bank if the seller needs funds
before the bill matures. When a trade bill is accepted by a
commercial bank it is known as a commercial bill.

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Miscellaneous-
 Repurchase Agreements (Repo)
 Repurchase Agreements , also called as Repo or Reverse Repo
are short term loans that buyers and sellers agree upon for
selling and repurchasing.
 Repo or Reverse Repo transactions can be done only between
the parties approved by RBI and allowed only between RBI-
approved securities such as state and central government
securities, T-Bills, PSU bonds and corporate bonds.
 They are usually used for overnight borrowing.
 Banker's Acceptance:
 Banker's Acceptance is like a short-term investment plan
created by non-financial firm, backed by a guarantee from
the bank.
 It's like a bill of exchange stating a buyer's promise to pay to
the seller a certain specified amount at a certain date. And,
the bank guarantees that the buyer will pay the seller at a
future date. Firm with strong credit rating can draw such bill.
These securities come with the maturities between 30 and
180 days and the most common term for these instruments
is 90 days. Companies use these negotiable time drafts to
finance imports, exports and other trade.

Indian Financial Market : Capital Market

 The term capital market refers to facilities and institutional
arrangements through which long-term funds, both debt and equity
are raised and invested.
 It consists of a series of channels through which savings of the
community are made available for industrial and commercial
enterprises and for the public in general. It directs these savings
into their most productive use leading to growth and development
of the economy.
 It consists of development banks, commercial banks and stock
exchanges.
 The Capital Market can be divided into two parts:
 Primary Market
 Secondary Market
Primary Market
 The primary market is also known as the new issues market.
 It deals with new securities being issued for the first time.
 The essential function of a primary market is to facilitate the
transfer of investible funds from savers to entrepreneurs seeking to
establish new enterprises or to expand existing ones through the
issue of securities for the first time.

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 The investors in this market are banks, financial institutions,

insurance companies, mutual funds and individuals.
 A company can raise capital through the primary market in the form
of equity shares, preference shares, debentures, loans and
deposits.
 Funds raised may be for setting up new projects, expansion,
diversification, modernisation of existing projects, mergers and
takeovers etc.
Secondary Market
 The secondary market is also known as the stock market or stock
exchange.
 It is a market for the purchase and sale of existing securities.
 It helps existing investors to disinvest and fresh investors to enter
the market. It also provides liquidity and marketability to existing
securities.
 It also contributes to economic growth by channelizing funds
towards the most productive investments through the process of
disinvestment and reinvestment.
 Securities are traded, cleared and settled within the regulatory
framework prescribed by SEBI. Advances in information technology
have made trading through stock exchanges accessible from
anywhere in the country through trading terminals. Along with the
growth of the primary market in the country, the secondary market
has also grown significantly during the last ten years.

Stock Exchange
 A stock exchange is an institution which provides a platform for
buying and selling of existing securities.
 As a market, the stock exchange facilitates the exchange of a
security (share, debenture etc.) into money and vice versa.
 Stock exchanges help companies raise finance, provide liquidity and
safety of investment to the investors and enhance the credit
worthiness of individual companies.
 Meaning of Stock Exchange According to Securities Contracts
(Regulation) Act 1956, stock exchange means anybody of
individuals, whether incorporated or not, constituted for the purpose
of assisting, regulating or controlling the business of buying and
selling or dealing in securities.
Functions of a Stock Exchange
 Providing Liquidity and Marketability to Existing Securities
 Pricing of Securities
 Safety of Transaction
 Contributes to Economic Growth
 Spreading of Equity Cult
 Providing Scope for Speculation

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Derivatives
Derivative Instruments
A derivative is an instrument whose value is derived from the value of one
or more underlying, which can be commodities, precious metals,
currency, bonds, stocks, stocks indices, etc. Four most common examples
of derivative instruments are Forwards, Futures, Options and Swaps.
Forward Contracts
A forward contract is a customized contract between two parties, where
settlement takes place on a specific date in future at a price agreed
today.
The main features of forward contracts are-
 They are bilateral contracts and hence exposed to counter-party
risk.
 Each contract is custom designed, and hence is unique in terms of
contract size, expiration date and the asset type and quality.
 The contract price is generally not available in public domain.
 The contract has to be settled by delivery of the asset on expiration
date.
 In case the party wishes to reverse the contract, it has to
compulsorily go to the same counter party, which being in a
monopoly situation can command the price it wants.
Futures
Futures are exchange-traded contracts to sell or buy financial
instruments or physical commodities for a future delivery at an agreed
price. There is an agreement to buy or sell a specified quantity of
financial instrument commodity in a designated future month at a price
agreed upon by the buyer and seller. To make trading possible, BSE
specifies certain standardized features of the contract.

Difference between Forward Contracts and Futures Contracts-

Basis Futures Forwards

Traded on organized
Nature Over the Counter
exchange
Contract
Standardized Customised
Terms
Liquidity More liquid Less liquid
Margin Requires margin
Not required
Payments payments
Settlement Follows daily settlement At the end of the period
Can be reversed with Contract can be reversed only
Squaring off any member of the with the same counter-party with
Exchange. whom it was entered into.

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Trading and Settlement Process

 Trading in securities is now executed through an on-line, screen-
based electronic trading system.
 Trading in securities is done through brokers who are members of
the stock exchange.
 Every broker has to have access to a computer terminal that is
connected to the main stock exchange.
 In this screen-based trading, a member logs on to the site and any
information about the shares (company, member, etc.) he wishes to
buy or sell, and the price is fed into the computer. The software is
so designed that the transaction will be executed when a matching
order is found from a counter party.
 Those that are not matched remain on the screen and are open for
future matching during the day.
 The Securities and Exchange Board of India (SEBI) has made it
mandatory for the settlement procedures to take place in demat
form in certain select securities.
 Physical shares can be converted into electronic form or electronic
holdings can be reconverted into physical certificates
(rematerialisation).
 Dematerialisation enables shares to be transferred to some other
account just like cash and ensures settlement of all trades through
a single account in shares.

Depository
 A depository is an organisation which holds securities (like shares,
debentures, bonds, government securities, mutual fund units etc.)
of investors in electronic form at the request of the investors
through a registered depository participant. It also provides services
related to transactions in securities.
 Just like a bank keeps money in safe custody for customers, a
depository also is like a bank and keeps securities in electronic form
on behalf of the investor. In the depository a securities account can
be opened, all shares can be deposited, they can be withdrawn/
sold at any time and instruction to deliver or receive shares on
behalf of the investor can be given. It is a technology driven
electronic storage system.
 The minimum net worth stipulated by SEBI for a depository is
Rs.100 crore.
 At present two Depositories viz. National Securities Depository
Limited (NSDL) and Central Depository Services (India) Limited
(CDSL) are registered with SEBI.

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 National Securities Depositories Limited (NSDL) is the first and

largest depository presently operational in India. It was promoted
as a joint venture of the IDBI, UTI, and the National Stock
Exchange.
 Public financial institutions, scheduled commercial banks, foreign
banks operating in India with the approval of the Reserve Bank of
India, state financial corporations, custodians, stock-brokers,
clearing corporations / clearing houses, NBFCs and registrar to an
issue or share transfer agent complying with the requirements
prescribed by SEBI can be registered as Depository Participant (DP).
Banking services can be availed through a bank branch whereas
depository services can be availed through a DP.
 ISIN (International Securities Identification Number) is a unique 12-
digit alphanumeric identification number allotted for a security
(e.g.- INE383C01018). Equity fully paid up, equity-partly paid up,
equity with differential voting /dividend rights issued by the same
issuer will have different ISINs.

Securities and Exchange Board of India

 The Securities and Exchange Board of India was established by the
Government of India on 12 April 1988 as an interim administrative
body to promote orderly and healthy growth of securities market
and for investor protection.
 It was to function under the overall administrative control of the
Ministry of Finance of the Government of India.
 The SEBI was given a statutory status on 30 January 1992 through
an ordinance. The ordinance was later replaced by an Act of
Parliament known as the Securities and Exchange Board of India
Act, 1992.
Objectives of SEBI -
1. To regulate stock exchanges and the securities industry to promote
their orderly functioning.
2. To protect the rights and interests of investors, particularly
individual investors and to guide and educate them.
3. To prevent trading malpractices and achieve a balance between self-
regulation by the securities industry and its statutory regulation.
4. To regulate and develop a code of conduct and fair practices by
intermediaries like brokers, merchant bankers etc., with a view to
making them competitive and professional.
Functions of SEBI
1. Regulatory Functions
 Registration of brokers and sub brokers and other players in the
market.
 Registration of collective investment schemes and Mutual Funds.

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 Regulation of stock brokers, portfolio exchanges, underwriters and

merchant bankers and the business in stock exchanges and any
other securities market.
 Regulation of takeover bids by companies.
 Calling for information by undertaking inspection, conducting
enquiries and audits of stock exchanges and intermediaries.
 Levying fee or other charges for carrying out the purposes of the
Act.
 Performing and exercising such power under Securities Contracts
(Regulation) Act 1956, as may be delegated by the Government of
India.
2. Development Functions
 Training of intermediaries of the securities market.
 Conducting research and publishing information useful to all market
participants.
 Undertaking measures to develop the capital markets by adapting a
flexible approach.
3. Protective Functions
 Prohibition of fraudulent and unfair trade practices like making
misleading statements, manipulations, price rigging etc.
 Controlling insider trading and imposing penalties for such practices
 Undertaking steps for investor protection.
 Promotion of fair practices and code of conduct in securities market.
Distinction between Capital Market and Money Market
Participants:
 The participants in the capital market are financial institutions,
banks, corporate entities, foreign investors and ordinary retail
investors from members of the public.
 Participation in the money market is by and large undertaken by
institutional participants such as the RBI, banks, financial
institutions and finance companies. Individual investors although
permitted to transact in the secondary money market, do not
normally do so.
Instruments:
 The main instruments traded in the capital market are – equity
shares, debentures, bonds, preference shares etc.
 The main instruments traded in the money market are short term
debt instruments such as T-bills, trade bills reports, commercial
paper and certificates of deposit.
Investment Outlay:
 Investment in the capital market i.e. securities does not necessarily
require a huge financial outlay. The value of units of securities is
generally low i.e. Rs 10, Rs 100 and so is the case with minimum
trading lot of shares which is kept small i.e. 5, 50, 100 or so. This
helps individuals with small savings to subscribe to these securities.

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 In the money market, transactions entail huge sums of money as

the instruments are quite expensive.
Duration:
 The capital market deals in medium- and long-term securities such
as equity shares and debentures.
 Money market instruments have a maximum tenure of one year and
may even be issued for a single day.

Reserve Bank of India (RBI) and its Functions

Establishment
 RBI was established on April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act, 1934.
 RBI was set up on the recommendations of Royal Commission on
Indian Currency and Finance also known as Hilton-Young
Commission.
 The Central Office of the Reserve Bank was initially established in
Calcutta but was permanently moved to Mumbai in 1937.
 The Central Office is where the Governor sits and where policies are
formulated.
 Sir Osborne Smith was the first Governor of the Reserve Bank.
 C D Deshmukh was the first Indian Governor of the Bank.
 RBI was privately owned initially.
 Since nationalisation in 1949, the Reserve Bank is fully owned by
the Government of India.
Preamble
The Preamble of RBI describes the basic functions as:
"to regulate the issue of Bank notes and keeping of reserves with a view
to securing monetary stability in India and generally to operate the
currency and credit system of the country to its advantage; to have a
modern monetary policy framework to meet the challenge of an
increasingly complex economy, to maintain price stability while keeping in
mind the objective of growth."
Subsidiaries
Fully owned:
 Deposit Insurance and Credit Guarantee Corporation of India
(DICGC)
 Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)
 Reserve Bank Information Technology Private Limited (ReBIT)
 Indian Financial Technology and Allied Services (IFTAS)
Main Functions of RBI:
 Monetary Authority
 Regulator and supervisor of the financial system:
 Manager of Foreign Exchange
 Issuer of currency
 Developmental role
 Banker to the Government
 Banker to banks

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Monetary Policy
The Reserve Bank of India (RBI) is vested with the responsibility of
conducting monetary policy. This responsibility is explicitly mandated
under the Reserve Bank of India Act, 1934.
The primary objective of monetary policy is to maintain price stability
while keeping in mind the objective of growth. Price stability is a
necessary precondition to sustainable growth.
Other objectives of the monetary policy:
 Price Stability
 Controlled Expansion Of Bank Credit
 Promotion of Fixed Investment
 Restriction of Inventories and stocks
 To Promote Efficiency
 Reducing the Rigidity
Monetary Policy Committee (MPC)
RBI Act, 1934 provides for an empowered six-member monetary policy
committee (MPC) to be constituted by the Central Government. Three
Members are from the RBI and the other three Members of MPC are
appointed by the Central Government.
Instruments of Monetary Policy
The instruments of monetary policy used to control the money flow in the
economy are of 2 types broadly:
1. Quantitative Instruments
2. Qualitative tools
A. Quantitative Instruments or General Tools
Reserve Ratios
Cash Reserve Ratio (CRR):
 It is a certain percentage of bank deposits which banks are required
to keep with RBI. It is based on Net demand and time liabilities
(NDTL),
 Higher the CRR with the RBI, lower will be the liquidity in the
system and vice versa
Statutory Liquidity Ratio (SLR):
 Every financial institution has to maintain a certain quantity of liquid
assets with themselves at any point of time of their NDTL.
 These assets are government securities, cash and gold. Changes in
SLR often influence the availability of resources in the banking
system for lending to the private sector.
 Higher the SLR, lower will the banks be allowed to lend in the
system and vice versa.
Open Market Operations (OMOs)
An open market operation is an instrument of monetary policy which
involves buying or selling of government securities from or to the public
and banks.

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Policy Rates
 Bank Rate: The bank rate, also known as the discount rate, is the
rate of interest charged by the RBI for providing funds or loans to
the banking system.
 Liquidity adjustment facility(LAF): is a monetary policy which
allows banks to borrow money through repurchase agreements. It
consists of repo and reverse repo operations.
 Repo Rate: Repo rate is the rate at which RBI lends to its clients
generally against government securities.
 Reverse Repo rate: Rate at which RBI borrows money from the
commercial banks.
 Marginal Standing Facility (MSF): It is a window for banks to
borrow from RBI in an emergency when inter-bank liquidity dries up
completely.
B. Qualitative Instruments or Selective Tools
These tools are not directed towards the quality of credit or the use of the
credit. They are used for discriminating between different uses of credit.
It can be discrimination favouring one thing over the other.
1. Fixing Margin Requirements
2. Consumer Credit Regulation
3. Selective Credit Control
4. Credit Rationing
5. Moral Suasion
6. Direct action

Non-Banking Financial Companies (NBFCs) and their types

What is Non-Banking Financial Company (NBFC)?
 It is a company registered under the Companies Act, 1956 engaged
in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government
or local authority or other marketable securities of a like nature,
leasing, hire-purchase, insurance business, chit business.
 A non-banking institution which is a company and has principal
business of receiving deposits under any scheme or arrangement in
one lump sum or in instalments by way of contributions or in any
other manner, is also a non-banking financial company (Residuary
non-banking company).
Different types of NBFCs are as follows:
 Asset Finance Company (AFC)
 Investment Company (IC)
 Loan Company (LC)
 Infrastructure Finance Company (IFC)
 Systemically Important Core Investment Company (CIC-ND-SI)
 Infrastructure Debt Fund: Non- Banking Financial Company (IDF-
NBFC)
 Non-Banking Financial Company - Micro Finance Institution (NBFC-
MFI)

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 Non-Banking Financial Company – Factors (NBFC-Factors)

 Mortgage Guarantee Companies (MGC)
 NBFC- Non-Operative Financial Holding Company (NOFHC).

Financial Inclusion
According to the Planning Commission (2009), Financial inclusion
refers to universal access
to a wide range of financial services at a reasonable cost. These
include not only banking
products but also other financial services such as insurance and equity
products.
Dimensions of Financial Inclusion
 Branch Penetration- penetration of commercial bank branches
and ATMs for the provision of maximum formal financial services to
the rural population, which is measured as number of bank
branches per one lakh population.
 Credit Penetration- it takes the average of the three measures:
number of loan accounts per one lakh population, number of small
borrower loan accounts per one lakh population and number of
agriculture advances per one lakh population.
 Deposit Penetration- it can be measured as the number of saving
deposit accounts per one lakh population, which helps in analysing
the extent of the usage of formal credit system.
 Insurance Penetration- It is used as an indicator of insurance
sector development within a country and is calculated as ratio of
total insurance premiums to gross domestic product.
Among these the credit penetration is the key problem in the
country as the all India average ranks the lowest for credit penetration
compared to the other two dimensions.
Objectives of Financial Inclusion-
 Financial inclusion intends to help people secure financial services
and products at economical prices such as deposits, fund transfer
services, loans, insurance, payment services, etc.
 It aims to establish proper financial institutions to cater to the
needs of the poor people.
 It aims to build and maintain financial sustainability so that the less
fortunate people have a certainty of funds which they struggle to
have.
 It also intends to have numerous institutions that offer affordable
financial assistance so that there is sufficient competition so that
clients have a lot of options to choose from.
 Financial inclusion intends to increase awareness about the benefits
of financial services among the economically underprivileged
sections of the society.
 It intends to improve financial literacy and financial awareness in
the nation.

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 Financial inclusion aims to bring in digital financial solutions for the

economically underprivileged people of the nation.
 It also intends to bring in mobile banking or financial services in
order to reach the poorest people living in extremely remote areas
of the country.
 There are many governmental agencies and non-governmental
organisations that are dedicated to bringing in financial inclusion.
 These agencies are focussed on improving the access to receiving
government-approved documents. There are so many people who
live in rural areas or tribal villages who do not have knowledge
about documents such as PAN, Aadhaar, Driver’s License, or
Electoral ID. Hence, they cannot avail many of the services offered
by governmental or private institutions.
Financial inclusion schemes in the country: Schemes
Pradhan Mantri Jan Dhan Yojana (PMJDY)
Pradhan Mantri Vaya Vandana Yojana
Stand Up India Scheme
Pradhan Mantri Mudra Yojana
Pradhan Mantri Suraksha Bima Yojana (PMSBY)
Sukanya Samridhi Yojana
Jeevan Suraksha Bandhan Yojana
Credit Enhancement Guarantee Scheme (CEGS) for
Scheduled Castes (SCs)

Reserve Bank of India: Steps toward Financial Inclusion

Aadhar Schemes
Prime Minister Jan Dhan Yojana
Pradhan Mantri Suraksha Bima Yojana
MUDRA Bank
Venture Capital Fund for Scheduled Caste
Entrepreneurs'
Credit Enhancement Guarantee Scheme
for the Scheduled Castes
Swachhta Udyami Yojana
Green Business Scheme
Direct Benefit Transfer
UPI (Unified Payments Interface
BHIM (Bharat Interface for Money) App

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Insurance Regulatory and Development Authority of India

(IRDAI)
 Insurance Regulatory and Development Authority of India (IRDAI),
is a statutory body formed under an Act of Parliament, i.e.,
Insurance Regulatory and Development Authority Act, 1999 (IRDAI
Act 1999) for overall supervision and development of the Insurance
sector in India.
 The powers and functions of the Authority are laid down in the
IRDAI Act, 1999 and Insurance Act, 1938. The key objectives of the
IRDAI include promotion of competition so as to enhance customer
satisfaction through increased consumer choice and fair premiums,
while ensuring the financial security of the Insurance market.
 The Insurance Act, 1938 is the principal Act governing the
Insurance sector in India. It provides the powers to IRDAI to frame
regulations which lay down the regulatory framework for
supervision of the entities operating in the sector. Further, there are
certain other Acts which govern specific lines of Insurance business
and functions such as Marine Insurance Act, 1963 and Public
Liability Insurance Act, 1991.

Objectives of IRDAI-
To protect the interest of and secure fair treatment to policyholders;
To bring about speedy and orderly growth of the insurance industry
(including annuity and
superannuation payments), for the benefit of the common man, and to
provide long term
funds for accelerating growth of the economy;
To set, promote, monitor and enforce high standards of integrity,
financial soundness, fair
dealing and competence of those it regulates;
To ensure speedy settlement of genuine claims, to prevent insurance
frauds and other
malpractices and put in place effective grievance redressal machinery;
To promote fairness, transparency and orderly conduct in financial
markets dealing with
insurance and build a reliable management information system to
enforce high standards of
financial soundness amongst market players;
To take action where such standards are inadequate or ineffectively
enforced;
To bring about optimum amount of self-regulation in day-to-day
working of the industry
consistent with the requirements of prudential regulation.

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Some Important Financial Terms-

 Accounts payable – a record of all unpaid short-term (less than 12
months) invoices, bills and other liabilities. Examples of accounts
payable include invoices for goods or services, bills for utilities and
tax payments due.
 Accounts receivable – a record of all short-term accounts (less
than 12 months) from customers you sell to but are yet to pay.
These customers are called debtors and are generally invoiced by a
business.
 Accrual accounting – an accounting system that records
transactions at the time they occur, whether the payment occurs
now or in the future.
 Amortisation – It is the process of offsetting assets such as
goodwill and intellectual property over a period of time.
 Assets – things you own. These can be cash or something you can
convert into cash such as property, vehicles and inventory.
 Audit – a check by an auditor or tax official on your financial
records to check that a person account for everything correctly.
 Balance sheet – listing of all of your assets and liabilities and
works out the net assets.
 Balloon payment – a final lump sum payment due on a loan
agreement. Loans with a larger final 'balloon payment' have lower
regular repayments over the term of the loan.
 Bank reconciliation – a cross-check that ensures the amounts in
your cashbook match the relevant bank statements.
 Bankrupt – when someone cannot pay their debts and aren't able
to reach an agreement with their creditors.
 Benchmarking – it is the process of comparing your business to
similar businesses in your industry.
 Bill of sale – a legal document for the purchase of property or
other assets that details the purchase, where it took place, and for
how much.
 Bootstrapping – where a business funds its growth purely through
personal finances and revenue from the business.
 Break-even point – the exact point when a business's income
equals its expenses.
 Budget – a listing of planned revenue and expenditure for a given
period.
 Capital – It is defined as wealth in the form of money or property
owned by a business.
 Capital cost – a one-off substantial purchase of physical items
such as plant, equipment, building or land.
 Capital gain – the amount gained when an asset sells above its
original purchase price.
 Capital growth – an increase in the value of an asset.

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 Cash – includes all money available on demand, including bank

notes and coins, petty cash, certain cheques, and money in savings
or debit accounts.
 Cash flow – the measure of actual cash flowing in and out of a
business.
 Chart of accounts – an index of the accounts a business will use
to classify transactions. Each account represents a type of
transaction such as asset, liability, owner's equity, income, and
expense.
 Chattel mortgage – similar to a hire-purchase agreement although
the business owns the asset from the start. Chattel mortgages
require regular ongoing payments and typically provide the option
of reducing the payments through the use of a final 'balloon'
payment.
 Contingent liability – a liability where payment is made only if a
particular event or circumstance occurs.
 Cost of goods sold – the total direct costs of producing a good or
delivering a service.
 Credit – a lending term for when a customer purchases a good or
service with an agreement to pay at a later date. This could be an
account with a supplier, a store credit card or a bank credit card.
 Creditor – a person/ business that allows you to purchase a good
or service with an agreement to pay at a later date. A creditor is
also anyone who you owe money to, such as a lender or supplier.
 Credit limit – a dollar amount that you cannot exceed on a credit
card or the maximum lending amount offered for a loan.
 Credit rating – a ranking applied to a person or business based on
their credit history that represents their ability to repay a debt.
 Current asset – an asset in cash or something you can convert
into cash within 12 months.
 Current liability – a liability that is due for payment within 12
months.
 Debt – any amount that you owe including bills, loan repayments
and income tax.
 Debt consolidation – the process of combining several loans or
other debts into one for the purposes of obtaining a lower interest
rate or reducing fees.
 Debt finance – money provided by an external lender, such as a
bank or building society.
 Depreciation – the process of offsetting an asset over a period of
time. You can depreciate an asset to spread the cost of the asset
over its useful life.
 Disbursements – money that a business spends.
 Drawings – personal expenses paid for from a business account.
 Encumbered – an encumbered asset is one that is currently put
forward as security or collateral for a loan.

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 Equity – the value of ownership interest in the business, calculated

by deducting liabilities from assets.
 Equity finance – money provided to a business in exchange for
part ownership of the business. This can be money invested by the
business owners, friends, family, or investors like business angels
and venture capitalists.
 Fixed asset – a physical asset used in the running of a business.
 Fixed cost – a cost that is not part of producing a good or service.
 Fixed interest rate – when the interest rate of a loan remains the
same for the term of the loan or an agreed timeframe.
 Float – when a private company offers shares in the company to
the public for the first time. See Initial public offering.
 Gross income – the total money earned by a business before you
deduct expenses.
 Gross profit -the difference between sales and the direct cost of
making the sales.
 Initial public offering (IPO) – when a company first offers shares
on the stock market to sell them to the general public. Also known
as floating on the stock market.
 Insolvent – a business or company is insolvent when they cannot
pay their debts as and when they are due.
 Intangible assets – non-physical assets with no fixed value, such
as goodwill and intellectual property rights.
 Interest – the cost of borrowing money on a loan or earned on an
interest-bearing account.
 Interest rate – a percentage used to calculate the cost of
borrowing money or the amount you will earn. Rates vary from
product to product and generally the higher the risk of the loan, the
higher the interest rate. Rates may be fixed or variable.
 Investment – the purchase of an asset for the purpose of earning
money such as shares or property.
 Liability – any financial expense or amount owed.
 Line of credit – an agreement allowing a borrower to withdraw
money from an account up to an approved limit.
 Liquidation – the process of winding up an insolvent company.
 Liquidity – how quickly you can convert assets into cash.
 Loan – a finance agreement where a business borrows money and
pays it back in instalments (plus interest) within a specified period
of time.
 Loan to value ratio (LVR) – your loan amount shown as a
percentage of the market value of the property or asset that you
purchase. The ratio helps a lender work out if they can recover the
loan amount if the loan goes into default.
 Maturity date – when a loan's term ends, and all outstanding
principal and interest payments are due.
 Net assets (also known as net worth, owner's equity or
shareholder's equity) – the total assets minus total liabilities.

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 Net income – the total money earned by a business after tax and
other deductions.
 Net profit – the total gross profit minus all business expenses
 Overdraft facility – a finance arrangement where a lender allows a
business to withdraw more than the balance of an account.
 Overdrawn account – a credit account that has exceeded its
credit limit or a bank account that has had more than the remaining
balance withdrawn.
 Receipts – a document given to a customer to confirm payment
and to confirm the sale of a good or service.
 Refinance – when a new loan helps to pay off an existing one.
Reasons to refinance include: extending the original loan over a
longer period of time, reduce fees or interest rates, switch banks, or
move from a fixed to variable loan.
 Repossess – the process of a bank or other lender taking
ownership of property/assets for the purpose of paying off a loan in
default.
 Return on investment (ROI) – a calculation that works out how
efficient a business is at generating profit from the original equity
from the owners/shareholders. It's a way of thinking about the
benefit (return) of the money you invest into the business. To
calculate ROI, divide the gain (net profit) of the investment by the
cost of the investment. The ROI then becomes a percentage or a
ratio.
 Revenue– the amount earned before expenses, tax and other
deductions.
 Security-property or assets that a lender can take ownership of
when repayment of a loan does not occur.
 Stock – the actual goods or materials a business currently has on
hand.
 Tax invoice – an invoice required for the supply of goods or
services over a certain price. You need a valid tax invoice when
claiming GST credits.
 Variable interest rate – when the interest rate of a loan changes
with market conditions for the duration of the loan.
 Variable cost – a cost that changes depending on the number of
goods produced or the demand for the products or service.
 Venture capital – an investment in a start-up business that has
excellent growth prospects. However, it does not have access to
capital markets because it is a private company.
Some Stock Market Terms
 BOURSES is another word for the stock market BULLS and BEARS
– The term does not refer to animals but to market sentiment of the
investors. A Bullish phase refers to a period of optimism and a
Bearish phase to a period of pessimism on the Bourses.

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 BADLA – This refers to a carry forward system of settlement,

particularly at the BSE. It is a facility that allows the postponement
of the delivery or payment of a transaction from one settlement
period to another.
 ODD LOT TRADING – Trading in multiples of 100 stocks or less.
 PENNY STOCKS – These are securities that have no value on the
stock exchange but whose trading contributes to speculation.

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Important Financial Institutions : Facts

NATIONAL FINANCIAL
INSTITUTIONS
Financial Institution Headquarters Established
Year
Reserve Bank of India (RBI) Mumbai 1935
Small Industries Development Bank of India Lucknow 1990
(SIDBI)
Securities and Exchange Board of India (SEBI) Mumbai 1992
National Bank for Agriculture & Rural Mumbai 1982
Development (NABARD)
Export-Import Bank of India (EXIM Bank) Mumbai 1982
National Housing Bank (NHB) New Delhi 1988
Industrial Finance Corporation of India (IFCI) New Delhi 1948
Life Insurance Corporation of India (LIC) Mumbai 1956
Export Credit Guarantee Corporation of India Mumbai 1957
(ECGC)
Bharatiya Reserve Bank Note Mudran Private Bengaluru 1995
Limited (BRBNMPL)
National Payments Corporation of India (NPCI) Mumbai 2008
Insurance Regulatory and Development Authority Hyderabad 1999
of India (IRDAI)
Credit Information Bureau (India) Limited Mumbai 2000
Credit Rating Information Services of India Mumbai 1987
Limited (CRISIL)
Information and Credit Rating Agency of India Gurugram 1991
Limited (ICRA)
Agriculture Finance Corporation of India Limited Mumbai 1968
Deposit Insurance and Credit Guarantee Mumbai 1978
Corporation (DICGC)
Credit Analysis and Research Limited (CARE) Mumbai 1993
Asset Reconstruction Company (India) Limited Mumbai 2002
(ARCIL)
National Securities Depository Limited (NSDL) Mumbai 1996
Institute for Development & Research in Banking Hyderabad 1996
Technology
Insolvency and Bankruptcy Board of India (IBBI) New Delhi 2016
Association of Mutual Funds in India (AMFI) Mumbai 1995
Central Depository Services Ltd (CDSL) Mumbai 1999
National Institute of Bank Management (NIBM) Pune 1969
Clearing Corporation of India Limited (CCIL) Mumbai 2001
India Infrastructure Finance Company Ltd (IIFCL) New Delhi 2006

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INTERNATIONAL FINANCIAL INSTITUTIONS

Financial Institution Headquarters Established

Year
International Bank for Reconstruction and Washington DC, USA 1944
Development (IBRD)
International Monetary Fund (IMF) Washington DC, USA 1945
European Investment Bank (EIB) Kirchberg, Luxembourg 1958
Asian Development Bank (ADB) Manila, Philippines 1966
Asian Infrastructure Investment Bank (AIIB) Beijing, China 2016
European Bank for Reconstruction & London, UK 1991
Development (EBRD)
New Development Bank (NDB) Shanghai, China 2014
Bank for International Settlements (BIS) Basel, Switzerland 1930
International Investment Bank (IIB) Budapest, Hungary 1970
International Finance Corporation (IFC) Washington DC, USA 1956
International Fund for Agricultural Development Rome, Italy 1977
(IFAD)
Society for Worldwide Interbank Financial La Hulpe, Belgium 1973
Telecommunication (SWIFT)
Organisation for Economic Co-operation & Paris, France 1961
Development (OECD)
United Nations Economic and Social Council for Asia Bangkok, Thailand 1947
and the Pacific (UNESCAP)
World Economic Forum (WEF) Geneva, Switzerland 1971
International Development Association (IDA) Washington DC, USA 1960
Multilateral Investment Guarantee Agency Washington DC, USA 1988
International Centre for Settlement of Investment Washington DC, USA 1966
Disputes

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