Financial system and Commercial Banking

Que 1 .The key functions of financial system are to provide a link between savers and investors.What are the key functions of financial market? Ans.a) In the previous section,we studied about significance of the financial system.We discuss earlier that the economic development of a nation is reflected by the development of its economic units,categorized as the corporate,private,government and household sectors.These categorises,while undertaking their normal business or industrial activities,reflect the position of a lender or a borrower in their balance sheets. Each of these factors is interdependent and cannot function in isolation.A good financial system will also characterizes orderly growth of all sectors,geographical locations and sections of the society with growth-oriented regulation.It will ensure farir participation by all players in the financial system.

b) In the previous section,we studied about characterises of the financial system.We shall study the need and importance of financial system.The need and importance of the financial system can be learnt from its function and performance.

The financial system helps in mopping up and channelizing the mobilized savings of scattered savers in an efficient and effective manner. Orgenises and accumulated the savings and investment in creative ventures and investment. Facilitates project selection for employing funds and evaluates projects for its viability. Acts as a payment system for facilitating exchange of goods and services. Enables the transfer of resources across boundaries. Encourages capital formation process by creting avenues for investment.

Financial system and Commercial Banking

Que 2.Explain the meaning and the purpose of financial instruments. Ans . In the previous section, we have had introduced to financial instruments.In this section,we shall study the meaning and purpose of financial instruments.

Meaning: Financial instruments are documents in the form of draft,cheque,bill of exchange ,debentures,equity shares and warrants,etc, through which issuers raise funds.In general,financial instruments can also be defined as an instruments that possesses the monetary value or recording of a monetary transaction.

In any contact or agreement which is enforceable by law,made between any two parties,the financial instruments lifts up financial assets of an entity and the financial liability of the entity of another.Hence, the term financial instrument lifts up financial assets of an entity and the financial liability of the entity of another.Equity is a financial instrument that gives some income in the form of residual benefits in the assets after deducting all its liabilities.An example of this an oligation of income-tax payment.

Purpose: Finacial instruments are used to raise funds by the issuer of the instruments.These instruments facilitate the flow of funds from surplus to the needy.The issuers may be corporate ,governmentor quais government or individuals.The issuers raise funds through public issues,rights issues, preferential allotments, private placements ,borrowings from financial institutions or private borrowings.The requirement of funds is based on the need of the issuers and the receiver.Financial instruments are also used for tax saving purposes.Instruments are floated in the capital market for raising

Financial system and Commercial Banking

funds,both debts as well as equity instruments can only get share of profit if available a distributed surplus.

Que 3.Discuss the role played by brokers and primary dealers in the process of intermediation? Ans.Primary Dealers:

The system of PDs in the govt.securities market was introduced by the RBI in 1995 to strengthen the market infrastructers of govt.securities and put in place an improved and efficient secondary market trading system.This was to encourage holding og govt.securities on large scale and make the market more vibrat and liquid.In 2006-07,the RBI permitted banks to undertake primary dealership business departmentally.

PDs can also be referred to as merchant bankersd to the govt.of India as they are the ones who are allowed to underwrite primary issues of govt.securities other than the RBI.However,the RBI has gotten rid of this role.

Dealing in interest rate derivarives Dealing and underwriting in govt.securities Providing broking services in govt.securities Dealing and underwriting in corporate Lending in call/notice/term Investment in commercial papers Investment in certificates of deposit Investment in security receipts issued by securitization companies Investment in debt mutual funds where entire corpus is invested in debt securities,etc.

Financial system and Commercial Banking

Investment management companies Investment management is professionally managing of various securities and assets to meet the specified investment goals that benefit investors.The security management services include the management of shares,bonds and other securities.Investores seek the services of investment management companies.

Need of investment management The need for investment management arises due to: The existence of a large number of complex financial products. Financial market volatility. Changes in regulation requirements.

Importance steps of investment management Setting objectivesThe first step of investment management is to set the objectives.The objectives can be different for the different investors.Investment goals difffier for banks,insurance companies,financial institutions,pension and mutual funds including the individuals. Formulating investment plan-

There should be a proper plan for investment management after setting the objectives.The investment plan is formulated based on investor-related constraints such as financial capacity and risk profile as well as environmental constraints such as govt.regulations,etc.

Establishing portfolio strategy-

Financial system and Commercial Banking

After setting the objectives and constraints,the next step is to make an ideal mix of asset classes.These asset classes could include equities,fixed income securities,foreign securities,debt,real estate and/or currencies.

Selecting assets-

This step involves selecting the individual options within the wide asset classes.

Performance measurement-

Investment management is an ongoing process.It is critical to consistently evaluate the performance of the portfolio and to improve it constinuously.

Que 4 .Explain the challenges and issues regarding the perspective in banking industry? Ans .The importance challenge is how to bring equilibriumin the banking sector in terms of growth with the financial stability.The main objective of RBI is to make certain the necessary flow of credit to the production sectors of the economy and trying to maintain the price including financial stability.

KYC guidelines: The guideline and norms of kyc are very relavent in the perspective of money laundering and suspicious activities.The severity of application to low-

Financial system and Commercial Banking

value low0risk customers needed to be modified to facilitate access to the formal financial system.

Credit information:

One of the policy objectives of RBI is achieving financial inclusion.The availability of credit information has to assist the flow of creditworthy borrowers.Only a few credit information companies are in the activity of setting up business in India,there is a need for available of credit information.