Institutional Finance

By Radhika

Financial System
Plays a Vital role in economy Bridges the gap between Channelize/ mobilize the vital resources

FUNDS

Financial Intermediaries

FUNDS

Commercial Banks Insurance Company DEPOSITES Mutual Funds /SHARE Non-banking financial co.
Supplier of Funds Individuals Business Government
FUNDS

LOANS

Financial System
Financial Market Money Market Capital Market

Demander of Funds Individuals Business Government

FUNDS

SECURITIES

SECURITIES

Financial intermediaries Commercial Banks

Public Sector Banks Foreign Banks Private Sector Banks

Financial Institutions
IFCI SIDBI ICICI NABARD

Cont. Insurance Companies

LIC GIC Private sectors

Cont.
Mutual Funds It is financial intermediary that collect savings from investors Different types of investment Pool of funds from investors Advantages of mutual funds are reduction in risk, expert professional mgt., liquidity of investment & tax benefits SEBI (Mutual Funds) Regulation, 1993

Cont.
Non-banking Financial Intuitions [NBCI/NBFC]
According to RBI, NBFC means; i. a financial institution which is a co.; ii. a non-banking inst. whiz a co. & has, as its principal business, the receiving of deposits under the scheme or mgt. or any other manner or lending in any manner; iii. such other non-banking institution or class of such inst. as the bank may with the previous approval of the Central Govt. specify

Cont.
NBFC are Categorized into: An equipment leasing co. [EL] A hire-purchase co. [HP] A housing finance co. [HFC] An investment co. [IC] A loan co. [LC] A mutual benefit co. [MBFC] i.e Nidhi Companies A miscellaneous non-banking co. i.e Chit fund co.

Money Market
Introduction It is a whole sale market No need of place Transactions generally settled in daily basis Important Segment Market for monetary assets of a shot-term nature Money market instruments have the characteristic of liquidity

Money Market instruments 1. Treasury Bills

One of the safest instruments Short term borrowing instruments of Central Govt. issued by Zero Risk instruments hence Short term securities that will mature... Issued at discounted rate and with promise to pay full face vale on maturity Generally available in minimum of 25K & in multiples thereof

Cont.
Currently, T-bills are generally available in 91-Day T-bills - auctioned every Friday 182- Day T-bills - auctioned every alternate Wed. 364-Day Types of T-bills On Tap Bills Ad-hoc Bills Auctioned Bills

Cont.
2. Commercial Paper [CP] It is an unsecured short term promissory note issued by creditworthy corporate, primary dealers & all financial inst. basically negotiable & transferrable by Fixed maturity period Issued to meet w.c requirements of the firms Also known as Finance Paper, Industrial Paper or Corporate Paper

Cont.
RBI introduced commercial papers in 1990 CP can be issued to banks, individuals, companies & other registered bodies It can also be issued to NRI but FII are also permitted to subscribe but to a certain limit fixed by SEBI

Cont. 3. Commercial Bills

CB are negotiable instruments drawn by the seller on the buyer which, are in turn, accepted & discounted by Commercial Banks These are basically called trade bills & when these bills are accepted by commercial banks, they called.. Bank accepts the bill from the seller & pays the amount of the bill after charging some discount. after expiry of the bill collected from the buyer...

Cont.
Meanwhile, if the bank requires fund then it can also re-discount the same with RBI,UTI,LIC,ICICI etc. Maturity period varies from 30 to 180 days. Example:
Bill Amt. rs. 10000 Discount - 2% Payment made by Bank to seller 9800 Payment received by bank from buyer rs.10000 Commission earned by bank rs. 200

Cont.

Seller
Trade Bill
Commercial Bill

Buyer
Collected By Bank

Bank

Cont.
Major Types of Commercial Bills I. Demand Bill v/s Usance Bill II. Inland Bill v/s Foreign Bill
III. Export Bill v/s Import Bill

Cont. 4. Call/ Notice Money:

Call Money Market It is a short term funds market with maturity period 1 day to 2 weeks Call money Notice money Main aim of growth of this instrument is due to commercial banks requirements

Cont.
To fulfill mandatory requirements of RBI commercial banks borrow money from the other banks & institutions The interest rate paid on the call/notice money loan is called CALL RATE

Cont. 5. Certificate of Deposit

It was introduced in 1989 CDs are unsecured, negotiable, short term instruments in bearer form issued by commercial banks & financial institutions Generally CD are time deposits (FD) CD are transferable & tradable while FD are not. It can be issued to all even to NRI.

Capital Market
To achieve growth in various sectors To meet the requirements of various investors, borrower & entrepreneurs A platform for investors to get greater returns Provide funds to the Organization to get developed Buying and selling of long-term debt or equitybacked securities Provides effective & efficient way to support exchange of various financial instruments for mutual benefit.

Primary Market

Cont.
IPO

Issue of Tender Primary market

Right Issue

Offer for Sale

Private Placements

Secondary market

Cont.
Secondary market popularly known as stock market Where outstanding or existing securities are purchased & sold on a continuous basis Unlike primary markets it facilitates changing of hands (ownership) Securities issued in primary market are traded Like ordinary market where there is buyer & seller Likewise the prices will be determined by the demand & supply forces

Cont.
Distinguishing feature
In India Secondary market functions as a recognized stock exchanges operating under certain rules & regulations duly approved by the government.

Thus, these stock exchanges constitute an organized mechanism under which various public & private securities are traded.

Functions of Secondary market

1. 2. 3. 4. 5. Marketability Safety Performance check Valuation Promotion & development

Nature & Role Of Financial System

Mobilizing funds to productivity Provides excellent mechanism for exchange of goods &services Establishment of different institutions Crucial role in reducing risk