MERCHANT BANKING &

FINANCIAL SERVICES
 FINANCIAL SYSTEMS IN INDIA
Economic development of any country depends upon the existence
of a well organized financial system.

FINANCIAL SYSTEM:-

Supplies Promoters
Financial inputs -> Production of -> Well being & standard of
goods & services living of people.

• Money and monetary assets are traded.

• Mobilize the savings
• Investment in productive ventures
Intermediary Result in it promotes
• Savers<------------>promoter------->Faster economic Development.
 FUNCTIONS OF FINANCIAL SYSTEM
1. Provision of liquidity
 Provision of money
 No shortage
 Liquidity
 RBI-Monopoly
 Other banks
 Supply should not exceed demand
 Develop a sound financial system.
 2.Mobilization of savings

•Mobilize and channelise into productive activities.

•Implement offers

Transformed
•Savings------------------->Investment and consumption
 FINANCIAL CONCEPTS

I. Financial Assets.
II. Financial Intermediaries.
III. Financial Markets.
IV. Financial Rates Of Return.
V. Financial Instruments.
 1.FINANCIAL ASSETS.
Creation/transfer of assets.
• A financial assets is one which is used for production
or consumption or for further creation of assets.
• Financial assets Vs Physical asset.

• Building: 1. Financial assets ----->Hiring

2. Physical asset ------>Residential purpose.
 CLASSIFICATION OF FINANCIAL
ASSETS

1. Marketable asset.
2. Non marketable asset.
3. Cash Asset.
4. Debt Asset.
5. Stock Asset.
 Marketable &Non Marketable
assets:
Marketable assets:
Those which can be easily transferred from
one person to another without much
hindrance.
E.g.: Shares / Govt Securities / Bonds.
Non Marketable assets:
Assets which cannot be easily transferred
E.g.: Bank Deposits,PF,Pension
Funds,NSC.
 Financial Assets

Marketable assets. Non Marketable Assets

Shares Bonds Govt MF UTI Debenture

securities

Bank PF LIC Coy P.O.

deposits deposits certificate
 Cash & Debt assets:
Cash asset
RBI – Issue of currency and coins
Banks create money.
Debt asset
A fixed repayment schedule with regard to
interest and principal.
Stock asset
Stock issued for the purpose of raising fixed
capital.
2.FINANCIAL INTERMEDIARIES

 Refers to all kinds of financial

institutions and investing institutions
which facilitate financial transactions in
financial markets.
 Organized and Unorganized.
a. Capital Market Intermediaries
b. Money Market Intermediaries
 Capital & Money Market
Intermediaries
Capital Market Intermediaries(CMI)
• Provide long term funds.
• Specialized Institutions.
Money Market Intermediaries
• Supply only short term funds.
• Individuals & Corporate customers are
benefited.
 Financial Intermediaries in India

Organised Sector Unorganised Sector

Money Indigenous Pawn Traders &

Lenders Bankers Brokers Landlords

Capital Market Intermediaries Money Market Intermediaries

 Capital Market Intermediaries

Development Insurance Govt Exim NBFCy

Banks Companies (PF/NSC etc) Bank

Agriculture Financial
UTI
Institutions

Hire Purchase Leasing Investment Finance

Companies Companies Companies
 Money Market Intermediaries

Commercial Co-operative Post Office

RBI Government
Banks Banks SB
 3.Financial Markets

Whenever a financial transaction

takes place, it is deemed to have
taken place in the financial market.
 Classification Of Financial Markets

Unorganized
Organized Market Market

Money Lenders,
Capital Market Money Market Indigenous
Bankers Etc.
 Organised Market
– Rules and Regulations are standardized.

– Strict Supervision and control by RBI/other

bodies
 Un-Organized Market
- RBI steps to bring private Financial
Institution and chit funds under its strict
control by issuing NBFC Directions 1998.
 Capital Market

Industrial Government Long-Term

Securities Market Securities Loans Market

Primary Market Secondary Market

Market for
Term Loans Market for
Financial
Market Mortgages
Guarantees
 Capital Market

• A market for financial assets which have

a long or indefinite maturity.
Divided into three.
1. Industries Securities Market.
2. Government Securities Market.
3. Long Term Loans Market.
 a. Industries Securities Market.
• A Market for industrial securities
i. Equity Shares.
ii. Preference Shares.
iii. Debentures.
Further divided into two.
a. Primary Market.
b. Secondary Market.
 a. Primary & Secondary Market.

• A market for new issues.

• 3 Ways by which a company may raise
capital .
 Public Issue
 Rights Issue.
 Private Placement.
Market for secondary sale of securities.
b.Government Securities Market
• Also called Gilt– Edged Securities market.
• Where Govt securities are only traded.
• Both Long Term & Short Term.
• Issued in denominations of Rs.100
• Secondary market is very limited.
 c.Long Term Loans Market.
• Banks play a major role by supplying
long term loans to corporate customers.
• Classified into
a) Term Loans Market.
b) Mortgages Market.
c) Financial Guarantees Market.
 a. Term Loans Market.

– Dominate Industrial Finance.

– ST and LT to Customers.
– Help in Identifying investment opportunities,
encourage new entrepreneurs and support
modernization efforts.
 b.Mortgages Market.

– Those centres which supplies mortgage loan

mainly to individual customers.
– A loan against the security of immovable
property.
– The transfer of interest in a specific
immovable property to secure a loan is called
Mortgage.
c.Financial Guarantees Market.

A centre where finance is provided against the

guarantee of a reputed person.
Performance Guarantee covers payment of
earnest money retention money, advance
payment, non-completion of contracts etc.
Financial Guarantee covers only financial
markets.
 Money Market

Short-Term Treasury
Call Money Commercial Loan Bills
Market Bills Market Market Market
 Money Market:
Is a market for dealing with financial
assets and securities which have a
maturity period of upto one year.
Subdivided into 4.
1. Call Money Market
2. Commercial Bills Market.
3. Treasury Bills Market.
4. Short - Term loan market.
 1.Call Money Market:

– Extremely short period loans.

– Interest rate varies.
– Highly sensitive to changes in demand and
supply.
 2.Commercial Bills Market
– Market for bills of Exchange.
– Seller and Buyer are present.
– Discount and Finance House of India was
set up in the year 1988.
 3.Treasury Bills Market
– Have ‘short – term’ maturity.
– A promissory note/finance bills issued by the
govt.
– highly liquid.
– 2 types (a) Ordinary/Regular (b) Ad-hoc.
 4.Short - Term loan market
- Given to Corporates Customers.
– Commercial Banks provide loans in form of
cash credit and Overdraft.
– OD is for Business People.
– Cash Credit is for industrialist.
– Cash Credit – period is one year.
– Cash Credit Sanctioned in a separate A/c.
Importance of Capital Market
– Important source of productive use of
economy's savings.
– Incentives provision and promotes capital
formation.
– An avenue for investors.
– Facilitates increase in product and
productivity.
– Operations induce economic growth.
– Promotes stability in values of securities.
– Source for technological upgradation.
 Foreign Exchange Market:
Refers to the process of converting home
currencies into foreign currencies, end vice
versa.
Dr. Paul Einzing.
Foreign exchange is the system/process of
converting one national currency into another
and of transferring money from one country to
another.
Those engaged in the foreign exe business are
controlled by Foreign Exchange Regulation Act.
 Functions:FEM
– Make necessary arrangement of transfer.
– Provide adequate credit facilities.
– Cover foreign exchange risks.

Foreign Exchange Business has a 3-tiered

structure.
– Trading between banks and their commercial
customers.
– Trading between banks through authorised
brokers.
– Trading with banks abroad.
 Banks play a major role.
 Authorized money changes.
 FERA helps to smoothen the flow of
Foreign currency and to prevent any
misuse of foreign currency.
Financial Rates Of Return
Interest rate policy of the Govt is designed to
achieve the following.
– To enable the Govt to borrow comparatively cheaply.
– To ensure stability.
– To support Certain Sectors.
– To mobile Savings.
Recent Trends
– Interest rates are freed.
– reflects the free Market Rates.
– Rates on loans are revised.
– Debentures interest rates are fixed by companies.
– Fixed Deposit interest rates are freed.
 Financial Instruments:
( or ) Financial Securities:
Financial asset refers to a claim to the
repayment of a certain sum of money at
the end of a specified period together with
interest/divided.
Classified into Two:
i. Primary or Direct Securities.
ii. Secondary or Indirect Securities.
 Primary Securities:
Securities Issued directly by Ultimate Investor to
the Ultimate Savers.
Secondary Securities:
Securities issued by source intermediaries.
classified
i. ST S’es  Mature within a period of 1 year.
ii. MT S’es  Mature ranges between 1-5 years.
iii. LT S’es  Matures more than 5 years
 Characteristic / Features of
Financial Instruments.
- Easily transferred. - Carry Risks.
- Ready Market. - Less Handling Costs.
- Posses Liquidity. - Return is directly
- Possess Security proportionate to risk
value. - May be ST/MT/LT.
- Enjoy Tax Status.
- Facilitate Future
Trading
 Development of Financial System In India.
- Market was weak initially.
- Govt created new Financial Institutions to
supply finance
Nationalisation of Financial Institutions.
- RBI – leader, estd – 1935, Nationalised -1948.
- Followed – Nationalisation Imperial BOI in 1956
renamed SBI.
- Same year- 245 LIC were brought – Govt
control.
- How? By Merging- single corpn called LIC.
- 1969- 14 Major Commercial Banks-
Nationalised.
- Thus FI were brought under Public Control.