https://moveacademy.in/caiib-course-caiib-exam-caiib-classes-caiib-subject/JAIIB Principles and Practices of Banking – Unit – 1 : Indian Financial System – MOVE Academy

Indian Financial System:

  • Accepting money from the surplus (more than requirement) sector in the form of deposits (Time and demand deposits),  Capital market products (Equity and Debt related instruments), Insurance products (Life and Non Life or General Insurance) and pension products. The same is allocated to the needy sector in the form loans and investments.

Indian Financial System

  • NBFC (Non banking financial Companies) are allowed to raise money from the public for lending. NBFC’s main lending  activities are  leasing, hire purchase and bill financing (Bill purchase and bill finance). Deposits placed with NBFCs are not guaranteed or insured by RBI or Government of India. Its mandatory Non Banking Financial Companies (NBFC) has to registered with Reserve Bank of India. Then only they have the permission can raise money from public in the form deposits. NBFCs deposit receipts should have the deposit date, maturity period, interest offered by them and maturity date and maturity value. Before depositing money with public are advised to go through the terms and conditions of the deposits. NBFC can not offer more than 12.5 percentage interest as per Reserve Bank of India (RBI) directions. Also, its your personal risk to keep safe your investments.
  • Primary dealers (PD) are deal in government securities in primary as well as secondary markets. This is known OMO (Open market operation)
  • In Indian Financial System, Apex Financial Institutions are financial institutions which provide long term funds for industry and agriculture.
  • Co-operative banks are allowed to raise deposits and give advances from/to public. Urban co-operative banks are regulated by State government and RBI. Other co-operative banks are controlled by State Government and NABARD.

Indian Financial System – RBI – Statutory Ratios

Indian Financial System

Cash Reserve Ratio (CRR)

  • CRR is a mandatory ratio,  percentage of demand and time liabilities of a bank which is deposited into RBI in the form of cash. No interest will be payable by RBI.  Currently commercial bank has to maintain 4 percentage in the form of cash from time and demand liabilities with  RBI

Statutory Liquidity Ratio (SLR)

  • SLR is a percentage of demand and time liabilities of a bank which is held in the form cash, Gold or marketable securities.
  • Commercial paper

  • Commercial paper (CP – Short Term Debt Instrument, maturity within 365 days)  is an unsecured money market instrument issued in the form of a promissory note nd Debentures (Long term debt instrument – more than 365 days) are examples of corporate securities (issue by public limited companies) and can be used to raise money. Commercial Paper was introduced in India in 1990. Corporates, primary dealers (Primary Dealers) and the All-India Financial Institutions (FI) are eligible to issue Commercial Paper. CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue. However, the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid. Commercial paper  which can be issued in denominations of Rs.5 lakh or multiples of Rs. 5 lakh.
  • Equity & Debt – Indian Financial System

  • Finance
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    Equity (Owner’s Contribution),  Debt (Borrowing money from others) are capital market instruments which will be issued by corporate in the primary market and traded in the secondary market for liquidity purpose.  Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can can buy CPs

  • SEBI (Securities and Exchange board of India)  is  regulating capital market, mutual funds, RTA, Credit Rating Agencies, Merchant Banker, Depositories (NSDL, CDSL) etc
  • Merchant bankers are Investment bankers are licensed by SEBI they assist corporate to raise money by equity and they issue stocks, raise fund in the form equity are debt through IPO
  • Foreign Institutional Investor (FII) are authorized by SEBI to invest in Indian equity and debt market (Capital Market) through stock exchanges. FII institutional Investors are issuing  Participatory Notes (P-Note)
  • In Indian financial System Depositories means (NSDL, CDSL) are held securities in demat (Dematerialization – Electronic form)
  • Mutual fund pools money from investors and invests in stocks, debt, gold, real estate and commodities
  • Major Regulators of Indian Financial System
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  • Supervisor for all the four regulators is Ministry of Finance

Key points – Indian Financial System 

The Indian financial system that is available in an economy to mobilize the capital from various surplus sectors of the economy and allocate the same to the various needy sectors (like loans and investments) is known as Indian Financial System. 

Reserve Bank of India has two distinct roles one is Monetary Control including that is the  controlling inflation  of the country and other is supervision of banks and Non Banking Finance Companies 

Stock Brokers perform the job between buyers and sellers of various securities. They help to build up an order book carry out price discovery and are responsible for brokers contracts being honoured. These services are subject to SEBI Rules