MBA605_Business Environment and Regulatory Framework (1)

Politico-Legal Environment - III 145 Central Consumer Protection Authority The overall responsibility to exercise the powers and discharge the functions under the CPA vests with the Central Consumer Protection Authority, known as the Central Authority, established by the Central Government. The Central Authority shall consist of a Chief Commissioner and such number of other Commissioners as may be prescribed, to be appointed by the Central Government to exercise the powers and discharge the functions under this Act. The headquarters of the Central Authority shall be at such place in the National Capital Region of Delhi, and it shall have regional and other offices in any other place in India as the Central Government may decide. According to the Act, the Central Authority shall have an Investigation Wing headed by a Director-General for the purpose of conducting inquiry or investigation under this Act as may be directed by the Central Authority. Powers and Functions: The Central Authority has the power and responsibility to regulate matters relating to violation of rights of consumers, unfair trade practices and false or misleading advertisements which are prejudicial to the interests of public and consumers and to promote, protect and enforce the rights of consumers as a class. Consumer Protection Councils Central Consumer Protection Council: The Act requires the Central Government to establish an advisory council known Central Consumer Protection Council. It shall consist of the Minister-in-charge of the Department of Consumer Affairs in the Central Government, who shall be the Chairperson; and such number of other official or non-official members representing such interests as may be prescribed. The objects of the Central Council are to render advice on promotion and protection of the consumers’ rights under this Act. State Consumer Protection Council: According to this Act, in every State, there shall be a State Consumer Protection Council established by the State Government. The State Council shall consist of the Minister-in-charge of Consumer Affairs in the State Government as the Chairperson and such number of other official or non-official members representing such interests as may be CU IDOL SELF LEARNING MATERIAL (SLM)

146 Business Environment and Regulatory Framework prescribed and such number of other official or non-official members, not exceeding ten, as may be nominated by the Central Government. The objects of the State Council are to render advice on promotion and protection of consumer rights under this Act within the State. District Consumer Protection Council: For every District there shall be a District Consumer Protection Council established by the State Government. The District Council, which is an advisory council, shall consist of the Collector of the district (by whatever name called), who shall be the Chairperson and such number of other official and non-official members representing such interests as may be prescribed. The objects of the District Council are to render advice on promotion and protection of consumer rights under this Act within the district. National, State and District Consumer Disputes Redressal Commissions National Consumer Disputes Redressal Commission: The Act provides for the establishment of a National Consumer Disputes Redressal Commission, to be known as the National Commission, by the Central Government. The National Commission shall ordinarily function at the National Capital Region. However, the Central Government may, establish regional Benches of the National Commission, at such places, as it deems fit. The National Commission ordinarily entertains complaints involving a value of the consideration paid exceeding rupees ten crore. Any person, aggrieved by an order made by the National Commission may prefer an appeal against such order to the Supreme Court within a period of thirty days from the date of the order. State Consumer Disputes Redressal Commission Every: State Government shall establish a State Consumer Disputes Redressal Commission, to be known as the State Commission, in the State. The State Commission shall ordinarily function at the State capital; but the State Government may establish regional benches of the State Commission, at such places, as it deems fit. CU IDOL SELF LEARNING MATERIAL (SLM)

Politico-Legal Environment - III 147 The State Commission ordinarily entertains complaints involving a value of the consideration paid exceeding rupees one crore. District Consumer Disputes Redressal Commission Every District shall have a Consumer Disputes Redressal Commission, to be known as the District Commission, established by the State Government. State Government may, if it deems fit, establish more than one District Commission in a district. The District Commission shall have jurisdiction to entertain complaints where the value of the goods or services paid as consideration does not exceed one crore rupees. 6.5 Superiority of Consumer Protection Act, 2019 Compared to the 1986 Act, the Consumer Protection Act, 2019 is much broader in the scope of the gamut of consumer transactions covered, administrative mechanism, consumer disputes redressal and promotion of consumer protection in general. The new Act, coming 33 years after the enactment of the erstwhile Act, significantly reflects on the important developments in the business-consumer interface, including the growing digitalisation, supply chain dynamics and widening spectrum of goods and services. For example, the inclusion of service providers under the ambit of product liability has important implications for e-commerce business, in addition to manufacturers. The e-commerce sites cannot escape as aggregators anymore. It assumes greater importance in the light of the findings of a recent survey more than one-third of the respondents reported that they were sold counterfeit products from e-commerce sites. The CPA 2019 has tightened the existing rules to further safeguard consumer rights. Other important highlights include introduction of a central regulator (Central Consumer Protection Authority), strict penalties for misleading advertisements, and guidelines for e-commerce and electronic service providers. One important change is that new Act has increased the pecuniary jurisdiction which benefits the consumers. More importantly, now a consumer can file a complaint in a court where the complainant resides or works; according to the 1986, it had to be in a court where the seller’s office was located. Figure 6.2 highlights some of the superiorities of the 2019 Act over the previous Act. CU IDOL SELF LEARNING MATERIAL (SLM)

148 Business Environment and Regulatory Framework Fig. 6.2: Comparison between Consumer Protection Acts of 1986 and 2019 Courtesy: Shipra Singh, “Here's how consumers will benefit under the new Consumer Protection Act”, The Economic Times, August 19, 2019. 6.6 Environment (Protection) Act, 1986 Government of India has taken a number of measures, including enactment of laws, for protection of the environment. One such important legislation is the Air (Prevention and Control of Pollution) Act, 1981 which provides for the prevention, and control of air pollution and preservation of air quality. Following the Water (Prevention and Control of Pollution) Act, 1974, a Central Pollution Control Board (CPCB) at Central Government level and State Pollution Control Boards (SPCB) at the State government level were established. The Environment (Protection) Act, 1986 has a special significance because it was designed to act as an umbrella legislation on the environment. The responsibility to administer this Act lies with the Central and State Pollution Control Boards. CU IDOL SELF LEARNING MATERIAL (SLM)

Politico-Legal Environment - III 149 The Environment (Protection) Act, 1986 may be regarded as a follow-up of certain decisions taken in the United Nations Conference on the Human Environment held at Stockholm in June, 1972, in which India participated. The Conference decided to take appropriate steps for the protection and improvement of human environment. It was considered necessary further to implement the decisions aforesaid insofar as they relate to the protection and improvement of environment and prevention of hazards to human beings, other living creature, plant and properties. This Act also reflects the discharge of one of the Directive Policies of State Policy enshrined under Article 48a of the Constitution that “the State shall endeavour to protect and improve the environment and to safeguard the forests and wild life of the country.” The objective of this Act is to provide for the protection and improvement of environment and matters connected therewith. According to the Environment (Protection) Act, 1986, the Central Government has power to take all such measures as it deems necessary or expedient for the purpose of protecting and improving the quality of the environment and preventing, controlling and abating environmental pollution. Such measures may include measures with respect to all or any of the following, matters: 1. Co-ordination of actions, related to matters under this Act, by the State Government, officer and other authorities. 2. Planning and extension of nation-wide programme for the prevention, control and abatement of environmental pollution. 3. Laying down standards for the quality of environment in its various aspects. 4. Laying down standards for emission or discharge of environmental pollutants from various sources whatsoever. 5. Restrictions of areas in which any industries, operations or process, or class of industries, operations or process shall not be carried out or shall be carried out subject to certain safeguards. CU IDOL SELF LEARNING MATERIAL (SLM)

150 Business Environment and Regulatory Framework 6. Laying down procedures and safeguards for the prevention of accidents which may cause environmental pollution and remedial measures for such accidents. 7. Laying down procedures and safeguards for the handling of hazardous substances. 8. Examination of such manufacturing processes, materials and substance as are likely to cause environmental pollution. 9. Carrying out and sponsoring investigations and research relating to problems of environmental pollution. 10. Inspection of any premises, plants, equipment, machinery, manufacturing or other processes, materials or substances and giving by order, of such directions to such authorities officers and persons as it may consider necessary to take steps, for prevention, control and abatement of environmental pollution. 11. Establishment or recognition of environmental laboratories and institutes to carry out functions entrusted to such environmental laboratories and institutes under this Act. 12. Collection and dissemination of information in respect of matters relating to environmental pollution. 13. Preparation of manuals, codes or guides relating to the prevention control and abatement of environmental pollution. 14. Such other matters as the Central Government deems necessary or expedient for the purpose of securing the effective implementation of the provision of this Act. Actions were taken by the Central Government to give effect to the measures listed above. The Ministry of Environment and Forests of the Government of India prepared its Environmental Action Plan to integrate environmental considerations into developmental strategies, which, among other priorities, include industrial pollution reduction. It has been decided to create industrial zones to encourage clusters of similar industries in order to help reduce the cost of providing utilities and environmental services. The Central Government has responsibility for deciding standards, restricting industrial sites, laying down procedures and safeguards for accident prevention and handling of hazardous waste, CU IDOL SELF LEARNING MATERIAL (SLM)

Politico-Legal Environment - III 151 overseeing of investigations and research on pollution issues, on-site inspections, establishment of laboratories, and collection and dissemination of information. It has also been provided for to set standards on specific pollutants in specific industrial sectors. Further, guidelines have been provided for location of industries and mining areas, for permitting and restricting industries in environmentally sensitive areas, coastal zone regulations and environmental impact assessments of development projects. Some rules have been brought out under this Act, like the Hazardous Wastes (Management and Handling) Rules, 1989, Manufacture Storage and Import of Hazardous Chemicals Rules, 1989, and Noise Pollution (Regulation and Control) Rules, 2000. Several authorities have been established under the Environment Protection Act, 1986. A National Environmental Appellate Authority has been constituted to hear appeals with respect to rejection of proposals from the environmental angle. The objective is to bring in transparency in the process and accountability, and to ensure the smooth and expeditious implementation of developmental schemes and projects. An Environmental Impact Assessment Authority for the National Capital Region has been constituted to deal with environmental protection problems arising out of projects planned in the National Capital Region (NCR). An Aquaculture Authority has been constituted to deal with the situation created by the Shrimp Culture industry in the coastal States and Union Territories. The Central Ground Water Authority for regulation and control of ground water management has initiated action regarding registrations for ground water pollution/depletion. It has also initiated mass awareness programme. Besides this, different authorities have been created for dealing with specific problems in some States. 6.7 Summary The first comprehensive law in India for consumer protection was the Consumer Protection Act, 1986, which provided for a system for the protection of consumer rights and the redressal of consumer disputes. As this decade-old Act was considered deficient to deal with the dynamics of the consumer-business interface in the fast changing business environment was replaced by the CU IDOL SELF LEARNING MATERIAL (SLM)

152 Business Environment and Regulatory Framework Consumer Protection Act, 2019, which has a much wider ambit of consumer protection and better implementation mechanism. One of the important measures taken by Government of India to prevent ecological damages is the Environment (Protection) Act, 1986. The objective of this Act, designed to act as an umbrella legislation on the environment, is to provide for the protection and improvement of environment and matters connected therewith. 6.8 Key Words/Abbreviations 1. Goods: “Goods” means every kind of movable property and includes “food” as is defined in the Food Safety and Standards Act, 2006. 2. Service: “Service” means service of any description which is made available to potential users and includes, but not limited to, the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, telecom, boarding or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service. 3. Spurious Goods: “Spurious goods” means such goods which are falsely claimed to be genuine. 4. Product: “Product\" means any article or goods or substance or raw material or any extended cycle of such product, which may be in gaseous, liquid or solid state possessing intrinsic value which is capable of delivery either as wholly assembled or as a component part and is produced for introduction to trade or commerce, but does not include human tissues, blood, blood products and organs. 5. Product Liability: “Product liability” means the responsibility of a manufacturer or seller of any product or service to compensate for any harm caused to a consumer by such defective product manufactured or sold or by deficiency in services relating thereto. CU IDOL SELF LEARNING MATERIAL (SLM)

Politico-Legal Environment - III 153 6. Restrictive Trade Practice: Restrictive trade practice refers to trade practices which by manipulation of price or conditions of delivery of goods or services impose on the consumers unjustified costs or restrictions. 6.9 Learning Activity 1. Make a survey of consumers’ awareness of consumer rights. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 2. Make a study of the environmental problems caused by any industrial unit of your choice or by any development project (like a dam or highway). ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 6.10 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions (i) Long Answer Questions 1. Give a brief description of the Consumer Protection Act, 2019. 2. What are the rights of consumers? Discuss the role of consumer protection laws to protect consumer rights. 3. Explain the role the Environment (Protection) Act, 1986 in promoting environmental protection in India. 4. Describe the types of exploitation and injustices consumers suffer. What are your suggestion to mitigate them? 5. Explain the important measures which can prevent environmental degradation. CU IDOL SELF LEARNING MATERIAL (SLM)

154 Business Environment and Regulatory Framework (ii) Short Answer Questions 1. What do you understand by unfair trade practices and restrictive trade practices? 2. List all the Acts mentioned in this unit. 3. Compare Consumer Protection Act of 2019 with the Consumer Protection Act of 1986. 4. List the consumer rights and examine the extent to which they are really enjoyed by the consumers. 5. Write a note on the role of law in protecting the environment. B. Multiple Choice/Objective Type Questions 1. The current consumer protection law in India is: (a) Consumer Protection Act, 1986 (b) Consumer Protection Act, 1956 (c) Consumer Protection Act, 2019 (d) Consumer Rights Protection Act, 2018 2. Enactment of which of the following law is influenced by the Stockholm Conference of June 1972. (a) Environment (Protection) Act, 1986 (b) Air (Prevention and Control of Pollution) Act, 1981 (c) Water (Prevention and Control of Pollution) Act, 1974 (d) Consumer Protection Act, 1986 3. “Spurious goods” means such goods which are: (a) Falsely claimed to be genuine (b) Damaged goods (c) Goods of which the expiry date is over (d) Unbranded goods 4. Promotion, protection and enforcement of rights of consumers as a class is the function of: (a) Central Consumer Protection Authority (b) Central Consumer Protection Council CU IDOL SELF LEARNING MATERIAL (SLM)

Politico-Legal Environment - III 155 (c) State Consumer Protection Council (d) District Consumer Protection Council 5. District Consumer Disputes Redressal Commission deals with cases involving less than: (a) ` 10 lakhs (b) ` 50 lakhs (c) ` 20 lakhs (d) ` 1 crore Answers: 1. (c), 2. (a), 3. (a), 4. (a), 5. (d). 6.11 References Suggested Readings 1. United Nations, UN Guidelines for Consumer Protection, 2016. 2. Centre for Science and Environment, State of India’s Environment 2019. 3. Department of Consumer Affairs, Government of India, The Consumer Protection Act, 2019. 4. Legislative Department, Government of India, The Environment (Protection) Act, 1986. 5. Government of India, Economic Survey (Annual). Web Resources 1. www.cgsiindia.org. 2. www.cseindia.org. 3. https://consumeraffairs.nic.in.  CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 7 FINANCIAL ENVIRONMENT - I Structure: 7.0 Learning Objectives 7.1 Introduction 7.2 Constituents and Features of Indian Money Market 7.3 Money Market 7.4 Features of Indian Money Market 7.5 Money Market Instruments and Constituents 7.6 Capital Market – Nature, Importance and Constituents 7.7 Development of Indian Capital Market 7.8 Role of Commercial Banks 7.9 Banking Sector Reforms 7.10 Summary 7.11 Key Words/Abbreviations 7.12 Learning Activity 7.13 Unit End Exercise (MCQs and Descriptive) 7.14 References CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 157 7.0 Learning Objectives After studying this unit, you will be able to:  Explain the meaning of financial environment.  Analyse the meaning, importance and constituents of Indian money market.  Discuss the meaning, importance and constituents of Indian capital market.  Elaborate the structure of the Indian banking sector and the role commercial banks.  Get an idea of the banking sector reforms and their role in strengthening the banking sector. 7.1 Introduction One important determinant of our lives and scope for economic prosperity is what may be described as the financial environment. All of us, whether an ordinary person, a poor man or a big business man, are affected by the nature of and trends in the financial environment. In this unit and Unit 8, we will examine some important features of the financial environment. The financial environment refers to the financial system consisting of the financial intermediaries, financial services and instruments, and policies and regulations related to the financial system. The characteristics of the financial system have important bearing on the business and economic development of the country. The State, through several promotional and regulatory measures, has been making a significant contribution towards the healthy development of the financial system. The financial system of a nation consists of all those interdependent factors which promote, facilitate and regulate financial flows within the economy. These include:  The financial intermediaries like banks, non-banking financial intermediaries (NBFIs) and other financial service providers.  Promotional and regulatory organizations like the central bank (RBI) and Securities and Exchange Board of India (SEBI) CU IDOL SELF LEARNING MATERIAL (SLM)

158 Business Environment and Regulatory Framework  Financial instruments like securities  Facilitating markets like stock exchange, bill market and call money market.  Laws and other regulations. In other words, the financial system comprises of the financial markets and their functional mechanisms, including the promotional and regulatory factors. The financial market is made up, broadly, of two markets, viz., the money market and the capital market. 7.2 Constituents and Features of Indian Financial Market Indian financial Market comprises, in the main, the:  Credit market  Money market  Capital market  Foreign exchange market  Debt market.  Derivatives market. Besides the above, there are also some markets like the household finance market, NBFC market, and insurance market which hold considerable promise in the years to come. These markets are not yet as developed and regulated as the credit/foreign exchange/money/capital/gilt- edged markets. With banks having already been allowed to undertake insurance business, bancassurance market is also likely to emerge in a big way. Until the ushering in of economic reforms in the early 1990s, most of the financial markets were characterised by controls over the pricing of financial assets, restrictions on flows or transactions, barriers to entry, low liquidity and high transaction costs. These characteristics came in the way of developments of the markets and allocative efficiency of resources channeled through them. The initiation of financial sector reforms in the early nineties was essentially to bring about a transformation in the structure, efficiency and stability of financial markets, as also an integration of the markets. Some of the important structural changes enabled by financial CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 159 sector reforms relate to introduction of free pricing of financial assets in almost all segments, relaxation of quantitative restrictions, removal of barriers to entry, new methods of floatation/ issuance of securities, increase in the number of instruments and enlarged participation, improvement in trading, clearing and settlement practices, improvement in the informational flows, transparency and disclosure practices. The credit market is the predominant source of finance in India as the capital market is relatively underdeveloped., firms or economic entities depend largely on the credit market for their fund requirements. In terms of sources of credit, the financial intermediaries providing credit could be broadly categorised as institutional and non-institutional. The major institutional purveyors of credit in India are banks and non-banking financial institutions, i.e., development financial institutions (DFIs) and other financial institutions (FIs) and non-banking financial companies (NBFCs) including housing finance companies (HFCs). The non-institutional or unorganised sources of credit include money lenders, indigenous bankers and sellers for trade credit. The foreign exchange market in India comprises customers, authorised dealers (ADs) and the Reserve Bank. With the transition to a market determined exchange rate system in March 1993 and the subsequent gradual but significant liberalisation of restrictions on various external transactions, the forex market in India has acquired more depth. There has been a considerable improvement in the forex market turnover in the recent years, particularly during the post-reform period. The inter-bank turnover constitutes the predominant part of total turnover. As regards the classification by way of spot and forward transactions, available data for the recent period indicate that the merchant segment is dominated by spot transactions, while the inter-bank segment is dominated by forward transactions. The Reserve Bank’s presence in the market essentially reflects its policy of ensuring orderly market conditions. Reflecting its stance, net intervention sales of the Reserve Bank generally coincided with conditions of excess demand in the market, while net intervention purchases coincided with surplus market conditions and contributed to reserve build-up. CU IDOL SELF LEARNING MATERIAL (SLM)

160 Business Environment and Regulatory Framework The domestic debt market comprises two main segments, viz., the Government securities and other (mainly corporate) securities comprising private corporate debt, PSU bonds and DFI bonds. The government securities market is predominant, while the other segment is not very deep and liquid. The corporate debt market still constitutes a small segment of the debt market despite policy initiatives taken during the nineties. DFI bonds have emerged as an important segment of the debt market. Since the middle of the eighties, long-term bond issues (maturity 5-10 years) by public sector undertakings (PSUs) imparted a new dimension to the debt market. While traditionally most of the PSU bonds were floated in the public issues market, in the recent years, most of such bond issues were privately placed. This is one reason why secondary market activity in PSU bonds has been limited. 7.3 Money Market Money and Capital Markets are two most important components of the financial market. Meaning of Money Market Money Market is the market for short-term funds, as distinct from the Capital Market which deals in long-term funds. Sometimes, the term Money Market is used in a very broad sense to include markets for both the short-term and long-term funds. When the term is used in such a broad sense, Money Market includes, obviously, the Capital Market also. However, when a distinction is drawn between the Money Market and the Capital Market, the former refers only to the market for short-term funds, and the latter for long-term funds. As we draw, in this unit, a distinction between these two, Money Market should be interpreted as the market for short-term funds. In the words of the Reserve Bank of India, a Money Market is a “centre for dealings, mainly of a short-term character, in monetary assets; it meets the short-term requirements of the borrowers and provides liquidity or cash to lenders. It is the place where short-term surplus investible funds at the disposal of the financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government.” CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 161 Thus, a Money Market is a place where the lending and borrowing of short-term funds are arranged and it comprises the short-term credit instruments and the institutions and individuals who participate in the lending and borrowing business. Constituents/Composition of Money Market Dr. Lavington divides the money market into inner and outer spheres—the inner constituting “a nucleus of specialised institutions such as the banks, the market for negotiable securities, the bill brokers and the trust and finance companies, and the outer extending beyond this centre, including the work of solicitors, of brokers of securities and the entire system of trade and credit.” The central bank, commercial banks, co-operative banks, savings banks, discount houses, acceptance house etc. are the main constituents of a well developed money market. However, some of these institutions would not be found in some money markets. The central bank usually occupies a pivotal position in the money market. It is regarded as the ‘presiding deity’ of the money market. A strong central bank in an organised money market can very significantly influence the conditions and activities of the market. In developing economies like India, organisation and development of a full-fledged money market is one of the prime responsibilities of the central bank. In developing countries like India, the money market is broadly divided into organised and unorganised markets or sectors. The unorganised segment is by and large outside the control of the central bank, and is characterised by lack of uniformity and formality in their business dealings. In India, the indigenous bankers and money lenders are important constituents of the unorganised money market. A developed money market consists of certain specialised sub-markets which help the mobilisation of savings by providing fruitful investment opportunities. They are also very helpful in imparting liquidity. Certain specialised organisations like information bureaus, chambers of commerce, trade associations etc. help the smooth and efficient functioning of the money market by helping the collection and dissemination of information to industry, trade and commerce. CU IDOL SELF LEARNING MATERIAL (SLM)

162 Business Environment and Regulatory Framework Figure 7.1 shows the important constituents of the money market. INDIAN MONEY MARKET Organised Banking Unorganised Banking Sector Sub-markets Sector Call Money Market Bill Market Certificates of Deposit (CDs) Commercial Papers Commercial Bills Treasury Bills Fig. 7.1: Constituents of Indian Money Market Functions of Money Market As the Reserve Bank of India observes, “a well-developed money market is the basis for an effective monetary policy. It is in the money market that the Central Bank comes into contact with the financial sectors of the economy as a whole and it is through varying the liquidity in the market and thereby influencing the cost and availability of credit that the bank achieves its economic objectives.” The important functions of a well developed money market may be listed down in more precise terms as follows: 1. By providing various kinds of credit instruments suitable and attractive for different sections, a money market augments the supply of funds. 2. Efficient working of a money market helps to minimise the gluts and stringencies in the money market due to the seasonal variations in the flow of and demand for funds. 3. A money market helps to avoid wide seasonal fluctuations in the interest rates. 4. A money market, by augmenting the supply of funds and making them readily available to the legitimate borrowers, helps in making funds available at cheaper rates. 5. A well organised money market, through quick transfer of funds from one place to another, helps to avoid the regional gluts and stringencies of funds. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 163 6. It enhances the amount of liquidity available to the entire country. 7. A money market, by providing profitable investment opportunities for short-term surplus funds, helps to enhance the profit of financial institutions and individuals. A money market functions like a dam-canal-irrigation system. Like a reservoir, it collects and augments the resources and channelises it to the various needed areas. A well organised money market is an essential condition for the successful operation of the Central Banking Policies. The money market is “the locus of central banking policies for holding the conditions of liquidity within the bounds of what the monetary authorities consider desirable”. 7.4 Characteristics of Indian Money Market As the Reserve Bank observes, “as in most developing countries, the money market in India comprises two sectors which may broadly be termed as the Organised and Unorganised markets, with substantially higher rates of interest in the unorganised sector”. The organised market comprises in the first place the Reserve Bank which is “the key constituent of the money market being the residual source of supply of funds and it is this which invests the Bank’s operations with great significance,” and occupies “a strategic position in the money marker.” Then come the commercial banks. They include the public sector banks and other joint stock banks, Indian and foreign. In the past, quasi-government bodies and large size joint stock companies also used to participate in the operations of the money market as lenders, the money lent by them being usually termed ‘house money’. In later years, such ‘house money’ declined to negligible proportions as most of the joint stock companies did not have surplus fund to lend and they were in fact in search of funds which they obtained partly by accepting deposits from the public. Then there are the financial intermediaries such as call loan brokers and general finance and stock brokers. “The core of the Indian money market is the inter-bank call money market”. Although the magnitude of funds dealt in this market is not large in relation to the deposit CU IDOL SELF LEARNING MATERIAL (SLM)

164 Business Environment and Regulatory Framework resources of banks, “perhaps this is the most sensitive sector of the money market.” The banks have been directing their demands for accommodation to the Reserve Bank. According to the Reserve Bank, despite its limitations, “from the point of view of specialisation of functions and organised relationships, the Indian money market may be considered to be comparatively well-developed”. The unorganised sector, which itself is not homogeneous, is largely made up of what are known as “indigenous” bankers. In this market, there is no clear demarcation between short-term or long-term finance, inasmuch as there is usually nothing on the hundi (an indigenous bill of exchange) to indicate whether it is for financing trade or providing financial accommodation — in other words, whether it is genuine trade bill or financial paper. By and large, these bills are accommodation bills. The co-operative credit institutions occupy a somewhat intermediate position between the organised and unorganised sectors of the money market. With the notable increase in the number of commercial bank branches in the rural and semi-urban areas, closer links have been forged between the co-operative credit system and the organised money market, especially with the State Bank and its subsidiaries. The money market structure in India, loosely knit as it is, is not entirely unco-ordinated. The indigenous bankers enjoy rediscount facilities from the commercial banks which in turn have access to the Reserve Bank. A well-developed money market will have close links with the leading money markets of a world and will be sensitive to the developments in these foreign markets. But the Indian money market was an insular one with little contact with foreign money markets. The money markets of advanced Western Countries are characterised by large movements of capital between them. Due to the partly exchange control restrictions on capital movements, there was hardly any movement of funds between the Indian money market and the foreign market. Consequent to the economic reforms ushered in 1991, the Indian market has been getting linked, albeit in a limited way, to the global market. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 165 The money market structure has undergone a change over the years, particularly under the impetus of the economic reforms. Unlike in developed economies where money markets are promoted by financial intermediaries out of efficiency considerations, in India, as in many other developing countries, the evolution of the money market and its structure has been integrated into the overall deregulation process of the financial sector. The Reserve Bank has gradually developed money markets through a five-pronged effort. First, interest rate ceilings on inter-bank call/notice money, inter-bank term money, rediscounting of commercial bills and inter-bank participation without risk were withdrawn effective May 1, 1989. Secondly, several financial innovations in terms of money market instruments such as auctions of Treasury Bills, certificates of deposit, commercial papers and RBI repos were introduced. Thirdly, barriers to entry were gradually eased by: (i) increasing the number of players (beginning with the Discount and Finance House of India (DFHI) in April 1988 followed by primary and satellite dealers and money market mutual funds), (ii) relaxing both issuance restrictions and subscription norms in respect of money market instruments and allowing determination of yields based on demand and supply of such paper, and (iii) enabling market evaluation of associated risks, by withdrawing regulatory restrictions, such as, bank guarantees in respect of CPs. Fourthly, the development of markets for short-term funds at market determined interest rates has been fostered by a gradual switch from a cash credit system to a loan-based system, shifting the onus of cash management from banks to borrowers and phasing out the 4.6 per cent 91-day tap Treasury bills, which in the past provided an avenue for investing short-term funds. Finally, institutional development has been carried out to facilitate interlinkages between the money market and the foreign exchange market, especially after a market-based exchange rate system was put in place in March 1993. The changes in the money market structure need to be seen in the context of a gradual shift from a regime of administered interest rates to a market-based pricing of assets and liabilities. The development of money markets in India in the last half of the 1990s has been facilitated by three major factors. First, the limiting of almost automatic funding of the government, largely realised with the replacement of ad hoc Treasury bills (which bore a fixed coupon rate of 4.6 per cent per annum from July 1974, implying a negative real interest rate for most part of the period) by ways CU IDOL SELF LEARNING MATERIAL (SLM)

166 Business Environment and Regulatory Framework and means advances (WMA) at interest rates linked to the Bank Rate and the development of the government securities market, discussed later in the unit, permitting a gradual de-emphasis on cash reserve ratio as a monetary policy instrument. Secondly, the development of an array of instruments of indirect monetary control, such as, the Bank Rate (re-activated in April 1997), the strategy of combining auctions, private placements and open market operations in government paper, and the liquidity adjustment facility (LAF). Thirdly, the enabling institutional framework was introduced in the form of primary and satellite dealers, and money market mutual funds. The monetary authority uses money markets to adjust primary liquidity in the domestic economy and monetary policy is often, in turn, shaped by developments in the money and the foreign exchange markets. 7.5 Money Market Instruments and Constituents The money market instruments in India mainly comprise: (i) call money, (ii) certificates of deposit, (iii) treasury bills, (iv) other short-term government securities transactions, such as, repos, (v) bankers’ acceptances/commercial bills, (vi) commercial papers and (vii) inter-corporate funds. While inter-bank money markets and central bank lending via repo operations or discounting provide liquidity for banks, private non-bank money market instruments, such as, commercial bills and commercial paper provide liquidity to the commercial sector. Call/Notice Money: Market Call and notice money are money dealt for 1 to 14 days. The period of term money ranges from 14 days to 90 days. This is sometimes a very volatile market and the interest rate is determined by the market forces. This market is of vital importance to banks and financial institutions because of the avenue it provides for investing surplus funds and meeting the deficits. The inter-bank lending is the major component of this market. The overnight inter-bank call money market, in which banks trade positions to maintain cash reserves, is the key segment of the money market in India. It is basically an ‘over the counter’ (OTC) market without the intermediation of brokers. Participation has been gradually widened to include other financial institutions, primary/satellite dealers, mutual funds and other participants in the bills rediscounting market and corporates (through primary dealers) besides banks, LIC and CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 167 UTI. While banks and primary dealers are allowed two-way operations, other non-bank entities can only participate as lenders. As per the announced policies, once the repo market develops, the call money market would be made into a pure inter-bank market, including primary dealers. The call money market is influenced by liquidity conditions (mainly governed by deposit mobilisation, capital flows and the Reserve Bank’s operations affecting banks’ reserve requirements on the supply side and tax outflows, government borrowing programme, non-food credit off-take and seasonal fluctuations, such as, large currency drawals during the festival season on the demand side). At times of easy liquidity, call rates tend to hover around the Reserve Bank’s repo rate, which provides a ready avenue for parking short-term surplus funds. During periods of tight liquidity, call rates tend to move up towards the Bank Rate and more recently the Reserve Bank’s reverse repo rate (and sometimes beyond) as the Reserve Bank modulates liquidity in pursuit of monetary stability. Besides, there are other influences, such as: (i) the reserve requirement prescriptions (and stipulations regarding average reserve maintenance), (ii) the investment policy of non-bank participants in the call market which are among the large suppliers of funds in the call market, and (iii) the asymmetries of the call money market, with few lenders and chronic borrowers. Term Money Market: The term money market in India is still not developed. Select financial institutions (IDBI, ICICI, IFCI, IIBI, SIDBI, EXIM Bank, NABARD, IDFC and NHB) are permitted to borrow from the term money market for 3-6 months maturity within stipulated limits for each institution. Repos: Repo is a money market instrument, which enables collateralised short-term borrowing and lending through sale/purchase operations in debt instruments. Under a repo transaction, a holder of securities sells them to an investor with an agreement to repurchase at a pre-determined date and rate. In the case of a repo, the forward clean price of the bonds is set in advance at a level which is different from the spot clean price by adjusting the difference between repo interest and coupon earned on the security. Repo is also called a ready forward transaction as it is a means of funding by selling a security held on a spot (ready) basis and repurchasing the same on a forward basis. Reverse repo is a mirror image of repo as in the case of former, securities are acquired with a simultaneous commitment to resell. CU IDOL SELF LEARNING MATERIAL (SLM)

168 Business Environment and Regulatory Framework Subsequent to the irregularities in securities transactions, repos were initially allowed in the Central Government Treasury bills and dated securities created by converting some of the Treasury bills. In order to activate the repos market essentially to be an equilibrating force between the money market and the Government securities market, the Reserve Bank gradually extended repos facility to all Central Government dated securities and Treasury bills of all maturities. Recently, while the State Government securities were made eligible for repos, the Reserve Bank also allowed all non-banking entities, maintaining SGL and current account with its Mumbai office, to undertake repos (including reverse repos). Furthermore, it has been decided to make PSU bonds and private corporate securities eligible for repos to broaden the repos market. The Reserve Bank also undertakes repo/reverse repo operations with PDs and scheduled commercial banks, as part of its open market operations. It also provides liquidity support to SDs and 100 per cent gilt-edged mutual funds through reverse repos. There is no limit on the tenor of repos. Repos help to manage liquidity conditions at the short-end of the market spectrum. Repos have often been used to provide banks an avenue to park funds generated by capital inflows to provide a floor to the call money market. During times of foreign exchange market volatility, repos have been used to prevent speculative activity as the funds tend to flow from the money market to the foreign exchange market. For instance, a fixed rate repo auction system was instituted in November 1997 with a view to ensuring an effective floor for the short-term interest rates in order to ward off the spread of contagion during the South-East Asian crisis. The repo rates were reduced with the return of capital flows, which imparted stability to the foreign exchange market. Commercial Papers: Commercial papers are unsecured promissory notes of short-term maturity of highly rated companies, issued to meet working capital requirements. The CP is subject to credit rating by any of the recognised credit rating agencies in India. As the CPs are tradable in the secondary market, including National Stock Exchange, they are regarded liquid. Commercial Paper (CP) is issued by non-banking companies and all-India Financial Institutions (AIFIs) as an unsecured promissory note or in a dematerialised form at a rate of CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 169 discount not tied to any transaction. It is privately placed with investors through the agency of banks. Banks act as both principals (i.e., as counterparties in purchases and sales) and agents in dealership and placement. Banks are not allowed to either underwrite or co-accept issue of CP. The pricing of CP usually lies between the scheduled commercial banks’ lending rate (since corporates do not otherwise have the incentive to issue CP) and some representative money market rate (which represents the opportunity cost of bank funds). The Indian CP market is driven by the demand for CP by scheduled commercial banks, which, in turn, is governed by bank liquidity. Banks’ investments in CP, despite a positive interest rate differential between the bank loan rate and the CP rate, may be explained by two factors, viz., (i) the higher transactions costs of bank loans and (ii) the relative profitability of CP as an attractive short-term instrument to park funds during times of high liquidity. As inter-bank call rates are typically lower than the CP rates, some banks also fund CP by borrowing from the call money market and, thus, book profit through arbitrage between the two money markets. Most of the CPs seem to have been issued by the manufacturing companies for a maturity period of approximately three months or less, mainly due to the fact that investors do not wish to lock funds for long periods of time. In most international markets, CP is issued on a short-term basis with a roll-over facility; this facility, however, is not allowed in the Indian CP market. The secondary activity is subdued in most CP markets on account of the investors’ preference to hold the instrument due to higher risk-adjusted return relative to those of other instruments. However, mutual funds find the secondary market relatively remunerative, since stamp duty for the issuer will be higher in case the buyer is a mutual fund rather than a bank. Hence, there is a tendency to route a CP through an institution (usually a bank), which attracts lower stamp duty in the primary market, to a mutual fund in the secondary market. Certificates of Deposit: Certificates of Deposit (CD), introduced in June 1989, are essentially securitised short-term time deposits issued by banks during periods of tight liquidity, at relatively high interest rates (in comparison with term deposits). But the transaction cost of CDs is often lower as compared with that of retail deposits. When credit picks up, placing pressure on banks’ liquidity, banks try to meet their liquidity gap by issuing CDs, often at a premium. The required amounts are mobilised in larger amounts through CD, often for short CU IDOL SELF LEARNING MATERIAL (SLM)

170 Business Environment and Regulatory Framework periods in order to avoid interest liability overhang in the subsequent months when credit demand slackens. As banks offer higher interest rates on CDs, subscribers find it profitable to hold CDs till maturity. As a result, the secondary market for CDs has been slow to develop. Commercial Bills Market: Commercial Bills (Bills of Exchange) are important instruments used to facilitate credit sales. Commercials bills can be discounted with banks and the banks, when they are in need of funds, may rediscount them in the money market. The commercial bill market in India is very limited. The commercial bills market was constricted by the cash credit system of credit delivery where the onus of cash management rested with banks. The success of the bills discounting scheme is contingent upon financial discipline on the part of borrowers. As such discipline did not exist, the Reserve Bank, in July 1992, restricted the banks to finance bills to the extent of working capital needs based on credit norms. However, in order to encourage the ‘bills’ culture, the Reserve Bank advised banks in October 1997 that at least 25 per cent of inland credit purchases of borrowers should be through bills. Money Market Mutual Funds (MMMFs): In April 1992, scheduled commercial banks and public financial institutions were allowed to set up MMMFs, subject to certain terms and conditions. The prescribed restrictions were relaxed subsequently between November 1995 and July 1996 in order to impart more flexibility, liquidity and depth to the market. MMMFs are allowed to invest in rated corporate bonds and debentures with a residual maturity of one year. The minimum lock-in period for units of MMMFs was relaxed from 30 days to 15 days in May 1998. In 1999-2000, MMMFs were allowed to offer ‘cheque writing facility’ in a tie-up with banks to provide more liquidity to unit holders. MMMFs, which were regulated under the guidelines issued by the Reserve Bank, have been brought under the purview of the SEBI regulations since March 7, 2000. Banks are now allowed to set up MMMFs only as a separate entity in the form of a trust. Currently, there are only three MMMFs in operation. Treasury Bills: Treasury bills are promissory notes issued by the Central Government to raise short-term funds to bridge short-term mismatches between receipts and expenditures. The RBI which issues the TBs on behalf of the Government does not purchase them before maturity but investors can sell them in the secondary market through the DFHI or get it rediscounted. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 171 7.6 Capital Market – Nature, Importance and Constituents Capital Market is generally understood as the market for long-term funds. However, sometimes the term is used in a very broad sense to include also the market for short-term funds. For instance, by capital market, some people mean “the market for all the financial instruments, short-term and long-term, as also commercial, industrial and government paper”. When ‘Capital Market’ is used in such a broad sense, it embraces, obviously, the money market also. However, in most cases, the term Capital Market is used to refer to the market for long-term loanable funds as distinct from the money market which deals in short-term funds. It should, however, be added that there is no clear-cut distinction between the two markets. Many a time, the same institutions receive and supply both short- and long-term funds. The money and capital market are, in fact, interdependent, developments and trends in one affecting the other. Importance of Capital Market The pace of economic development is conditioned, among other things, by the rate of long- term investment and capital formation. And capital formation is conditioned by the mobilisation, augmentation and channelisation of investible funds. The capital market serves a very useful purpose by pooling the capital resources of the country and making them available to the enterprising investors. Well-developed capital market augment resources by attracting and lending funds on a global scale. The Euro-currency and Eurobond markets are international finance markets in terms of both the supply and demand for funds. The increase in the size of the industrial units and business corporations due to technological developments, economies of scale and other factors has created a situation wherein the capital at the disposal of one or few individuals is quite insufficient to meet the investment demands. A developed capital market can solve this problem of paucity of funds. An organised capital market can mobilise and pool together even the small and scattered savings and augment the availability of investible funds. While the rapid growth of joint stock companies has been made possible to a large extent by the growth of capital markets, the growth of joint stock business has in its turn encouraged the development of capital markets. CU IDOL SELF LEARNING MATERIAL (SLM)

172 Business Environment and Regulatory Framework A developed capital market provides a number of profitable investment opportunities for the small savers. The capital market consists of a number of individuals and institutions (including the government) that canalise the supply and demand for long-term capital and claims on capital. The stock exchanges, commercial banks, co-operative banks, savings banks, development banks, insurance companies, investment trust or companies etc. are the important constituents of the capital market. The capital market, like the money market, has three important components, namely, the suppliers of loanable funds, the borrowers and the intermediaries who deal with the lenders on the one hand and the borrowers on the other. In the capital market, the supply of funds comes from the individual and corporate savings, institutional investors and surplus of governments. The demand for capital comes mostly from the agriculture, industry, trade and the government. With the emergence of joint stock companies as the predominant form of industrial organisation, developed capital market became a necessary infrastructure for fast industrialisation. Business firms can raise funds from the capital market by issuing shares and credit instruments. Capital market is not concerned solely with the issue of new claims on capital, but also with dealing in existing claims. In fact, marketability of securities is an important element in the efficient working of the capital market, since investors would be reluctant to make loans if their claims could not be easily disposed of. The developed countries have comparatively well-developed money and capital markets. But, in the developing countries, the capital market, like the money market, is generally underdeveloped. Like the money market, the Indian capital market also consists of an organised sector and an unorganised sector. In the organized market, the demand for capital comes mostly from corporate enterprises and government and semi-government institutions, and the supply comes from household savings, institutional investors like banks, investment trusts, insurance companies, finance corporations, government and international financing agencies. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 173 The unorganised market consists mostly of the indigenous bankers and money lenders on the supply side. While in the organised sector, the demand for funds is mostly for productive investment, a large part of the demand for funds in the unorganized market is for consumption purposes. In fact, many purposes, for which funds are very difficult to get from the organized market, are financed by the unorganized sector. Like the unorganised money market, the unorganised capital market in India is characterised by the existence of multiplicity of interest rates, exorbitant rates of interest and lack of uniformity in their business dealings. While the activities of the organised market are subject to a number of government controls, the unorganised sector is by and large outside effective government control. The organised sector has been subjected to increasing institutionalisation. A large chunk of the business of this sector is accounted for by the public sector financial institutions, and there is government control over other segments of the organised capital market. 7.7 Development of Indian Capital Market The Indian capital market has undergone remarkable changes in the post-independence era. Certain steps taken by the government to place the market on a strong footing and develop it to meet the growing capital requirements of fast industrialisation and development of the economy have significantly contributed to the developments that took place in the Indian capital market over the last five decades or so. The important facts that have contributed to the development of the capital market in India are the following: 1. Legislative measures: Laws like the Companies Act, the Securities Contracts (Regulation) Act and the Capital Issues (Control) Act empowered the government to regulate the activities of the capital market with a view to assuring healthy trends in the market, protecting the interests of the investors, efficient utilisation of the resources, etc. 2. Establishment of development banks and expansion of the public sector: Starting with the establishment of the IFCI, a number of development banks have been established at the national and regional levels to provide financial and other development CU IDOL SELF LEARNING MATERIAL (SLM)

174 Business Environment and Regulatory Framework assistance to the entrepreneurs and enterprises. These institutions today account for a large chunk of the industrial finance. The expansion of the public sector in the money and capital markets has been accelerated by the nationalisation of the insurance business and the major part of the banking business. The Life Insurance was nationalised in 1956 and the General Insurance in 1972. The Reserve Bank of India was nationalised as early as 1949. The Imperial Bank, the largest commercial bank in India, was nationalised and established the State Bank of India in 1955. The fourteen major private commercial banks were nationalised in 1969. With the nationalisation of the six leading private banks in 1980, over 90 per cent of the commercial banking business came to be concentrated in the government sector. Thus, an important aspect of the Indian capital market is that a large part of the investible funds available in the organised sector is owned by the government. The new economic policy will change the trend. 3. Growth of underwriting business: There has been a phenomenal growth in the underwriting business, thanks mainly to the public financial corporations and the commercial banks. After the elimination of the forward trading, brokers have begun to take on underwriting risks in the new issue market. In the last one decade, the amount underwritten as percentage of total private capital issues offered to public varied between 72 per cent and 97 per cent. 4. Public confidence: Impressive performance of certain large companies encouraged public investment in industrial securities. 5. Increasing awareness of investment opportunities: The improvement in education and communication has created more public awareness about the investment opportunities in the business sector. The market for industrial securities has become broader. 6. Capital market reforms: A number of measures have been taken to check abuses and to promote healthy development of the capital market. For details, see the next unit. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 175 7.8 Role of Commercial Banks Banks play a very important role in every monetised economy. India has a very diversified banking system. An understanding of the structure of the banking sector would help understand the role better. Structure of the Banking Sector Figure 7.1 depicts the banking structure in the organised sector under the governance system of the Reserve Bank of India. There is also an unorganised banking sector, including indigenous bankers and money lenders, which play an important role. Scheduled banks are banks which are included in the Second Schedule of the Reserve Bank of India Act, 1934. These are banks with a paid-up capital and reserves of an aggregate value of not less than ` 5 lakhs and which function according to the regulations and norms laid down by the RBI. Except a very few, all commercial banks in India are scheduled. In the public sector, the dominant bank is the State Bank of India, which is a Fortune 500 company. The SBI had several affiliated banks. The affiliated banks have been merged into the SBI recently. Besides the SBI, there are 20 banks in the public sector. 14 of these became public sector banks with their nationalisation in 1969 and the other six in 1980. The public sector banks have undergone significant restructures by a slew of M&As. In the public sector, there are a number of Regional Rural Banks (RRBs), sponsored by one or other public sector bank with special focus on rural development. The Regional Rural Banks are akin to the commercial banks in their methods of operation and organisational set-up, even though the area of activity of each Regional Rural Bank is limited to specified district/s and its loaning operations are restricted to specified target groups and purposes A revamp of its regional rural banks (RRBs) was contemplated and the Plan included consolidation for better operational efficiencies in line with the government’s big rural focus. The proposal envisaged RRBs adopting differentiated banking strategies, such as targeting specific sectors, for a strong regional connect and merging RRBs with their sponsoring banks. CU IDOL SELF LEARNING MATERIAL (SLM)

176 Business Environment and Regulatory Framework Reserve Bank of India Scheduled Commercial Banks Scheduled Cooperative Banks Indian Banks Foreign Banks Scheduled State Cooperative Banks Public Sector Banks Private Sector Banks Scheduled Urban Cooperative Banks Fig. 7.2: Structure of Indian Organised Banking System There are several prominent private sector banks such as the Federal Bank, South Indian Bank and Catholic Syrian Bank. Private sector banks like ICICI Bank, Axis Bank etc. which were started after the introduction of economic reforms in 1991 are generally described as new generation banks. The hardly have presence in rural areas. There are a number of branches of foreign banks functioning in India. Their business is confined to metropolitan and large cities. There are also a large number of indigenous banks in the unorganised sector which are outside the control of the RBI. Banks in India can be broadly classified as commercial banks and co-operative banks. In terms of ownership and function, commercial banks can be grouped into three categories – public sector banks, regional rural banks and private sector banks (both domestic and foreign). These banks have a very large number of branches spread wide across the country. After initiation of financial sector reforms, competition in the banking sector has increased. As result of the removal of restrictions on project financing, the share of term loans as percentage of total bank loans went up considerably. An important development in the financial sector in the recent years has been the diversification and growth of para banking activities such as leasing, hire purchase, factoring, etc. The reasons for banks entering para-banking activities include the need for diversifying earnings, CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 177 maximising economies of scale and scope, making profits, and also the desire to have leading market positions in financial services. Following the erstwhile UK model, in India, these diversified financial activities are undertaken mostly by subsidiaries of banks. Merchant banking is an important area where subsidiaries of banks have made their presence felt. Merchant banking includes services such as pre-issue, management of public issue etc. and as such is dependent on the conditions in the stock market. The dealing in government securities is another area where banks have been fairly active. Venture capital is a new area where banks have entered. Many banking subsidiaries are also quite active in the field of housing finance. Banking subsidiaries are also operating in the credit card business. There is a shared responsibility between the Reserve Bank and SEBI in the regulation of para banking activities of banks. In India, a prudential regulatory framework based on capital adequacy is in place in the case of para banking subsidiaries as well. Another classification of banks which is in common usage is that of scheduled banks and non-scheduled banks. This classification came into existence with the coming into force of the Reserve Bank of India Act. Scheduled banks, as the term implies, are those banks which are included in the Second Schedule to the Reserve Bank of India Act and may be broadly compared to the member banks in the USA. Section 42(6)(a) of the Act lays down the conditions which a bank must fulfil to qualify for inclusion in the Second Schedule. These are: (i) the bank must have a paid-up capital and reserves of an aggregate value of not less than ` 5 lakhs, (ii) it must satisfy the Reserve Bank that its affairs are not being conducted in a manner detrimental to the interests of its depositors, and (iii) it must be a company as defined in the Companies Act, 1956, or a State co-operative bank or an institution notified by the Central Government in this behalf or a corporation or a company incorporated by or under any law in force in any place outside India. The status of scheduled banks confers on them certain advantages, especially the facility of obtaining accommodation from the Reserve Bank and of being considered for grant of authorised dealer’s licence to handle foreign exchange business (for which other conditions have also to be CU IDOL SELF LEARNING MATERIAL (SLM)

178 Business Environment and Regulatory Framework fulfilled). Correspondingly, they bear certain obligations towards the Bank such as maintenance of cash reserves and submission of weekly returns. Commercial Banks are a very important source of finance for the industry. The industrial sector is getting a substantial share of the total banks’ credit. Particularly since the major bank nationalisation of 1969, there has been a substantial expansion of the bank branch network and a substantial growth of the bank deposits and credits. Commercial banks in India had been following the orthodox British line of disfavouring term loans to industries. However, there has been a change in their attitude. In respect of term finance, the commercial banks, besides providing term credit and subscribing to shares and debentures, indirectly participate in term finance by subscribing to the shares and debentures of financial institutions. Commercial banks also do underwriting of shares and debentures. Some of the banks have merchant banking divisions. Scheduled banks have been permitted to hold in their own investment portfolio shares and debentures of the private corporate sector devolving on them through their underwriting and merchant banking commitments. However, according to the shift in favour of the ‘priority sectors’ led to a decline in the share of the industrial sector in the total bank credit. Today, the industrial sector accounts for about half of the total bank credit compared to over two-thirds prior to the nationalisation of 1969. This decline in the share has been confined to the medium and large sectors. Small industry is a priority sector and there has been a very significant increase in the proportion of the credit flow to this sector. Functions of Commercial Banks Commercial banks perform a number of functions. These include traditional functions such as receiving deposits, making loans and advances, transfer of funds, provision of safety vaults or lockers etc. Non-traditional functions include such services as merchant banking and factoring. Deposit Mobilisation: Receiving deposits is one of the fundamental functions of commercial banks. Deposit mobilisation may be a more appropriate usage than receiving deposits CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 179 because ‘receiving deposits’ is rather passive whereas ‘deposit mobilisation’ is proactive and dynamic. The two important category of deposits are current deposits which can be withdrawn any time without any restrictions (subject to the minimum amount in the account) and time deposits which are fixed deposits made for specific periods and which are withdrawn, normally, only on maturity of the period for which the deposit is made while current deposits earn, normally, no interest, time/fixed deposits earn interest and the rate of interest normally varies with the duration of the deposit. In between the current and time deposits, there are different types of deposits like the savings deposits. Banks have also devised deposit schemes combining elements of current and fixed deposits. Promotion of Savings: Deposit mobilisation involves promotion of savings. What is meant here is the special schemes designed by the banks to suit customer’s income and future requirements such as savings schemes for meeting the financial requirements of education of children, marriage of children, retirement plans, savings plan linked to housing loan etc. Making Loans and Advances: Making loans and advances is also one of the fundamental functions of commercial banks. The deposits received by the banks cannot be kept idle because banks have to pay interest and incur management expenses. One of the ways of profitably employing the funds is by giving loans and advances. By deposit mobilisation and by lending the funds, the banks play a very important role in the socio-economic development by mobilising savings of the surplus units and channelling them to deficit units. Transfer of Funds: Another important functions performed by banks is transfer of funds between places and persons/firms/organisations by mail transfer, drafts, cheques etc. Online transfer is coming into vogue. Miscellaneous: Besides the above, commercial banks perform a number of other functions like provision of safe vaults/lockers; providing credit guarantees on behalf of its clients; providing CU IDOL SELF LEARNING MATERIAL (SLM)

180 Business Environment and Regulatory Framework reports about creditworthiness and related matters about its clients; issuing letters of credit; merchant banking; leasing; factoring; accepting payment of telephone bills, electricity bills etc. and so on. Commercial Banks and Economic Development Commercial banks play a very important role in economic development by performing the functions described above. In addition, the following specific points may also be noted: 1. By playing the role of a financial intermediary and mobilising the savings and making that available to the needy, banks activate economic and social activities. Lot of productive investments take place because of this role played by the banks. 2. A corollary of the point mentioned above is that banks activate idle resource flow in the economy. 3. Banks support the development strategy of the government by paying special attention to the needs of the priority sectors such as export sector, agriculture, small business etc. 4. Banks have made significant contribution to the development of small-scale industry and self-employment. 5. In many regions of the country, banks have made commendable contribution to the promotion of saving habit and development of the economic well-being of individuals and households. 6. The financial and other assistances provided by commercial banks have very significantly contributed to the agricultural, industrial and commercial development of the nation. 7. The consumer credit schemes of banks not only favour the borrowers but also stimulates the business sector. 8. Educational loans provided by banks have helped a large number of people. 9. The banking sector is one of the largest employers for the educated. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 181 7.9 Banking Sector Reforms Until the economic reforms ushered in 1991, the banking sector in India was highly regulated and largely public owned. The situation prior to the economic reforms is best epitomised by Dr. Y.V. Reddy, former Governor, Reserve Bank of India as follows: “The Indian financial system in the pre-reform period … essentially catered to the needs of planned development in a mixed economy framework where the public sector had a dominant role in economic activity. The strategy of planned economic development required huge development expenditure, which was met through Government’s dominance of ownership of banks, automatic monetisation of fiscal deficit and subjecting the banking sector to large pre- emptions – both in terms of the statutory holding of Government securities (statutory liquidity ratio, or SLR) and cash reserve ratio (CRR). Besides, there was a complex structure of administered interest rates guided by the social concerns, resulting in cross-subsidisation. This not only distorted the interest rate mechanism but also adversely affected the viability and profitability of banks by the end of 1980s. There is perhaps an element of commonality of such a ‘repressed’ regime in the financial sector of many emerging market economies. It follows that the process of reform of financial sector in most emerging economies also has significant commonalities while being specific to the circumstances of each country.” As hinted above, the banking sector of India had been characterised by several deficiencies and constraints: unviable branches; external constraints such as the administered structure of interest rates, lack of effective competition and the resultant low efficiency and productivity; small size compared to international banks; problems related to capital inadequacies; loss incurred by several public sector banks; high levels non-performing assets (NPAs); deficiencies pertaining to governance etc. Several committees/commissions/working groups were constituted at different points of time to make in-depth studies of the banking sector as a whole or specific matters. In 1991, the Reserve Bank of India set up a committee on the Financial System under the chairmanship of M. Narasimham, a former Governer of RBI. In 1998, M. Narasimham chaired another committee, viz., Committee on Banking Sector Reforms. Reports of both these Narasimham committees made far-reaching recommendations to reform the banking sector to CU IDOL SELF LEARNING MATERIAL (SLM)

182 Business Environment and Regulatory Framework make it more competitive, efficient and socially more useful. These Reports covered issues such as interest structure regime, reserve ratio requirement, statutory liquidity ratio (SLR), credit allocation policies, competition in the banking sector, role of public, private and foreign banks, mergers and consolidation, NPAs, capital adequacy norms etc. Important Reform Initiatives The main objectives and features of the banking sector reforms in India are the following: Planned easing of the external constraints: A very important feature of the reforms was the creation of an enabling environment for banks to overcome the external constraints such as the administered structure of interest rates, high levels of pre-emption in the form of reserve requirements and credit allocation to certain sectors. The interest rates in the banking system have been largely deregulated. Sequencing of interest rate deregulation has been an important component of the reform process which has imparted greater efficiency to resource allocation. The process has been gradual and predicated upon the institution of prudential regulation for the banking system, market behaviour, financial opening and, above all, the underlying macroeconomic conditions. Diversification of capital base of banks: During the pre-reform period, the lion’s share of financial intermediation was accounted for by the public sector. The reform period witnessed significant diversification of the ownership base of the banking sector. An element of private shareholding in public sector banks has been injected by enabling a reduction in the Government shareholding in public sector banks to 51 per cent. As part of the reforms programme, although initially there was infusion of capital by the Government in public sector banks, this was followed by expanding the capital base with equity participation by the private investors. The share of the public sector banks in the aggregate assets of the banking sector has come down significantly. Between 1991 and 2004, the share of wholly Government-owned public sector banks (i.e., where no diversification of ownership has taken place) sharply declined from about 90 per cent to 10 per cent of aggregate assets of all scheduled commercial banks. Diversification of ownership has led to greater market accountability and improved efficiency. Since the initiation of reforms, infusion of funds by the Government into the public sector banks happened a number of times through the Union Budget. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 183 Expansion of private sector: As in other industries/sectors, fast expansion of the private sector has been a notable outcome of the banking sector reforms. Guidelines have been laid down for establishment of new banks in the private sector and the foreign banks have been allowed more liberal entry. As a major step towards enhancing competition in the banking sector, foreign direct investment in the private sector banks is now allowed up to 74 per cent, subject to conformity with the guidelines issued from time to time. Since the 1993, a number of new private sector banks were set up. The increase in the competition has substantial beneficial effects to the banking sector and the economy as a whole. Greater autonomy for public sector banks: Public sector banks have been accorded larger autonomy with a view to strengthening them to face the growing competition in the banking sector. As a result, they can now decide on virtually the entire gamut of human resource issues and, subject to prevailing regulation, are free to undertake acquisition of businesses, close or merge unviable branches, open overseas offices, set up subsidiaries, take up new lines of business or exit existing ones, all without any need for prior approval from the Government. In short, the Boards of public sector banks are given greater autonomy and bigger responsibility – strategic challenge – to strengthen them themselves to grow and perform well. Efficiency and productivity enhancement: Enhancement of efficiency and productivity through competition has been a major objective and outcome of the banking sector reforms. The developments described in the preceding paragraph have contributed to this. Institutional and legal reforms: Institutional and legal reforms have been one of the salient features of the banking sector reforms. In 1994, a Board for Financial Supervision (BFS) was constituted comprising select members of the RBI Board with a variety of professional expertise to exercise ‘undivided attention to supervision’. The BFS provides direction on a continuing basis on regulatory policies including governance issues and supervisory practices. It also provides direction on supervisory actions in specific cases. The BFS ensures an integrated approach to supervision of commercial banks, development finance institutions, non-banking finance companies, urban co-operative banks and primary dealers. A Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) was constituted to prescribe policies relating to the regulation and supervision of all types of payment and settlement systems, set CU IDOL SELF LEARNING MATERIAL (SLM)

184 Business Environment and Regulatory Framework standards for existing and future systems, authorise the payment and settlement systems and determine criteria for membership to these systems. Several other regulatory have also been taken to reform the financial sector. Transparency: A number of measures have been taken to enhance the transparency and disclosures standards. For example, with a view to enhancing further transparency, all cases of penalty imposed by the RBI on the banks as also directions issued on specific matters, including those arising out of inspection, are to be placed in the public domain. Beyond benchmarking: While the regulatory framework and supervisory practices pertaining to the banking sector in India have almost converged with the best practices elsewhere in the world, two points are noteworthy. First, the minimum capital to risk assets ratio (CRAR) has been kept at 9 per cent, i.e., one percentage point above the international norm; and second, the banks are required to maintain a separate Investment Fluctuation Reserve (IFR) out of profits, towards interest rate risk, at 5 per cent of their investment portfolio under the categories ‘held for trading’ and ‘available for sale’. This was prescribed at a time when interest rates were falling and banks were realising large gains out of their treasury activities. Simultaneously, the conservative accounting norms did not allow banks to recognise the unrealised gains. Such unrealised gains coupled with the creation of IFR helped in cushioning the valuation losses required to be booked when interest rates in the longer tenors have moved up in the last one year or so. Thrust on Governance: Another important aspect of the banking sector reforms is the thrust given to good governance. Corporate governance is concerned with the values, vision and visibility. It is about the value orientation of the organisation, ethical norms for its performance, the direction of development and social accomplishment of the organisation, and the visibility of its performance and practices. Dr. D. Subbarao, former Governor of Reserve Bank of India, points out that banks are different from other corporates in important respects, and that makes corporate governance of banks not only different but also more critical. Banks lubricate the wheels of the real economy, are the conduits of monetary policy transmission and constitute the economy’s payment and settlement system. By the very nature of their business, banks are highly leveraged. They accept CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 185 large amounts of uncollateralised public funds as deposits in a fiduciary capacity and further leverage those funds through credit creation. The presence of a large and dispersed base of depositors in the stakeholders’ group sets banks apart from other corporates. Banks are interconnected in diverse, complex and oftentimes opaque ways, underscoring their ‘contagion’ potential. If a corporate fails, the fallout can be restricted to the stakeholders. If a bank fails, the impact can spread rapidly through to other banks with potentially serious consequences for the entire financial system and the macro economy. As banks are, thus, special in a number of ways, Subbarao observes that corporate governance of banks has to be special too, reflecting these special features. In particular, boards and senior managements of banks have to be sensitive to the interests of the depositors, be aware of the potentially destructive consequences of excessive risk-taking, be alert to warning signals and be wise enough to contain irrational exuberance. A proper regulatory framework and its astute implementation is one of the cornerstones of corporate governance. The transformation of the banking sector under LPG, characterised by an increase in the number of private sector banks, a dilution of government shareholding in public sector banks, and far-reaching changes in the nature, scope and technology of banking business, have called for a reform of the regulatory and governance system of the banking sector. A glimpse of this has been given in a preceding subsection entitled Institutional and Legal Reforms. Post-reform, banking regulation shifted from being prescriptive to being prudential. This implied a shift in balance away from regulation and towards corporate governance. Banks now had greater freedom and flexibility to draw up their own business plans and implementation strategies consistent with their comparative advantage. The Boards of Banks had to assume the primary responsibility for overseeing this. This required directors to be more knowledgeable and aware, and also exercise informed judgement on the various strategy and policy choices. Certain measures of reform of the public sector banks like the dilution of the government equity that paved the way for the entry of institutional and retail shareholders about marked changes in their corporate governance standards. Directors representing these classes of shareholders brought new perspectives to Board deliberations and strategic decisions. The corollary development of the listing of these banks on stock exchanges too has contributed to CU IDOL SELF LEARNING MATERIAL (SLM)

186 Business Environment and Regulatory Framework bettering the corporate governance – the listing requirements of SEBI enhance the standards of disclosure and transparency. Another important set of measures that has paved the way for better governance is a series of structural reforms pertaining to the Board of Directors of banks. These included mandating a higher proportion of independent directors on the boards; inducting board members with diverse sets of skills and expertise; and setting up of board committees for key functions like risk management, compensation, investor grievances redressal and nomination of directors. Structural reforms were furthered by the implementation of the Ganguly Committee recommendations relating to the role and responsibilities of the Boards of Directors, training facilities for directors, and most importantly, application of ‘fit and proper’ norms for directors. Two reform measures pertaining to public sector banks – entry of institutional and retail shareholders and listing on stock exchanges – brought about marked changes in their corporate governance standards. Directors representing private shareholders brought new perspectives to board deliberations, and the interests of private shareholders began to have an impact on strategic decisions. On top of this, the listing requirements of SEBI enhanced the standards of disclosure and transparency. Another significant step towards improving the governance was the splitting the posts of the Chairman of the Board and Chief Executive Officer (CEO) of private banks, following the recommendation of the Ganguly Committee appointed by the Reserve Bank. M&As and Consolidation: Consolidation in the banking sector has been another feature of the reform process. In the light of the blurring of the distinction between short-term and long-term finance providers of finance, some of the mergers in the finance sector have also encompassed the Development Financial Institutions (DFIs), which have been traditionally regarded as providers of long-term finance. The reverse merger of the Industrial Credit and Investment Corporation of India (ICICI), which was one of the largest Development Banks of the country, with its subsidiary, ICICI Bank, in 2001 was an important development towards universal banking. RBI issued separate guidelines for mergers between non-banking financial companies and banks. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 187 The Indian banking sector has seen a number of M&As. Prior to 1999, bank mergers were characterised mostly by M&As between weak and strong banks (RBI/Government considered such mergers as a way to salvage the week banks) whereas in the post-1999 period, there have also been mergers between healthy banks driven by business and commercial considerations. There have been several mergers and acquisitions (M&As) between public sector and private banks, between private banks, and between public sector banks. The Narasimham Committee II strongly favoured substantial consolidation in the public sector banking space and drastic reduction in the number of public sector banks. It suggested a three-tier banking structure and creation of 2-3 banks with international orientation and 8-10 large banks with national base and character so as to take care of large and medium corporate sectors. At the third level, a set of local banks were suggested so as to cater to the requirements of small enterprises. Since 2017, witnessed a slew of M&As of public sector banks. In 2017, the State Bank of India absorbed 5 of its associate banks and the Bharatiya Mahila Bank. Merger of 3 public sector banks announced in 2018 became effective from April 1, 2019. In August 2019, the Finance Minister announced a big consolidation of the public sector banks by merging 10 banks into 4. This amounts to bringing down the number of public sector banks to 12 from 27 in 2017. Technological Advances Information and communication technology (ICT) has greatly transformed the banking sector. A substantial part of the banking transaction is done online without the need for the consumer to go to the bank office. ICT has significantly improved productivity, speed and efficiency. Small and Payment Banks In order to expedite financial inclusion, the Finance Minister in his last budget speech in 2014 announced that the RBI would create a framework for licensing Payments Banks/Small Banks and other differentiated banks. A number of small/payment banks have been established and some are doing very well. CU IDOL SELF LEARNING MATERIAL (SLM)

188 Business Environment and Regulatory Framework Small Banks: The objective for the Small Banks is to increase financial inclusion by provision of savings vehicles to underserved and unserved sections of the population. The small bank shall primarily undertake basic banking activities of accepting deposits and lending to small farmers, small businesses, micro and small industries, and unorganised sector entities. It cannot set up subsidiaries to undertake non-banking financial services activities. The area of operations would normally be restricted to contiguous districts in a homogeneous cluster of States or Union territories so that the Small Bank has a ‘local feel’ and culture. However, if necessary, it would be allowed to expand its area of operations beyond contiguous districts in one or more states with reasonable geographical proximity. After the initial stabilisation period of five years, and after a review, the RBI may liberalise the scope of activities for small banks. Payment Banks: The objective of payments banks is to increase financial inclusion by serving unserved and underserved sections. They can provide small savings accounts and payments/remittance services to migrant labour workforce and low-income households, small businesses and other unorganised sector entities. In case of deposits, the customer balance should not exceed ` 1 lakh. Payment banks can issue ATM/Debit card but no credit cards. They cannot give loans. They can distribute non-risk simple financial products such as mutual funds and insurance products. NRIs will not be allowed to open accounts. The Payments Banks would be required to use the word ‘Payments’ in its name to differentiate it from other banks. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 189 7.10 Summary Money and Capital Markets are two most important components of the Financial Market. The term Money Market refers to the market for short-term funds, as distinct from the Capital Market which deals in long-term funds. However, sometimes, these terms are used very broadly to include markets for both short- and long-term funds. The money market and the capital market have three important components, namely, the suppliers of loanable funds, the borrowers and the intermediaries who deal with the lenders on the one hand and the borrowers on the other. The capital market consists of a number of individuals and institutions (including the government) that channelise the supply and demand for long-term capital and claims on capital. The stock exchanges, commercial banks, co-operative banks, savings banks, development banks, insurance companies, investment trust or companies etc. are important constituents of the capital market. The Indian capital market has undergone remarkable changes in the post-independence era. Certain steps taken by the government to place the market on a strong footing and develop it to meet the growing capital requirements of fast industrialisation and development of the economy have significantly contributed to the developments that took place in the Indian capital market over the last five decades or so. 7.11 Key Words/Abbreviations 1. Money Market: Money Market is a place where the lending and borrowing of short- term funds are arranged and it comprises the short-term credit instruments and the institutions and individuals who participate in the lending and borrowing business. 2. Capital Market: The market for all the financial instruments, short-term and long-term, as also commercial, industrial and government paper. CU IDOL SELF LEARNING MATERIAL (SLM)

190 Business Environment and Regulatory Framework 3. Treasury Bills: Treasury bills are promissory notes issued by the Central Government to raise short-term funds to bridge short-term mismatches between receipts and expenditures. 4. Commercial Papers (CPs): Commercial papers are unsecured promissory notes of short-term maturity of highly rated companies, issued to meet working capital requirements. 7.12 Learning Activity 1. Read the Annual Report of Reserve Bank of India. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 2. Read the Annual Report of any major commercial bank of India. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 7.13 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions (i) Long Answer Questions 1. Explain the constituents and functions of the money market. 2. Explain the characteristics of the Indian Money market. 3. Give a brief description of the banking sector reforms and their benefits. 4. Explain the meaning, nature and constituents of the Indian capital market. 5. Discuss the role of commercial banks with special reference to business. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - I 191 (ii) Short Answer Questions 1. Write a note on Indian financial system. 2. Describe the functions of money market. 3. Explain the functions of commercial banks. 4. Describe the structure and nature of the banking sector of India. 5. Give short description of the important characteristics of Indian capital market. B. Multiple Choice/Objective Type Questions 1. Market for short-term funds is known as: (a) Money market (b) Capital market (c) Stock market (d) Foreign exchange market 2. Market for long-term funds is known as:: (a) Money market (b) Capital market (c) Treasury bills market (d) Foreign exchange market 3. Which one of the following is NOT true of Payment Bank? (a) It can issue ATM card (b) It can issue credit card (c) It can issue debit card (d) It can distribute products such as mutual funds and insurance products 4. The total number of public sector banks in India in 2017 was: (a) 27 (b) 22 (c) 15 (d) 12 5. ‘Hundi ’refers to: (a) Indigenous bill of exchange (b) Village market (c) Barter trade (d) Unregulated village market Answers: 1. (a), 2. (b), 3. (b), 4. (a), 5. (a). CU IDOL SELF LEARNING MATERIAL (SLM)

192 Business Environment and Regulatory Framework 7.14 References Text References 1. Reserve Bank of India, Reserve Bank of India: Functions and Working, RBI, Bombay. 2. This section is based on Reserve Bank of India, Report on Currency and Finance, 1999- 2000. 3. Y.V. Reddy, “Banking Sector Reforms in India – An Overview”, Address, at the Institute of Bankers of Pakistan, Karachi, 18 May 2005. 4. Ibid. 5. D. Subbarao, “Corporate Governance of Banks in India in Pursuit of Productivity Excellence”, Inaugural Address at the FICCI-IBA Conference on “Global Banking: Paradigm Shift”, Mumbai, 23 August 2011. Suggested Readings 1. Reserve Bank of India, Handbook of Statistics on Indian Economy (Annual). 2. Government of India, Economic Survey (Annual). 3. Viral V. Acharya, “Development of Viable Capital Markets –– The Indian Experience” (available at https://www.bis.org/publ/cgfs62.pdf). 4. Shri Shaktikanta Das, “Seven Ages of India’s Monetary Policy”, address delivered at the St. Stephen's College, University of Delhi, on January 24, 2020 (available at the website of RBI). 5. S.K. Misra and V.K. Puri, Indian Economy. Web Resources 1. www.imf.org/.../world-economic-outlook 2. www.rbi.org.in/Scripts/BS_ViewBulletin.aspx 3. https://www.sebi.gov.in/sebiweb/home  CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 8 FINANCIAL ENVIRONMENT - II Structure: 8.0 Learning Objectives 8.1 Introduction 8.2 Types of Institutions and Assistances 8.3 National Level Development Finance Institutions 8.4 State Financial Institutions 8.5 Institutions for MSMEs 8.6 Institutions for Foreign Trade Financing 8.7 NBFIs 8.8 SEBI 8.9 Capital Market Reforms 8.10 Summary 8.11 Key Words/Abbreviations 8.12 Learning Activity 8.13 Unit End Exercise (MCQs and Descriptive) 8.14 References CU IDOL SELF LEARNING MATERIAL (SLM)

194 Business Environment and Regulatory Framework 8.0 Learning Objectives After studying this unit, you will be able to:  Explain of the types of financial institutions and assistances extended by them.  Get an idea of the nature and activities of NBFIs.  Discuss the role of SEBI in regulating capital market.  Elaborate the salient features capital market reforms and developments. 8.1 Introduction In the previous Unit, we have got a general picture of the financial environment. In this Unit, we shall examine some important components of the financial environment which were not included in Unit 7. As you know well, finance is a prerequisite to mobilise real resources for organising production. In a developing economy, however, lack of finance is not the only deterrent to economic development. Even when finance is available, other important factors like imperfections in the information flow and dearth of entrepreneurship may come in the way of industrial and economic development. Hence, it is necessary to make finance and other development assistances in a package to take the dormant and developing economies to the take- off stage. Many developing countries, in particular, therefore, set up Development Banks rather than institutions which merely provide finance. A large variety of financial institutions has come into existence over the years to perform a variety of financial activities. While some of them operate at all-India level, others are State level institutions. All-India financial institutions (AIFIs) consist of all-India development banks, specialised financial institutions, investment institutions and refinance institutions. The State level institutions, on the other hand, comprise State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs). A number of sector specific financial institutions have also been established. CU IDOL SELF LEARNING MATERIAL (SLM)