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M.B.A 2 All right are reserved with CU-IDOL BUSINESS ENVIRONMENT AND REGULATORY FRAMEWORK Course Code: MBA 605 Semester: First SLM UNITS : 6&7 E- LESSON NO : 5 www.cuidol.in Unit-5 (MBA605)

Financial Environment 33 OBJECTIVES INTRODUCTION Student will be able to : The survival and success of a business firm Understand the meaning of financial environment depends on its innate strength and its adaptability to the environment Acquiring the knowledge of financial markets with relation of business operations The extent to which the financial environment is favorable for the Learn the Indian banking system with knowledge development of an organization of operations of banks Covering the concept of Indian Banking and Explore the concept of financial institutions. Financial systems www.cuidol.in Unit-5 (MBA605) INSTITAUllTEriOghF tDaISreTArNesCeErAveNdDwOiNthLICNUE-LIDEAORLNING

AN OVERVIEW OF FINANCIAL SYSTEM 4 www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

What is Financial system? 5 Financial system (FS) - a framework for describing set of markets, organisations, and individuals that engage in the transaction of financial instruments. - the basic role of FS is essentially channelling of funds within the different units of the economy – from surplus units to deficit units for productive purposes. www.cuidol.in Unit-5 (MBA605) 5 All right are reserved with CU-IDOL

What are Financial Markets? 6 ❖ Financial markets perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds (for short term – money market and for long term – capital market) ❖ At any point in time in an economy, there are individuals or organizations with excess amounts of funds, and others with a lack of funds they need for example to consume or to invest. ❖ Exchange between these two groups of agents is settled in financial markets ❖ The first group is commonly referred to as lenders, the second group is commonly referred to as the borrowers of funds. Unit-5 (MBA605) 6 www.cuidol.in All right are reserved with CU-IDOL

Money Market 7 • Money market is the market for lending and borrowing of short term funds. • It deals with the financial assets having a maturity period less than 1 year. • It deals with only those parts which can be converted into cash easily and with minimum transaction cost. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Money Market Instruments 8 www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Certificates of Deposit 9 ❖ Certificate of Deposit (CD) is a time deposit with a bank. CDs are generally issued by commercial banks but they can be bought through brokerages. They bear a specific maturity date (from three months to five years), a specified interest rate, and can be issued in any denomination, much like bonds. Like all time deposits, the funds may not be withdrawn on demand like those in a checking account. ❖ Issuers: Commercial Banks, Financial Institutions. ❖ Subscribers: Individuals, Corporations, Trusts, associations and NRI’s ❖ Features: • Freely negotiable • Repayable at fixed date. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

10 ❖ Call money Market : ✓ Market for extremely short period loans- 1 day to 14 days. ✓ Loans are repayable at demand at the option of either the lender or the borrower. ✓ The loans are of short-term duration (1 to 14 days). Money lent for one day is called ‘call money’; if it exceeds 1 day but is less than 15 days it is called ‘notice money’. Money lent for more than 15 days is ‘term money’. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

❖ Commercial Papers : 11 ❖ In money market, commercial paper is a promissory note with a fixed maturity of no more than 270 days. Commercial paper is a money-market security issued (sold) by large corporation to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. ❖ Features: ✓ Instrument comprising promissory note with fixed maturity. ✓ can also be issued in interest bearing form. ✓ No pledging of asset. ✓ Can be issued directly by the company or through banks. ❖ Repo Instruments : ❖ Repo is a money market instrument which helps in collateralized short-term borrowing and lending through sale/purchase operations in debt instrument. Under a repo transaction, securities are sold by their holder to an investor with an agreement to repurchase them at a predetermined rate and date. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

❖ Treasury Bills : 12 All right are reserved with CU-IDOL ✓ Issued to the public and other financial institutions for meeting the short term financial requirements of the central government. ✓ On the basis of time period, TB’s can be classified into- ✓ 91 Days TB’s (issued at a fixed rate) ✓ 182 Days TB’s ✓ 364 Days TB’s (do not carry any fixed rate. The discount rate is quoted in the auction by the participants and accepted by the authorities) www.cuidol.in Unit-5 (MBA605)

Capital Market 13 A market in which individuals and institutions trade long term financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets. Capital Market Primary Secondary Gilt edge Market Market market www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

❖ Primary Market 14  Also known as new issue market  It deals with the new securities which are issued for the first time for the public subscription (IPO-Initial Public Offers) and after first time for the pubic subscription (FPO-Follow on Public Offers).  It is also a Platform for expansion, diversification and modernization of existing units. ❖ Secondary Market • Secondary market is a place where existing shares and debentures are treaded (Stock Exchanges- NSE, BSE etc). ❖ Gilt edge Market • It is concerned with government securities backed by RBI and these securities are stable in value. It is no risk market. The investors in gilt edge market are predominantly institutions such as commercial banks, LIC, GIC, provident funds etc. it is most liquid debt instrument. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

SIMILALARITES OF MONEY MARKET 15 & CAPITAL MARKET  Complementary: The Money Market and the Capital Market are complementary to each other and are not competitive.  Same Institutions: Certain institutions operate in money as well as capital markets. For example, commercial banks operate in money market as well as in Capital Market.  Interdependence: Money Market and Capital Market are interdependent. The activities and policies of one market have their impact on those of the other. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Role of Commercial Banks in India 16 • Trade Development: The commercial banks provide capital, technical assistance and other facilities to businessmen according to their need, which leads to development in trade. • Supports to Agriculture Development • Supports to Industrial Development • Capital Formation (Capital formation means increase in number of production units, technology, plant and machinery) www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Role of Commercial Banks in India 17 • Development of Foreign Trade: Letter of credit is issued by the importer’s bank to the exporters to ensure the payment. The banks also arrange foreign exchange. • Transfer of Money • Supports to more Production (Agriculture & Industry) • Development of Transport (banks financed the transport sector) • Accelerating the Rate of Capital Formation: They encourage the habit of savings among people and mobilise idle resources for production purpose. • Provision of Finance and Credit: Banks are instruments for developing internal as well as external trade. • Monetization of Economy: Banks are opening branches in rural areas can promote the process of the monetization in the economy. • Innovations: Innovations are an essential prerequisite for economic development. These innovations are mostly financed by bank credit in the developed countries. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Role of Commercial Banks in India 18 • Implementation of Monetary Policy • Encouragement to Right Type of Industries • Regional Development • Promote Industrial Development • Fulfillment of Socio-economic Objectives www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Nationalization of Banks 19 ❖ Nationalization: The act of taking an industry or assets into the public ownership of a national government or state. ❖ Nationalization took place in two phases, with a first round in 1969 covering 14 banks followed by another in 1980 covering six banks. Reasons for Nationalization ❖ Private commercial banks were not fulfilling the social and developmental goals of banking ❖ The developmental goals of financial intermediation were not being achieved other than for some favored large industries and established business houses. ❖ To ensure that credit allocation occur in accordance with plan priorities. ❖ Reduce the hold of money lenders and make more funds available for agricultural development. Nationalization of bank was to actively involve in poverty alleviation and employment generation programs. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Reasons for Nationalization ❖ Private commercial banks were not fulfilling the social and developmental goals of banking 20 ❖ The developmental goals of financial intermediation were not being achieved other than for some favored large industries and established business houses. ❖ To ensure that credit allocation occur in accordance with plan priorities. ❖ Reduce the hold of money lenders and make more funds available for agricultural development. Nationalization of bank was to actively involve in poverty alleviation and employment generation programs. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Structure of 21 Indian Commercial Banks www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Commercial Banks • A commercial bank is owned by stockholders and operated for profit. 22 • Its primary functions are to receive, transfer, and lend money to individuals, businesses, and governments. • Indian banks consist mostly of Scheduled Commercial Banks (SCBs), which includes both Public Sector Banks, and the Private Sector Banks. In Public Sector Banks, the government must retain a 51% stake. • Scheduled Commercial Banks in India are categorized into five different groups according to their ownership and / or nature of operation. • These bank groups are • State Bank of India and its Associates • Nationalized Banks • Private Sector Banks • Foreign Banks and • Regional Rural Banks • In the bank group-wise classification, IDBI Bank Ltd. has been included in Nationalized Banks. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Functions Accepting Deposits ❖ Accepting deposits 23 ❖ Advancing Loans ❖ Discounting Bills of exchange ❖ Agency services and ❖ General services www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Advancing Loans 24 ❖ This is the most important means of earnings for the banks. ❖ Giving loans to businessmen. ❖ But it keeps a fine balance between deposits and loans. ❖ Banks profitability depends on this as well Discounting Bills of Exchange ❖ If a seller sells some goods to a buyer who does not pay in cash. But the seller draws a bill of exchange which is signed by buyer. ❖ There is maturity or payment period, say one month. ❖ Now the seller can give this bill to a bank which will give him/her cash against it. ❖ Bank charges interest on it till one month. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Agency Services 25 ❖ Collection of bills and cheques. ❖Payment of insurance premium. ❖ Collection of dividends, interest, and premium. ❖Acts as trustee when nominated. ❖ Purchase and sale of shares and debentures. General services ❖ Traveler's cheques, bank draft ❖ Economic surveys ❖ Safe vaults for valuables ❖ Projects report preparation ❖ Supplying trade information www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

NON BANKING FINANCIAL INSTITUTION 26 FINANCIAL INSTITUTION Banking institution Non banking institution www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

FINANCIAL INSTITUTION 27 ❖ A financial institution is an institution which collects funds from the public, and places them in financial assets, such as deposits, loans and bonds rather than tangible property. NON BANKING FINANCIAL INSTITUTION ❖ A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. ❖ Non-banking financial institutions, are financial institutions that provide banking services, but do not hold a banking license. These institutions are not allowed to take deposits from the public. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

NBFI’s VERSUS BANK’s BANKS NBFIS 28 Definition Banking is acceptance of deposits withdraw NBFI cannot accept demand able by cheque or demand; deposits Scope of business NBFI are companies carrying financial business Major limitation on Business Scope of business of the bank is limited. There is a various types of business Need for a license regarding financial activities. Regulations No non banking activity are carried. Cannot provide checking facilities. www.cuidol.in License norms are tightly controlled and It is comparatively much easier to generally it is perceived to be quite difficult to get a registration as an NBFI. get a license for a bank BR Act and RBI Act lay down the stringent Much lesser control over NBFI control over the bank. Unit-5 (MBA605) All right are reserved with CU-IDOL

Role of NBFIs Functions 29 ❖ Development of sectors like Transport & ❖ Brokers of loanable funds. Infrastructure ❖ Mobilization of savings. ❖ Channelization of funds into investment, ❖ Substantial employment generation ❖ Stabilize the capital market, ❖ Help & increase wealth creation ❖ Provide liquidity. ❖ Broad base economic development ❖ To finance economically weaker sections www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

REGULATIONS 30 “RBI Act, 1934, it is mandatory that every NBFI should be registered with RBI to commence or carry on any business of non-banking financial institution.” Financial Risk Contractual services pooling saving providers institutions institutions Specialized TYPES sectoral Market financiers Unit-5 (MBA605) makers www.cuidol.in All right are reserved with CU-IDOL

 Risk-pooling institutions: 31 ❖ Insurance companies underwrite economic risks associated with illness, death, damage and other risks of loss. ✓ There are two main types of insurance companies: (a) general insurance (b) life insurance. ❖ Contractual savings institutions: ✓ Contractual savings institutions (also called institutional investors) give individuals the opportunity to invest in collective investment vehicles (CIV). Collective investment vehicles pool resources from individuals and firms into various financial instruments including equity, debt and derivatives. Eg- mutual funds, pension funds. ❖ Market makers Market makers are broker-dealer institutions that quote a buy and sell price and facilitate transactions for financial assets. Such assets include equities, government and corporate debt, derivatives, and foreign currencies. Cont. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

32  Specialized sectoral financiers: They provide a limited range of financial services to a targeted sector. For example, real estate financiers channel capital to prospective homeowners, leasing companies provide financing for equipment and payday lending companies that provide short term loans to individuals that are under banked or have limited resources.  Financial service providers Financial service providers include brokers management consultants, and financial advisors, and they operate on a fee-for-service basis. Their services include: improving informational efficiency for the investors and, in the case of brokers, offering a transactions service by which an investor can liquidate existing assets. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

COMPANY’S UNDER NBFC 33 ❖ They are also categorized in a different format among 8 categories : ✓ LOAN COMPANY ✓ HIRE PURCHASE COMPANY ✓ INVESTMENT COMPANY ✓ MUTUAL BENEFIT COMPANY ✓ HOUSING FINANCE COMPANY ✓ EQUIPMENT LEASING COMPANY www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Top five NBFCs in India 34 ❖ Housing Development Finance Corporation Limited ❖ Power Finance Corporation Limited ❖ Rural Electrification Corporation Limited ❖ National Bank of Agricultural and Rural Development ❖ Infrastructure Development Finance Company Limited www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

CAPITAL MARKET REFORMS AND SEBI 35 PROBLEMS IN INDIA CAPITAL MARKETS BEFORE 1992 ❖ Multiplicity of administration ❖ Poor disclosure in prospectus ❖ Investors faced problems of delays (Refund, Transfers etc.) ❖ No concept of capital adequacy ❖ No inspections of stock exchanges undertaken ❖ Stock Exchanges management dominated by brokers ❖ Poor disclosures by Mutual Funds (NAV not published, No valuation Norms) ❖ No prohibition of insider trading, or fraudulent and unfair trade practices. ❖ Primary markets not in the main stream of the financial systems www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Reforms in Indian Capital Market ❖ 36 Companies free to raise funds from securities markets after filing prospectus with SEBI ❖ SEBI introduces regulation for primary & other secondary market intermediaries ❖ Listed Co’s to furnish annual statement to the exchanges ❖ Book Building introduced for institutional investors ❖ SEBI introduces regulations governing substantial acquisition of shares and takeovers. ❖ NSE establishment as a stock exchange with national wide electronic trading ❖ BSE introduces screen based trading ❖ FDI allowed in stock broking ,AMC’s, Merchant Bankers , NBFC’s. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Reforms in Indian Capital Market ❖ FII’s allowed to access Indian capital markets on registration 3 7 with SEBI ❖ Capital adequacy requirement for brokers ❖ System of mark to market margins introduced ❖ Stock Lending schemes introduced ❖ NSCCL setup by NSE ❖ SEBI strengthen surveillance mechanisms and have a separate surveillance departments with all stock exchanges ❖ Depositories act introduces for Electronic transfer of shares. ❖ Permission to access in international capital markets by Indian companies through Euro issues www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Regulatory Framework of Indian Capital Markets 38 SEBI ❖ Setup in 1992 , as a statutory body ❖ Registering & regulating intermediaries ❖ Investor protection through regulating Indian capital markets ❖ Boost up the development of Indian Capital Markets ❖ Registering & regulating service providers, Mutual funds, collective investment schemes, venture capital funds, takeovers etc. ❖ Power to inspect book, records, suspend registered entities and cancel registration www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

RBI (RESERVE BANK OF INDIA) 39 ❖ Regulatory involvement in Indian Capital Markets ❖ Limited to the Debt Management ❖ Foreign Exchange Control ❖ Liquidity support to market participants ❖ Regulate primary dealers in the Government securities markets ❖ Securities transactions that involve foreign exchange transaction need prior permission of RBI ❖ Important role in NSE debt Markets www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

DCA(Dept of Company Affairs) 40 ❖ Administered by Controller of capital issue(CCI) ❖ Part of Ministry of Finance ❖ In 1992 ,Liberalize capital issuance and pricing ❖ Public & Private Companies were governed by companies act 1956, which continued to be administered by DCA. ❖ Specify certain aspects concerning capital issuance and securities trading. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Stock Exchanges 41 ❖ Two major exchanges (NSE,BSE) in India. ❖ Automated Trading System developed for fast & transparent execution of trades ❖ Listing of securities in exchanges ❖ Introduced risk management systems ❖ Committees of stock exchange set up to handle matters of discipline , default and investor-broker disputes www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

Major crash in Indian Capital Markets 42 ❖ 28 April 1992 ✓ Sensex fall by 570 points (12.77%) ✓ Harshad Mehta securities scam ❖ 18 May 2006 ✓ Nifty crash by 496.50 points(8.70%) ✓ Heavy selling by FII’s due to weakness in global markets ❖ 21 JAN 2008 ✓ Sensex crash by 1408 points ✓ Due to recession in US www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

MULTIPLE CHOICE QUESTIONS 1) Markets in which new securities are issued by corporations to raise funds are called? A) primary markets C) Gross markets 43 B) secondary markets D) proceeds markets 2) Financial institutions having loans swapped for bonds can sell all bonds in? A) under-developed markets C) primary markets B) developed markets D) secondary markets 3) The performance of which scheme does the National Housing Bank monitor? A) Liberalized Finance Scheme C) Energy Efficient Housing Finance Scheme B) Golden Jubilee Rural Housing Finance Scheme D) Finance scheme for indirect loans 4) Which agency regulates and supervises NBFCs C) RBI A) Finance Ministry D) Respective state government B) SEBI 5) Which of the following statements is/are correct? C) Only 2 1. NBFCs does not hold a banking license. D) None 2. NBFC can issue Demand Drafts like banks. A) Only 1 B) Both www.cuidol.in Unit-5 (MBA605) ANSWERS: 1. (A), 2. (D), 3. (B), 4. (C), 5. (A) All right are reserved with CU-IDOL

SUMMARY 44 ❖ Financial Environment– Meaning and concept of Financial institutions with all instruments ❖ Composition of Indian Money market and Capital market – Indian Money Market, Capital Market, Instruments of Money Market and Capital. ❖ Role of Commercial Banks – Types of Banks and their associations ❖ Financial Institutions and Non-Banking Financial Institutions – Meaning of NBFI’s, Functioning and role of NBFI’s ❖ SEBI and Capital Market Reforms – Capital Market Reforms, SEBI and other official for reforming capital market www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

FREQUENTLY ASKED QUESTIONS 45 Q 1. Enumerate the Financial system with detail explanation. Ans: Financial system (FS) a framework for describing set of markets, organisations, and individuals that engage in the transaction of financial instruments. Financial markets perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds (for short term – money market and for long term – capital market) For further detail refer to SLM. Q.2 Explain the role of commercial bank in India. Ans: Implementation of Monetary Policy ❖ Encouragement to Right Type of Industries ❖ Regional Development ❖ Promote Industrial Development ❖ Fulfillment of Socio-economic Objectives For further detail refer to SLM. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

REFERENCES ❖ Baumel, W.J.,A.S. Blinder and W.M.Scarth (1985), 46 Economics:Principles and Policy, Academic Press Canada, Toronto, Chapters-26, 34, 38, 40 and 41. ❖ Planning Commission, (1997) Approach paper to the Ninth Five Year Plan, Government of India, New Delhi Chapter-1. ❖ Swamy, D.S. (1994), The Political Economy of Industrialization, Sage Publications, New Delhi, Introduction, Chapter-1, and Conclusion. ❖ Dasgupta, A and Sengupta, N.K. 1989 Government and Business, Vikas Pulishing House, New Delhi. ❖ Nadkarni, M.V., A.S. Seetharamu and Abdul Aziz, 1991, India – The Emerging Challlenges, Sage India. ❖ Krishna, Sumi, 1996, Environmental Politics, Sage India. www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL

47 THANK YOU For queries Email: [email protected] www.cuidol.in Unit-5 (MBA605) All right are reserved with CU-IDOL