CU-MCOM-SEM-IV-Capital Market and Financial Services

MASTER OF COMMERCE SEMESTER-IV CAPITAL MARKET AND FINANCIAL SERVICES 21MCM751

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning SLM Development Committee Prof. (Dr.) H.B. Raghvendra Vice- Chancellor, Chandigarh University, Gharuan, Punjab:Chairperson Prof. (Dr.) S.S. Sehgal Registrar Prof. (Dr.) B. Priestly Shan Dean of Academic Affairs Dr. Nitya Prakash Director – IDOL Dr. Gurpreet Singh Associate Director –IDOL Advisors& Members of CIQA –IDOL Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Editorial Committee Prof. (Dr) Nilesh Arora Dr. Ashita Chadha University School of Business University Institute of Liberal Arts Dr. Inderpreet Kaur Prof. Manish University Institute of Teacher Training & University Institute of Tourism & Hotel Management Research Dr. Manisha Malhotra Dr. Nitin Pathak University Institute of Computing University School of Business © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS 2 CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit - 1: Indian Financial System .......................................................................................... 5 Unit - 2: Financial Instruments ............................................................................................ 19 Unit - 3: Financial Markets.................................................................................................. 30 Unit - 4: Financial Institution .............................................................................................. 40 Unit - 5: Capital Market ...................................................................................................... 54 Unit - 6: SEBI ..................................................................................................................... 68 Unit - 7: Capital Market Instruments ................................................................................... 82 Unit - 8: Share Capital And Debentures............................................................................... 94 Unit – 9: Rating And Grading Of Instruments ................................................................... 107 Unit – 10: Stock Exchanges............................................................................................... 118 Unit – 11: Trading, Clearing And Settlement Systems ....................................................... 131 Unit – 12: Risk Management ............................................................................................. 143 Unit – 13: Demutualization Of Stock Exchanges ............................................................... 154 Unit – 14: Emerging Challenges In Capital Markets .......................................................... 166 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 1: INDIAN FINANCIAL SYSTEM STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 Meaning 1.3 Features of Indian financial system 1.4 Monetary Institutions 1.5 Monetary markets 1.6 Financial Instruments 1.7 Financial Instruments 1.8 Financial services 1.9 Summary 1.10 Keyword 1.11 Learning activity 1.12 Unit end questions 1.13 References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  To understand about Indian financial system.  To know more about monetary institution.  To find out the financial instruments.  To know about financial services. 1.1 INTRODUCTION In its basic importance the term 'finance' alludes to money related assets and the term 'financing' alludes to the movement of giving required money related assets to the poor 5 CU IDOL SELF LEARNING MATERIAL (SLM)

people and establishments. The term 'monetary framework' alludes to a framework that is worried about the assembly of the investment funds of people in general what's more, giving of important assets to the poor people and establishments for empowering the creation of products and additionally for arrangement of administrations. Consequently, a monetary framework can be perceived as a framework that permits the trading of assets between banks, financial backers, and borrowers. As such, the framework that works with the development of money from the people who have excess assets to the people who need it is called as monetary framework. It comprises of complex, firmly related administrations, markets, and organizations used to give an effective and customary linkage among financial backers and contributors. Monetary frameworks work at public, worldwide, and firm-explicit levels. It incorporates the general population, private and government spaces also, monetary instruments which can identify with endless resources and liabilities. 1.2 MEANING The monetary framework empowers moneylenders and borrowers to trade reserves. India has a monetary framework that is constrained by free controllers in the areas of protection, banking, capital business sectors, and different administrations areas. Hence, a monetary framework can be said to assume a critical part in the financial development of a nation by activating the excess assets and using them adequately for useful purposes. Monetary business sectors include different players, including borrowers, moneylenders, and financial backers that arrange credits for speculation purposes. The borrowers and loan specialists will in general exchange cash trade for a profit from the venture sometime not too far off. Subsidiary instruments are exchanged the monetary business sectors also, which are gets still up in the air dependent on a hidden resource's exhibition. While deciding the rules of raising capital inside a monetary framework, the venture being financed and who finances they are settled on by the organizer, who can be a business supervisor. In this manner, the monetary framework is ordinarily coordinated through focal arranging, a market economy, or a blend of both. A midway arranged economy is organized around a focal position, like an administration, which settles on monetary choices in regards to the assembling and appropriation of items for a particular country. A market economy is the point at which the valuing of labor and 6 CU IDOL SELF LEARNING MATERIAL (SLM)

products is directed by the totaled choice of residents and entrepreneurs, regularly bringing about the impacts of organic market. Monetary business sectors work inside an administration administrative system that channels the kind of exchanges that can be directed. Monetary frameworks are intensely controlled because of their impact and help abilities to add to the development of genuine resources. 1.3 FEATURES OF INDIAN FINANCIAL SYSTEM It assumes a fundamental part in the financial improvement of a country. • It supports the two reserve funds and venture. • It joins savers and financial backers. • It helps in the capital arrangement. • It helps in a portion of hazard. • It works with the extension of monetary business sectors. 1.4 COMPONENTS/ CONSTITUENTS OF INDIAN FINANCIAL SYSTEM The monetary framework is made out of a large number contingent upon the level. According to an organization's viewpoint, its monetary framework incorporates methods that follow its monetary exercises. It would incorporate viewpoints like funds, bookkeeping, income, costs, compensation, and then some. From a territorial point of view, the monetary framework, as referenced above, works with the trading of assets among borrowers and loan specialists. Players on a provincial level would incorporate banks and other monetary foundations, for example, clearinghouses. On a worldwide scale, the monetary framework incorporates the associations between monetary organizations, financial backers, national banks, government specialists, the World Bank, and that's just the beginning. Coming up next are the four significant parts that involve the Indian Monetary System: 1. Monetary Institutions 2. Monetary Markets 7 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Monetary Instruments/Assets/Securities 4. Monetary Services. 1.5 MONETARY INSTITUTIONS Monetary establishments are the mediators who work with smooth working of the monetary framework by making financial backers and borrowers meet. They assemble investment funds of the excess units and distribute them in useful exercises promising a superior pace of return. Monetary establishments likewise offer types of assistance to substances (individual, business, government) looking for guidance on different issue going from rebuilding to expansion plans. They give entire reach of administrations to the substances that need to raise assets from the business sectors or somewhere else. Monetary organizations are additionally named as monetary middle people since they go about as center between savers by collecting Funds them and borrowers by loaning these assets. It is additionally gone about as delegates since they acknowledge stores from a bunch of clients (savers loan these assets to one more arrangement of clients (borrowers). Like - insightful contributing establishments such ICCIC, shared assets additionally aggregate reserve funds and loan these to borrowers, in this way play out the job of monetary delegates. Kinds of Financial Institutions: Monetary establishments can be characterized into two classifications: A. Banking Institutions B. Non - Banking Financial Institutions A. BANKING INSTITUTIONS (Reserve Bank of India): Indian financial industry is dependent upon the control of the Central Bank. The RBI as the peak foundation coordinates, runs, directs, manages and fosters the money related framework and the monetary arrangement of the country. The fundamental enactment overseeing business banks in India is the Banking Regulation Act, 1949. The Indian financial establishments can be extensively characterized into two classifications: 1. Coordinated Sector 2. Sloppy Sector. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Coordinated Sector: The coordinated financial area comprises of business banks, agreeable banks and the local rustic banks. (a) Commercial Banks: The business banks might be booked banks or non – booked banks. At present just one bank is a non - booked hank. All different banks are plan banks. The business banks comprise of 27 public area banks, private area banks and unfamiliar banks. Preceding 1969, all major keeps money except for State Bank of India in the private area. A significant stage towards public area banking was taken in July 1969, when 14 significant private saves money with a store base of 50 crores or more were nationalized. Later in 1980, another 6 were nationalized raising the aggregate number of banks nationalized to twenty. (b) Co-employable banks: A significant portion of the coordinated area of Indian banking is agreeable banking. The fragment is addressed by a gathering of social orders enrolled under the Acts of the states identifying with helpful social orders. Truth be told, co-usable social orders might be credit social orders or non-credit social orders. Various sorts of helpful credit social orders are working in the Indian economy. These establishments can be characterized into two general classifications: (a) Rural credit social orders which are essential horticulture, (b) Urban credit social orders which are essentially non-horticulture. With the end goal of agribusiness credit there are distinctive co-employable credit establishments to meet various types of necessities. (c) Regional Rural Banks: Regional Rural Banks were set by the state government and supporting business manages an account with the target of fostering the provincial economy. Territorial country banks give banking administrations also, credit to little ranchers, little business people in the rustic regions. The local country banks were set up so as to give credit offices to more fragile segments. They comprise a significant piece of the country monetary design in India. There were 196 RRBs toward the finish of June 2002, as looks at to 107 of every 1981 and 6 out of 1975. (d) Overseas Banks: Overseas banks have been in India from British days. Unfamiliar banks as banks that have branches in different nations and principal Head Quarter in the Home Country. With the liberation (Elimination of Government Authority) in 1993, various unfamiliar banks are entering India. Unfamiliar Banks are: Citi Bank. Bank of Ceylon. 9 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Sloppy Sector: In the sloppy financial area are the Indigenous Bankers, Moneylenders. a. Native Bankers: Native Bankers are private firms or person who works as banks and as such both get stores and given credits. Like brokers, they additionally monetary delegates. They ought to be recognized proficient cash loan specialists whose essential business isn't banking and cash loaning. The native banks are exchanging with the Hundies, Commercial Paper. b. Cash Lenders: Cash moneylenders depend totally to on their one asset. Cash Lenders might be provincial or metropolitan, proficient or non-proficient. They incorporate enormous number of ranchers, vendors, brokers. Their activities are completely unregulated. They charge exceptionally high pace of interest. B. NON – BANKING INSTITUTIONS The non – banking organizations might be classified extensively into two gatherings: (a) Organized Non – Banking Financial Institutions. (b) Unorganized Non – Banking Financial Institutions. (a) Organized Non – Banking Financial Institutions: The coordinated non - banking monetary organizations include: 1. Advancement Finance Institutions: These include: The organizations like IDBT, ICICI, IFCI, IIBI, and IRDC at all India level. The State Finance Corporations (SFCs), State Industrial Development Companies (SIDCs) at the state level. Agribusiness Development Finance Institutions as NABARD, LDBS and so on Advancement banks give medium and long-haul money to the corporate what's more, mechanical area and furthermore take up special exercises for financial advancement. 2. Venture Institutions: These incorporate those monetary organizations which assemble reserve funds at the general population everywhere through different plans and put these assets in corporate and government protections. These incorporate LIC, GIC, LTT, and shared assets. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

The non - banking monetary organizations in the coordinated area) have been talked about finally exhaustively in discrete sections of this book. (b) Unorganized Non - Banking Financial Institutions: The disorderly non - banking monetary foundations incorporate number of non - banking monetary organizations (NBFCs) giving entire scope of monetary administrations. These incorporate recruit - buy 300 purchaser finance organizations, renting organizations, lodging finance organizations, figuring organizations, FICO assessment organizations, dealer banking organizations and so on NBFCs activate public assets and give loanable assets. 1.6 MONETARY MARKETS It is through monetary business sectors and establishments that the monetary arrangement of a monetary works. Monetary business sectors allude to the institutional game plans for managing in monetary resources and credit instruments of various kinds, for example, money, checks, bank stores, charges, securities and so forth Elements of monetary business sectors are: (i) To work with creation and allotment of credit and liquidity (ii) To fill in as mediators for mobilization of investment funds. (iii) To help the course of adjusted financial development. (iv) To give monetary accommodation. (v) To take into account the different credit needs of the business houses. These coordinated business sectors can be additionally ordered into two they are (i) Capital Market (ii) Money Market CAPITAL MARKET: The capital market is a business opportunity for monetary resources which have a long or endless development. For the most part, it manages long haul protections which have a development time of over one year. Capital market might be additionally partitioned into three to be specific: (I) Industrial protections market 11 CU IDOL SELF LEARNING MATERIAL (SLM)

(II) Government protections market and (III) Long term advances market 1. MECHANICAL SECURITIES MARKET: As the very name infers, it is a business opportunity for modern protections specifically: (i) Equity offers or normal offers, (ii) Preference shares and (iii) Debentures or bonds. It is a market where modern concerns raise their capital or obligation by giving suitable instruments. It very well may be additionally partitioned into two. They are: (i) Primary market or new issue market (ii) Secondary market or Stock trade Primary Market: Essential market is a business opportunity for new issues or new monetary cases. Henceforth, it is additionally called New Issue market. The essential market manages those protections which are given to the general population interestingly. In the essential market, borrowers trade new monetary protections for long term reserves. Hence, essential market works with capital arrangement. There are three different ways by which an organization might bring capital up in an essential market. They are: (i) Public issue (ii) Rights issue (iii) Private arrangement The most widely recognized strategy for raising capital by new organizations is through deal of protections to general society. It is called public issue. At the point when a current organization needs to raise extra capital, protections are first presented to the current investors on a pre-emptive premise. It is called rights issue. Private situation is a method of selling protections secretly to a little gathering of financial backers. Secondary Market: Auxiliary market is a business opportunity for optional offer of protections. As such, protections which have as of now went through the new issue market are exchanged this 12 CU IDOL SELF LEARNING MATERIAL (SLM)

market. For the most part, such protections are cited the Stock Trade and it gives a consistent and standard market to purchasing and selling of protections. This market comprises of all stock trades perceived by the Government of India. The stock trades in India are controlled under the Protections Contracts (Regulation) Act 1956. The Bombay Stock Exchange is the chief stock trade in India which establishes the vibe of the other stock markets. II. GOVERNMENT SECURITIES MARKET It is generally called Gilt - Edged protections market. It is a market where Government protections are exchanged. In India there are varieties of Government Securities - present moment and long haul. Long haul protections are exchanged this market while transient protections are exchanged the cash market. III. LONG HAUL LOANS MARKET Improvement banks and business banks assume a huge part in this market by providing long haul credits to corporate clients. Long haul credits market might additionally be arranged into: (i) Term credits market (ii) Mortgages market (iii) Financial Guarantees market. Term Loans Market In India, numerous mechanical financing establishments have been made by the Government both at the public and territorial levels to supply long haul and medium-term credits to corporate clients straightforwardly just as in a roundabout way. These improvement banks rule the modern money in India. Foundations like IDBI, IFCI, ICICI, and other monetary partnerships go under this classification. Home loans Market A home loan credit is an advance against the security of resolute property like genuine home. The exchange of interest in a particular steady property to get a credit is called contract. This home loan might be an evenhanded home loan or legitimate one. 13 CU IDOL SELF LEARNING MATERIAL (SLM)

1.7 FINANCIAL INSREUMENTS Monetary instruments allude to those records which address monetary claims on resources. As examined before, monetary resource alludes to a case to promise to the reimbursement of a specific amount of cash toward the finish of a predetermined period along with interest or profit. Models: Bill of trade, Promissory Note, Treasury Bill. Monetary protections can be ordered into: (i) Primary or direct protections. (ii) Secondary or roundabout protections. Essential Securities: These are protections straightforwardly gave by a definitive financial backer to a definitive saver. E.g. offers and debentures gave straightforwardly to the general population. Auxiliary Securities: These are protections given by certain middle people called monetary mediators to a definitive saver. Again, these protections might be arranged based on term as follows: (i) Short - term protections (ii) Medium term protections (iii) Long - term protections. Short - term protections are those which mature inside a time of one year. E.g., Bill of Exchange, Treasury bill, and so forth medium-term protections are those which have a development period going somewhere in the range of one and five years. E.g. Debentures developing inside a time of 5 years, Long - term protections are those which have a development time of over five years. E.g., Government Bonds developing following 10 years. 1.8 FINANCIAL SERVICES Effectiveness of arising monetary framework to a great extent relies on the quality and assortment of monetary administrations given by monetary delegates. The term monetary administrations can be characterized as \"exercises, advantages, and fulfillments, associated with the offer of cash, that proposal to clients and clients, monetary related worth. inside the monetary administrations industry, the primary areas are banks, monetary organizations, and non-banking monetary organizations. 14 CU IDOL SELF LEARNING MATERIAL (SLM)

1.9 SUMMARY  It is a bunch of complex and firmly interconnected monetary organizations, markets, instruments, administrations, practices, and exchanges. India has a monetary framework that is controlled by free controllers in the areas of banking, protection, capital business sectors, rivalry and different administrations areas. In various areas Government assumes the part of controller. RBI is controller for monetary and banking framework; plans money related approach and recommend trade control standards.  The business banking area contains public area banks, private banks and unfamiliar banks. The public area banks involve the 'State Bank of India' and its seven partner banks what's more, nineteen different banks claimed by the public authority and record for right around three fourth of the financial area.  India has a two-level design of monetary foundations with thirteen all India monetary organizations and 46 establishments at the state level. All India monetary organizations involve term-loaning foundations, specific establishments also, speculation organizations, remembering for protection.  State level foundations contain State Financial Institutions and State Industrial Improvement Corporations giving undertaking finance, hardware renting, corporate credits, momentary advances and bill limiting offices to corporate. Non-banking Financial Institutions give advances and recruit buys finance, generally for retail resources and are managed by RBI.  RBI additionally directs unfamiliar trade under the Foreign Exchange Management Act (FEMA). SEBI set up under the Securities and Exchange Board of India Act, 1992 is the administrative expert for capital business sectors in India.  Protection area in India has been generally overwhelmed by state possessed Life Insurance Organization and General Insurance Corporation and its four auxiliaries. Protection Development and Regulatory Authority (IRDA) is the administrative expert in the protection area under the Insurance Development and Regulatory Authority Act, 1999. 15 CU IDOL SELF LEARNING MATERIAL (SLM)

1.10 KEYWORD  Capital Market: The capital market is the market for securities, where companies and governments can raise long-term funds.  Deposit: An account at a banking institution that allows money to be deposited and withdrawn by the account holder.  Loan: A type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower.  Money Market: That segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. 1.11 LEARNING ACTIVITY 1. What do you mean by Auxiliary Securities? ___________________________________________________________________________ ___________________________________________________________________________ 2. What is Term Loans Market? ___________________________________________________________________________ ___________________________________________________________________________ 1.12 UNIT END QUESTIONS A. Descriptive Questions 16 Short Questions 1. What are the features of Indian financial system? 2. What do you mean by new issue market? 3. What do you mean by Stock trade? 4. What are the elements of monetary business sectors? 5. What is Commercial Banks? Long Questions 1. Explain the components of Indian Financial System. 2. Explain the mechanical securities market. 3. Explain the financial instruments. CU IDOL SELF LEARNING MATERIAL (SLM)

4. What do you mean by long haul loans market? 5. Explain in detail the features of Indian financial system. B. Multiple Choice Questions 1. The stock trades in India are controlled under the Protections Contracts (Regulation) Act_________________. a. 1956 b. 1958 c. 1960 d. 1962 2. A home loan credit is an advance against the security of ______________like genuine home. a. Buckle b. Market Risk c. Resolute property d. Liquidity Risk 3. _________________market is a business opportunity for optional offer of protections. a. Homogeneous b. Auxiliary c. Independent d. Heterogeneous 4. A significant portion of the coordinated area of _____________is agreeable banking. a. Funds b. Agency costs c. Markets d. Indian banking 5. _______________protections are those which mature inside a time of one year. 17 a. Procurement b. Capital budgeting CU IDOL SELF LEARNING MATERIAL (SLM)

c. Short - term d. Computation Answers 1-a, 2-c, 3-b, 4-d, 5-c 1.13 REFERENCES Reference’s book  Bharati V. Pathak (2018); Indian Financial System; Pearson Education; Fifth edition.  Sujatra Bhattacharya (2017); Indian Financial System; Oxford University Press.  M.Y. Khan (2017); Indian Financial System; McGraw Hill Education; Tenth edition.  Shashi. K. Gupta & Nisha Aggarwal (2014); Indian Financial System; Kalyani Publishers; 6 editions. 18 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 2: FINANCIAL INSTRUMENTS STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 Meaning and Definition 2.3 Financial Instrument’s Function 2.4 Types of Financial Instruments 2.5 Advantages 2.6 Disadvantages 2.7 Asset Classes of Financial Instruments 2.8 Characteristics of Financial Instruments 2.9 Summary 2.10 Keyword 2.11 Learning Activity 2.12 Unit End Questions 2.13 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  To understand about Financial Instruments.  To know more about types of Financial Instruments.  To find out the Asset Classes of Financial Instruments.  To know characteristics of Financial Instruments 2.1 INTRODUCTION A monetary instrument is an agreement wherein one-party consents to pass cash or stock in a business to one more party in the future as a trade-off for something of significant worth. In 19 CU IDOL SELF LEARNING MATERIAL (SLM)

this way, monetary instruments can be pretty much as straightforward as a receipt or check, or as intricate as the credit default trades that caused the breakdown of the insurance agency AIG in 2008. Let’s see a portion of the instances of monetary instruments and the various sorts which incorporate the subsidiaries and money instruments. Agreements for money related resources that can be gained, traded, created, changed, or made due with are alluded to as monetary instruments. During a monetary instrument exchange, there is an authoritative commitment between the gatherings in question. For instance, if an organization pays cash for a bond, another party should convey a monetary instrument all together for the exchange to be completely finished. One organization is needed to supply cash, while the other is needed to supply the bond. Checks, bonds, and protections are essential instances of monetary instruments. Monetary instruments can be physical or virtual records that address a legitimate concurrence with any money related worth. Value based monetary instruments likewise address resource possession. Unfamiliar trade instruments are additionally a third and unmistakable classification of these instruments. Each instrument type has distinctive subcategories, for example, favored offer value and normal offer value. 2.2 MEANING AND DEFINITION A monetary instrument alludes to a resource that can be exchanged by financial backers, regardless of whether it's an unmistakable substance like property or an obligation contract. Monetary instruments can likewise include bundles of capital utilized in venture, as opposed to a solitary resource. What kinds of resources qualify as monetary instruments? These could be anything from money to shares. Monetary instruments can be genuine records or virtual arrangements, addressing responsibility for of money related worth. There are a couple of various classes to consider. Value based monetary instruments: the understanding addresses genuine responsibility for resource. Obligation based monetary instruments: the understanding addresses a credit made by the financial backer to the resource's proprietor. Unfamiliar trade monetary instruments: the understanding relates to Forex cash trade rates. 20 CU IDOL SELF LEARNING MATERIAL (SLM)

Monetary instruments allude to the records that address monetary case. A monetary case is guarantee to the reimbursement of a specific measure of cash toward the finish of a predefined period alongside premium or profit. Offers, Government Securities, Bonds, Mutual Funds, Units of UTI, Debentures, Bank Stores, Provident Funds, LIC Policies, Company Deposits, Post Office Certificates, and so on, are a portion of the instances of monetary instruments. These instruments are ordered into two kinds, viz., Primary protections and Secondary protections. 1. Essential Securities – These are the monetary instruments that are given straightforwardly to the savers by the clients of the assets. For instance, offers or debentures gave by a business entity straightforwardly to the public and foundations are called as essential protections. 2. Optional Securities – These are the monetary instruments that are given to the savers by a few mediators. For instance, units gave by Unit Trust of India and other Mutual Fund Organizations are called as optional protections. 2.3 FINANCIAL INSTRUMENT’S FUNCTION Monetary instruments are the interstate expressways that empower cash and funding to pass starting with one area then onto the next. They serve various capacities. 1. Monetary pay: We as a whole utilize monetary instruments consistently to pay for labor and products that we need. This is likewise clear in loft rentals, vehicle loaning arrangements, home loans, and specialist bills. As another model, we use MasterCard’s for standard exchanges where installment is typically due inside a month-to-month time frame. Organizations convey solicitations that are expected by a specific date. Clients present their installments through check. Workers are compensated with investment opportunity plans. Any monetary instrument is an agreement with the right to a future income, a responsibility, and agreements. 2. Capital Raising: Organizations utilize monetary instruments to create pay and capital. Organizations likewise issue stocks and bonds and offer it to financial backers as a trade-off for possession rights, premium installments, and a promise to reimburse the head, or unique total contributed. 21 CU IDOL SELF LEARNING MATERIAL (SLM)

 Keeping Value Monetary instruments have money related worth and one can be buy and sell it. Likewise, receivables, addressed by exceptional solicitations, can be offered to \"figuring\" organizations, which gather the owed sums. Visa obligations that are past due can likewise be offered to assortment organizations. Trades are the place where stocks and bonds can be exchanged. 3. Hazard Transferring: To support against misfortunes, financial backers buy monetary instruments, for example, investment opportunities and loan cost trades. Global organizations buy cash prospects to fence against the danger of fluctuating trade rates. In this way, every one of these agreements trades the option to purchase, sell, or get income in the future in return for installment dependent on the agreements. 4. Creative mind: Financial backers purchase alternatives contracts, which give them the right however not the commitment to purchase or sell stocks, monetary forms, and items like gold later on, in light of the fact that they accept they will benefit from a value change. 2.4 TYPES OF FINANCIAL INSTRUMENTS 1. Money Instruments: Money instruments are monetary instruments with values straightforwardly affected by the state of the business sectors. Inside cash instruments, there are two sorts; protections and stores, and advances.  Protections: A security is a monetary instrument that has financial worth and is exchanged on the financial exchange. At the point when bought or exchanged, a security addresses responsibility for part of a traded on an open market organization on the stock trade.  Stores and Loans: Both stores and credits are viewed as money instruments since they address financial resources that have a type of authoritative understanding between parties. 2. Subsidiary Instruments: 22 CU IDOL SELF LEARNING MATERIAL (SLM)

Subsidiary instruments are monetary instruments that not really set in stone from fundamental resources, like assets, cash, securities, stocks, and stock lists. The five most normal instances of subordinate’s instruments are manufactured arrangements, advances, prospects, choices, and trades. This is talked about in more detail beneath.  Manufactured Agreement for Foreign Exchange (SAFE): A SAFE happens in the over-the-counter (OTC) market and is an understanding that ensures a predefined swapping scale during a concurred timeframe.  Forward: A forward is an agreement between two gatherings that includes adjustable subsidiaries in which the trade happens toward the finish of the agreement at a particular cost.  Future: A future is a subsidiary exchange that gives the trading of subordinates not really set in stone future date at a foreordained swapping scale.  Choices: A choice is an arrangement between two gatherings where the vender allows the purchaser the option to buy or sell a specific number of subordinates at a foreordained cost for a particular timeframe.  Financing cost Swap: A financing cost trade is a subordinate understanding between two gatherings that includes the trading of financing costs where each party consents to pay other loan fees on their advances in various monetary standards. 3. Unfamiliar Exchange Instruments: Unfamiliar trade instruments are monetary instruments that are addressed on the unfamiliar market and principally comprise of money arrangements and subordinates. As far as money arrangements, they can be broken into three classifications.  Recognize: A cash understanding in which the real trade of money is no later than the second working day after the first date of the arrangement. It is named \"spot\" in light of the fact that the money trade is finished \"on the spot\" (restricted time period).  Altogether Forwards: A money arrangement in which the real trade of cash is finished \"forwardly\" and before the genuine date of the concurred necessity. It is advantageous in instances of fluctuating trade rates that change regularly. 23 CU IDOL SELF LEARNING MATERIAL (SLM)

 Money Swap: A cash trade alludes to the demonstration of all the while purchasing and selling monetary standards with various indicated esteem dates. 2.5 ADVANTAGES There are a few unique benefits of the Financial Instrument are as per the following:  Fluid resources like money close by and cash counterparts are of extraordinary use for organizations since these can be effortlessly utilized for fast instalments or for managing monetary possibilities.  Partners regularly have a sense of safety in an association that has utilized more capital in their fluid resources.  Monetary instruments offer significant help in financing substantial resources. This is conceivable through reserve move from substantial resources that are running in excess qualities to those unmistakable resources that are lying in shortage.  Monetary instruments distribute the danger as for the danger bearing limits of the counterparties that have taken an interest in making a venture elusive resource.  Organizations who decide to make an interest in genuine resources yield higher incomes since they get a broadened portfolio, supported swelling, and they can likewise fence against vulnerabilities caused because of political reasons.  Monetary instruments like value go about as a long-lasting wellspring of assets for an association. With value shares, instalment of profits to value holders is simply discretionary. Value shares additionally permit an association to have an open shot at getting and appreciate held profit 2.6 DISADVANTAGES  The various impediments and disadvantages of the Financial Instrument incorporate the accompanying:  Fluid resources, for example, bank accounts adjust and other bank stores are restricted with regards to ROI or return of speculation. This is high a direct result of the way 24 CU IDOL SELF LEARNING MATERIAL (SLM)

that there are zero limitations for the withdrawal of stores in investment accounts and other bank adjusts.  Fluid resources like money stores, currency market accounts, and so forth may refuse associations from making a withdrawal for quite a long time or at times years as well or whatever is determined in the understanding.  In the event that an association wishes to pull out the cash before the consummation of the residency referenced in the understanding, then, at that point the equivalent may get punished or get lower returns.  High conditional expenses are additionally an issue of worry for associations that are managing or wish to manage monetary instruments.  An association should not over-depend on obligations like head and interest since these should be paid on a resulting premise.  Monetary instruments like bonds pay-out return a lot lesser than stocks. Organizations can even default on bonds.  A portion of the monetary instruments like value capital are Life-long weight for the organization. Value capital goes about as a long-lasting weight in an association. Value capital can't be discounted regardless of whether the association has an adequate measure of assets. Be that as it may, according to the most recent corrections, organizations can decide on repurchasing its own offers with the end goal of retraction however the equivalent is exposed to specific agreements. 2.7 ASSET CLASSES OF FINANCIAL INSTRUMENTS Past the sorts of monetary instruments recorded above, monetary instruments can likewise be ordered into two resource classes. The two resource classes of monetary instruments are obligation based monetary instruments and value based monetary instruments. 1. Obligation Based Financial Instruments: Obligation based monetary instruments are ordered as components that a substance can use to expand the measure of capital in a business. Models incorporate securities, debentures, contracts, U.S. depositories, charge cards, and line of credits (LOC). 25 CU IDOL SELF LEARNING MATERIAL (SLM)

They are a basic piece of the business climate since they empower companies to expand productivity through development in capital. 2. Value Based Financial Instruments: Value based monetary instruments are sorted as systems that fill in as lawful responsibility for substance. Models incorporate normal stock, convertible debentures, favored stock, and adaptable membership rights. They assist organizations with developing capital throughout a more drawn-out timeframe contrasted with obligation based however advantage in the way that the proprietor isn't liable for taking care of any kind of obligation. A business that possesses a value based monetary instrument can decide to either put further in the instrument or sell it at whatever point they consider significant. 2.8 CHARACTERISTICS OF FINANCIAL INSTRUMENTS The significant qualities of monetary instruments might be laid out as underneath: 1. Liquidity: Financial instruments give liquidity. These can be effectively and immediately changed over into cash. 2. Promoting: Financial instruments work with simple exchanging available. They have a prepared market. 3. Insurance esteem: Financial instruments can be promised for getting credits. 4. Adaptability: Financial instruments can be handily moved from individual to individual. 5. Development period: The development time of monetary instruments might be short term, medium term or long haul. 6. Exchange cost: Financial instruments include purchasing and selling cost. The purchasing and selling costs are called exchange costs. These are lower. 7. Hazard: Financial instruments convey hazard. This is on the grounds that there is vulnerability with respect to installment of head or interest or profit by and large. 8. Future exchanging: Financial instruments work with future exchanging in order to cover hazards because of value vacillations, financing cost variances and so on 26 CU IDOL SELF LEARNING MATERIAL (SLM)

2.9 SUMMARY  To close, one might say that the monetary instruments are only a piece of record that goes about as monetary resources for one association and as a risk for another association. These can either be as debentures, securities, money and money reciprocals, bank stores, value shares, inclination shares, trades, advances and fates, call or notice cash, letters of credit, covers and collars, monetary assurances, receivables and payables, advances and borrowings, and so on Each sort of monetary instrument enjoys its own benefits and disservices.  Monetary instruments should be properly taken into utilization for inferring most advantages out of them. These can be of tremendous importance for organizations that are searching for limiting their expenses and augmenting their income model. In this manner, associations should ensure that they are appropriately utilizing monetary instruments so they can receive more prominent rewards out of it and kill the odds of them getting blown up. 2.10 KEYWORD  Equity:Any contract that evidences a residual interest in the assets and entity after deducting all of its liabilities.  Forecast transaction: An uncommitted but anticipated future transaction.  Firm commitment: A binding agreement for the exchange of a specified quantity of resources at a specified price on a specified future date or date.  Interest rate risk: The risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. 2.11 LEARNING ACTIVITY 1. What do you mean by Liquidity? ___________________________________________________________________________ ___________________________________________________________________________ 2. What is Future exchanging? ___________________________________________________________________________ ___________________________________________________________________________ 27 CU IDOL SELF LEARNING MATERIAL (SLM)

2.12 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What do you mean by Obligation Based Financial Instruments? 2. What do you mean by Value Based Financial Instruments? 3. What is Development period? 4. What is Money Swap? 5. What is Exchange cost? Long Questions 1. Explain the functions of financial instruments. 2. What are the characteristics of financial instruments? 3. Explain advantages and disadvantages of financial Instruments. 4. Explain the types of financial instruments. 5. Explain about the asset classes of financial instruments. B. Multiple Choice Questions 1. Past the sorts of monetary instruments recorded above, monetary instruments can likewise be ordered into _________________resource classes. a. Two b. Three c. Five d. Seven 2. ______________________instruments should be properly taken into utilization for inferring most advantages out of them. a. Buckle b. Market Risk c. Monetary d. Liquidity Risk 3. Financial instruments give ___________________ 28 a. Homogeneous CU IDOL SELF LEARNING MATERIAL (SLM)

b. Liquidity c. Heterogeneous d. Hydrogenous 4. ________________monetary instruments are sorted as systems that fill in as lawful responsibility for substance. a. Funds b. Agency costs c. Markets d. Value based 5. A future is a subsidiary exchange that gives the trading of subordinates not really set in stone future date at a foreordained ____________scale. a. Swapping b. Capital budgeting c. Computation d. Monetary Answers 1-a, 2-c, 3-b, 4-d, 5-a 2.13 REFERENCES Reference’s book  Bharati V. Pathak (2018); Indian Financial System; Pearson Education; Fifth edition.  Sujatra Bhattacharya (2017); Indian Financial System; Oxford University Press.  M.Y.Khan (2017); Indian Financial System; McGraw Hill Education; Tenth edition.  Shashi. K. Gupta & Nisha Aggarwal (2014); Indian Financial System; Kalyani Publishers; 6 editions. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 3: FINANCIAL MARKETS STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.3 Functions of Financial Market 3.4 Classification of Financial Markets 3.5 Types of Financial Markets 3.6 Importance of Financial Markets 3.7 Benefits 3.8 Drawbacks 3.9 Summary 3.10 Keyword 3.11 Learning Activity 3.12 Unit End Questions 3.13 References 3.0 LEARNING OBJECTIVES In the wake of concentrating on this part, you will be capable:  To comprehend about the Financial Market sectors.  To comprehend functions of Financial Market.  To analyze classification and types of Financial Market.  To know merits and demerits of Financial Market. 3.1 INTRODUCTION All of you realize that a business needs finance from the time a business visionary settles on the choice to begin it. It needs finance both for working capital necessities, for example, 30 CU IDOL SELF LEARNING MATERIAL (SLM)

installments for crude materials and pay rates to its workers, and fixed capital consumption, for example, the acquisition of apparatus or building or to extend its creation limit. The abovementioned model gives a reasonable image of how organizations need to raise assets from the capital business sectors. Thought Cellular chose to enter the Indian capital market for its requirements of development. In this section you will concentrate on ideas like private situation, Initial public Offer (IPO) and capital business sectors which you run over in the case of Idea Cellular. Business can raise these assets from different sources and in an unexpected way through monetary business sectors. This part gives a short portrayal of the component through which accounts are activated by a business association for both present moment and long-haul necessities. It additionally clarifies the institutional design and the administrative measures for various monetary business sectors. 3.2 MEANING A business is a piece of a monetary framework that comprises of two primary areas – families which save reserves furthermore, business firms which contribute these reserves. A monetary market assists with connecting the savers and the financial backers by activating assets between them. In doing as such it performs what is known as an allocative capacity. It allots or coordinates reserves accessible for speculation into their most useful speculation opportunity. When the allocative work is performed well, two outcomes follow: • The pace of return presented to families would be higher • Scarce assets are apportioned to those organizations which have the most elevated usefulness for the economy. There are two significant other option systems through which portion of assets should be possible: through banks or by means of monetary business sectors. Families can store their excess assets with banks, who thusly could loan these assets to business firms. On the other hand, families can purchase the offers and debentures presented by a business utilizing monetary business sectors. The interaction by which designation of assets is finished is called monetary intermediation. Banks and monetary business sectors are contending middle people in the monetary framework, and give families a decision of where they need to put their investment funds. 31 CU IDOL SELF LEARNING MATERIAL (SLM)

3.3 FUNCTIONS OF FINANCIAL MARKET Monetary business sectors play a significant job in the designation of scant assets in an economy by performing the accompanying four significant capacities. 1. Assembly of Savings and directing them into the most Useful Uses: A monetary market works with the exchange of reserve funds from savers to financial backers. It gives savers the decision of various speculations and in this way assists with channelizing excess assets into the most useful use. 2. Work with Facilitating Price Discovery: You all realize that the powers of interest and supply help to build up a cost for a ware or administration on the lookout. In the monetary market, the families are providers of assets and business firms address the interest. The communication between them assists with building up a cost for the monetary resource which is being exchanged that specific market. 3. Giving Liquidity to Financial Resources: Assets: Financial business sectors work with simple buy and offer of monetary resources. In doing as such they give liquidity to monetary resources, so they can be effectively changed over into cash at whatever point required. Holders of resources can promptly sell their monetary resources through the instrument of the monetary market. 4. Reducing the Cost of Transactions: Monetary business sectors give important data about protections being exchanged the market. It assists with saving time, exertion and cash that both purchasers and venders of a monetary resource would need to in any case spend to attempt also, observe to be one another. The monetary market is in this way, a typical stage where purchasers and dealers can meet for satisfaction of their singular requirements. Monetary business sectors are arranged on the premise of the development of monetary instruments exchanged them. Instruments with a development of less than one year are exchanged the cash market. Instruments with longer development are exchanged the capital market. 3.4 CLASSIFICATION OF FINANCIAL MARKETS There are distinctive methods of grouping monetary business sectors. There are essentially five methods of ordering monetary business sectors. 32 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Arrangement based on the sort of monetary case: On this premise, monetary business sectors might be arranged into obligation market and value market.  Obligation market: This is the monetary market for fixed cases like obligation instruments.  Value market: This is the monetary market for leftover cases, i.e., value instruments. 2. Arrangement based on development of cases: On this premise, monetary markets might be arranged into currency market and capital market.  Currency market: A market where transient assets are acquired and loan is called currency market. It bargains in transient financial resources with a development time of one year or less. Fluid assets just as profoundly fluid protections are exchanged the currency market. Instances of currency market are Treasury bill market, call currency market, business charge market and so on the primary members in this market are banks, monetary organizations and government. To put it plainly, cash market is where the interest for and supply of transient assets are met. Capital market: Capital market is the market for long haul reserves. This market bargains in the drawn-out cases, protections and stocks with a development time of over one year. It is the market from where useful capital is raised and made accessible for mechanical purposes. The financial exchange, the government security market and subordinates’ market are instances of capital market. To put it plainly, the capital market manages long haul obligation and stock. 3. Order based on preparing of guarantee: On this premise, monetary markets are ordered into essential market and optional market.  Essential market: Primary business sectors are those business sectors which bargain in the new protections. In this manner, they are otherwise called new issue markets. These are markets where protections are given interestingly. At the culmination of the diurnal, these are the business sectors for the protections gave straight by the organizations. The essential markets assemble investment funds and supply new or extra cash-flow to business units. To put it plainly, essential market is a business opportunity for bringing new capital up in the structure of offers and debentures.  Optional market: Secondary business sectors are those business sectors which bargain in existing protections. Existing protections are those protections that have as of now 33 CU IDOL SELF LEARNING MATERIAL (SLM)

been given and are as of now exceptional. Optional market comprises of stock trades. Stock trades are self-administrative bodies under the generally administrative domain of the Govt. /SEBI. 4. Grouping based on construction or game plans: On this premise, monetary business sectors can be grouped into coordinated business sectors and sloppy markets.  Coordinated business sectors: These are monetary business sectors in which monetary exchanges occur inside the grounded trades or in the precise and deliberate construction.  Sloppy business sectors: These are monetary business sectors in which monetary exchanges occur outside the grounded trade or without precise and efficient design or game plans. 5. Characterization based on planning of conveyance: On this premise, monetary markets might be characterized into cash/spot market and forward/future market.  Money/Spot market: This is the market where the purchasing and selling of wares occurs or stocks are sold for cash and conveyed following the buy or offer of products or protections.  Forward/Future market: This is the market where members purchase and sell stocks/products, contracts and the conveyance of items or protections happens at not set in stone time in future. 6. Different sorts of monetary market: Apart from the abovementioned, there are some other kinds of monetary business sectors. They are unfamiliar trade market and subordinate’s market.  Unfamiliar trade market: Foreign trade market is basically characterized as a market in which one country's money is exchanged for another nation's cash. It is a business opportunity for the buy and offer of unfamiliar monetary standards.  Subsidiaries market: The subordinates are most present-day monetary instruments in supporting danger. The people and firms who wish to stay away from or decrease hazard can manage the other people who will acknowledge the danger at a cost. A typical place where such exchanges happen is known as the subsidiary market. It is a market in which subordinates are exchanged. So, it is a business opportunity for 34 CU IDOL SELF LEARNING MATERIAL (SLM)

subsidiaries. The significant kinds of subsidiaries are advances, prospects, alternatives, trades, and so on 3.5 TYPES OF FINANCIAL MARKETS There are such countless monetary business sectors, and each nation is home to somewhere around one, despite the fact that they change in size. Some are little while some others are universally referred to, for example, the New York Stock Exchange (NYSE) that exchanges trillions of dollars consistently. Here are a few sorts of monetary business sectors. 1. Securities exchange The securities exchange exchanges portions of responsibility for organizations. Each offer escorts a cost, and pecuniary promoters bring in cash with the stocks when they perform well on the lookout. It is not difficult to purchase stocks. The unaffected test is in preference the right frameworks that will bring in cash for the fiscal benefactor. There are different lists that financial backers can use to screen how the securities exchange is getting along, for example, the Dow Jones Industrial Average (DJIA) and the S&P 500. At the point when stocks are purchased at a less expensive cost and are sold at a greater cost, the financial backer acquires from the deal. 2. Security market The security market offers openings for organizations and the public authority to tie down cash to back a task or speculation. In a security market, financial backers purchase securities from an organization, and the organization returns the measure of the securities inside a concurred period, in addition to premium. 3. Items market The items market is the place where merchants and financial backers purchase and sell normal assets or products like corn, oil, meat, and gold. A particular market is made for such assets on the grounds that their cost is capricious. There is a products fates market wherein the cost of things that are to be conveyed at a given future time is now recognized and fixed today. 4. Subsidiaries market 35 CU IDOL SELF LEARNING MATERIAL (SLM)

Such a market includes subsidiaries or agreements whose worth depends available worth of the resource being exchanged. The fates referenced above in the products market is an illustration of a subsidiary. 3.6 IMPORTANCE OF FINANCIAL MARKETS There are numerous things that monetary business sectors make conceivable, including the accompanying:  Monetary business sectors give where members like financial backers and indebted individuals, paying little mind to their size, will get reasonable and appropriate treatment.  They give people, organizations, and government associations with admittance to capital.  Monetary business sectors assist with bringing down the joblessness rate as a result of the many open positions it offers 3.7 BENEFITS a. It gives a stage for purchasers and dealers to meet to exchange the resources. The costs for exchanging are dictated by the market influences, i.e., request and supply on the lookout. So, it helps in the assurance of the costs of protections. b. It helps in the activation of the reserve funds of the financial backers as the financial backer can place his cash in the most useful employments. c. For the dealers, the monetary market stage gives the expected purchaser and merchant of their protections, which helps them in setting aside their time and cash in tracking down the possible purchaser and vender. d. In the monetary market, financial backers can sell their protections promptly and convert them into cash, in this way giving liquidity to the tradable resources. 3.8 DRAWBACKS a. Costs in the monetary market may not show a stock's actual inherent worth on account of some macroeconomic powers like expenses and so on 36 CU IDOL SELF LEARNING MATERIAL (SLM)

b. There are sure factors that change the costs of protections abruptly. So, there is a danger implied when exchanging the monetary market. Like on the off chance that any pessimistic news about the organization comes, its cost might diminish by and large making misfortune the individual holding its offers. 3.9 SUMMARY Monetary Market is a business opportunity for creation and trade of monetary resources. It helps in assembly and channelizing the reserve funds into most useful employments. Monetary business sectors additionally help in value revelation and give liquidity to monetary resources. Currency Market is a business opportunity for transient assets. It bargains in monetary resources whose time of development is short of what one year. The instruments of currency market incorporate depository charges, business paper, and call cash, Certificate of store, business charges, interest endorsements and currency market common assets. 3.10 KEYWORD  Open position: Trades that are currently running within a portfolio  Market feed: It means the automated live streaming prices of the underlying markets from their respective exchanges.  Illiquid Market A market in which it is difficult to sell or buy due to lack of interested buyers/sellers. 3.11 LEARNING ACTIVITY 1. What do you mean by Securities exchange? ___________________________________________________________________________ ___________________________________________________________________________ 2. What is Subsidiaries market? ___________________________________________________________________________ ___________________________________________________________________________ 3.12 UNIT END QUESTIONS A. Descriptive Questions 37 CU IDOL SELF LEARNING MATERIAL (SLM)

Short Questions 1. What do you mean by Currency market? 2. What do you mean by Optional market? 3. What is essential market? 4. What is Financial Market? 5. What Sloppy business sectors? Long Questions 1. Explain about Agency theory. 2. Explain the types of agency problems. 3. Explain about agency conflicts. 4. Explain about Agency relationship with Charities. 5. Explain about the uniqueness of interests between the investors and the organization's administration. B. Multiple Choice Questions 1. ____________business sectors are those business sectors which bargain in the new protections. a. Planning b. Primary c. Funds d. Controlling 2. The ____________for exchanging is dictated by the market influences. a. Costs b. Buckle c. Market Risk d. Credit Risk 3. The _____________exchange exchanges portions of responsibility for organizations. a. Homogeneous b. Independent c. Securities d. Heterogeneous 38 CU IDOL SELF LEARNING MATERIAL (SLM)

4. The unaffected test is in preference the right frameworks that will bring in cash for the ______________benefactor. a. Funds b. Agency costs c. Markets d. Fiscal 5. ____________________market is basically characterized as a market in which one country's money is exchanged for another nation's cash. a. Procurement b. Capital budgeting c. Foreign trade d. Computation Answers 1-b, 2-a, 3-c, 4-d, 5-c 3.13 REFERENCES Reference’s book  Financial Institutions and Markets by Bhole  Financial Markets and Institutions by Frederic S Mishkin and Stanley Eakins  Financial Markets Institutions and Financial Services by Dr Vinod Kumar/Atul Gupta /Manmeet Kaur  Financial Markets, Institutions and Financial Services by Gomez and Clifford 39 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 4: FINANCIAL INSTITUTION STRUCTURE 4.0 Learning Objectives 4.1 Introduction 4.2 Meaning 4.3 Role in Economic Development 4.4 Functions of Financial Institutions 4.5 Benefits of Financial Institutions 4.6 Classification of Financial Institutions / Types of Financial Institutions 4.7 Summary 4.8 Keyword 4.9 Learning Activity 4.10 Unit End Questions 4.11 References 4.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  To understand about Financial Institution.  To know more about role in economic development.  To find out the functions of Financial Institution.  To know the types of Financial Institution. 4.1 INTRODUCTION In its basic significance a monetary foundation is an establishment that offers monetary types of assistance. Monetary administrations allude to the movement of move of monetary assets from the savers or financial backers to the clients or borrowers. Along these lines, basically monetary organizations are the delegates between the savers and borrowers of the cash. All the more explicitly, the expression \"monetary foundations\" alludes to a wide range of 40 CU IDOL SELF LEARNING MATERIAL (SLM)

associations which transitional and work with monetary exchanges of both individual and corporate clients. 4.2 MEANING A monetary foundation is an organization that offers monetary types of assistance for its customers or individuals. Any organization that gathers cash and places it into resources like stocks, bonds, bank stores, or then again advances are viewed as a monetary establishment. There are two kinds of monetary foundations principally, viz. 1. Storehouse foundations and 2. Non-store establishments.  Store establishments pay you interest on your stores and utilize the stores to make credits.  Non-storehouse establishments, then again embrace the capacity of selling monetary items. As such, those administration or private that fill in as a middle person between savers and borrowers, however don't acknowledge time stores, are known as non- vault organizations. Such organizations reserve their loaning exercises either by offering protections or protection strategies to the general population. Their liabilities (contingent upon the liquidity of the risk) may fall under one or more cash supply definitions, or might be named close to cash. Numerous monetary establishments give both store and non-storehouse administrations. Likely the main monetary help given by monetary organizations is going about as monetary delegates. Most monetary foundations are exceptionally managed by government bodies. Money organizations commonly appreciate high FICO scores and are henceforth ready to get at the most minimal market rates, empowering them to make advances at rates very little higher than banks. Despite the fact that their clients normally don't meet all requirements for bank credit, these organizations have encountered a low pace of default. A money organization overall will in general be loan fee touchy increments and diminishes in market loan costs influence their benefits straightforwardly. 41 CU IDOL SELF LEARNING MATERIAL (SLM)

4.3 ROLE IN ECONOMIC DEVELOPMENT Monetary organizations have been there on the planet markets for quite a while presently. They have moreover made critical commitments. The two fundamental explanations behind the presence of monetary foundations are: 1. Financial turn of events 2. Monetary dependability. On the off chance that we enter a bit, we will see that the second justification behind the presence of monetary establishments prompts the first once more. In any case, banks offer stores that case to be capital sure. In the event that this guarantee is to be respected, then, at that point there should be cutoff points to the reach and nature of resources that a bank can sensibly take on to its monetary records. All the more for the most part, monetary foundations perform a plenty of exercises through their arrangement of liquidity, distinguishableness, enlightening efficiencies also, hazard pooling administrations which widen the range of dangers accessible to financial backers. In this way, they support and work on the effectiveness of speculation and reserve funds in the economy. Through the arrangement of a more extensive scope of monetary instruments, they can encourage a danger the executive’s culture by drawing in clients who are not as much ready to bear hazards. Additionally, from the perspective on monetary steadiness, in an economy wherein the foundations are similarly less created, banks will definitely be needed to accept chances that something else may be borne by the securities exchange, aggregate speculation plans or insurance agencies. One method of limiting monetary delicacy in the creating economies is to energize a variety of monetary foundations, where financial backers can accept an assortment of dangers outside the banking framework itself. Without this variety, there is an inclination for all dangers to be packaged inside the monetary record of the financial framework, which almost certain may prompt extreme monetary emergencies. The monetary establishments assume a significant part in supplementing the offices presented by the banks in an economy. Truth be told, the presence of Banking Financial Institutions (BFIs) and Nonbanking Financial Institutions (NBFIs) upheld by effective cash and capital business sectors, keep the monetary area complete and improve the general development of the economy. 42 CU IDOL SELF LEARNING MATERIAL (SLM)

Monetary organizations are the central members in the improvement of the capital market in any economy. Be that as it may, even after their incredible exhibition, there for the most part stay a few areas similarly really testing. For them there fostered an exceptional requirement for extraordinary monetary foundations. Indeed, the requirement for building up such monetary establishments emerged chiefly due to the accompanying causes: 1. It has been hard for industry overall to acquire adequate long-haul assets in the capital business sectors. There has been an absence of monetary foundations to supply long haul finance to industry. As we probably are aware, generally, and all the more prevalently, business banks gave just momentary money. In this manner some Special Financial Institutions (SFIs) were set up to guarantee that industry got adequate long-haul assets in the ideal areas. What's more, that as well as per not set in stone. 2. Certain particular areas of the business confronted more prominent troubles as contrasted and the others in securing long haul finance. Whatever areas were: (a) Small and medium estimated associations (b) Specific ventures requiring assets for modernization (c) New concerns set up by new enterprising gatherings (d) Concerns engaged with advancement and new innovative turns of events (e) Concerns requiring extra-conventionally a lot of money for a long development that is all (f) Concerns in reverse regions. One of the vital requirements for SFIs was to meet the drawn-out monetary prerequisite of such associations on financial and social grounds. Overall, one might say that the hole between the interest for and supply of money overall what's more, mechanical money all the more explicitly, is looked to be filled through term advances being advertised by different monetary establishments. Furthermore, this makes itself as the main requirement for monetary organizations. 4.4 FUNCTIONS OF FINANCIAL INSTITUTIONS 1. Monetary organizations assemble the reserve funds of people in general 2. They give credit office to the destitute people 43 CU IDOL SELF LEARNING MATERIAL (SLM)

3. They render different other monetary administrations like exchange of assets starting with one spot then onto the next, installment component, and so on, 4.5 BENEFITS OF FINANCIAL INSTITUTIONS 1. Monetary organizations empower moving of assets from financial backers to corporate clients and other business visionaries. 2. They work with the progression of cash starting with one corner of the country then onto the next corner. 3. They empower accomplishment of economy of huge scope tasks by giving assets to enormous scope business exercises. 4. They decrease the expense of exchange by expanding the quantity of exchanges. 5. They decrease the danger of loss of capital through expansion of assets to various businesses. 4.6 CLASSIFICATION OF FINANCIAL INSTITUTIONS / TYPES OF FINANCIAL INSTITUTIONS Fundamentally there are three kinds of monetary organizations, viz., (a) Banking Institutions (b) Non-Banking Monetary Institutions and (c) Mutual Funds I) Banking Institutions As indicated by the Banking Regulations Act, a financial foundation is an organization that does the matter of banking. The term banking business is characterized as the tolerant of stores of cash from people in general for the reason for loaning or speculation and repayable on request. A financial foundation assembles the investment funds of people in general through tolerating of stores of cash and loans something similar to the individual and corporate clients to meet their present moment, medium term and long-haul monetary prerequisites and puts the excess sum in different protections or monetary instruments in the monetary market. 1. Kinds of Banking Institutions Based on the capacities performed by the financial establishments, they are grouped into the accompanying types: 44 CU IDOL SELF LEARNING MATERIAL (SLM)

a) Commercial Banks b) Investment Banks/Industrial Banks c) Exchange Banks d) Co-employable Banks e) Land Development Banks f) Regional Rural Banks g) Savings Banks h) Central Bank a) Commercial banks The banks which take part in the action of giving money to different business foundations for Meeting their functioning capital necessities are called as business banks. The expression \"working capital prerequisite\" alludes to the assets needed for meeting the everyday exercises like purchasing of crude materials, installment of compensations, and so forth these banks raise the necessary assets in the structure different sorts of stores from general society and loan present moment and medium-term advances to merchants and business people essentially for meeting working capital prerequisites. The business banks are characterized into two kinds viz., booked banks and non-planned banks.  Scheduled Banks - The banks which are enrolled in the second timetable of the RBI are called as booked banks. To be enrolled under the second timetable of the RBI, the accompanying conditions ought to be satisfied: 1. The bank should convey the matter of banking in India 2. The bank should have a settled-up capital and hold of a total worth of at the very least Rs. 5 lakhs and 3. The bank should fulfill the RBI that its issues are not being led in a way hindering to the interests of the investor.  Non-booked Banks – The banks which are not enrolled in the second timetable of the RBI are called as non-planned banks. 45 CU IDOL SELF LEARNING MATERIAL (SLM)

Advantages delighted in by booked banks The planned banks go under the immediate domain of the credit control proportions of the RBI and are qualified for borrowings and rediscounting offices. Non-booked banks are not qualified for such benefits. b) Industrial Banks/Investment Banks The banks which participate in the action of giving money to industrialists to meeting their proper capital necessities are called as modern banks. The expression \"fixed capital prerequisite\" alludes to the assets needed for buying fixed resources like Land, Building, Plant, Machinery, Furniture, and so forth These banks raise the necessary assets as issue of offers, debentures and bonds to general society and different monetary establishments and loan medium term and long-haul advances to industrialists and enormous finance managers fundamentally for meeting their proper capital necessities. c) Exchange Banks The banks which participate in unfamiliar trade business are called as trade banks. The expression \"unfamiliar trade business\" alludes to the matter of changing over homegrown cash into unfamiliar money as well as the other way around. These banks convert unfamiliar cash into Indian money and Indian money into unfamiliar cash and assume a critical part in import and fare exercises. d) Co-usable Banks The banks which are framed on the standard of common co-activity to address the issues of its individuals are called as co-usable banks. They are shaped by little gathering of people having a place with same or comparable sort of exercises like cultivating, retailing, limited scope industry, and so on These banks raise the necessary assets in the type of different sorts of stores from the individuals and people in general. They loan present moment and medium- term credits to individuals and different brokers, business people and agriculturists predominantly for meeting working capital prerequisites at by and large low pace of interest and assumes a critical part in financing farming and unified exercises in India. 46 CU IDOL SELF LEARNING MATERIAL (SLM)

e) Land Development Banks The banks which are framed by the agriculturists on the rule of shared co-activity to meet the long haul needs of agriculturists are called as land improvement banks. These banks raise the required assets by the issue of offers and debentures, bonds, and so on, primarily to the particular gathering of people and other monetary establishments. They give present moment and medium-term credits to individuals and other agriculturists predominantly for securing instruments and types of gear required and furthermore to make extremely durable improvement of the land and for partnered exercises like cows cultivating, and so forth, at by and large low pace of interest also, assume a huge part in financing horticultural and partnered exercises in India. These banks are currently days called as Agriculture and Rural Development Banks. f) Local Rural Banks The banks which are framed to activate the investment funds of the rustic individuals and satisfy the credit needs of the generally less served or not served segments of the social orders in rustic regions are called as Regional Rural Banks (RRBs). They are the banks that were set up as government supported territorial based provincial banking establishments under the Regional Rural Banks Act, 1976. The shareholding example of these banks is 50: 35: 15 among focal government, supporting bank and state government separately. They were designed as half breed miniature financial establishments, consolidating the neighborhood direction and limited scope loaning culture of the cooperatives and the business culture of business banks. Little ranchers, agrarian workers and socio-monetarily more vulnerable segments of the general public are the principal clients of these banks. g) Investment funds Banks The banks which are shaped to prepare investment funds of poor people and center pay individuals of the general public are called as reserve funds banks. The essential goal of these banks is to advance the propensity for frugality and investment funds among individuals with little salaries. The cash saved in these banks is allowed to be removed by the investors on schedule of need. In any case, there are sure limitations on the number and the measure of 47 CU IDOL SELF LEARNING MATERIAL (SLM)

withdrawal to be made in a specific period. In India, the focal government runs investment funds bank through the postal division. Practically the entirety of the business banks likewise does the capacity of reserve funds bank also, urge individuals to open bank account with them. For the most part, these banks don't participate in the action of loaning cash to people in general. h) National Bank The bank framed for administering, controlling and managing the exercises of both banking and other non-banking monetary organizations is called as national bank. For the most part, every nation will have just one national bank. In India, Reserve Bank of India is the national bank. The national bank goes about as a head of the currency market, implements financial discipline in the economy of the nation, deals with the issue and dissemination of the money, controls the production of bank stores and safe monitors the monetary solidness of the country. It additionally keeps a nearby touch with the public authority and aids the execution of its financial approaches. It fills in as broker, specialist and counselor to the public authority. In this way, its capacities as the zenith bank of the nation and add to the better support of the financial and monetary soundness of the country. It acknowledges stores from the public authority, banks and other monetary foundations and loans something very similar to the public authority, banks and other monetary establishments to empower them balance their reserves position.  Primary elements of national bank The elements of national bank are ordered into three viz., Traditional capacities, Promotional capacities also, Supervisory capacities. 1. Conventional capacities a) Monopoly important issue b) Banker to government c) Agent and guide to government d) Banker to banks e) Act as public clearing house f) Lender after all other options have run out 48 CU IDOL SELF LEARNING MATERIAL (SLM)

g) Controller of credit h) Foreign trade the executives I) Exchange control j) Publication of data 2. Limited time capacities a) Promotion of banking propensities b) Provide renegotiate for send out advancement c) Provide offices for farming exercises d) Provide offices for limited scope enterprises e) Provide help to co-employable area 3. Administrative capacities a) Granting of permit to banks b) Supervising and reviewing the exercises of monetary establishments c) Implementing of store protection conspire d) Controlling of monetary establishments II) Non-Banking Financial Institution/Non-Banking Financial Corporation (NBFCs) A Non-Banking Financial Institution prevalently called as Non-Banking Financial Company (NBFC) alludes to a particular monetary foundation other than a financial organization that activates the reserve funds of a certain fragment of people in general and loans something similar to the individual and corporate clients to meet their concentrated necessities. It is enrolled under the Companies Act, and is occupied with the matter of loaning to particular purposes and putting resources into shares, debentures, bonds, and so on According to segment 45(1) (f) of the Hold Bank of India Act, a non-banking monetary organization is a non-financial foundation which is an organization and which has its foremost business the getting of stores under any plan or loaning in any way. It is obligatory for a NBFC to get itself enrolled with RBI as a store tolerating organization. An organization meaning to do the business as a NBFC should have at least Rs. 25 lakhs as possessed asset. It ought to have over half of resources as monetary resources and over half of pay as pay from monetary resources. 49 CU IDOL SELF LEARNING MATERIAL (SLM)

4.7 SUMMARY  Monetary establishments can be characterized as private or public associations that, comprehensively talking, go about as a channel among savers and borrowers of assets. Two fundamental kinds of monetary organizations with progressively obscured separating line are vault banks and credit associations and non-safe insurance agencies and shared assets.  The two principal purposes behind the presence of monetary establishments are monetary turn of events and monetary solidness. Monetary strength as a justification behind the presence of monetary organizations prompts its part in financial advancement once more.  A business bank is a kind of monetary middle person that gives financial records, bank accounts, and currency market accounts and that acknowledges time stores Commercial banks.  Private area banks arose in India after progression. Business banks needed to stay aware of the reformist offers made by their private and unfamiliar partners.  Accordingly Indian business banks began making monetary developments. A few developments are driven by more extensive innovative advances. Some are absolutely a response to a benefit or business opportunity.  There are likewise advancements which are the aftereffect of guideline or other government strategy activities. For smooth working, business banks need to deal with their resources and liabilities. 4.8 KEYWORD  Ex-dividend: A share bought without the right to receive the next dividend which is retained by the seller.  Corporate action: Any event initiated by a corporation which impacts its shareholders. Examples include stock splits, consolidations, mergers and spinoffs.  Hedging: A strategy to reduce the risk of an open position. 4.9 LEARNING ACTIVITY 1. What do you mean by Local Rural Banks? 50 CU IDOL SELF LEARNING MATERIAL (SLM)