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Institutional finanace Unit-5 T Y BBA

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  • 1. Institutional Finance By Radhika
  • 2. Financial System • Plays a Vital role in economy • Bridges the gap between… • Channelize/ mobilize the vital resources
  • 3. FUNDS Financial Intermediaries Commercial Banks Insurance Company DEPOSITES Mutual Funds /SHARE Non-banking financial co. Supplier of Funds Individuals Business Government FUNDS Financial System Financial Market FUNDS LOANS Demander of Funds Individuals Business Government FUNDS Money Market Capital Market SECURITIES SECURITIES
  • 4. Financial intermediaries • Commercial Banks – Public Sector Banks – Foreign Banks – Private Sector Banks • Financial Institutions – IFCI – SIDBI – ICICI – NABARD
  • 5. Cont. • Insurance Companies  LIC  GIC  Private sectors
  • 6. Cont. • Mutual Funds – It is financial intermediary that collect savings from investors – Different types of investment – Pool of funds from investors – Advantages of mutual funds are reduction in risk, expert professional mgt., liquidity of investment & tax benefits – SEBI (Mutual Funds) Regulation, 1993
  • 7. Cont. • Non-banking Financial Intuitions [NBCI/NBFC] • According to RBI, – NBFC means; i. a financial institution which is a co.; ii. a non-banking inst. whiz a co. & has, as its principal business, the receiving of deposits under the scheme or mgt. or any other manner or lending in any manner; iii. such other non-banking institution or class of such inst. as the bank may with the previous approval of the Central Govt. specify
  • 8. Cont. • NBFC are Categorized into: – An equipment leasing co. [EL] – A hire-purchase co. [HP] – A housing finance co. [HFC] – An investment co. [IC] – A loan co. [LC] – A mutual benefit co. [MBFC] i.e Nidhi Companies – A miscellaneous non-banking co. i.e Chit fund co.
  • 9. Money Market • • • • • • • Introduction It is a whole sale market No need of place Transactions generally settled in daily basis Important Segment Market for monetary assets of a shot-term nature Money market instruments have the characteristic of liquidity
  • 10. Money Market instruments 1. Treasury Bills – One of the safest instruments – Short term borrowing instruments of Central Govt. issued by… – Zero Risk instruments hence… – Short term securities that will mature... – Issued at discounted rate and with promise to pay full face vale on maturity – Generally available in minimum of 25K & in multiples thereof
  • 11. Cont. • Currently, T-bills are generally available in – 91-Day T-bills - auctioned every Friday – 182- Day T-bills - auctioned every alternate Wed. – 364-Day • Types of T-bills – On Tap Bills – Ad-hoc Bills – Auctioned Bills
  • 12. Cont. 2. Commercial Paper [CP] – It is an unsecured short term promissory note issued by creditworthy corporate, primary dealers & all financial inst. – basically negotiable & transferrable by… – Fixed maturity period – Issued to meet w.c requirements of the firms – Also known as Finance Paper, Industrial Paper or Corporate Paper
  • 13. Cont. – RBI introduced commercial papers in 1990 – CP can be issued to banks, individuals, companies & other registered bodies – It can also be issued to NRI but… – FII are also permitted to subscribe but to a certain limit fixed by SEBI
  • 14. Cont. 3. Commercial Bills – CB are negotiable instruments drawn by the seller on the buyer which, are in turn, accepted & discounted by Commercial Banks – These are basically called trade bills & when these bills are accepted by commercial banks, they called.. – Bank accepts the bill from the seller & pays the amount of the bill after charging some discount. – after expiry of the bill collected from the buyer...
  • 15. Cont. – Meanwhile, if the bank requires fund then it can also re-discount the same with RBI,UTI,LIC,ICICI etc. – Maturity period varies from 30 to 180 days. – Example: • • • • • Bill Amt. – rs. 10000 Discount - 2% Payment made by Bank to seller – 9800 Payment received by bank from buyer – rs.10000 Commission earned by bank – rs. 200
  • 16. Cont. •Seller •Buyer Trade Bill Collected By Bank Commercial Bill •Bank
  • 17. Cont. • Major Types of Commercial Bills I. Demand Bill v/s Usance Bill II. Inland Bill v/s Foreign Bill III. Export Bill v/s Import Bill
  • 18. Cont. 4. Call/ Notice Money: • Call Money Market – It is a short term funds market with maturity period 1 day to 2 weeks – Call money – Notice money – Main aim of growth of this instrument is due to commercial banks requirements
  • 19. Cont. – To fulfill mandatory requirements of RBI commercial banks borrow money from the other banks & institutions – The interest rate paid on the call/notice money loan is called “CALL RATE”
  • 20. Cont. 5. Certificate of Deposit – It was introduced in 1989 – CDs are unsecured, negotiable, short term instruments in bearer form issued by commercial banks & financial institutions – Generally CD are time deposits (FD) – CD are transferable & tradable while FD are not. – It can be issued to all even to NRI.
  • 21. Capital Market • To achieve growth in various sectors • To meet the requirements of various investors, borrower & entrepreneurs • A platform for investors to get greater returns • Provide funds to the Organization to get developed • Buying and selling of long-term debt or equitybacked securities • Provides effective & efficient way to support exchange of various financial instruments for mutual benefit.
  • 22. Primary Market
  • 23. Cont. IPO Issue of Tender Right Issue Primary market Offer for Sale Private Placements
  • 24. Secondary market
  • 25. Cont. • Secondary market popularly known as stock market • Where outstanding or existing securities are purchased & sold on a continuous basis • Unlike primary markets it facilitates changing of hands (ownership) • Securities issued in primary market are traded • Like ordinary market where there is buyer & seller • Likewise the prices will be determined by the demand & supply forces
  • 26. Cont. • Distinguishing feature • In India Secondary market functions as a recognized stock exchanges operating under certain rules & regulations duly approved by the government. • Thus, these stock exchanges constitute an organized mechanism under which various public & private securities are traded.
  • 27. Functions of Secondary market 1. 2. 3. 4. 5. Marketability Safety Performance check Valuation Promotion & development
  • 28. Nature & Role Of Financial System • Mobilizing funds to productivity • Provides excellent mechanism for exchange of goods &services • Establishment of different institutions • Crucial role in reducing risk