Role of banks in financial markets


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Role of banks in financial markets

  2. 2. Financial market Financial market is a highly organized place which provide mechanism to bring together the people who demand for and supply of financial instruments (financial assets, securities, etc)
  3. 3. BanksIn India, the definition of the business of banking has beengiven in the Banking Regulation Act, (BR Act), 1949.According to Section 5(c) of the BR Act, a banking companyis a company which transacts the business of banking inIndia. Further, Section 5(b) of the BR Act defines banking as,accepting, for the purpose of lending or investment, ofdeposits of money from the public, repayable on demand orotherwise, and withdraw able, by cheque, draft, order orotherwise. This definition points to the three primary activitiesof a commercial bank which distinguish it from the otherfinancial institutions.These are:(i) maintaining deposit accounts including current accounts,(ii) issue and pay cheques,(iii) collect cheques for the banks customers.
  4. 4. BANKS Loan and Mostly perform • Investment advances s
  5. 5.  What are SLR investments? As part of prudential guidelines, central banks require lenders to maintain a portion of their deposits in liquid assets. These liquid assets can be cash, gold or government securities. The ratio of prescribed liquid investments to deposits is termed as statutory liquidity ratio. In India, banks invest in bonds issued by the government and notified by the Reserve Bank of India as qualifying for SLR to meet the prescribed ratio. What are non-SLR investments? Besides giving loans to businesses and individuals, RBI has also allowed banks to invest in various capital market instruments such as stocks and bonds issued by public and private sector companies and commercial papers. In addition, banks are also allowed to invest in various mutual fund schemes. Unlike SLR investments, there is no compulsion on banks to invest in these instruments. Investments are entirely guided by commercial considerations and many such investments are in accordance with the prescribed guidelines. How are non-SLR investments and loans linked? RBI treats both loans extended by commercial banks and the non-SLR investments as a resource flow to the commercial sector. Hence, it includes both while making credit projections it is comfortable with to achieve the targeted economic growth at the time of the monetary policy formulation during the beginning of the fiscal year. Is there any differential treatment for the two types of investments? Since SLR investments in bonds are issued by the government or its bodies, these enjoy a sovereign protection, and hence, are perceived to be risk-free. However, in case of non-SLR investments, the central bank attaches risk weights, depending on the industry and the state of the perceived risk on that sector as a prudential measure.
  6. 6. FinancialMarketsMoney Market- for short-term funds (less than a year) Organized (Banks) Unorganized (money lenders, chit funds, etc.)Capital Market- for long-term funds Primary Issues Market Stock Market Bond Market
  7. 7. Organized Money Market Call money market Bill Market ◦ Treasury bills ◦ Commercial bills Bank loans (short-term) Organized money market comprises RBI, banks (commercial and co- operative)
  8. 8. Call Money short term finance repayable on demand maturity period of one day to fifteen days inter-bank transactions. Commercial banks have to maintain a minimum cash balance known as cash reserve ratio. Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. A rise in call money rates makes other sources of finance such as commercial paper and certificates of deposit cheaper in comparison for banks raise funds from these sources.
  9. 9. Certificates of Deposit unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions. They can be issued to individuals, corporations and companies during periods of tight liquidity They help to mobilise a large amount of money for short periods
  10. 10. Bill Market These bills are short- term liabilities (91-day, 182-day, 364-day) of the Government of India T-BILLS It is an IOU of the The rate of discount government, a and the promise to pay the corresponding issue stated amount after price are expiry of the stated determined at each period from the date auction of issueCommercial Bill market- is one which arises out of a genuine trade transaction, i.e. credit transaction.
  11. 11. RBI in financial market CRR- is the amount of funds that the banks have to keep with the RBI. If the central bank decides to increase the CRR, the available amount with the banks comes down. Reverse Repo The rate at which rate is the rate at the RBI lends which money to the RBI borrows commercial banks money from is called repo rate.commercial banks. It is an instrument Banks are always RBI of monetary happy to lend policy. Whenever money to the RBI banks have any since their money shortage of funds are in safe hands they can borrow with a good from the RBI. interest. Statutory Liquidity Ratio refers to the amount that the commercial banks require to maintain in the form gold or govt. approved securities before providing credit to the customers.
  12. 12. Short term loan Market PURPOSE: To meet temporary shortfall / mismatch in liquidity, for meeting genuine business requirements only. ENTERPRISES GROUP: Micro, Small & Medium Enterprises as per Regulatory definition and all other entities with annual sales turnover of Rs. 1/- crore to Rs. 150/- crores. PERIOD: Not exceeding 180 days – minimum 90 days SECURITY First charge / Equitable mortgage of fixed assets of the company / firm or extension of existing first charge / equitable mortgage of fixed assets, ensuring that there is a minimum asset cover of 1.25. Extension of Charge on current assets for the additional facility ensuring that adequate drawing power is available. Extension of all existing guarantees of Directors / Third party guarantees to cover the additional facility.
  13. 13. Capital market Various institutions like commercial banks and development banks are important player of capital market Development institutions/banks – IDBI (Industrial Development Bank of India) IFCI (Industrial Finance Corporation of India) ICICI (Industrial Credit and Investment Corporation of India) IIBI (Industrial Investment Bank of India) SIDBI (Small Industries Development Bank of India)
  14. 14.  Development banks provide direct and indirect assistance to large and medium scale enterprises. Assistance through capital market- underwriting direct subscription to shares and debentures guarantee for deferred payments equipment finance schemes.
  15. 15. Role of Banks - Conclusion Maturity Transformation Size Transformation Risk Reduction Search and Transaction Cost reduction Monitoring Providing a Payments Mechanism Developing a “framework” for Profitable Financial Inclusion
  16. 16. THANK YOU