The document provides an overview of the Indian financial system. It discusses the role of financial markets and institutions in capital formation and economic development. It describes the key components of the Indian financial system including commercial banks, the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), money markets, capital markets, and foreign exchange markets. It outlines the functions of RBI as the central bank and regulator of the banking system and discusses the types and roles of commercial banks in India.

1. INDIAN FINANCIAL
SYSTEM
-DEEPAK BANSAL

2. UNIT-1
OVERVIEW OF INDIAN FINANCIAL SYSTEM
AGENDA
 Role of Financial Markets in capital formation and
economic development.
 Commercial Banks and industrial finance-evolving
role.
 Reserve Bank of India as a regulator of Banking
systems and its other functions.
 Securities & Exchange Board of India as a regulator
of Indian capital market

3. FINANCIAL SYSTEM AND ECONOMIC
DEVELOPMENT
 The growth of output in any economy depends on the
increase in the proportion of savings/investment to a
nation‟s output of goods and services.
 The financial system and financial institutions help in the
diversion of rising current income into
savings/investments.
 The financial system is possibly the most important
institutional and functional vehicle for economic
transformation. Finance is a bridge between the present
and the future and whether it be the mobilisation of
savings or their efficient, effective and equitable
allocation for investment, it is the success with which the
financial system performs its functions that sets the
pace for the achievement of broader national objectives.

4. SIGNIFICANCE & DEFINITION
 The term financial system is a set of inter-related
activities/services working together to achieve
some predetermined purpose or goal. It includes
different markets, the
institutions, instruments, services and mechanisms
which influence the generation of
savings, investment capital formation and growth.
 Van Horne defined the financial system as the
purpose of financial markets to allocate savings
efficiently in an economy to ultimate users either for
investment in real assets or for consumption.

5.  According to Robinson, the primary function of the
system is "to provide a link between savings and
investment for the creation of new wealth and to
permit portfolio adjustment in the composition of the
existing wealth.“
 From the above definitions, it may be said that the
primary function of the financial system is the
mobilisation of savings, their distribution for
industrial investment and stimulating capital
formation to accelerate the process of economic
growth.

6. TYPES OF MARKET
 Well-developed financial markets are required for
creating a balanced financial system in which both
financial markets and financial institutions play
important roles.
 The primary function of the financial markets is to
facilitate the transfer of funds from surplus sectors
(lenders) to deficit sectors (borrowers).
 Normally households have excess of funds or
savings which they lend to borrowers in the
corporate and public sectors, whose requirement of
funds exceed their savings.

7.  A financial Market consists of investors or
buyers, sellers, dealers and brokers and does not
refer to a physical location.
 The participants in the market are linked by formal
trading rules and communication networks for
originating and trading financial securities.
 The primary market in which the public issue of
securities is made through a prospectus is a retail
market and there is no physical location.
 The investors are reached by direct mailing or
invitation to bid within a price band.

8.  On the other hand, the secondary market or stock
exchange where existing securities are traded, is
an auction market and may have a physical location
such as the rotunda of the Bombay Stock
Exchange or the trading floor of Delhi, Ahmadabad
and other exchanges where the exchange
members meet to trade securities face-to-face.

9. MONEY MARKET
 The money or credit market is the centre for
dealings in monetary assets of short-term nature
generally below one year.
 The instruments are call money/notice money, term
money, treasury bills, commercial paper, certificates
of deposits, participation certificates and forward
rate agreements/interest rate swaps.
 The money market has organised and unorganised
components.
 The organised credit market is dominated by
commercial banks.

10.  The other major players are the Reserve bank of
India, Life Insurance corporation, General
Insurance corporation, Unit Trust of India,
Securities Trading corporation of India Ltd. And
Discount and finance house of India.
 Unorganised Market consists of indigenous bankers
and money lenders.
 There is no clear demarcation between short-term
and long-term finance in as much as there is
nothing on a hundi to indicate accommodation.
 Hundi is the indigenous bill of exchange.
 Hundis are usually accommodation bills.

11. CAPITAL MARKET
 The capital market consists of primary and
secondary markets.
 The primary market deals with the issue of new
instruments by corporate sector such as equity
shares, preference shares and debentures.
 The secondary market consists of 24 stock
exchanges, (out of which 5 has been de-
recognized) including the national stock
exchange, the over the counter exchange of India
and interconnected stock exchange of India Ltd.
Where existing instruments including negotiable
debts are traded.

12.  Capital formation occurs in the primary market
while the secondary market provides a continuous
market for the securities already issued to be
bought and sold in volume with little variation in the
current market price.
 The major player in the primary market are the
merchant banker, mutual funds, financial
institutions, foreign institutional investors and the
anchor of the market, the individual investor.
 In the secondary market, the stockbrokers who are
members of the stock exchanges, the mutual funds,
financial institutions, foreign institutional investors
and individual investors.

13. FOREIGN EXCHANGE MARKET
 The foreign exchange market encompasses all
transactions involving the exchange of different
monetary units for each other.
 Every sovereign nation has its own currency. The
monetary unit of a country can be exchanged with any
other currency of any other country in the foreign
exchange market.
 The foreign exchange market is not a physical place. It
is a network of banks‟ dealers and brokers who are
dispersed throughout the leading financial sectors of the
world.
 It acts as an intermediary for individual buyers and
sellers. The foreign exchange market links financial
activities in different currencies.

14.  FEM in India comprises of authorized dealers
consisting mainly of commercial banks, customers
and Reserve Bank of India.
 There are seven major centres in Mumbai, Delhi,
Calcutta, Chennai, Bangalore, Kochi and
Ahmadabad with Mumbai accounting for the major
portion of the transactions.
 The Foreign Exchange Dealers Association of
India(FEDAI) plays an important role by laying
down the rules for commission and other charges.

15. FOREIGN EXCHANGE RATES
 The foreign exchange rates govern the rate at
which one currency can be exchanged for another.
 An exchange rate may be defined as the amount of
currency that one requires to buy one unit of
another currency or is the amount of a currency one
receives when selling one unit of another currency.

16. RESERVE BANK OF INDIA
 The Reserve Bank of India as the central bank of
the country, is at the head of this group.
 Commercial banks themselves may be divided into
two groups, the scheduled and the non scheduled.
 The commercial banking system may be
distinguished into:
 A. Public Sector Banks
 B. Private Sector Banks

17. A. Public Sector Banks
 i) State Bank of India
 ii) Associate Bank
 iii) 14 Nationalized Banks (1969)
 iv) 6 Nationalized Banks (1980)
 v) Regional Rural Banks
B. Private Sector Banks
 Other Private Banks;
 ii) New sophisticated Private Banks;
 iii) Cooperative Banks included in the second
schedule;
 iv) Foreign banks in India, representative offices,
and
 v) One non-scheduled banks

18. RBI
 The Reserve Bank of India (RBI) is the apex
financial institution of the country„s financial system
entrusted with the task of control, supervision,
promotion, development and planning.
 RBI is the queen bee of the Indian financial system
which influences the commercial banks'
management in more than one way.
 RBI performs the four basic functions of
management, viz., planning, organising, directing
and controlling in laying a strong foundation for the
functioning of commercial bank

19. FUNCTIONS
 Issuing currency notes, to act as a currency
authority.
 Banker, Agent and Financial Advisor to the State
 Banker to the Banks
 Custodian of Foreign Exchange Reserves
 Lender of the Last Resort
 Banks of Central Clearance, Settlement and
Transfer
 Controller of Credit
 Supervisory Functions

20. COMMERCIAL BANKS
 In India there are 88 commercial banks which
account for about 82 %of the total assets of the
financial sector, over 2000 cooperative banks
accounting for about 5% and 133 regional Rural
Banks, which account for about 3% of the total
assets of the financial sector.
 Commercial banks are business enterprises which
deal in finances, financial instruments and provide
various financial services for a price known as
interest, discount, commission, fee etc.

21.  According to the Banking Regulation Act, 1949,
Banking means, “accepting, deposit of money from
the public, for the purpose of lending or
investment.”
 These deposits may be repayable on demand or
otherwise and may be withdrawn by cheque, draft,
order or otherwise.
 Accepting deposits and lending these resources to
business houses and individuals are the main
function of commercial banks.
 Commercial banks also involve into various
financial services.

22. FUNCTIONS OF COMMERCIAL BANKS
 Accepting deposits
 Loans and advances
 Agency functions
 Dealings in foreign exchange
 Credit creation
 Popularising cheque system
 Transfer of funds
 Other functions
 Function under innovative banking
 Insurance business

23. SECURITY & EXCHANGE BOARD OF INDIA
 The SEBI Act was passed on 4th April, 1992 which
empowered SEBI to regulate entire gamut of
activities in primary and secondary market.
 SEBI exercises control over new issues registration
and regulation of market intermediaries, regulation
of mutual funds, regulating listing of securities,
imposing a code of conduct on merchant bankers,
underwriter, brokers.
 SEBI protects the interests of investors in securities
and promote the development and regulation of the
securities market.

24.  The Board consists of a chairman, two members
from the Government of India, ministries of Law and
Finance, one member from the RBI and two other
members.
 The SEBI prohibits unfair trade practices and
insider trading, regulation of take-overs etc.

25. FUNCTIONS OF SEBI
 Regulating the business in stock exchanges and
any other securities market.
 Registering and regulating the working of stock
brokers, sub-brokers, share transfer agents,
bankers to an issue, merchant bankers,
underwriters, portfolio managers, investment
advisers and such other intermediaries who may be
associated with securities markets in any manner.
 Registering and regulating the working of collective
investment schemes including mutual fund.

26.  Promoting and regulating self-regulatory
organisation.
 Prohibiting fraudulent and unfair trade practices
relating to securities market.
 Promoting investors‟ education and training of
intermediaries of securities market.
 Prohibiting insider trading in securities.
 Levying fees or other charges for carrying out the
above purposes and
 Conducting research for the above purposes.

27. UNIT- II
FINANCIAL MARKET
Agenda
 Money Market: Organisation, Constituents and
Instruments
 Capital Market: New Issue Market & Stock
Exchanges- Differences & Similarities, Functions,
Methods of New Issues, Regulatory framework.

28. MONEY MARKET
 Money Market is a very important segment of the
Indian financial system.
 Money Market is basically over-the-phone market.
The transactions are conducted through oral
communications.
 It is the market for dealing in monetary assets of
short-term nature. Short-term funds up to one year.
 Money market instruments have the characteristics
of liquidity, minimum transaction cost and no loss in
value.

29.  Money market provides access to providers and
users of short term funds to fulfill their borrowings
and investment requirements.
 The Money Market is the major mechanism through
which the Reserve Bank influences liquidity and the
general level of interest rates.
 There are a large number of participants in the
money market: Commercial Banks, Mutual funds,
investment institutions, financial institutions and
finally the Reserve Bank of India.
 The money market can obtain funds from the
central bank either by borrowing or through sale of
securities.

30. ORGANISATION OF MONEY MARKET
 Organised
 Reserve Bank of India
 Public Sector Banks
 Private Sector Banks-
 Non-Scheduled Banks
 Scheduled Banks-
Foreign Banks

 Indian Banks
 Development Banks and other Financial Institutions like
LIC, UTI, IFC, IDBI etc.
 DFHI Ltd.

31.  Unorganised
 Indigenous bankers
 Money Lenders
 Traders
 Commission Agents
 Chit Funds
 Nidhis

32. MONEY MARKET INSTRUMENTS
 Money at call and short notice (Call Loans)
 Treasury Bills
 Bills Rediscounting Scheme (BRS)
 Certificates of Deposits (CDs)
 Commercial Papers (CPs)
 Repurchase Options
 Inter-Bank Participation Certificates on a risk
sharing basis or without risk sharing basis
 Options
 Swaps

33. CAPITAL MARKET
New Issue Market
New Issues Market comprises all people,
institutions, methods, services and practices
involved in raising fresh capital for both new and
existing companies. This Market is also called
Primary Market. PM deals in only new securities
which acquire form for the first time, i.e. which were
not available previously.
On the other hand, secondary market or stock
market or stock exchange deal in existing
securities, i.e. securities which have already been
issued by companies and are listed with the stock
exchanges.

34. FUNCTIONS OF NIM
 Facilitates transfer of resources from savers to
entrepreneurs establishing new companies.
 Helps raising resources for expansion and/or
diversification of activities of existing companies
 Helps selling existing enterprises to the public as
going concerns through conversion of existing
proprietorship/partnership/private limited concerns
into public limited companies.

35. PLAYERS IN THE NEW ISSUE MARKET
 Merchant Bankers
 Registrars
 Collecting and co-ordinating Bankers
 Underwriters
 Brokers, Agents
 Printers
 Advertising Agencies
 Mailing Agencies
 SEBI

36. DIFFERENCES BETWEEN NIM AND STOCK
EXCHANGES
NIM Stock Exchanges
1. Market for new securities 1. Market for existing securities
2. No fixed geographical location 2. Located at a fixed place
3. Results in raising fresh 3. Facilitates transfer of securities
resources for the corporate sector from one corporate investor to
another.
4. All companies enter NIM 4. Securities of only listed
companies can be traded at stock
exchanges
5. No tangible form or 5. Has a definite administrative
administrative set-up set-up and a tangible form.
6. Subjected to outside control by 6. Subjected to control both from
SEBI, Stock Exchanges and the within and outside.
companies Act.

37. SIMILARITIES BETWEEN NIM & STOCK
EXCHANGES
 Securities traded at stock exchanges are those
which have first been issued by the companies.
 While issuing prospectus, the companies stipulate
in the prospectus that application has been made or
will be made in due course for listing of shares with
the stock exchange.
 Stock exchange exercise control over the
organisation of new issues as a precondition for
listing of shares.
 Stock exchanges provide liquidity to the securities
which have passed through NIM.

38. METHODS OF NEW ISSUES
 Public issue through prospectus
 Through offer for sale
 Through placement of securities- private placement
and stock exchange placing
 Rights issue
 Issue of Bonus shares
 Book-building
 Stock option or Employees Stock Option Scheme

39. UNIT-III
BANKING INSTITUTIONS
Agenda
 Commercial Banks
 Co-operative Banks

40. COMMERCIAL BANKS
 Commercial Banks are business enterprises which
deal in finances, financial instruments and provide
various financial services for a price known as
interest, discount, commission, fee etc.
 According to the Banking Regulation Act, 1949,
banking means, “Accepting deposits of money from
the public, for the purpose of lending or
investment”.
 These deposit may be repayable on demand or
otherwise and may be withdrawn by cheques, draft,
order or otherwise.

41.  Accepting deposits and lending these resources to
business houses and individuals are the main
function of commercial banks.

42. FUNCTIONS OF COMMERCIAL BANKS
 Accepting Deposits
 Demand deposits or current accounts
 Savings deposits
 Time deposits or fixed deposits
 Loans and Advances
 Cash Credits
 Overdrafts
 Discounting of bills
 Short-term, Medium-term or Long-term loans

43.  Agency function
 Dealings in foreign exchange
 Credit Creation
 Popularising Cheque System
 Transfer of funds
 Other functions
 Insurance Business

44. SOURCES & APPLICATION OF FUNDS
Sources
 Paid-up Capital
 Reserves and Surpluses
 Deposits
Application
 Buildings, furniture, office equipment etc. for
conducting business
 Money at call and short notice
 Bills discounted and purchased
 Treasury bills etc.

45. ASSET STRUCTURE OF COMMERCIAL BANKS
 Cash Balances
 Money at call and short notice
 Short-term Bills
 Loans and advances
 Investments

46. NON-PERFORMING ASSETS
 A non-performing Asset in India represents an
advance that has not been serviced as a result of
past dues accumulating for 90 days and over.
 NPAs consist of assets under three categories:-
 Sub-standard
 Doubtful and
 Loss

47.  A non-performing asset is an advance where:
 Interest and/or installment of principal remain
overdue for a period of more than 90 days in
respect of term loan.
 The account remains our of order for a period of
more than 90 days in respect of an overdraft/cash
credit.
 The bill remains overdue for a period of more than
90 days in case of the bills purchased and
discounted.
 Interest and/or installment of principal remain
overdue for two harvest seasons but for a period of
not exceeding 180 days in the case of an advance
granted for agricultural purposes.
 And amount to be received for a period of more
than 90 days in respect of other accounts.

48. BANK RATE, LENDING RATES AND CREDIT-
OFF TAKE
 Bank rate is the rate of interest at which Reserve
Bank of India lends money to banks.
 Its is the rate at which the central bank rediscounts
certain defined bills and other eligible papers.
 Prime Lending rate is the rate of interest at which
banks lend to the borrowers with highest credit-
worthiness.
 Credit-off take occurs when the demand for money
at lower rate (bank rate and various interest rate) is
promoted.

49. REPO AND REVERSE REPO RATE
 Repo rate is the rate at which banks borrow short-
term funds from RBI.
 Reverse repo rate is the rate at which banks park
their short-term surplus funds in the RBI.

50. Commercial Banks
Scheduled Banks non-scheduled banks
(i) Public Sector (28) (i) Local Area Banks
(ii) Private Sector (60) SBI Group (8)
(iii) Regional Rural (231) Nationalised Bank(19)
Indian (29)
Foreign (31)

51. ORGANISATIONAL STRUCTURE OF CO-
OPERATIVE CREDIT INSTITUTIONS
 Urban Co-operative Banks
 Rural Co-operative Credit Institutions
 Short Term Credit
 State Co-operative Banks
 District/Central Banks
 Primary Agricultural Credit Societies
 Long Term Credit
 State Co-operative Agricultural & Rural
Development Banks
 Primary Co-operative Agricultural & Rural
Development Banks

52. CO-OPERATIVE BANKS
 Co-operative Banks undertake the business of
banking both in urban and rural areas on the
principle of co-operation.
 They have served a useful role in spreading the
banking habit throughout the country.
 The co-operative banks have been set up under the
various Co-operative Societies Acts enacted by the
State Governments.
 The State Governments regulate/monitor these
banks.
 Certain provisions of the Banking Regulation Act
1949 were made applicable to co-operative banks
as well.

53.  The State Co-operative Banks and Urban Co-
operative Banks are eligible to be granted the
status of scheduled banks by the Reserve Bank of
India.
 All Co-operative banks are eligible for being
registered as insured banks.

54. URBAN CO-OPERATIVE BANKS
 These banks are required to obtain a license from
the Reserve Bank of India under section 22 of the
Banking Regulation Act, 1949.
 Recently the Reserve Bank of India has revised the
licensing policy of new banks.
 According the this, a new bank should have share
capital of Rs. 4 Crore and membership of at least
3000 if the population is over 10 lakhs.
 A share capital of Rs. 2 Crore and membership of
at least 2000 are required for population of 5 to 10
lakhs.

55.  Share capital of Rs. 1 Crore and membership of at
least 1500 are required for population of 1 to 5
lakhs.
 Share capital of Rs. 25 lakhs and membership of at
least 500 for population of less than 1 lakh.
 The new bank should have at least 2 directors with
suitable banking experience or relevant
professional qualifications.
 An urban co-operative bank is allowed to become a
schedule bank if its net demand and time liabilities
are at least Rs. 100 Crore and its overall
functioning in terms of select parameters is
satisfactory.

56.  All categories of scheduled banks including co-
operative banks are now subject to the same cash
reserve requirement as applicable to Scheduled
Commercial Banks.

57. STATE CO-OPERATIVE BANKS
 These are the important banks in the field of short-
term co-operative credit in rural areas.
 The scheduled co-operative banks are eligible for
loans and advances from RBI and have to make
cash reserve ratio with the RBI.
 The non-scheduled state co-operative banks have
to comply with the requirement of making deposit
with RBI.
 State co-operative banks are also required to seek
licence from RBI for carrying on of Banking
business under section 22 of the Banking
Regulation Act, 1949.

58.  State Co-operative banks are eligible for obtaining
credit from NABARD on the basis of short-term and
medium-term credit granted by them.
 State co-operative banks grant loans and advances
to the central/district co-operative banks.

59. UNIT-IV
NON-BANKING FINANCIAL INTERMEDIARIES
Agenda
 Investment Policy and performance appraisal of
Unit Trust of India and other mutual funds
 Non-Banking Financial Companies
 Insurance Companies

60. NON-BANKING FINANCIAL COMPANIES
 Non-banking Financial Institutions carry out
financing activities but their resources are not
directly obtained from the savers as debt. Instead,
these Institutions mobilize the public savings for
rendering other financial services including
investment. All such Institutions are financial
intermediaries and when they lend, they are known
as Non-Banking Financial Intermediaries (NBFIs) or
Investment Institutions.

61.  The principal business of NBFCs is to accept
deposits under various schemes or arrangements
like regulated deposits and exempted deposits and
to lend in various ways.
 NBFCs except HFCs are regulated by the RBI.
 HFCs are regulated by NHB.
 NBFCs were allowed to enter into credit card
business on their own or in association with another
NBFC or a scheduled commercial bank.

62.  Loan Companies
 Investment Companies
 Hire-purchase Finance
 Housing finance
 Lease Finance
 Mutual Benefit Financial Companies
 Residuary Non-Banking Companies
 Merchant Banks
 Venture Capital Funds
 Factors

63.  Apart from these NBFIs, another part of Indian
financial system consists of a large number of
privately owned, decentralised, and relatively small-
sized financial intermediaries. Most work in
different, miniscule niches and make the market
more broad-based and competitive. While some of
them restrict themselves to fund-based business,
many others provide financial services of various
types. The entities of the former type are termed as
"non-bank financial companies (NBFCs)". The latter
type are called "non-bank financial services
companies (NBFCs)".

64.  Non-bank financial intermediaries (NBFIs) comprise
a mixed bag of institutions, ranging from leasing,
factoring, and venture capital companies to various
types of contractual savings and institutional
investors (pension funds, insurance companies,
and mutual funds). The common characteristic of
these institutions is that they mobilize savings and
facilitate the financing of different activities, but they
do not accept deposits from the public. NBFIs play
an important dual role in the financial system.

65. MUTUAL FUNDS
 Mutual Funds are financial intermediaries which
collect the savings of investors and invest them in a
large and well diversified portfolio of securities such
as money market instruments, corporate and
Government bonds and equity shares of joint stock
companies.
 A Mutual Fund is a pool of mix funds invested by
different investors, who have no contact with each
other.
 Mutual funds helps the investors who generally
don‟t have adequate time, knowledge, experience
and resources for directly accessing the capital
market.

66.  The first mutual fund was the Unit Trust of India in
1964 under an act of Parliament.
 During the years 1987-1992, seven new mutual
funds were established in the public sector.
 In 1993, the Government changed its policy to allow
the entry of private corporate and foreign
institutional investor into the mutual fund segment.
 There are two types of Mutual Funds :
 Open-ended funds
 Closed-ended funds

67. ORGANIZATION
 The Sponsor
 The Board of Trustee or Trust Company
 The Asset Management Company
 The Custodian
 The Unit-holders

68. INVESTMENT POLICY & PERFORMANCE APPRAISAL
OF UTI
 The MFs invest their resources in different type of
financial assets subject to the guidelines form the
government and the SEBI.
 The government directs that investment by the UTI
in anyone company should not exceed five percent
of its total investible fund, or 10 percent of the value
of the outstanding securities of that company,
whichever is lower.
 It is further laid down that UTI should not invest
more than 5 percent of its funds in the initial issues
of any new industrial concern.

69.  The objective of government regulations are to
minimize risk and avoid concentration of
investments in a few large companies.
 In view of the requirement of safe provision of a
stable, regular and growing income to its unit-
holders, the portfolio of its assets has to be
composed of fixed-income securities and ordinary
shares.
 The SEBI requires other mutual funds to invest not
more than 5 percent of the outstanding equity
capital of any company.

70. DETERMINANTS OF MUTUAL FUND
PERFORMANCE
 Factors affecting expected returns include asset
allocation and systematic risk, while transaction
costs include explicit and implicit ones, which can
be measured by expense ratios, age of the funds,
fund fees, management structure, management
tenure, macro economics variables like inflation,
growth rate of GDP, development of capital market,
and size of funds respectively.
 In order to judge the performance of MF schemes
in an objective manner and offer investors an easy
way to identify funds that have performed better in
relation to their peer, a number of….

71.  Entities are evaluating and ranking their
performance.
 The most popular of them are rankings/evaluations
by CRISIL, Value Research India and Credence
Analytics.

72. INSURANCE COMPANIES
 The Insurance companies are financial
intermediaries as they collect and invest large
amounts of premiums.
 They offer protection to the investors, provide
means for accumulating savings and channelise
funds to the government and other sectors.
 The insurance industry has both economic and
social purpose. It provides social security and
promotes individual welfare.
 The actual premium of insurance companies
comprises the pure premium and administrative as
well as marketing cost.

73.  The pure premium is the present value of the
expected cost of an insurance claim.
 Since there is a lag between payment of premiums
and payment of claims, there is generation of
investible funds known as insurance reserves.
 Insurance companies may be organised as either
corporations or mutual associations.
 There are various parts of insurance industry: life
insurance, health insurance, general insurance, etc.

74. INSURANCE INDUSTRY IN INDIA
 Public Sector
 Life – LIC, Post Office Insurance
 General – GIC and its four subsidiaries
 Private Sector
 Life
 General

75. INVESTMENT PATTERN AND POLICY
 The pattern of investment of LIC funds has been
governed by the provisions of the Insurance Act
1938.
 Till very recently, it had to invest at least 50 percent
of its controlled funds in government and other
approved securities, 15 percent in “other”
investments which included loans to state
government for housing and water supply schemes,
municipal securities not included in category one,
government guaranteed loans to municipal
committees and co-operative sugar factories, and
upto 35 percent in “approved” …..

76. investments which included shares and debentures
of public and private limited companies, of co-
operative societies, immovable property, loans to its
policy-holders and fixed deposits with scheduled
banks and co-operative societies.

77. UNIT-V
DEVELOPMENT, MERCHANT & INVESTMENT
BANKING
Agenda
 Development Banking
 Merchant Banking
 Investment Banking

78. DEVELOPMENT BANKING
 Development Banking is the financing of projects
assessed on the basis of their viability to generate
cash flows to meet the interest and repayment
obligation.
 They have an in-built promotional aspect because
projects have to fall within the overall national
industrial priorities, located preferably in backward
areas and promoted by entrepreneurs.

79. Development banking is different: Loans are made
not to those who have accumulated wealth in the
past but to those who show promise to become
wealthy in the future. Normal banking looks for
safety in assets accumulated from the past; in
development banking, possible accumulation of
assets in the future is the true collateral. Thus, while
in normal banking, the collateral is real and
tangible, in development banking, the collateral is a
dream; it is intangible. In normal banking, an
interest default of more than 90 days becomes a
non-performing asset. In the case of development,
growth is rarely smooth; development happens in
fits and starts; cash flows are subject to wild
fluctuations and become negative at times.

80. development banks need to have a longer
perspective than three months; they should show
patience for years. Normal banks can afford to be
myopic; development banks should take the long
view. For development banks, it is the trend line
and not the current surplus that is important. As one
development banker blithely explained: "When I see
any risk, I take my money and run away." But that is
not development banking; development banks take
risks that ordinary banks will not.

81. MERCHANT BANKING
 Merchant banking activity was formally initiated into
the Indian Capital markets when Grindlays bank in
1967 received the license from Reserve Bank of
India in 1967.
 Apart from meeting specially, the needs of small
scale units, it provided management consultancy
services to large and medium sized companies.
 Following Grindlays Bank, Citibank set up its
merchant banking division in 1970. The division
took up the task of assisting new entrepreneurs and
existing units in the evaluation of new projects and
raising funds through borrowing and equity issues.

82.  Merchant Bankers are permitted to carry on activities of
primary dealers in government securities.
 On the recommendations of Banking Commission in
1972, Indian banks should offer merchant banking
services as part of the multiple services they could
provide their clients.
 State Bank of India started the merchant Banking
division in 1972. In the initial years the SBIs objective
was to render corporate advice and assistance to small
and medium entrepreneurs.
 The commercial banks that followed SBI were Central
Bank of India, Bank of India and syndicate Bank in 1977;
Bank of Baroda, Standard Chartered Bank and
Mercantile Bank in 1978 and United Bank of India,
United Commercial Bank, PNB, Canara Bank and IOB in
late 1970s and early 1980s.

83.  Among the development banks ICICI started merchant
banking activities in 1973, followed by IFCI(1986) and
IDBI (1991).
 The notification of the Ministry of Finance defines a
merchant banker as, “any person who is engaged in the
business of issue management either by making
arrangements regarding selling, buying or subscribing to
securities as manager, consultant, advisor or rendering
corporate advisory service in relation to such issue
management.”
 Merchant bankers have to be organized as body
corporates. They are governed by the merchant bankers
rules issued by the Ministry of Finance and merchant
bankers regulations issued by SEBI.

84. SERVICES RENDERED BY MERCHANT BANKS
 Organizing and extending finance for investment in
projects,
 Assistance in financial management,
 Acceptance of house business,
 Raising Eurodollar loans and issue of foreign
currency bonds,
 Financing local authorities
 Financing export of capital goods, ships,
hydropower installation, railways.
 Financing of hire-purchase transactions, equipment
leasing, mergers and take-overs

85.  Valuation of Assets,
 Investment management and promotion of
investment trusts.
 All merchant banks don‟t offer all these services.
 Different merchant bankers specialize in different
services.
 Merchant banking is a skill based activity and
involves servicing of any financial need of the client.
 Merchant banking activities are regulated by (1)
Guidelines of SEBI and Ministry of Finance, (2)
Companies act 1956 (3) Listing guidelines of Stock
Exchanges and (4) Securities Contracts
(Regulation) Act 1956.

86. INVESTMENT BANKING

87. UNIT-VI
FDI AND ISSUES RELATED THEREIN
Agenda
 Foreign Investment and its regulation
 Accessing International Capital Market

88. FOREIGN DIRECT INVESTMENT