Indian financial system summary


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Indian financial system summary

  1. 1. Terminology The stock or capital stock of a business entity represents the original capital paid or invested into the business by its founders. The stock of a business is divided into shares, the total of which must be stated at the time of business formation. Types of stock Stock typically takes the form of shares of either common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders. Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Shares of such stock are called "convertible preferred shares" Stock derivatives A stock derivative is any financial instrument which has a value that is dependent on the price of the underlying stock. Futures and options are the main types of derivatives on stocks. The underlying security may be a stock index or an individual firm's stock, e.g. single-stock futures. Bond In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals. Bond: Bonds are debt and are issued for a period of more than one year. • Convertible Bond: Bonds that can be converted into common stock at the option of the holder. • Corporate Bond: Debt obligations issued by corporations. • Debt Market: The market for trading debt instruments. • Equity: The portion in an account that reflects the customer’s ownership interest. • Equity Market: Also called the stock market, the market for trading equities. • FII: Foreign Institutional Investors • G-Secs: The Reserve Bank of India (RBI) issues bonds known as Government of India
  2. 2. Securities (G-Secs) on behalf of the Government of India. • Inflation-Indexed Bonds: When one buys Inflation-Indexed securities, the interest is paid on the inflation-adjusted principal amount. • Redemption: The retiring of a debt instrument by paying cash. • Secondary Market: The market in which securities are traded after the initial (or primary) offering. Gauged by the number of issues traded. The over-the-counter market is the largest secondary market. • Step-up Bond: A bond that pays a lower coupon rate for an initial period which then increases to a higher coupon rate. • Zero Coupon Bonds: Such a debt security pays an investor no interest. It is sold at a discount to its face price and matures in one year or longer. Scheduled and Unscheduled Banks Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. "Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank". Cooperative Banks Definition of a cooperative bank (Source: ICBA, International Cooperative Banks Association) Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. NBFCs What is a non-banking financial company (NBFC)? A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (residuary non-banking company). NBFCs are doing functions similar to banks. What is difference between banks & NBFCs? NBFCs are doing functions akin to that of banks; however there are a few differences:
  3. 3. • (i) A NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.) • (ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and What are the different types of NBFCs registered with RBI? The NBFCs that are registered with RBI are: • (i) equipment leasing company; • (ii) hire-purchase company; • (iii) loan company; • (iv) investment company. With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as • (i) Asset Finance Company (AFC) • (ii) Investment Company (IC) • (iii) Loan Company (LC) Development Finance Institutions Development finance institution (DFI) is generic term used to refer to a range of alternative financial institutions including microfinance institutions, community development financial institution and revolving loan funds. Microfinance Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services. PSU Bonds PSU Bonds are debt instruments issued by various public sector units of the country. Debt Market Q. What is the Debt Market? The Debt Market is the market where fixed income securities of various types and features are issued and traded. Debt Markets are therefore, markets for fixed income securities issued by Central and State Governments, Municipal Corporations, Govt. bodies and commercial entities like Financial Institutions, Banks, Public Sector Units, Public Ltd. companies and also structured finance instruments.
  4. 4. Q. What is the Money Market? The Money Market is basically concerned with the issue and trading of securities with short term maturities or quasi-money instruments. The Instruments traded in the money-market are Treasury Bills, Certificates of Deposits (CDs), Commercial Paper (CPs), Bills of Exchange and other such instruments of short-term maturities (i.e. not exceeding 1 year with regard to the original maturity) Terms relating to Money Market Money Market: Refers to the market for short-term requirement and deployment of funds. Call Money: Money lent for one day Notice Money: Money lent for a period exceeding one day Term Money: Money lend for 15 days or more in Inter-bank market Commercial Bills Bills of exchange are negotiable instruments, drawn by the seller (drawer) of the goods on the buyer (drawee) of the goods for the value of the goods delivered. These bills are known as trade bills. Trade bills are called commercial bills when they are accepted by commercial banks. If the bill is payable at a future date and the seller needs money during the currency of the bill, he may approach his bank to discount the bill. The maturity proceeds or face value of a discounted bill from the drawee is received by the bank. If the bank needs funds during the currency of bill, it can rediscount the bill that has been already discounted by it in the commercial bill rediscount market at the available market discount rate. Difference between commercial paper and commercial bill.? Market Segment Issuer Instruments Government Securities Central Government Zero Coupon Bonds, Coupon Bearing Bonds, Treasury Bills, STRIPS State Governments Coupon Bearing Bonds. Public Sector Bonds Government Agencies / Statutory Bodies Govt. Guaranteed Bonds, Debentures Public Sector Units PSU Bonds, Debentures, Commercial Paper Private Sector Bonds Corporates Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits Banks Certificates of Deposits, Debentures, Bonds Financial Institutions Certificates of Deposits, Bonds
  5. 5. Commercial paper is a money-market security issued by large banks and corporations. It is generally not used to finance long-term investments but rather to purchase inventory or to manage working capital A Commercial Bill assists you to raise finance through the drawing and discounting of negotiable bank bills. Under this facility Bank agrees to both accept and discount a customer's bills. Bank Certificate of Deposit (Bank CD) A Bank Certificate of Deposit is much like a Bank Fixed Deposit, the major difference being that large, wholesale deposits are raised through Bank CDsBank CDs typically have a maturity period of 3-6 months. Securities Definition: Securities are any form of ownership that can be easily traded on a secondary market, such as stocks and bonds. It also includes their derivatives, such as futures contracts, options, or mutual funds. Time deposit Definition Savings account or CD held in a financial institution, usually a bank, for a fixed term or with the understanding that the customer can withdraw only by giving advanced notice. Depository Definition A bank or company which holds funds or securities deposited by others, and where exchanges of these securities take place. There are two Depositories and approximately 390 Depository Participants (DP) are registered with SEBI at present. The two Depositories are: * National Securities Depository Limited * Central Depository Services (I) Limited Credit Rating A credit rating estimates the credit worthiness of an individual, corporation, or even a country. Factoring
  6. 6. Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Forfaiting In trade finance, forfaiting involves the purchasing of receivables from exporters. The forfaiter will take on all the risks involved with the receivables. It is different from the factoring operation in the sense that forfaiting is a transaction based operation while factoring is a firm based operation - meaning, in factoring, a firm sells all its receivables while in forfaiting, the firm sells one of its transactions. Merchant Banking Known as “accepting and issuing houses” in the U.K. and “investment banks” in the U.S., modern merchant banks offer a wide range of activities, including portfolio management, credit syndication, acceptance credit, counsel on mergers and acquisitions, insurance, etc. Leasing Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of the assets. The relationship between the tenant and the landlord is called a tenancy, and can be for a fixed or an indefinite period of time (called the term of the lease). The consideration for the lease is called rent. Hire Purchase Hire purchase(frequently abbreviated to HP) is the legal term for a contract developed in the United Kingdom, and now found in India, Australia and New Zealand. It is also called closed-end leasing. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. In Canada and the United States, a hire purchase is termed an installment plan; other analogous practices are described as closed-end leasing or rent to own. Guaranteeing Definition To accept responsibility for an obligation if the entity with primary responsibility for the obligation does not meet it. What Does Portfolio Management Mean?
  7. 7. The art and science of making decisions about investment Underwriting Definition To assume risk, as when offering an policy or bringing a corporation's new securities issue to the public; in the latter case, the term originally applied only to firm commitment offerings, but is now used for all offerings. Pawn broker A pawnbroker (or pawnshop) is an individual or business that offers secured loans to people, with items of personal property used as collateral.