General Finance & Banking

8/4/2019 General Finance & Banking

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T O G E T H E RT A L E N T E D

Unissons nos Talents

T O G E T H E RT A L E N T E D

General Finance &Banking


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Financial System

Financial System

FinancialInstitution

FinancialMarkets

FinancialInstruments

FinancialServices

Financial System transfers funds from savers to consumers


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Financial System-Functions


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Financial Markets

Financial Markets

Capital Markets Money Markets

Organized Unorganized

Primary Market Secondary Market

Price discovery process - when buyers and sellers trade the assets, they

determine price at which financial assets can be sold or bought atProvision of liquidity by providing a mechanism for investors to sell

financial assets

Low cost of transaction and information, as buyers / sellers are able to

access each other on a collective basis and therefore individual

efforts of finding a buyer / seller need not be made


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Capital Markets Overview

Markets A place where exchange of goods and services happen

Money markets are financial markets where only short-term debt instruments(maturity of less than one year) are traded. Money markets are mainly wholesalemarkets (large transactions) where firms and financial institutions manage theirshort-term liquidity needs (i.e. to earn interest on their temporary surplus funds).

Capital Market Capital markets are markets in which long-term securities aretraded. These long-term instruments include equity instruments (infinite life),government bonds and corporate bonds (original maturity of one year or greater).Capital markets securities are often held by financial intermediaries, such as mutualfunds, pension funds and insurance companies.

Place where capital (fund) requirements of the issuers are met; i.e. Issuers(Corporate, Government, etc) raise funds

Trades in these markets are for debt, equity securities or other instruments

Organized, as they are governed by regulatory bodies [Securities &

Exchange Board of India, RBI]


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Primary Market

Sell (float) new stocks and bonds to the public for the first time. In the

primary market the security is purchased directly from the issuer. A primary

market is a financial market in which new issues of financial securities (both

bonds and stocks) are sold to initial buyers.

Secondary Market

Secondary market is where investors trade among themselves. An

investor purchases a security from another investor rather than the

issuer. Auction market forms a part of this market. A secondary

market is one in which securities that have been previously issued

can be resold.

Primary markets facilitate new financing to corporations, but most of

the trading takes place in the secondary markets.

Primary and Secondary Capital Markets


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Financial Markets


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Terms.

CB (Commercial Bills): A document expressing the commitment of aborrowing firm to repay a short-term debt at a fixed date in the future.

Repo Rate: Instrument of Money market, rate at which bank borrows moneyfrom central bank

CD (Certificate of Deposits): Time Deposits, certificate issued by bank thatindicates sum of money is deposited. Bears a maturity date, interest rate,duration can be max of 5 years.

CP (Commercial papers): Short term promissory notes either unsecured orbacked by assets such as loan or mortgages issued by corporation.

ICD (Investment corporation of Dubai): Special instruments bi investmentbanking of Dubai to generate investment returns and support Dubai.

Treasury Bills: Treasury Billsare money market instruments to finance theshort term requirements of the Government.

ALM :ALM is a comprehensive and dynamic framework for measuring,monitoring and managing the market risk of a bank.


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Financial Institutions

Financial Institutions

Regulatory Intermediaries Non-Intermediaries Others

Banking Non-banking

Non Banking Intermediaries

Insurance Cos.

Pension Funds

Credit Unions

Non Intermediaries

Asian Development Bank

World bank

Banks as Intermediaries

ABN AMRO, CITI Bank, State Bank of India


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1.Money market is a place where banks deal in short term loans in the form ofcommercial bills and treasury bills. But capital market is a place where

brokers deal in long term debt and equity capital in the form of debenture,shares and public deposits.

2.In money market maturity date of repayment may after one hour to 90 days.But in capital market, loans are given for 5 to 20 years and if issue of sharesby co. , its amount will repay at winding of company . But investors have rightto sell it to other investors if they need the money.

3.Rate of interest in money market is controlled by RBI or central bank of anycountry. But capital markets interest and dividend rate depends on demandand supply of securities and stock markets sensex conditions. Stock marketregulator is in the hand of SEBI.

4.Main dealer of money market s are commercial banks like SBI, ICICI Bank,UTI and LIC and other financial institutions. Main dealers are all the public andprivate ltd. Co. and more than 30 million investors. It is increasing trend due toopening of online capital market.

5.In USA, money marketis famous with dealing of money fund and bankersacceptance instruments. But capital market in USA is famous with New Yorkstock exchange and stock regulator is Security exchange commission (SEC)
http://www.svtuition.org/2009/12/what-is-dividend.htmlhttp://www.svtuition.org/2009/12/what-is-dividend.html


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Share & Bond

Bonds, debentures, government securities: These are all debt instruments.You are loaning your money to the entity issuing the security. It could be a

corporation, a government entity, etc.

Shares: You own a portion of the company, thus another word for a stock isequity. You get to share in the success or failure of the company.

Deposits are like any bank deposit. Interest is paid in various ways on thedeposits.

difference between debenture and bond: according to companies act 1956India Debenture includes stocks, bond and any other securities of company. private sector companies issue debentures and public sector and financial

institutions issue bonds . Bond is a long term debt instrument that promises to pay a fixed annual interest over

a specific period. debentures may be convertible into equity shares while bonds are not. debentures may be redeemed in installment

To issue a share / bond / debenture, the company must be registered andmust have the necessary minimum capital. Prior approval from the existingshare holders, Company Law Board, SEBI, RBI etc is necessary


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Which is better investment? it totally depends on where you are in life andwhat your tolerance for risk is.

Id rather own something for a period of years in hope for growth, then lendsomebody $20 and know Im getting $25 back in 5 years. Thus, I wouldprobably consider myself more of a stock investor.

However, the bondholder may very well feel safer and more secure with

his/her investment choice. The ideal long-term portfolio would probablyhave a little bit of each.

Equity Market: In Equity market we buy shares instead of certificates. Theseshares makes us a proportionate owner of the company of which we buyshares. Here also we lend money to the companies but like a owner. Ifcompanies makes profit we gain interest and if the companies makes loss

we loose money.

In short you can say in DEBT MARKET investment is very safe but giveslow but fixed returns. In EQUITY MARKET investment is linked with a riskbut when market if good given a much better returns than DEBT schemes.


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Debt Market: If a person invests in Debt funds it means he is eitherinvesting in Company bonds, Fixed Deposits, Debt linked mutual funds,bank bonds, municipal bonds, central/state government securities etc.As the name suggest companies/Institutions line central government,state government, Private/Public sector companies, banks etc needsfunds to run their daily business. They issue securities/certificatesagainst which we lend them money against a chargeable interest.

Mainly in Debt market we lend money in the form of DEBT. The interestpromised by companies, banks, government here is secured.


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Some Story.

The name bankderives from the Italian word banco"desk/bench", usedduring the Renaissance by Florentine bankers, who used to make theirtransactions above a desk covered by a green tablecloth. However,traces of banking activity can be found even in ancient times.

In fact, the word traces its origins back to the Ancient Roman Empire,where moneylenders would set up their stalls in the middle of enclosed

courtyards called macellaon a long bench called a bancu, from whichthe words bancoand bankare derived. As a moneychanger, themerchant at the bancudid not so much invest money as merely convertthe foreign currency into the only legal tender in Rome- that of theImperial Mint


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Why do Banks exist?

To Provide Financial products and Services


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What is a Bank?

A bank is a business.

Banks sell services - financial services such as car loans, home mortgageloans, business loans, checking accounts, savings accounts, certificatesof deposit, and credit card services.

Some people go to the bank in search of a safe place to keep their money.

Others go to the bank seeking money for loans to buy houses or cars, startbusinesses, expand farms, or do any of the other things that requireborrowing money.


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More Facts

Where do banks get the money to lend?

They get it from all the people who open savings and other typesof accounts. Banks act as a go between the people who saveand people who need to borrow.

If savers didn't put their money in banks, the banks would havelittle or no money to lend.


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More Facts

Your savings are combined with everyone else's savings to form abig pool of money.

The bank uses that pool of money to make loans. The money doesn'tbelong to the bank's president, board of directors, or stockholders.It belongs to the depositors.

That's why banks have a special obligation not to take big risks whenthey make loans.


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Banking as a Whole

Clients

Includes Auto Finance,

Consumer Banking, Home

Finance, Insurance and Small

Business Banking

Provides mutual fund, insurance

& home finance and workplace

banking products to consumers

and small businesses

One of the worlds leadinginvestment banks

Services provided: Advice on

corporate strategy and structure,

raising and placing capital, making

markets in financial instruments and

offering sophisticated risk

management services

Provides investment & wealth management

services to institutional investors, high net

worth individuals & retail customers

Provides personalized advice and solutions to

wealthy individuals

Global leader in transaction

processing and information

services to wholesale clients

Three Businesses: Institutional

Trust Services, Investor

Services(WSS) and Treasury

Services

Major provider of financial services

including corporate finance, cash

management, & credit

Comprises of five national business

segments: Middle Market Banking,

Mid-Corporate Banking, Commercial

Real Estate, Asset Based Lending

and Commercial Leasing

Delivers credit card and other related

payment products to cardholders and

merchant outlets

Aims to be the preferred payment card in

existing customers wallets and to increase

access to new customers

InvestmentBank

Treasury andSecurities

Services

CardServices

Assetand

wealthManagement

Retail

FinancialServices

CommercialBanking


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A Bank is?

A bank is defined as a commercial institution licensed as a receiver ofdeposits and giver of loans both short and long term.

An organization, usually a corporation, chartered by a state or federalgovernment,which does most or all of the following: receives demand deposits and timedeposits, honorsinstruments drawn on them, and paysinterest on them;discounts notes, makes loans, and invests in securities; collects checks, drafts,and notes; certifies depositor's checks; and issues drafts and cashier's checks.


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Terms

An unsecured, short-term debt instrument issued by a corporation, typicallyfor the financing of accounts receivable, inventories and meeting short-termliabilities. Maturities on commercial paper rarely range any longer than 270days. The debt is usually issued at a discount, reflecting prevailing marketinterest rates. A major benefit of commercial paper is that it does not need to be registered with

the Securities and Exchange Commission (SEC) as long as it matures before ninemonths (270 days), making it a very cost-effective means of financing. Theproceeds from this type of financing can only be used on current assets

(inventories) and are not allowed to be used on fixed assets,

The working capital requirement of business firms is provided by banksthrough cash-credits / overdraft and purchase/discounting of commercialbills. Commercial bill is a short term, negotiable, and self-liquidatinginstrument with low risk. It enhances he liability to make payment in a fixeddate when goods are bought on credit.

Treasury Bills: A short-term debt obligation backed by the U.S. governmentwith a maturity of less than one year. The purchase price is less than theface value. At maturity the government pays the Treasury Bill holder the fullface value. The Treasury Bills are marketable, affordable and risk free. Thesecurity attached to the treasury bills comes at the cost of very low returns.


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Money Market instruments

Certificate of Deposit: The certificates of deposit are basically time deposits that are issued by thecommercial banks with maturity periods ranging from 3 months to five years. The return on thecertificate of deposit is higher than the Treasury Bills because it assumes a higher level of risk.

Commercial Paper: Commercial Paper is short-term loan that is issued by a corporation use forfinancing accounts receivable and inventories. Commercial Papers have higher denominations ascompared to the Treasury Bills and the Certificate of Deposit. The maturity period of CommercialPapers are a maximum of 9 months. They are very safe since the financial situation of the corporationcan be anticipated over a few months

Banker's Acceptance: It is a short-term credit investment. It is guaranteed by a bank to makepayments. The Banker's Acceptance is traded in the Secondary market. The banker's acceptance ismostly used to finance exports, imports and other transactions in goods. The banker's acceptanceneed not be held till the maturity date but the holder has the option to sell it off in the secondarymarket whenever he finds it suitable.

Euro Dollars: The Eurodollars are basically dollar- denominated deposits that are held in banksoutside the United States. Since the Eurodollar market is free from any stringent regulations, thebanks can operate at narrower margins as compared to the banks in U.S. The Eurodollars are tradedat very high denominations and mature before six months. The Eurodollar market is within the reachof large institutions only and individual investors can access it only through money market funds.

Repos: The Repo or the repurchase agreement is used by the government security holder when hesells the security to a lender and promises to repurchase from him overnight. Hence the Repos haveterms raging from 1 night to 30 days. They are very safe due government backing.


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Who is a Banker?

Halsburys Laws of England defines a banker as

An individual, partnership or corporation whose sole predominatingbusiness is banking, that is the receipt of money on current account ordeposit account and the payment of cheques drawn by and thecollection of cheques paid in by a customer.


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Meaning of Customer

In General Western Railway C. vs. London and County Banking Co. Ltd., itwas stated,

A customer is a person who has some sort of account, either deposit orcurrent or some similar relation with a bank and from this it follows thatany person may become a customer by opening a deposit or currentaccount or having some similar relation with a bank.


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Role of Banks

Intermediary role between lenders and borrowers

Lenders Deposits funds with Banks

Liability products (Liability for Banks)

Borrowers Borrows funds from Banks

Asset Products (Assets for Banks)


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Different types of Banks

Types of Banks

Central Bank (RBI)

Non BankingFinance Companies

(NBFCs)Commercial Banks

Term FinancialInstitutions

State FinanceCorporations

(SFCs)

IndianFinancial

Institutions

E.g.

IFCI

NABARD

SIDBI

PublicSector

PrivateSector

Foreign Co-operative

Banks

RegionalRuralBanksE.g.

SBI

PNB

BOB

E.g.

HDFC Bank

UTI Bank

ICICI Bank

E.g.

Citibank

ABN Amro

HSBC

State/Central PrivatePrimary Credit

Societies


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Banking Types

Retail Banking

Wholesale Banking

Retail banking refers to banking in which banking institutions executetransactions directly with consumers, rather than corporations or other banks.

Services offered include: savings and checking accounts, mortgages, personalloans, debit cards, credit cards, and so forth.


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Wholesale Banking

Wholesale banking is the provision of services by banks to the likes oflarge corporate clients, mid-sized companies, real estate developersand investors, international trade finance businesses, institutionalcustomers (such as pension funds and government entities/agencies),and services offered to other banks or other financial institutions. Inessence, wholesale banking services usually involve high valuetransactions.

(Wholesale finance means financial services, which are conducted between financial services companies andinstitutions such as banks, insurers, fund managers, and stockbrokers.)

Wholesale banking contrasts with retail banking, which is the provision ofbanking services to individuals

Wholesale Banking Products

Term Loans / Working Capital Finance Bills Discounting Guarantees Letter of Credit

St t f B k


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Structure of Banks

Front Office Middle Office Back Office

Customer

Relationships

Trading

Reports

Mark to Market

Valuations

Risk Management

Settlements

Payments

Reconciliations

Confirmations

B ki & Fi i l M k t


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Banking & Financial Markets

InstitutionalDelivery

ACH

SWIFT

CENTRALBANK

REPORTING

RATE FEEDS

Customer Delivery Channels

Internet Teller ATM Phone Mobile POS

SECURITY

Current &Savings Acct

Deposits Loans Loan AppProcessing

LoanSyndication

Bills &Collections

Letters ofCredit

ForeignExchange

Money Market Dealer InvestorServices

Cash & Liq

Management

AssetManagement

Derivatives Securities

SignatureVerification

Funds Transfer StandingInstructions

Elect MsgSystem

WorkflowManagement

NostroReconciliation

Fixed AssetsManagement

ExpenseProcessing

Risk Management Clearing

Management Information System & Regulatory Framework (Basel II) & SOXA

Customer Information System

General Ledger

3rd PartyInterface

Internet

Banking Suite

PORTAL

RETAIL

CORPORATE

INVESTORSERVICES

3rd PartyInterfaces

CRM Systems

Dealing Systems

Other Systems

Information Center

AnalyticalCRM

CapacityManagement

ProductProfitability

CustomerProfitability

ALM Credit Risk


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Banking Activities

Banking is defined as accepting deposits for the purpose of lending and

investment.

Dimensions of Banking

Deposits Loans Services


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Banking and Banking operations

Bank is a commercial institution licensed as a receiver of deposits. Banks are mainly concernedwith making and receiving payments as well as supplying short-term loans to individuals.

Exists to help you make the most of your money

Assist you with your monetary requirements and promote savings

How do they do it ??

By offering different products and ServicesBanking Services

Deposits Loans Services Capital Market

Short Term Long Term Retail Institutional

Fund based activities, greater market risk

Fee based activities, lesser market risk

E.g.

Savings

Current

Fixed E.g.

Overdraft

E.g.

Auto Loan

Home Loan

E.g.

DDs

Lockers

Bill Pay

E.g.

Bank

GuaranteeTrade

Finance

E.g.

DP

Custodian

MerchantBanking

Debenture

Trustees


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Accepting deposits from Public

Lending money to public

Remittances/Collection Business

Keeping valuables in safe custody

Government business

Acting as trustee

Treasury services

Capital Market activity

Activities of a Bank


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Lets Discuss


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How to be Happy

Three essentials for happiness:

1. Something to do,

2. Someone to love,

3. Something to hope for.

Thank You ALL & be Happy


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Repo Rate

A repo or Repurchase Agreement is an instrument of money market. Usuallyreserve bank (RBI) and commercial banks involve in repo transactions but not

restricted to these two. Individuals, banks, financial institutes can alsoparticipate in repurchase.

Repo is a collateralized lending i.e. the banks which borrow money from Reserve Bankto meet short term needs have to sell securities, usually bonds to Reserve Bank withan agreement to repurchase the same at a predetermined rate and date.

The party who originally buys the securities effectively acts as a lender (RBI).

The original seller is effectively acting as a borrower, using their security ascollateral for a secured cash loan at a fixed rate of interest (BANK).

Borrower of funds is called as seller of repo and lender of funds is called asbuyer of repo. When the term of the loan is for one day it is known as anovernight repo and if it is for more than one day it is called a Term Repo .


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Reverse Repo

CRR (Cash Reserve Ratio): Cash reserve Ratio (CRR) is the amount of Cash (liquid cashlike gold) that the banks have to keep with RBI. This Ratio is basically to secure solvencyof the bank and to drain out the excessive money from the banks. If RBI decides toincrease the percent of this, the available amount with the banks comes down and if RBI

reduce the CRR then available amount with Banks increased and they are able to lendmore.

Repo Rate: Repo rate is the rate at which our banks borrow rupees from RBI. This facilityis for short term measure and to fill gaps between demand and supply of money in a bank.when a bank is short of funds they borrow from bank at repo rate and if bank has asurplus fund then the deposit the funds with RBI and earn at Reverse repo rate.

Reverse Repo rate is the rate which is paid by RBI to banks on Deposit of funds with

RBI.A reduction in the repo rate will help banks to get money at a cheaper rate. When therepo rate increases borrowing from RBI becomes more expensive. To borrow from RBI,bank have to submit liquid bonds /Govt Bonds as collateral security ,so this facility is ashort term gap filling facility and bank does not use this facility to Lend more to theircustomers. present rate is 3.25 as on 29.01.2010)

SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in theform of cash, or gold or govt. approved securities (Bonds) before providing credit to itscustomers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in

order to control the expansion of bank credit. Generally this mandatory ration is compliedby investing in Govt bonds. present rate of SLR is 24 %.(as on 29.01.2010)But Banksaverage is 27.5 %, the reason behind it is that in deficit Budgeting ,Govt lending is moreso they borrow money from banks by selling their bonds to banks. so banks haveinvested more than required percentage and use these excess bonds as collateralsecurity (over and above SLR) to avail short term Funds from the RBI at Repo rate.


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Inflation: Cause

Inflation is caused by a combination of four factors; those factors are:

The supply of money goes up. The supply of goods goes down. Demand for money goes down. Demand for goods goes up.


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Money A view

MONEY IS WEALTH..

The key thing to remember is that wealth is not money.

money is only one of many forms of wealth, it has plenty of substitutes. The interaction between money and its substitutes explain why the demand for

money changes.

People hold money because money has purchasing power and thepurchasing power of money is determined by the supply of, anddemand for, money.

If a rise in the money supply is accompanied by an equal rise in moneydemand, overall prices and the purchasing power of money remainunchanged. Tooooo optimistic a view..

DEMAND FOR MONEY IS INFINITE


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Demand for Money

The demand for money is the desired holding of financial assets in theform of money: that is, cash or bank deposits.

The demand for money is a result of the form in which a person's wealthshould be held

motivations for holding one's wealth in the form of money:

Transaction motive Asset Motive

Two Advantages of Holding Money

the liquidity advantage (carry out transactions) of holding money and the interest advantage of holding other assets

Demand for money is defined as the nominal amount of moneydemanded divided by the price level

d i


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Money Demand Function

A typical money-demand functionmay be written as

where Mdis the nominal amount of money demanded,

Pis the price level,

Ris the nominal interest rate, Yis real output, and

L(R,Y) is the liquidity preference function.

Quantity Theory: The most basic "classical" transaction motive can be illustratedwith reference to the Quantity Theory of Money.

According to the equation of exchange MV= PY, where M is the stock of money, V is its velocity (how many times a unit of money turns over during a period of time), P is the price level and Y is real income. Consequently PY is nominal income or in other

words the number of transactions carried out in an economy during a period of time.Rearranging the above identity and giving it a behavioral interpretation as a demand formoney we have

Hence in this simple formulation demand for money is a function of prices andincome, as long as its velocity is constant.

M D d F ti


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Money Demand Function

while workers may get paid only once a month they generally will wishto make purchases, and hence need money, over the course of theentire month. an economic model that is based on such considerationsis the Baumol-Tobin model. In this model an individual receives herincome periodically, for example, only once per month, but wishes tomake purchases continuously.

Micro foundations for money demand

Asset motive: The asset motive treats money, focuses on the potential return on variousassets (including money) as an additional motivation

Speculative motive Portfolio motive: hold the wealth in a form of a low risk/low return asset (here, money) or

high risk/high return asset (bonds or equity).

where t is the cost of a trip to the bank, R is the nominal interest rate and P and Y are as before.

hi h h h d d f


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Factors which can change the demand for money

Interest Rates: Two important stores of wealth are bonds and money, these are substitute to oneself. afall in interest rates cause the demand for money to rise.

Consumer Spending: if the demand for consumer spending increases, so will the demand formoney.

Precautionary Motives: If people think that they will suddenly need to buy things in the immediatefuture (say it's 1999 and they're worried about Y2K), they will sell bonds and stocks and hold onto money, so

the demand for money will go up

Transaction Costs for Stocks and Bonds: If it becomes difficult or expensive to quickly buyand sell stocks and bonds, they will be less desirable. People will want to hold more of their wealth in the form

of money, so the demand for money will rise.

Change in the General Level of Prices: If we have inflation, goods become more expensive,so the demand for money rises.

International Factors:

An increase in the demand of that country's goods abroad. An increase in the demand for domestic investment by foreigners. The belief that the value of the currency will rise in the future. A central banking wanting to increase its holdings of that currency.

F t Whi h I th D d f M


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Factors Which Increase the Demand for Money

A reduction in the interest rate.

A rise in the demand for consumer spending.

A rise in uncertainty about the future and future opportunities.

A rise in transaction costs to buy and sell stocks and bonds.

A rise in inflation causes a rise in the nominal money demand but real moneydemand stays constant.

A rise in the demand for a country's goods abroad.

A rise in the demand for domestic investment by foreigners.

A rise in the belief of the future value of the currency.

A rise in the demand for a currency by central banks (both domestic andforeign).

General Finance & Banking

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