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Debjani Singha
Financial System
y Existence y Promotes y Money
the well being and standard of living of the people of a country and monetary assets the saving investment
y Mobilize y Promotes
Definition
The processes and procedures used by an organizations management to exercise financial control and accountability
y
These measures include recording , verification ,and timely reporting of transaction that affect revenues , expenditures ,Assets and Liabilities.
Financial System
Money & Finance play an important Role in Economic activities. Development of Economic
Economics is the Social Science that analyzes the production , distribution , and consumption of goods and Services
Scarcity
All resources, goods, and services are limited, however. y This means its impossible for all the wants to be met.
y
Scarcity
Scarcity
y y
Goods
Stuff.
Services
Things people do for others.
Shortage
Factors of Production
Land
Labor
Capital
Investors Borrowers
Un-organized Sector
Economy
Non- Organized Money lenders Local bankers Traders Landlords Chit Funds
Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products
Regulator s
Financial Instruments
Financial Markets
Forex Market
Capital Market
Money Market
RBI
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934 The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937.
Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
1) Bank of Issue 2) Banker to Government 3) Bankers' Bank and Lender of the Last Resort 4) Controller of Credit 5) Custodian of Foreign Reserves 6) Supervisory functions 7) Promotional functions
Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality The assets and liabilities of the Issue Department are kept separate from those of the Banking Department
Bank of Issue
The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations Its provides Loans to Local and state banks It acts as adviser to the Government on all monetary and banking matters.
y y
Banker to Government
y y
The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in India. banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit .
y y y
The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. As supereme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: (a) It holds the cash reserves of all the scheduled banks. (b) It controls the credit operations of banks through quantitative and qualitative controls. (c) It controls the banking system through the system of licensing, inspection and calling for information. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.
Controller of Credit
Manages the Foreign Exchange Management Act, 1999. y Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. y The Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. (International Monetary Fund )
y
Prescribes broad parameters of banking operations within which the countrys banking and financial system functions. y Objective: maintain public confidence in the system, protect depositors interest and provide cost-effective banking services to the public. y Regulator and supervisor of the payment systems Authorises setting up of payment systems Lays down standards for operation of the payment system Issues direction, calls for returns/information from payment system operators
y
Supervisory functions
1) Industrial Development Bank of India also in 1964. 2) Agricultural Refinance Corporation of India in 1963 3) Industrial Reconstruction Corporation of India in 1972 4) Agricultural Refinance and Development Corporation to provide longterm finance to farmers. 5) Agricultural Credit Department to provide agricultural credit .
Promotional functions
Credit creation
Money creation is the process by which the money supply of a country or a monetary region is increased due to some reason. There are two principal stages of money creation. First, the central bank introduces new money into the economy (termed 'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions. Second, the new money introduced by the central bank is multiplied by commercial banks through fractional reserve banking; this expands the amount of broad money (i.e. cash plus demand deposits)
y 1)
2)
credit control
y Objectives
1)
of Credit Control
Price Stability:Price stability is an important objective of credit control policy. The central bank, by regulating the supply of credit in accordance with the commercial needs of the people, can bring about price stability in the country.
2) Economic Stability:Operation of the business cycle brings instability in a capitalist economy. The objective of the credit control policy of the central bank should be to eliminate cyclical fluctuations and ensure economic stability in the economy.
3) Maximisation of Employment:
Therefore economic stability with full employment and high per capita income has been considered as an important objective of credit control policy of a country.
4 ) Economic Growth:
Countries generally suffer from the deficiency of financial resources. Hence, the central banks in these countries should solve the problem of financial scarcity through planned expansion of bank credit.
Monetary policy
Monetary policy is a tool used by the central bank to manage money supply in the economy in order to achieve a desirable growth The central bank controls the money supply by increasing and decreasing the cost of money, the rate of interest.
Expansionary policy :- The policy makers increase the money supply in the system by lowering interest rates. This is done mainly to boost economic growth and decrease level of unemployment. y Contractionary policy:-the cost of money is made dearer by increasing the rate of interest, which in turn helps in reducing the money supply in the system and combat inflation
y
1) Open Market Operations :y An important instrument of credit control, the Reserve Bank of India purchases and sells securities in open market operations. y In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities. 2) Bank Rate :y Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate. y Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through altering the cost of credit.
3) Direct Regulation of Interest Rate :y The RBI can control the monetary policy by regulating market rate of interest Directly .It has been fixing all deposit rate of commercial bank and their lending rates 4) Cash Reserve Ratio :y All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per cent. 5) Statutory Liquidity Ratio :y Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. y These are collectively known as SLR securities
6) Reserve requirements (RR):(RR):y percentages of certain types of deposits that banks must keep on hand in their own vaults or on deposit at a Federal Reserve Bank RR raised RR lowered banks reduce lending banks increase lending
Monetary Policy
y y
Fiscal policy
y y
Monetary policy is typically implemented by a central bank. Monetary policy is expected to improve the economy's rate of growth of output (measured by Gross Domestic Product or GDP) Monetary policy is policy by which the amount of money and credit available aims to affect the economy. Eg:- Fed has decided to lower or raise the interest rate
while fiscal policy decisions are set by the national government Fiscal policies, tax cuts, and spending increases are normally expected to stimulate economic growth in the short run Government spending and taxing policies that aim to affect the economy are fiscal policies. Eg:- the recent economic stimulus package, through which the government spent a great deal of money in order to try and stimulate the economy
Market
Instruments
Intermediaries Regulator
SEBI
Primary
Secondary
Equity
Players
CRA
Corporate Intermediaries
Individual
Banks/FI
FDI /FII
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