Indian Financial
System
Financial Markets:
A financial
market can be defined as a market where financial assets can be created or
transferred.
It is
basically classified as primary and secondary markets. But more often financial
market s are classified as money markets and capital markets.
Money market
deals with all transactions in short term instruments (with a period of
maturity of one year or less, like treasury bills, bills of exchange etc.)
Capital
Market deals with all transaction in long term instruments (with a period of
maturity above one year like corporate debentures, govt. bonds etc.) and
stocks.
Money Market:
The
important function of money market is to channel savings in to short term
productive investments like working capital.
Call Money Market
It is a part
of national money market where day to day surplus funds, mostly of banks, are
traded. The maturity period of the call money loans vary from 1- 15 days.
The money
that is lent for one day is known as “call money” and if it exceeds one day it
is referred as “notice money”.
Call Rates: The interest paid on call loans are
known as call rates. It reflects the day to day availability of funds. It is
largely influenced by the forces of supply and demand of funds.
High call
rate indicates the tightness of liquidity in the financial system and low rate
indicates an easy liquidity position in the market.
The rate is
usually high in the first week as banks try to meet the CRR requirements and
subside gradually.
Commercial Paper(CPs)
It is an unsecured usance money market instrument issued in
the form of a promissory note at a discount, and is transferable by endorsement
and delivery and is of fixed maturity.
It is
introduced by in 1990 enabling highly rated corporate borrowers, to diversify
their source of short term borrowings and to provide an additional instrument
to investors.
A corporate
would be eligible to issue CP provided
I.
The
tangible net worth of the company is not less than Rs.4 crore as per the latest
audited balance sheets.
II.
Company
has been sanctioned working capital limit by bank/s or all India financial
institutions.
III.
The
borrowed account of the company is classified as standard asset by banks/institution.
Issue Expenses: The stamp duty on a primary issue of CP is 0.25 percent for
all other investors, with a concession rate of 0.05 percent for banks.
Secondary market transactions do not attract any stamp duty.
Certificates of Deposits (CDs)
Certificate of Deposit
is a negotiable promissory note, secure and short term in nature. It is
issued at a discount to the face value, the discount rate being negotiated
between the issuer and the investor.
CDs were
introduced in India in 1989 based on the Vaghul Committee recommendations.
The minimum
amount of a CD an investor can subscribe should not be less than Rs.1 Lakh, it
should be a multiple of Rs.1 Lakh & there after.
The maturity
period for CDs should not be less than 7days and not more than 1year.
Money Market Mutual Funds (MMMFs)
MMMFs are
mutual funds that invest primarily in money market instruments of very high quality
and of very short maturities.
Two types of
schemes offered by MMFs
1.
Open-ended Scheme: In this case the units available for
purchase on a continuous basis and the MMMF will be willing to repurchase the
units.
2.
Closed-ended Scheme: In this case the units available for
subscription for a limited period and is redeemed at maturity.
The guide
line on MMMFs specifies a minimum lock-in period of 15 days during which the
investor cannot redeem his investment. The guidelines also stipulate the
minimum size of the MMMFs to be Rs.50 crore and this should not exceed 2% of
the aggregate deposits of the latest accounting year in the case of banks and
2% of the long –term domestic borrowings in the case of public financial
institutions.
Capital Market:
The capital
market functions as an institutional mechanism to channel long-term funds for
those who save, for those who need them for productive purposes.
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