Module 1 Introduction

Q1. What is financial system? What are the components of financial system?
Discuss the function of financial system. What are the types of financial system?
Ans. A financial system is a set of institutions, such as banks, insurance companies,
and stock exchanges, that permit the exchange of funds. Financial systems exist on
firm, regional, and global levels. Borrowers, lenders, and investors exchange
current funds to finance projects, either for consumption or productive
investments, and to pursue a return on their financial assets. The financial system
also includes sets of rules and practices that borrowers and lenders use to decide
which projects get financed, who finances projects, and terms of financial deals.
Components of the Financial System
1. Financial Institutions
Financial organizations, such as banks, offer a variety of goods and services
and serve as a go-between for borrowers and lenders. They provide
commodities like foreclosures, broker services, and reinsurance.
2. Financial Markets
Financial markets are places wherein market participants engage to buy, sell, and
raise capital such as bonds and stocks. Trading companies such as the New York
Stock Exchange and NASDAQ are examples of these marketplaces.

3. Money

Money serves as the foundation of financial systems. Whereas the constancy

of currency may vary in response to fluctuations in technology and financial
systems, money is most commonly associated with electronic funds. People
who hide their money either from their bank or their spouse is a new form of
financial cheating, but the digital age has made it harder to be deceptive.

4. Financial Services
 Financial services include investing, healthcare, and banking services supplied
by liabilities and investment management businesses. These services aid in
the acquisition and efficient investment of funds.

5. Financial Instruments

Equities, shares, contracts, premiums, and mortgages are examples of

financial instruments or assets that are exchanged in the financial system.
Each loan applicant may have different needs, and buying and selling stocks
or securities may include investment products or pooling investors' resources.
Functions of the Financial Systems

1. Payment System - A well-functioning payment system enables enterprises

and individuals to acquire financial compensation for their goods or services.
Payments can be made in cash, cheques, credit cards, and, in some
cases, cryptocurrencies.

2. Savings - Corporations and individuals may invest in a variety of investments

and watch them increase over time with national expenditure. Borrowers
can utilize them to finance future initiatives and boost future earnings, while
investors profit from the return on that investment.

3. Liquidity - By extending credit, financial markets enable investors to lower

systemic risk. It facilitates the purchases and sales of assets as appropriate.

4. Risk management - It is the process of providing protection from diverse

accounting hazards by using insurance and other sorts of contracts.
 5. Government Policy - Authorities strive to stabilize or manage an economy by
enacting particular policies to address issues such as inflation, labor, and
borrowing costs.

Types of Financial Services

1. Advisories

This area of financial services assists both individuals and businesses with a
number of activities. Financial advisers may assist with economic thorough
research, business appraisal, and real estate ventures, among other things. In
each of these cases, advisers assist clients in making sound financial decisions.

2. Mutual Funds

Mutual fund institutions provide a sort of investing in which numerous parties

participate. These securities are administered by a professional rather than
the investors.

Because the commitment in a money market fund is not as significant as

other conservative investments in securities, the equity markets, or the like,
they are a popular choice for those who are unsure about their money. The
assets are also dispersed, which reduces risk.

3. Banking

Banking entails both receiving contributions from accounting organizations

and transferring funds to consumers. According to the Federal Deposit
 Insurance Corporation's (FDIC) monetary supply, around 10% of money put
into companies must be kept on hand.

The remaining 90% is accessible for loans. Some of the investment earnings
by the bank on such repayments are distributed to clients who have invested
funds with the institution.

4. Wealth Management

This aspect of economic service assists consumers in saving money wisely and
earning a return on their commitment when feasible. One sort of financial
management is having a 401K plan via your company.

5. Mortgages

This is among the most popular sorts of commercial services sectors. Most
people seem to understand what healthcare is; it is a structure that people
contribute to on a monthly subscription basis that functions as a safety net
and covers the costs of major, often unanticipated expenses. There are
several types of insurance, including health, vehicle, home, renters, and life
insurance, to mention a few.
Q2. What is financial markets? State the types of financial markets. Discuss the
function of financial markets. State the classification of financial markets. What are
financial markets and institutions?
Ans. A Financial Market is referred to space, where selling and buying of financial
assets and securities take place. It allocates limited resources in the nation’s
economy. It serves as an agent between the investors and collector by mobilising
capital between them.

Types of Financial Markets

 Over the Counter (OTC) Market – They manage public stock exchange, which
is not listed on the NASDAQ, American Stock Exchange, and New York Stock
Exchange. The OTC market dealing with companies are usually small
companies that can be traded in cheap and has less regulation.
 Bond Market – A financial market is a place where investors loan money on
bond as security for a set if time at a predefined rate of interest. Bonds are
issued by corporations, states, municipalities, and federal governments
across the world.
 Money Markets – They trade high liquid and short maturities, and lending of
securities that matures in less than a year.
 Derivatives Market –They trades securities that determine its value from its
primary asset. The derivative contract value is regulated by the market price
of the primary item — the derivatives market securities, including futures,
options, contracts-for-difference, forward contracts, and swaps.
 Forex Market – It is a financial market where investors trade in currencies. In
the entire world, this is the most liquid financial market.

Functions of Financial Market

Mentioned below are the important functions of the financial market.

 It mobilises savings by trading it in the most productive methods.

 It assists in deciding the securities price by interaction with the investors and
depending on the demand and supply in the market.
 It gives liquidity to bartered assets.
 Less time-consuming and cost-effective as parties don’t have to spend extra
time and money to find potential clients to deal with securities. It also
decreases cost by giving valuable information about the securities traded in
the financial market.

Classification of Financial Market

The financial market can be classified into three different forms.
1. By Nature of Claim

1. Debt Market – It is a market where fixed bonds and debentures or bonds are
exchanged between investors.
2. Equity Market – It is a place for investors to deal with equity.

2. By Maturity of Claim

1. Money Market – It deals with monetary assets and short-term funds such as
a certificate of deposits, treasury bills, and commercial paper, etc. which
mature within twelve months.
2. Capital Market – It trades medium and long term financial assets.

3. By Timing of Delivery

1. Cash Market – It is a market place where trade is completed in real-time.

2. Futures Market – Here, the delivery or compensation of products are taken
in the future specified date.

4. By Organizational Structure

 Exchange-Traded Market – It has a centralised system with a patterned

procedure.
 Over-the-Counter Market – It has a decentralised organisation with
customised procedures

What are Financial Markets and Institutions?

Financial markets dispense efficiently flow of investments and savings in the
economy and facilitate the growth of funds for producing goods and services. The
right blend of financial products and instruments and financial markets and
institutions fuels the demands of investors, receiver and the overall economy of a
country.
Financial markets (bonds and stocks), instruments (derivatives, bank CDs, and
futures), and institutions (banks, pension funds, insurance companies, and mutual
funds) give the investors the opportunities to specialize in specific services and
markets.
Q3. What is financial intermediary? How a financial intermediary works? State the
different types of financial intermediary. Discuss the benefits of intermediary.
Ans. A financial intermediary is an entity that acts as the middleman between two
parties in a financial transaction, such as a commercial bank, investment bank,
mutual fund, or pension fund. Financial intermediaries offer a number of benefits
to the average consumer, including safety, liquidity, and economies of
scale involved in banking and asset management. Although in certain areas, such
as investing, advances in technology threaten to eliminate the financial
intermediary, disintermediation is much less of a threat in other areas of finance,
including banking and insurance.
A non-bank financial intermediary does not accept deposits from the general
public. The intermediary may provide factoring, leasing, insurance plans, or other
financial services. Many intermediaries take part in securities exchanges and
utilize long-term plans for managing and growing their funds. Financial
intermediaries move funds from parties with excess capital to parties needing
funds. The process creates efficient markets and lowers the cost of conducting
business. Banks connect borrowers and lenders by providing capital from
other financial institutions and from the Federal Reserve. Insurance companies
collect premiums for policies and provide policy benefits.

Types of Financial Intermediaries

Mutual funds provide active management of capital pooled by shareholders. The

fund manager connects with shareholders through purchasing stock in companies
he anticipates may outperform the market. By doing so, the manager provides
shareholders with assets, companies with capital, and the market with liquidity.

Benefits of Financial Intermediaries

Through a financial intermediary, savers can pool their funds, enabling them to
make large investments, which in turn benefits the entity in which they are
investing.

Financial intermediaries also provide the benefit of reducing costs on several

fronts. For instance, they have access to economies of scale to expertly evaluate
the credit profile of potential borrowers and keep records and profiles cost-
effectively. Last, they reduce the costs of the many financial transactions an
individual investor would otherwise have to make if the financial intermediary did
not exist.
Q4. What is flow of fund matrix? State the importance and limitation of flow of
fund matrix.
Ans. On the flow of funds matrix, if financial uses of funds exceed financial sources
of funds, there is a net surplus on financial investment for a specific sector or for all
sectors as a whole. On the contrary, if financial sources of funds exceed financial
uses of funds, net financial investment is negative.

Limitations:
1.The flow of funds accounts are more complicated than the national income
accounts because they involve the aggregation of a large number of sectors with
their very detailed financial transactions.

2. There is the problem of valuation of assets. Many assets, claims and obligations
have no fixed value. It, therefore, becomes difficult to have their correct valuation.

3. The problem of inclusion of non-reproducible real assets arises in the flow of

funds accounts. Economists have not been able to decide as to the type of
reproducible assets which may be included in flow of funds accounts.

4. Similarly, economists have failed to decide about the inclusion of human wealth
in flow of funds accounts.
Despite these problems, the flow of funds accounts supplements the national
income accounts and help in understanding social accounts of an economy.

Importance:
The flow of funds accounts present a comprehensive and systematic analysis of the
financial transactions of the economy.

1. The flow of funds accounts is superior to the national income accounts. Even
though the latter are fairly comprehensive, yet they do not reveal the financial
transactions of the economy which the flow of funds accounts do.

2. They provide a useful framework for studying the behaviour of individual

financial institutions of the economy.

3. According of Prof. Goldsmith, they bring “the various financial activities of an

economy into explicit statistical relationships with one another and with data on
the nonfinancial activities that generate income and production.”

4. They trace the financial flows that interact with and influence the real saving-
investment process. They record the various financial transactions underlying
saving and investment.

5. They are essential raw materials for any comprehensive analysis of capital
market behaviour. They help to identify the role of financial institutions in the
generation of income, saving and expenditure, and the influence of economic
activity on financial markets.
Q5. How financial system related to economic development?
1. Ans. Mobilizing Savings: The financial system encourages individuals and
businesses to save their surplus funds, providing them with various savings
and investment instruments such as bank accounts, certificates of deposit,
 and mutual funds. These savings are then channeled towards productive
investments, which spur economic development.
2. Allocating Capital: Financial institutions, such as banks, venture capitalists,
and stock markets, play a vital role in allocating capital to different economic
agents. They assess investment opportunities and direct funds to projects
with high growth potential. This helps in the efficient allocation of resources,
supporting the expansion of industries and businesses.
3. Facilitating Investment: The financial system provides the necessary
infrastructure and mechanisms to facilitate investment. It offers diverse
financing options, including loans, equity financing, and bonds, which enable
businesses to fund their expansion plans, invest in new technologies, and
create employment opportunities. Investment is a crucial driver of economic
development as it stimulates economic activity and boosts productivity.
4. Managing Risk: The financial system helps manage and mitigate risks
associated with economic activities. Financial institutions offer insurance
products, hedging instruments, and risk management services, which protect
businesses and individuals against unforeseen events. By reducing
uncertainty, the financial system encourages investment and
entrepreneurship, leading to economic growth.
5. Promoting Innovation and Entrepreneurship: Access to finance is vital for
promoting innovation and entrepreneurship, as it provides the necessary
funding for research and development, product innovation, and the
establishment of new businesses. Entrepreneurs often rely on the financial
system to secure capital for their ventures, which fosters innovation and
creates job opportunities, ultimately driving economic development.
6. Enhancing Efficiency: A well-functioning financial system improves economic
efficiency by reducing transaction costs and facilitating the flow of funds
between savers and investors. Efficient payment systems, electronic banking,
and access to credit enable smoother economic transactions and foster
economic growth.
7. Fostering Financial Inclusion: Inclusive financial systems that provide access
to banking services and credit to a wide range of individuals and businesses
are crucial for economic development. By promoting financial inclusion, the
financial system helps reduce poverty, empowers marginalized groups, and
enables them to participate in economic activities, ultimately contributing to
overall economic growth.
 Q6. What is Indian Financial System? Discuss the components of Indian Financial
System.
Ans. The Indian Financial System is one of the most important aspects of the
economic development of our country. This system manages the flow of funds
between the people (household savings) of the country and the ones who may
invest it wisely (investors/businessmen) for the betterment of both the parties.

Components of Indian Financial System

There are four main components of the Indian Financial System. This includes:

1. Financial Institutions
2. Financial Assets
3. Financial Services
4. Financial Markets

Let’s discuss each component of the system in detail.

1. Financial Institutions
The Financial Institutions act as a mediator between the investor and the
borrower. The investor’s savings are mobilised either directly or indirectly via the
Financial Markets.
The main functions of the Financial Institutions are as follows:

 A short term liability can be converted into a long term investment

 It helps in conversion of a risky investment into a risk-free investment

 Also acts as a medium of convenience denomination, which means, it can

match a small deposit with large loans and a large deposit with small loans
The best example of a Financial Institution is a Bank. People with surplus amounts
of money make savings in their accounts, and people in dire need of money take
loans. The bank acts as an intermediate between the two.
The financial institutions can further be divided into two types:

 Banking Institutions or Depository Institutions – This includes banks and

other credit unions which collect money from the public against interest
provided on the deposits made and lend that money to the ones in need
  Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual
funds and brokerage companies fall under this category. They cannot ask for
monetary deposits but sell financial products to their customers.
Further, Financial Institutions can be classified into three categories:

 Regulatory – Institutes that regulate the financial markets like RBI, IRDA,
SEBI, etc.
 Intermediates – Commercial banks which provide loans and other financial
assistance such as SBI, BOB, PNB, etc.
 Non Intermediates – Institutions that provide financial aid to corporate
customers. It includes NABARD, SIBDI, etc.

2. Financial Assets
The products which are traded in the Financial Markets are called Financial Assets.
Based on the different requirements and needs of the credit seeker, the securities
in the market also differ from each other.
Some important Financial Assets have been discussed briefly below:

 Call Money – When a loan is granted for one day and is repaid on the second
day, it is called call money. No collateral securities are required for this kind
of transaction.
 Notice Money – When a loan is granted for more than a day and for less than
14 days, it is called notice money. No collateral securities are required for
this kind of transaction.
 Term Money – When the maturity period of a deposit is beyond 14 days, it is
called term money.
 Treasury Bills – Also known as T-Bills, these are Government bonds or debt
securities with maturity of less than a year. Buying a T-Bill means lending
money to the Government.
 Certificate of Deposits – It is a dematerialised form (Electronically generated)
for funds deposited in the bank for a specific period of time.
 Commercial Paper – It is an unsecured short-term debt instrument issued by
corporations.
3. Financial Services
Services provided by Asset Management and Liability Management Companies.
They help to get the required funds and also make sure that they are efficiently
invested.
The financial services in India include:

 Banking Services – Any small or big service provided by banks like granting a
loan, depositing money, issuing debit/credit cards, opening accounts, etc.
 Insurance Services – Services like issuing of insurance, selling policies,
insurance undertaking and brokerages, etc. are all a part of the Insurance
services
 Investment Services – It mostly includes asset management

 Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are

a part of the Foreign exchange services
The main aim of the financial services is to assist a person with selling, borrowing
or purchasing securities, allowing payments and settlements and lending and
investing.

4. Financial Markets
The marketplace where buyers and sellers interact with each other and participate
in the trading of money, bonds, shares and other assets is called a financial
market.
The financial market can be further divided into four types:

 Capital Market – Designed to finance the long term investment, the Capital
market deals with transactions which are taking place in the market for over
a year. The capital market can further be divided into three types:
(a)Corporate Securities Market
(b)Government Securities Market
(c)Long Term Loan Market

 Money Market – Mostly dominated by Government, Banks and other Large

Institutions, the type of market is authorised for small-term investments
only. It is a wholesale debt market which works on low-risk and highly liquid
instruments. The money market can further be divided into two types:
 (a) Organised Money Market
(b) Unorganised Money Market

 Foreign exchange Market – One of the most developed markets across the
world, the Foreign exchange market, deals with the requirements related to
multi-currency. The transfer of funds in this market takes place based on the
foreign currency rate.
 Credit Market – A market where short-term and long-term loans are granted
to individuals or Organisations by various banks and Financial and Non-
Financial Institutions is called Credit Market
Module 2 Financial Markets
Q1. What are money market instrument? Discuss the objectives of money
market. What are the types of money market instrument? Discuss the
considerable factor before investing in money market mutual funds.

Ans. The main characteristic of money market instruments is that they can be
easily converted to cash, thereby preserving an investor's cash requirements.

The money market and its instruments are usually traded over the counter and,
therefore, cannot be done by standalone individual investors themselves. It has to
be done through certified brokers or a money market mutual fund.

Objectives of Money Market

The following are the primary goals of the money market-

 Providing short-term financing to borrowers such as private investors,

governments, and others at a reasonable cost. Lenders will also benefit from
liquidity because money market securities are short-term.
  Since most businesses lack the necessary working capital, the money market
assists such businesses in obtaining the monies required to meet their
working capital requirements.

 It is a major source of government funding for both domestic and foreign

trade. As a result, it provides an opportunity for banks to lodge their excess
funds.

 It also enables lenders to convert idle capital into productive investments.

Both the lender and the borrower benefit from this arrangement.

 The RBI oversees the money market. As a result, it contributes to the

regulation of the economy's liquidity level.

There are multiple types of money market instruments available, each of them
aiming to boost the total productive capacity and hence, the GDP of the country. It
also provides secure returns to investors looking for low-risk investment
opportunities for a short tenure.

The list of money market instruments traded in the money market are-

 Certificate of Deposit

Lending substantial financial resources to an organization can be done against

a certificate of deposit. The operating procedure is similar to that of a fixed
deposit, except the higher negotiating capacity, as well as lower liquidity of the
former.
  Commercial Paper

This type of money market instrument serves as a promissory note generated by a

company to raise short term funds. It is unsecured, and thereby can only be used
by large-cap companies with renowned market reputation.

The maturity period of these debt instruments lies anywhere between 7 days to
one year, and thus, attracts a lower interest rate than equivalent securities sold in
the capital market.

 Treasury Bills

These are only issued by the central government of a country when it requires
funds to meet its short-term obligations.

These securities do not generate interest but allow an investor to make capital
gains as it is sold at a discounted rate while the entire face value is paid at the time
of maturity.

Since treasury bills are backed by the government, the default risk is negligible,
thus serving as an optimal investment tool for risk-averse investors.

 Repurchase Agreements

Commonly known as Repo, it is a short-term borrowing tool where the issuer

availing the funds guarantees to repay (repurchase) it in the future.

Repurchase agreements generally involve the trading of government securities.

They are subject to market interest rates and are backed by the government.
  Banker's Acceptance

One of the most common money market instruments traded in the financial sector,
a banker's acceptance signifies a loan extended to the stipulated bank, with a
signed guarantee of repayment in the future.

Since money market instruments are traded wholesale over the counter, it cannot
be purchased in standard units by an individual investor.

However, you can choose to invest in money market instruments through a money
market mutual fund. These are interest-earning open-ended funds and bear
significantly low risks due to their short maturity period and the collateral
guarantee of the central government in most cases.

Money market investments should ideally be undertaken when the stock market
poses a great degree of volatility. During this time, investing in equity and debt
instruments in the capital market has high risk associated with it, as the chances of
underperforming are immense.

The government generally tries to enhance the money circulation in the country to
minimize market fluctuations. Thus, government-backed instruments offer higher
returns in these circumstances to boost the demand for the same.

Money market mutual funds are an appealing option for people who are new to
the field of investment and are looking for safe options for a short period. The
characteristic gesture of such mutual funds is that they have low risk associated
with their money market instruments.

These funds generally aim to keep their portfolio as diverse as possible through a
calculated combination of different types of money market instruments so as to
maximize the yield.
Investing in the money market and its instruments through mutual funds preserves
an investor's liquidity interests, as the time horizon of such a mutual fund is
generally extremely short-term. Also, since these are open-ended, exiting such a
fund is usually hassle-free and quick.

Things to Consider Before Investing in Money Market Mutual Funds

Money market mutual funds are subject to market fluctuations as well. Thus,
before considering investing in the various types of money market instruments,
you must keep the following factors in mind:

1. The investment period for such tools is very short, ranging from three
months up to a year.

2. Expense ratios are applicable in money market mutual funds and are
charged at the discretion of the Asset Management Company in question.
Ideally, a lower expense ratio indicates higher yields for the investors, as the
total money deductible from the returns stays relatively less.

3. Mutual funds are subject to various tax gains under the Income Tax Act,
1961. Short-term capital gains are taxable at 15%.

4. The Net Asset Value of a mutual fund is subject to fluctuation as per the
market trend in the country. A rise in the aggregate interest rate leads to a
fall in the NAV of a mutual fund, thereby lowering your returns and vice-
versa.
5. Various types of money market instrumentsare clubbed together to pose as
one of the safest investment tool available in the market. This risk factor,
even though minimal, should not be written off.

Q2. What is money market? Discuss the features and function of money market.

Ans. The money market refers to a segment of the financial market where short-
term borrowing and lending of funds take place. It primarily deals with highly
liquid and low-risk instruments, typically characterized by their short maturity
periods, usually ranging from overnight to one year. The participants in the
money market include banks, financial institutions, corporations, and
governments.
Features of the money market:

1. Short-term instruments: Money market instruments have short maturities,

making them highly liquid. They are designed to meet short-term financing needs,
such as managing cash flow fluctuations or funding immediate obligations.

2. Low-risk investments: Money market instruments are considered to be low-risk

investments due to their short-term nature and high credit quality. They are
typically issued by entities with strong credit ratings, reducing the risk of default.

3. High liquidity: One of the key features of the money market is its focus on high
liquidity. Instruments traded in the money market can be easily bought or sold at
any time without significant price fluctuations. This makes them attractive to
investors looking for quick access to their funds.

4. Fixed income securities: Money market instruments are generally fixed income
securities, which means they provide a fixed interest rate or yield to investors. This
offers stability and predictability in terms of returns.

Functions of the money market:

1. Source of short-term funding: The money market serves as a crucial source of

short-term funding for financial institutions, corporations, and governments.
Participants can raise funds quickly and efficiently by issuing money market
instruments, such as Treasury bills, commercial paper, or certificates of deposit.

2. Liquidity management: Banks and corporations often use the money market to
manage their liquidity positions. They can invest excess funds in money market
instruments that provide a modest return while maintaining high liquidity. This
allows them to meet their short-term obligations and optimize their cash resources.

3. Implementation of monetary policy: Central banks utilize the money market to

implement and control monetary policy. By buying or selling money market
instruments, such as government securities, they can influence the money supply,
manage interest rates, and stabilize financial markets.
4. Investment opportunities: Investors seeking short-term and low-risk investment
options can participate in the money market. Money market instruments offer a
safe haven for parking funds temporarily, especially during uncertain market
conditions or when preserving capital is a priority.

5. Price discovery: The money market plays a vital role in determining short-term
interest rates. The supply and demand dynamics of money market instruments help
establish benchmark rates, such as the London Interbank Offered Rate (LIBOR),
which influence borrowing costs for various financial instruments globally.
Q2. Discuss the role of Central bank on money market.
 Ans.

 Implementing Monetary Policy: Central banks utilize the money market as a tool
to implement monetary policy. They conduct open market operations, which
involve buying or selling government securities in the money market. By buying
securities, the central bank injects money into the system, increasing liquidity and
stimulating economic activity. Conversely, selling securities reduces the money
supply, curbing inflationary pressures. These operations influence short-term
interest rates and overall liquidity conditions in the money market.

 Managing Interest Rates: Central banks often set benchmark interest rates, such
as the overnight lending rate or the policy rate, which directly impact the money
market. By adjusting these rates, central banks influence the cost of borrowing for
financial institutions and subsequently affect interest rates in the money market.
Through their monetary policy tools, central banks aim to achieve price stability,
economic growth, and financial stability.

 Providing Liquidity: Central banks act as lenders of last resort in the money
market. During times of financial distress or liquidity shortages, they provide
emergency funds to financial institutions to maintain stability and prevent systemic
risks. This is typically done through mechanisms like discount window lending or
repurchase agreements (repos), where banks can borrow funds by pledging eligible
collateral.

 Regulating and Supervising Financial Institutions: Central banks play a crucial

role in regulating and supervising financial institutions, including those
participating in the money market. They set and enforce prudential regulations to
ensure the soundness and stability of the banking system. This includes overseeing
capital adequacy requirements, risk management practices, and ensuring
compliance with anti-money laundering and counter-terrorism financing
regulations. By maintaining the safety and soundness of financial institutions,
central banks help foster confidence in the money market.
 Monitoring and Surveillance: Central banks closely monitor the money market
to assess overall market conditions, liquidity levels, and potential risks. They collect
data, analyze market developments, and identify any signs of stress or instability.
Through their surveillance activities, central banks can take preemptive measures
to address emerging risks and maintain the smooth functioning of the money
market.
Market.
 Development and Infrastructure: Central banks often contribute to the
development of the money market by establishing the necessary
infrastructure and frameworks. They may introduce or enhance payment
systems, promote the issuance of short-term securities, and encourage
market participants to adopt best practices. Central banks also work towards
improving market transparency, efficiency, and risk management practices in
the money market.
Q4. What are the different money market instrument in India? State the
features of Indian money market.
Ans. Treasury bills: Treasury bills are one of the extensively traded financial
instruments. These are short-term Government of India debt instruments issued in
three tenors of 91, 182 and 364 days. Treasury bills are heavily discounted money
market instruments and are repaid at the end of the term.
Commercial bills: Commercial bills are also one of the money market instruments
that work similarly to a bill of exchange. They are used by businesses to satisfy
their short-term liquidity demands. Liquidity is significantly increased with the help
of commercial bills. In an emergency, one can exchange money in return for
commercial bills.
Certificate Deposit (CD): CDs are a negotiable term deposit acknowledged by
commercial banks. A promissory note is the most common form of it. Individuals,
businesses, trusts and other entities can receive CDs. The CDs can also be offered at
a reduced rate by a commercial bank. These can last anywhere from three months
to one year. It is effective for a minimum level of one year and a maximum of
three years at a bank or a financial institution.
Commercial Paper (CP): Businesses use CPs to address short-term working capital
requirements. It will be used as an alternative to borrowing money from a bank.
Furthermore, commercial paper can last anywhere from 15 days to a year.
Call Money: Call money is a market sector in which regulated financial institutions
borrow or acquire on short notice (say, 14 days) to maintain track of daily cash
flows.

The Features of the Money Market

Unlike a stock exchange, a money market is not restricted by geography. While
there are many money market locations, including Mumbai, Calcutta, and Chennai,
these are not distinct autonomous markets but are interconnected and
intertwined.

 All transactions involving money or bank deposits are included

 It is only a short-term fund market
 There is no one-size-fits-all market
 The demand money market, as well as the tax increase market, are two
examples of sub-markets
 The money market serves as a conduit between the Reserve Bank of India
(RBI) and the commercial banks, giving monetary policy and management
information
 Transactions are completed without the use of a broker
Q5. What is capital market? State the feature of capital market. What are the
different instrument of capital market? What are the function of capital market?
What are the types of capital market?
Ans. A capital market is a financial market in which investors buy and sell
financial securities, such as stocks and bonds. These transactions take place
through various exchanges. A stock market, for example, is an exchange where
stock brokers and traders buy and sell stocks of public companies. A bond
market is an exchange where traders buy and sell bonds issued by corporations,
governments, or other entities.
Characteristics of Capital Market
Security is the basic requirement for any kind of investment to make a profit.
Securities are the financial instruments that carry all the information about the
underlying assets, liabilities, income, and expenses.
Brokers and dealers play an important role in the capital market. They act as
middlemen, that is, they buy and sell securities for their customers. The brokers
and dealers make their profit by collecting the brokerage fees, which is a small
percentage of the overall transaction value.

Competition among the market players is a key factor in the capital market.

An active and competitive market is very important as it ensures that the buyers
and sellers get the best price for their investment. There must be a proper system
of transfer of ownership of securities so that they can easily change hands.
The types of capital market instruments are broadly classified into two types -
1. Equity Security
a. Equity Shares
These shares are the prime source of finance for a public limited or
joint-stock company. When individuals or institutions purchase them,
shareholders have the right to vote and also benefit from dividends
when such an organization makes profits. Shareholders, in such cases,
are regarded as the owners of a company since they hold its shares.
b. Preference Shares
These are the secondary sources of finance for a public limited
company. As the name suggests, holders of such shares enjoy
exclusive rights or preferential treatment by that company in specific
aspects. They are likely to receive their dividend before equity
shareholders. However, they do not typically have any voting rights.

2. Debt Security
It is a fixed income instrument, primarily issued by sovereign and state
governments, municipalities, and even companies to finance infrastructural
development and other types of projects. It can be viewed as a loaning
instrument, where a bond’s issuer is the borrower.
a. Bonds
Bondholders are considered as creditors concerning such an entity and
are entitled to periodic interest payment. Furthermore, bonds carry a
 fixed lock-in period. Therefore, issuers of bonds are mandated to
repay the principal amount on the maturity date to bondholders.
b. Debentures
Unlike bonds, debentures are unsecured investment options.
Consequently, they are not backed by any asset or collateral. Here,
lending is entirely based on mutual trust, and, herein, investors act as
potential creditors of an issuing institution or company.
Irrespective of the capital market and its types, their functions are similar. These
are listed below -
 Enhance trading of securities
 Provides a common platform to both investors and savers
 Accumulation of capital for companies that need them
 Stimulates economic growth
 It improves the process of allocation of capital
 Prepares for continuity of funds availability
 It reduces information and transaction charges significantly.
 Faster valuation of securities.
 Provides proper channeling of funds to be used productively.
the former division of capital market types - primary and secondary markets.
 Primary Market
Herein, the trading takes place for new securities. Companies go public for
the first time in this market allows entities outside the locus of an
organization to purchase their shares. This phenomenon is called Initial
Public Offering or IPO.

 Secondary Market
Between the types of capital markets, it deals with securities that have
already been traded in the primary market. New York Stock Exchange
(NYSE), Bombay Stock Exchange (BSE), National Stock Exchange (NSE), etc.
are secondary markets.
Q6. What is debt market? What are debt instrument and who issue them?
Discuss the types of debt market instrument? State the advantages and
disadvantages of investing debt instrument. How does the debt market benefit
to the financial system and economy?
 Ans. The debt market in India is the financial marketplace where all debt
instruments are bought and sold. When we speak of debt instruments, we mean
those securities that offer a fixed rate of return on your investment and
repayment of the principal amount.
Debt instruments in India are securities that are traded in the debt market.
When an entity needs funds, it can issue a debt instrument to borrow money
from interested investors. The entity is called the issuer and the investor is
referred to as the lender. The issuer pays the interest rate to the investor at
periodic intervals, in exchange for borrowing the funds. Thus, debt instruments
carry a fixed interest rate.
Central and State Governments
 Corporate bodies, i.e., companies
 Public sector companies, or PSUs
 Banks
 Non-Banking Financial Companies (NBFCs)
 Financial Institutions
 Government agencies or statutory bodies
Types of debt market instruments

1. Bonds

Bonds are debt instruments issued by entities to raise funds to finance their
projects, operations and growth plans. Corporations, governments, institutions,
and even municipalities can issue bonds.

Bonds are of the following types:

 Fixed-interest bonds carry a fixed interest rate

 Floating interest bonds carry a fixed “spread” and a fluctuating interest
rate component that is subject to changes in benchmark rate. So this
floating component is reset at regular intervals.
 Zero coupon bonds are issued at a discounted rate and redeemed at
their par value. They don’t offer interest payments at regular
intervals.
 Government bonds are nearly risk-free investment avenues issued by
government bodies.
  Corporate bonds are issued by public and private companies for
financing an array of business purposes
 Tax-free bonds are generally issued by a government enterprise and
offer a tax advantage to investors
The bond market in India assumes two distinct forms—primary market and
secondary market. As the Primary market in India is the Dealer Market, the ticket
sizes of bonds are exorbitantly leading to minimal opportunities for retail
investors. Only institutions and wholesalers participate in it. Whereas, the
secondary market facilitates the trading of bonds bought in the primary market.

2. Fixed Deposits

Fixed deposits are quite a popular mode of investment for many people. They are
offered by banks, NBFCs, and even post offices. Under the fixed deposit scheme,
you can invest a lump sum with the financial institution. You can also choose the
term of deposit, i.e., for how long you want to stay invested.
The financial institution, in turn, offers a guaranteed rate of interest on the deposit
based on the term selected.
Some features of fixed deposits are as follows:

 The term of the investment ranges from 7 days to 10 years

 You can start a fixed deposit account with as little as Rs. 1000, and
make investments in multiples of 100.
 The interest might be paid annually, quarterly, half-yearly or even
monthly
 You can opt for a cumulative deposit scheme or a non-cumulative one.
Under the former, the interest income gets reinvested, and you get a
lump sum on maturity.
With the latter, the interest income is paid as and when earned. On
maturity, you get the amount that you deposited.
 Banks and post offices issue 5-year fixed deposits. Investment in such
schemes earns you a deduction under Section 80C of the Income Tax
Act, 1961, and the maximum deduction you can claim is Rs.1.5 lakhs.
3. National Savings Certificate

The National Savings Certificate, or NSC, as it is popularly called, is offered by the

post office and offers tax benefits.
The minimum investment amount is Rs. 1000 and the minimum deposit period is
five years. But you can stay invested for a longer tenure as well. For the quarter
ending September 30, 2022, the interest rate offered on NSC is 6.8% per annum.

4. Debentures

Like bonds, debentures are also a mode of raising funds. However, debentures are
different from bonds because only companies issue them.

Corporate houses can issue debentures to borrow money from investors.

Debentures have a face value, and you can buy them as units. For example, if a
debenture has a face value of Rs.100 and you invest Rs.1000, you get ten
debenture units.

5. Government Securities

Government securities are issued by the government and are viewed to be one of
the safest investment avenues on account of the significant creditworthiness of
governments. These securities carry a fixed interest rate and are available in short
and long-term tenures.

Advantages of investing in debt instruments

 Guaranteed returns
The primary feature of debt instruments is the guaranteed returns they promise.
Every debt instrument carries a fixed rate of return, giving you a guaranteed
income over the tenure of the investment.
So, if you are risk-averse or want guaranteed investment returns, the debt market
can always be a safe and suitable choice.

 Safety from market volatility

The equity market is prone to volatility, wherein the value of
investments fluctuates constantly. This volatility, however, is usually
negligible in debt markets.
 Portfolio diversification
A diversified portfolio is helpful for risk mitigation and also for
enhanced returns. The debt market allows you to add the debt
 component to your portfolio and diversify it. Moreover, with their
fixed returns, debt instruments also make the portfolio returns more
stable.
 Tax benefits
Some debt instruments offer tax benefits as well. For instance, if you
invest in 5-year fixed deposits or in National Savings Certificates, your
investment qualifies for a tax deduction under Section 80C. The
deduction limit is Rs.1.5 lakhs which can give you a tax saving of
Rs.45,000 if you fall in the 30% tax bracket.
Disadvantages of investing in debt instruments

While you can enjoy the benefits of investing in the debt market, there are some
drawbacks too that you should be aware of. These include:

 Vulnerability to debt market risks

Though the debt market does not face significant volatility risks, other risks affect
the market, which are:

 Default or credit risk – the risk that the issuing entity defaults on
interest and/or principal repayment
 Interest rate risk – Debt instruments follow an inverse relationship
with the fluctuating interest rates of the economy. When interest
rates rise, the value of debt instruments falls and vice-versa.
 Reinvestment risk – the risk of reduction in the interest rate at the
time of the security’s maturity, leaving you with minimal or no options
for reinvestment
The debt market has a positive impact on the overall economy of the country.
Here’s how:

 It allows the government to raise necessary funds to finance the

country’s development
 This market gives fixed returns and predictable income to investors
with lesser risk.
 Companies can issue debt instruments to raise funds without diluting
their equity to ensure enhancement of business operations.
Q7. State the features of primary and secondary market and distinguish
between them.
Ans. Features of Primary Market

 A company turns to the primary market for its long term capital needs.
Fulfilling the need for long term capital is, therefore, a feature of a primary
market.
 A fresh issue of securities takes place in the primary market. The buyers are
usually institutional investors and retail investors.

Features of Secondary Market

 The secondary market helps companies fulfil short-term liquidity

requirements. It facilitates the marketability of existing securities.
 It also ensures true and fair dealing for the protection of the investor’s
interest
 Securities that are issued in a market are referred to as the primary market.
When the company gets listed on an exchange and its stocks are then traded
among investors, it is called the secondary market.
 The primary market is also known as a ‘new issue market’ and the secondary
market is known as an ‘after issue market.’ Depending upon the demand and
supply of the securities traded the prices in the secondary market vary. But,
the prices in the primary market are fixed.
 In the primary market, investors have an option to purchase the shares
directly from the company, whereas in the secondary market, the investors
buy and sell the securities among themselves.
 Investment bankers do the selling in a primary market. In the secondary
market, the broker acts as an intermediary while the trading is done.
 In the primary market, the company stands to gain from the sale of a
security. While in the secondary market, investors stand to gain any sort of
capital appreciation from the securities.

Q8. State the role of stock exchange in capital market in India.

Ans.

1. Mobilization of Savings
Capital Markets are one of the most sought-after platforms for institutional
investors as well as individuals. To ensure investor’s protection, all the trading
transactions in the capital markets are regulated with proper regulations and rules.
2. Promoting Capital Formation
The mobilization of funds from the savers by the capital markets is channelized to
various industries which are involved in production and manufacturing of various
goods and services which is beneficial for the economy.

3. Liquidity of Investment
As an investor, it is very important to consider the liquidity of your investment.
This liquidity is provided by the stock exchanges. Investors can liquidate their
securities and other capital market assets anytime during the trade hours and days.
Therefore, stock exchanges help in ensuring liquidity of investment.

4. Investment Safety
One of the most important role of stock exchange in ensuring investment safety to
the investors. After the dematerialization act, trading on stock exchanges has been
completely online. The Securities and Exchange Board of India (SEBI) keeps an eye
on the functioning of exchanges and keeps on identifying new loopholes in the
system.

5. Wide Marketability to Securities

In the earlier days, trading on stock exchanges was done using physical security
certificates. The trading was limited to the office of the stock exchange and all
dealings were carried out over there only. Investors from distant parts of the
country remain in the dark about the price movements on exchanges.
Module 3: Financial Institution
Q1. What is commercial bank? Discuss the function of commercial bank. State the
types of commercial bank.
Ans. A commercial bank is a kind of financial institution that carries all the
operations related to deposit and withdrawal of money for the general public,
providing loans for investment, and other such activities. These banks are profit-
making institutions and do business only to make a profit.
The two primary characteristics of a commercial bank are lending and borrowing.

Function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.
(a) Primary functions
Accepts deposit : The bank takes deposits in the form of saving, current, and fixed
deposits. The surplus balances collected from the firm and individuals are lent to
the temporary requirements of the commercial transactions.
Provides loan and advances : Another critical function of this bank is to offer loans
and advances to the entrepreneurs and business people, and collect interest. For
every bank, it is the primary source of making profits. In this process, a bank
retains a small number of deposits as a reserve and offers (lends) the remaining
amount to the borrowers in demand loans, overdraft, cash credit, short-run loans,
and more such banks.
Credit cash: When a customer is provided with credit or loan, they are not provided
with liquid cash. First, a bank account is opened for the customer and then the
money is transferred to the account. This process allows the bank to create money.
(b) Secondary functions
Discounting bills of exchange: It is a written agreement acknowledging the amount
of money to be paid against the goods purchased at a given point of time in the
future. The amount can also be cleared before the quoted time through a
discounting method of a commercial bank.
Overdraft facility: It is an advance given to a customer by keeping the current
account to overdraw up to the given limit.
Purchasing and selling of the securities: The bank offers you with the facility of
selling and buying the securities.
Locker facilities: A bank provides locker facilities to the customers to keep their
valuables or documents safely. The banks charge a minimum of an annual fee for
this service.
Paying and gathering the credit : It uses different instruments like a promissory
note, cheques, and bill of exchange.
Q2. State the role in project finance and working finance of commercial bank.
Ans. Role in Project Finance:
 Project Evaluation and Financing: Commercial banks assess the feasibility
and viability of a project by conducting due diligence, evaluating the
project's financial projections, risks, and potential returns. They may provide
 long-term financing for large-scale projects such as infrastructure
development, energy projects, or industrial ventures.
 Structuring Financing Solutions: Commercial banks assist in structuring
financing solutions for project sponsors. They leverage their expertise in
financial modeling, risk assessment, and market conditions to design a
financing package that aligns with the project's requirements and mitigates
risks.
 Syndication and Loan Arrangement: Commercial banks often act as lead
arrangers or syndicate participants in project financing. They assemble a
group of lenders to collectively fund the project, sharing the associated risks
and returns. Commercial banks play a vital role in coordinating and
negotiating the terms of the financing arrangement among the various
lenders involved.
 Credit Assessment and Risk Mitigation: Banks conduct detailed credit
assessments to evaluate the creditworthiness of the project sponsors and
assess the project's risks. They employ risk management techniques, such as
collateral requirements, guarantees, and project insurance, to mitigate
potential risks and safeguard their investments.
 Monitoring and Project Management: Commercial banks monitor the
progress and performance of the project throughout its lifecycle. They
conduct periodic reviews, analyze financial statements, and ensure
compliance with loan covenants. Banks may also provide technical assistance
and guidance to project sponsors to enhance project execution and mitigate
risks.
Role in Working Capital Finance:
 Working Capital Loans: Commercial banks provide short-term working capital
loans to businesses to finance their day-to-day operational needs. These
loans help cover expenses such as inventory purchase, accounts receivable
financing, payroll, and other short-term obligations.
 Cash Flow Management: Banks assist businesses in managing their cash flow
by offering working capital financing options. This includes lines of credit,
overdraft facilities, and trade financing solutions to bridge the gap between
payables and receivables, ensuring smooth business operations.
 Trade Financing: Commercial banks facilitate trade finance activities,
including issuing letters of credit, providing export financing, and offering
documentary collections services. These services help businesses mitigate
payment risks and facilitate international trade transactions.
 Working Capital Advisory: Banks often provide advisory services to
businesses, offering expertise in optimizing working capital management.
 They analyze cash flow cycles, inventory levels, and receivables/payables
turnover to provide guidance on improving working capital efficiency and
reducing financing costs.
 Risk Mitigation: Commercial banks employ risk management tools such as
credit assessments, collateral requirements, and credit insurance to mitigate
risks associated with working capital financing. They ensure that appropriate
safeguards are in place to protect their interests and minimize the risk of
default.

Q3. State the background and present status of DFI (Development Financial
Institution). Discuss the need for DFI. State the ways forward to DFI.
Ans.
 Development banks are different from commercial banks, which
mobilize short- to medium-term deposits and lend for similar maturities
to avoid a maturity mismatch.
 In India, the first DFI was operationalized in 1948 with the setting up of
the Industrial Finance Corporation (IFC).
 DFIs in India like Industrial Development Bank of India (IDBI), Industrial
Credit and Investment Corporation of India (ICICI) and IFCI did play a
significant role in aiding industrial development in the past with the
best of the resources made available to them.
 However, after 1991 reforms, the concessional funding they were
getting from Reserve Bank of India (RBI) and the government was no
longer available in the subsequent years
 Infrastructure Building: Inadequate and inefficient infrastructure leads
to high transaction costs, which in turn stunts an economy’s growth
potential.
o Therefore, DFIs makes sense as the Centre government
envisages mobilizing nearly ₹100 lakh crore for the
ambitious National Infrastructure Pipeline.
 International Precedent: Irrespective of the level of development,
countries across the world have set up development banks to finance
key infrastructure and manufacturing projects.
 o For instance, the European Investment Bank (EIB) acts like a
DFI for Europe.
 Lack of Finance for Infrastructure: Although India has a long-term debt
market for the government securities and corporate bonds cut, it is still
out of reach of retail investors and unable to meet the large
infrastructure financing needs.
 Economic Crisis Triggered By Covid-19 Pandemic: The Covid-19
pandemic has exacerbated inequality, the poverty gap, unemployment,
and the economy’s slowing down.
o Thus, infrastructure building through DFIs can help in quick
economic recovery.
Way Forward

 Mobilizing Capital For DFI: To lend for the long term, DFI requires
correspondingly long-term sources of finance.
o In this context, the government may allow equity investment
by institutions having a long term horizon like insurance
companies, pension funds to augment the capital.
o Further, DFI can be adequately capitalized by the sovereign-
backed funds, alternative routes such as capital gains/tax-
free bond issues, external borrowings, and loans from
multilateral agencies.
 Administration of DFI: The ownership and organisation structure are
critical and require greater clarity as this would have bearing on the
functioning, flexibility, governance of the institution and its long-term
sustainability.
 Functionality of DFI: It is critical to hire experts with a good
understanding of infrastructure, policies, financing and risk
management to work with the institution by offering market-driven
lending packages.
 Reaching Out Retail Investors: The government needs to set up
institutions and network platforms to reach retail investors and
incentivize and structure the bonds/instruments so that they are
attracted to invest long-term in those instruments.
  Periodic Review of DFI: Periodic reviews are necessary to ensure that
the DFI remains relevant by taking into account changing priorities of
the economy and making consequential adjustments in the role.
Q4. State the role of DFI in the Indian economy.
Ans.
1. Long-term Financing: DFIs provide long-term financing for infrastructure
projects and key sectors of the economy. They offer funding for projects
with longer gestation periods, such as power plants, transportation
networks, telecommunications infrastructure, and industrial projects. By
providing long-term capital, DFIs bridge the gap between short-term
deposits and the long-term funding requirements of these sectors.
2. Infrastructure Development: DFIs play a significant role in promoting
infrastructure development in India. They finance projects related to
transportation, energy, water supply, housing, and other critical
infrastructure sectors. DFIs contribute to the expansion and modernization
of infrastructure, which is essential for sustainable economic growth and
improving the quality of life for citizens.
3. Risk Mitigation: DFIs often assume higher risks associated with long-term
and infrastructure financing. They support projects that may face challenges
in obtaining funding from commercial banks due to their size, complexity, or
long payback periods. By assuming certain risks and providing financial
assistance, DFIs help mitigate risks for other lenders and encourage private
sector participation in infrastructure development.
4. Sector-specific Expertise: DFIs possess specialized knowledge and expertise
in specific sectors. They understand the unique challenges, regulatory
frameworks, and financial requirements of sectors like power, roads,
telecommunications, etc. DFIs provide technical assistance, project
evaluation, and sector-specific guidance to promote sustainable and efficient
development within these sectors.
5. Financial Inclusion and MSME Support: DFIs in India also focus on promoting
financial inclusion and supporting micro, small, and medium enterprises
(MSMEs). They provide financing, credit facilities, and advisory services to
MSMEs, which play a crucial role in generating employment, fostering
entrepreneurship, and contributing to economic growth. DFIs help bridge
the funding gap and support the development of MSMEs, thereby fostering
inclusive economic development.
 6. Co-financing and Syndication: DFIs often collaborate with other financial
institutions, including commercial banks and international development
banks, to co-finance projects. They participate in syndicated loans and
consortiums to share risks and mobilize larger amounts of capital for
significant projects. By leveraging partnerships and co-financing, DFIs
facilitate the funding of large-scale projects and enhance their impact on the
economy.
7. Policy Formulation and Advocacy: DFIs contribute to policy formulation and
advocacy for economic development. They provide inputs, expertise, and
recommendations to government bodies, regulators, and policymakers. DFIs
play a vital role in influencing policies related to infrastructure development,
financing frameworks, and sector-specific regulations to create an enabling
environment for economic growth.

Q5. State the life and non-life insurance in India.

Ans. Life Insurance: Life insurance provides financial protection to individuals and
their families against the risk of death, disability, or critical illness. In India, life
insurance is primarily provided by life insurance companies. Here are key features
of life insurance in India:

1. Risk Coverage: Life insurance policies offer risk coverage, wherein the
insured individual pays premiums to the insurer, and in the event of the
insured's death, the insurer provides a predetermined sum assured to the
beneficiaries or nominee.
2. Savings and Investment Component: Many life insurance policies in India
also have a savings or investment component. These policies combine
insurance coverage with an opportunity to grow savings over time. Examples
include endowment plans, unit-linked insurance plans (ULIPs), and money-
back policies.
3. Long-term Commitment: Life insurance policies typically have long-term
commitments, with policy durations ranging from several years to the
insured's lifetime. Policyholders pay regular premiums throughout the policy
term.
4. Tax Benefits: Life insurance policies offer tax benefits under the Indian
Income Tax Act. The premiums paid and the benefits received are eligible for
tax deductions and exemptions, subject to specified limits.
Non-life Insurance: Non-life insurance, also known as general insurance, covers a
broad range of insurance policies that protect against risks other than those
covered by life insurance. Non-life insurance companies in India offer various types
of policies catering to different needs. Here are key features of non-life insurance:

1. Property and Casualty Coverage: Non-life insurance policies cover a range of

risks such as property damage, loss or theft of belongings, motor vehicle
accidents, health emergencies, travel-related risks, liability claims, and more.
2. Short-term Coverage: Non-life insurance policies typically provide coverage
for a specified period, usually one year, and policyholders need to renew
their policies annually.
3. Wide Range of Policies: Non-life insurance offers a wide range of policies,
including health insurance, motor insurance, home insurance, travel
insurance, fire insurance, marine insurance, liability insurance, and others.
Each policy type provides coverage against specific risks.
4. Premium Calculation: Premiums for non-life insurance policies are based on
various factors such as the sum insured, policy duration, risk profile of the
insured, type of coverage, and deductible amount (if applicable).
5. Third-party Coverage: Non-life insurance policies often include third-party
coverage, which protects policyholders against legal liability for damages
caused to third parties. Examples include motor third-party liability
insurance, public liability insurance, and professional indemnity insurance.
6. Mandatory Insurance: Certain types of non-life insurance, such as motor
insurance and health insurance for employees, are mandatory in India as per
the applicable laws.

It's important to note that life insurance and non-life insurance serve different
purposes and cater to different risks. Life insurance provides financial protection
against the risk of death or disability, while non-life insurance covers a wide range
of risks other than those related to life. Both types of insurance play important
roles in managing risk and providing financial security to individuals and businesses
in India.
Q6. What is mutual fund? What are the different types of mutual funds? State the
benefits of mutual funds. State the role of mutual funds in the economic
development.
Ans. A mutual fund is a pool of collective investment in stocks, bonds, and other
short-term investments. The investors in mutual funds are individuals and
institutions. This fund is usually managed by a fund manager who charges money
from the investors for taking care of their investments.
Types of Mutual Fund
1. Equity funds:-These schemes invest money directly into shares. These schemes
can be risky in the short term, but in the long term, it helps you to earn the best
returns. On the basis of the size of the companies, they are further divided into
small-cap, mid-cap, and large-cap. These types of mutual funds are preferred by
those who like to take the risk.
2. Fixed-Income Funds:- These types of mutual funds give fixed returns to the
owners. Fixed return funds are; corporate bonds, government bonds, or other debt
instruments. The manager basically passes interest income to its investors. This
type of investment is done by those investors who don't want to take the risk.
3. Hybrid Mutual Fund:- Hybrid Mutual Fund or exchange-traded funds (ETFs)
invest in more than one type of investment security, such as stocks and bonds.
These Mutual Fund schemes invest in both equity and debt. While choosing these
schemes, it is important for investors to take care of their risk-taking ability.
4. Solution-Oriented Mutual Fund:- Solution-Oriented Mutual Fund schemes are
made according to a specific goal or solution. These may have goals such as
retirement schemes or education of the child. You are required to invest in these
schemes for at least five years.
Features & Benefits of Mutual Funds
1. Risk diversification: - Diversification of funds into equity and debt securities
2. Liquidity: - The Investor can make partial or full withdrawal as per his/her
requirement
3. Transparency: - Investors know exactly where the money is being invested
4. Low cost: - No entry load while investing in mutual funds
5. Professional Management:- Industry experts manage the funds
6. Tax-efficient:- The Investors get tax benefits in equity and debt funds
7. Flexibility: - Flexibility to switch investment funds from one fund to another
Role of Mutual Funds in the Economic Development
As the definition of the Mutual Funds says that its a pool of collective investment
by the different investors and institutions.

1. It helps in arranging the money for investment purposes in the economy.

2. It mobilise the small savings of the public through investment.
3. We know that developing countries like India lacks capital accumulation. So
mutual funds help in capital accumulation which is crucial for the development of a
developing country like India.
4. It discourages the idle hoarding of the money in the house.
5. It helps in creating an environment of investment in the country.
6. It is helpful in employment generation.
Q7. What are non-banking financial company?

Ans. A non-banking financial institution (NBFI) is a financial institution that does

not have a full banking license and cannot accept deposits from the public.
However, NBFIs do facilitate alternative financial services, such as investment
(both collective and individual), risk pooling, financial consulting, brokering, money
transmission, and check cashing. NBFIs are a source of consumer credit (along with
licensed banks). Examples of nonbank financial institutions include insurance firms,
venture capitalists, currency exchanges, some microloan organizations, and pawn
shops. These non-bank financial institutions provide services that are not
necessarily suited to banks, serve as competition to banks, and specialize in sectors
or groups.

Q8. State the role of NBFI in financial system.

Ans. NBFIs supplement banks in providing financial services to individuals and

firms. They can provide competition for banks in the provision of these services.
While banks may offer a set of financial services as a package deal, NBFIs unbundle
these services, tailoring their services to particular groups. Additionally, individual
NBFIs may specialize in a particular sector, gaining an informational advantage. By
this unbundling, targeting, and specializing, NBFIs promote competition within the
financial services industry.

Having a multi-faceted financial system, which includes non-bank financial

institutions, can protect economies from financial shocks and recover from those
shocks. NBFIs provide multiple alternatives to transform an economy's savings into
capital investment, which act as backup facilities should the primary form of
intermediation fail.

However, in countries that lack effective regulations, non-bank financial

institutions can exacerbate the fragility of the financial system. While not all NBFIs
are lightly regulated, the NBFIs that comprise the shadow banking system are. In
the runup to the recent global financial crisis, institutions such as hedge funds
and structured investment vehicles, were largely overlooked by regulators, who
focused NBFI supervision on pension funds and insurance companies.

Module 4: Financial Services

Q1. What is financial service industry? State the financial service industry sector.
What are the services offered in the financial services industry?

Ans. The financial service industry refers to a broad sector of the

economy that encompasses various organizations and institutions
that provide financial products, services, and advice to individuals,
businesses, and governments. It plays a vital role in facilitating the
flow of funds, managing risks, and supporting economic activities.
The financial service industry sector includes the following key
segments:

1. Banking: Banks are central to the financial services industry.

They provide services such as deposit-taking, lending, credit
cards, mortgages, and other financial products to individuals,
businesses, and governments. Commercial banks, investment
banks, and retail banks are part of this sector.
2. Insurance: Insurance companies provide coverage against
various risks, such as life, health, property, and liability. They
offer policies and protection plans that safeguard individuals
and businesses from financial losses due to unforeseen events.
Life insurance, health insurance, property and casualty
insurance, and reinsurance companies fall under this sector.
3. Asset Management: Asset management firms manage and
invest funds on behalf of individuals, institutional investors,
and corporations. They offer services such as mutual funds,
hedge funds, pension funds, and private equity funds. Asset
management firms focus on optimizing returns while managing
risk for their clients.
4. Brokerage Services: Brokerage firms facilitate the buying and
selling of financial securities, such as stocks, bonds,
commodities, and derivatives, on behalf of investors. They act
as intermediaries between buyers and sellers and provide
platforms for trading and execution. Brokerage services
include stockbrokers, investment advisors, and online trading
platforms.
5. Financial Exchanges: Financial exchanges provide platforms for
trading financial instruments, such as stocks, bonds,
commodities, currencies, and derivatives. They serve as
marketplaces where buyers and sellers come together to trade
these instruments. Examples include stock exchanges,
commodity exchanges, and foreign exchange markets.
 6. Credit Card Companies: Credit card companies issue and
process credit cards, enabling individuals and businesses to
make purchases on credit. They provide payment processing
services and offer various benefits, rewards, and credit
facilities to cardholders.
7. Payment Services: Payment service providers facilitate the
transfer of funds and process electronic payments. They offer
services such as mobile payments, online payment gateways,
digital wallets, and money transfer platforms.
8. Financial Technology (FinTech): FinTech companies leverage
technology to provide innovative financial products and
services. They operate in various areas, including digital
banking, online lending, payment solutions, blockchain
technology, robo-advisory services, and peer-to-peer lending.
9. Financial Consulting and Advisory Services: Consulting firms
and advisory services provide financial planning, investment
advice, risk management, mergers and acquisitions (M&A)
advisory, tax planning, and other financial consulting services
to individuals, businesses, and governments.

These sectors collectively form the financial service industry, which

plays a crucial role in facilitating economic activities, allocating
capital, managing risks, and supporting financial transactions at
both the individual and institutional levels.
Here are some of the key services provided within the financial
services industry:

1. Banking Services: Banks offer various services, including

deposit accounts (such as savings accounts, current accounts,
and fixed deposits), loans (such as personal loans, business
loans, and mortgages), credit cards, ATM services, online
banking, wire transfers, and foreign exchange services.
2. Insurance Services: Insurance companies provide services such
as life insurance, health insurance, property and casualty
insurance, motor insurance, travel insurance, and liability
insurance. They offer coverage against specific risks and
provide financial compensation in case of covered events or
losses.
3. Investment Services: Financial institutions and asset
management companies provide investment services,
including investment advisory, portfolio management, mutual
 funds, hedge funds, pension funds, private equity investments,
and wealth management services. They help individuals and
organizations make informed investment decisions and
manage their investment portfolios.
4. Retirement Planning: Financial service providers assist
individuals in planning for retirement by offering retirement
savings plans, such as individual retirement accounts (IRAs)
and employer-sponsored retirement plans (like 401(k) plans).
They provide guidance on investment options, contribution
strategies, and retirement income planning.
5. Financial Planning and Advisory: Financial advisors and
planners offer comprehensive financial planning services to
individuals and businesses. They assess clients' financial
situations, set financial goals, create personalized financial
plans, provide investment advice, and offer guidance on tax
planning, estate planning, and risk management.
6. Brokerage and Trading Services: Brokerage firms facilitate
buying and selling of financial securities, including stocks,
bonds, commodities, currencies, and derivatives. They provide
platforms for trading, execute orders on behalf of clients, offer
research and analysis, and provide access to market
information and investment tools.
7. Payment and Transaction Services: Payment service providers
enable secure and efficient payment transactions. They offer
services such as online payment gateways, mobile payments,
digital wallets, peer-to-peer payments, money transfers, and
merchant services.
8. Risk Management Services: Risk management firms provide
services to identify, assess, and manage various types of risks
faced by businesses and individuals. This includes risk
assessment, insurance brokerage, risk consulting, and the
development of risk management strategies.
9. Tax and Accounting Services: Accounting firms offer tax
planning and compliance services, tax preparation, auditing,
financial statement preparation, bookkeeping, and advisory
services to individuals and businesses. They assist with tax
filings, financial reporting, and ensuring compliance with
accounting standards and regulations.
10. Estate Planning and Trust Services: Financial institutions
provide estate planning services, including the creation and
management of trusts, wills, and other estate planning
 documents. They assist in preserving and transferring wealth
to beneficiaries while minimizing tax implications.
11. Corporate Finance Services: Investment banks and
financial institutions provide corporate finance services to
businesses, including capital raising through initial public
offerings (IPOs), mergers and acquisitions (M&A) advisory, debt
and equity financing, underwriting services, and corporate
restructuring.

Q2. Discuss the pre and past issue management of merchant banking.

Pre & Post issue management:

Pre issue management is time bound programme and concerned with
following:

1) Issue of shares
2) Marketing,Coordination and underwriting of the issue.
3) Pricing of issues
Post issue management is concerned with following:

1) Collection of application forms and amount received

2) Scrutinising application
3) Deciding allotment procedure
4) Mailing of share certificates/refund or allotment orders