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ECONOMICS > CHAPTER 9 > Flashcards

CHAPTER 9 Flashcards

1
Q

Meaning of Financial Market:

A

Financial market refers to the market where sale and purchase of financial assets such as bonds, stocks, derivatives, government securities, foreign currency etc is undertaken.
Financial markets operate through banks, non-banking financial institutions, brokers, mutal funds, discount houses, etc

Includes 2 distinctive markets: Money market and Capital Market.

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2
Q

Meaning of Money Market:

A

Money market is a market for borrowing and lending of Short-Term Funds. It is a market for “Near Money” i.e short term instruments such as trade bills, government securities, promissory noted etc.
Such instruments are highly liquid, less risky and easily marketable with a maturity period of one year or less than one year.

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3
Q

Constituents of the Organised Sector of the Money Market:

A
  1. Reserve Bank of India
  2. Commercial Banks
  3. Co-operative Banks
  4. Development Financial Institutions
  5. Discount and Finance House of India
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3
Q

Constituents of the Unorganised Sector of Money Market:

A
  1. Indigenous Bankers
  2. Money Lenders
  3. Unregulated Non - Bank Financial Intermediaries -
    a. Nidhi
    b. Chit Fund
    c. Loan Companies
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4
Q

In context of RBI-

  1. Set up on recommendation of?
  2. Commenced it’s operations on?
  3. Nationalised on?
  4. Which act provides the statutory basis of its functions?
A
  1. Set up on the recommendation of Hilton Young Commission
  2. 1st April, 1935 as a private shareholders bank
  3. 1st January, 1949.
  4. The Reserve Bank of India Act, 1934
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5
Q

Definition of Central bank by Dr. M. H. de Kock

A

Central Bank is one which constitutes the apex of the monetary and banking structure of the country.

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6
Q

Function of Reserve Bank of India:

A

1. Issue of Currency Notes - RBI issues currency notes, except one rupee notes and coins, maintaining minimum reserves as per the ‘Minimum Reserve System’ of 1957.

2. Banker to the Government - RBI acts as a banker, agent, and advisor to the Government, managing public debt and advising on economic issues.

3. Banker’s Bank - RBI controls commercial banks, requiring them to maintain minimum cash reserves and providing financial assistance.

4. Custodian of Foreign Exchange Reserves - RBI maintains the official exchange rate of the rupee, ensuring stability, and handles currencies of IMF members.

5. Controller of Credit - RBI influences and monitors the volume and use of credit created by commercial banks through various methods.

6. Collection and Publication of Data - RBI collects and compiles statistical information related to banking and financial sectors.

7. Promotional and Developmental Functions - RBI extends banking services to semi-urban and rural areas, provides security to depositors, and develops specialized institutions.

8. Other Functions - RBI acts as
-Clearing House
-Lender of Last Resort
-Custodian of Cash Reserves.

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7
Q

In context to commercial banks-

  1. Dealer of what?
  2. Performs functions for what?
  3. Most important function of theirs?
  4. In terms of Ownership they can be classifies into?
A
  1. A bank is a dealer in credit
  2. A commercial bank performs all fucntions for earning profits
  3. Plays an important role in mobilizing savings and allocating them to various sectors of the economy.
  4. Classifies into 4 types - Public Sector Banks, Private Banks, Regional Rural Banks, Foreign Banks.
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8
Q

Definition of bank/banking accordinng to the Banking Regulation Act of 1949:

A

“Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, demand draft, order or otherwise.”

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9
Q

Functions of Commercial Banks:

A

1. Acceptance of deposits - Deposits are the main source of funds for commercial banks, categorized as demand deposits (withdrawable on demand) and time deposits (repayable after a certain period). Demand deposits include current accounts (with overdraft facility) and savings accounts. Time deposits include recurring deposits (fixed amount at regular intervals) and fixed deposits (lumpsum amount for a specified period with a high rate of interest).

2. Providing loans and advances - Commercial banks lend funds to institutions and individuals, offering various types of loans and credit facilities.

3. Ancillary functions - Commercial banks offer services like fund transfer, collection of money, periodical payments, merchant banking, foreign exchange, safe deposit lockers, Demat facility, internet banking, and mobile banking.

4. Credit Creation - Commercial banks create credit by lending out funds after meeting reserve requirements, leading to the creation of secondary deposits.

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10
Q

In context of Co-operative Banks:

  1. Came into existence with enactment of which act?
  2. Supplement whose efforts and how?
  3. Main Function?
  4. Structure of Co-operative Banks in India?
A
  1. Came into existence with the enactment of the Co-operative Credit Societies Act of 1904.
  2. Supplement Commercial Banks’ efforts by meeting the credit needs of local population
  3. Main function is to get deposits from members and public and grant loans to farmers(Even those who aren’t members) and small industrialists in both rural and urban areas.
  4. Primary Level - Primary Co-operative Credit Societies
    District Level - District Central Co-operative Banks
    State Co-operative banks.
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11
Q

In context of Development Financial Institutions-

  1. These are what type of agencies?
  2. First DFI?
  3. Examples?
A
  1. Development Financial Institutions are agencies that provide medium and long term financial assistance and are engaged in promotion and development of industry, agriculture and other key sectors.
  2. Industrial Finance Corporation of India(IFCI) established in 1948.
  3. IFCI, IDBI, ICICI, EXIM
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12
Q

In context to Discount and Finance House of India:

  1. Set up when, on whose recommendation as a what?
  2. Owned by?
  3. Main function?
A
  1. The Discount and Finance House of India was set up in 1988 on the Vaghul Committee’s Recommendation as a money market institution.
  2. Jointly owned by RBI, Public Sector Banks and Financial Institutions
  3. The main function of this mmi is to discount, re-discount, purchase and sell treasury bills, trade bills, commercial bills and commercial papers.
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13
Q

Chit funds:

A
  • Saving Institutions
  • The members make regular contributions to the fund. The collected fund is given to some member based on previously agreed criterion(By bids or by draws)
  • Famous in Kerala and Tamil Nadu
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14
Q

Nidhis:

A

The deposits from the members are the major source of funds, and they make loans to members at reasonable rate of interest for the purpose of construction of house, repairs, etc. They are highly localised to South India.

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15
Q

Role of Money Market in India:

A

1. Portfolio Management - Money market offers financial instruments that suit investors’ risk and return preferences, minimizing risk and maximizing returns.
**2. Implementation of Monetary policy **- Money market ensures successful implementation of monetary policy by managing money quantity and guiding interest policy.
3. Growth of Commerce, Industry and Trade - Money market facilitates discounting bills of exchange and provides working capital for agriculture and small-scale industries.
**4. Financial requirements of the Government **- Money market helps the Government fulfill short-term financial needs using Treasury Bills.
**5. Economizes the use of cash **- Money market deals with financial instruments that are close substitutes for money, economizing cash use.
**6. Equilibrating mechanism **- Money market helps establish equilibrium between the demand for and supply of short-term funds through resource allocation and savings mobilization.
7. Liquidity Management - Money market facilitates better liquidity management, leading to economic stability and development.
**8. Short-term requirements of borrowers **- Money market provides access to short-term financial needs at realistic prices.

16
Q

Problems of the Money Market in India:

A

1. Lack of uniformity in the rates of interest - Various entities in the money market have different interest rates due to diverse categories of borrowers.

2. Lack of financial inclusion - Inadequate and inaccessible banking facilities for vulnerable groups show a lack of financial inclusion.

3. Shortage of funds - Money market faces a shortage of funds due to inadequate savings, low per capita income, poor banking habits, and inadequate rural banking facilities.

4. Seasonal fluctuations - Demand for funds varies seasonally, leading to wide fluctuations in the money market.

5. Delays in technological upgradation - Delays in adopting advanced technology hamper the smooth functioning of financial markets.

6. Dual Structure of the Money Market - Presence of both organized and unorganized sectors leads to disintegration, lack of transparency, and increased volatility.

17
Q

Reforms made in the Money Market:

A

1. Introduction of new instruments - Treasury bills, Commercial Papers (CPs), Certificate of Deposits (CDs), and Money Market Mutual Funds (MMMFs) were introduced.

2. RBI Repos and Reverse Repos - Introduced under the Liquidity Adjustment Facility (LAF).

3. Interest rates - Largely determined by market forces.

4. NEFT and RTGS - Introduced as an improved payment infrastructure.

5. Electronic dealing system - Introduced to bring about technological upgradation.

18
Q

Meaning of Capital Market:

A

Capital Market is a market for long term funds both equity and debt raised within and outside a country.
It refers to all the facilities and the institutional arrangements for borrowing and lending funds (Medium and Long Term Funds).

19
Q

Structure of Capital Market:

A
  1. Government Securities Market/Gilt Edged Market
  2. Industrial Securities Market
  3. Development Financial Institutions
  4. Financial Intermediaries
20
Q

Role of Capital Market in India

A
  1. Mobilizes Long term savings
  2. Operational Efficiency
  3. Provides Equity Capital
  4. Integration
  5. Quick Valuation
21
Q

Problems of the Capital Market:

A
  1. Financial Scams
  2. Insider Trading and Price Manipulation
  3. Decline in Volume of Trade
  4. Inadequate Debt Instruments
  5. Lack of Informational Efficiency
22
Q

Reforms introduced in the Capital Market:

A
  1. SEBI
  2. Access to Global Funds
  3. Investor Education and Protection Fund(IEPF)
  4. Demat Account
  5. Computerized Trading System - Screen Based Trading System.
  6. NSE establishment

ECONOMICS (12 decks)

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