Economic Indicator

FINANCIAL
MARKETS AND
SERVICES
 Course Outcomes

 Understand the financial system, Institutions, financial markets

and services.
 Analyze the concepts relevant to Indian Financial market and
relevance.
 Understand concept of financial services, types and functions.
 Understand the types of financial instruments.
 Demonstrate an understanding of the functioning of stock
markets.
The Financial System: A
Network of Money and Credit

Save

Invest

Promo
te
Key Players in the Financial
System

Insurance Stock
Investme
Banks Companie Exchange
nt firms
s s
Functions of the Financial
System

Facilitate
Savings
Manage
and
Risk
Investme
nts

Secured
Allocate
Payment
Credit
Systems
Need for Financial System

Promotes
Economic Growth

Financial Stability

Financial Inclusion

Increased
Efficiency
Constituents of Indian
Financial System
Indian
Financial
System

Financial
Financial Financial Financial
Instrument
Institutions Markets Services
s

Money Payment
Banks Deposits
Market Services

Insurance Capital Investment

Loans
Companies Market Services

Insurance
NBFCs Stocks
services

Bonds
MODULE 02 –
FINANCIAL
INSTITUTIONS
INTRODUCTION – CHARACTERISTICS – BROAD CATEGORIES
The Lifeblood of the Economy
Providing Fa
cil
g Liquidity ita
in Tr
t
ca tal an g tin
lo i sa
Al ap n s ct i
C o
gs g

Ma Ris
vin in
Sa biliz

n a ks
gi
Mo

ng
Categories of Financial
Institutions
Money Capital
Market Market
Institutions Institutions

Commerci Stock
al Banks Exchanges

Financing Insurance
Companies Companies

Investmen Pension
t Banks Funds

Mutual
Funds
DEVELOPMENT BANKS OF
INDIA
INDUSTRIAL
FINANCE
CORPORATION OF
INDIA
INDUSTRIAL
DEVELOPMEN
T BANK OF
INDIA
INDUSTRIAL CREDIT
INVESTMENT CORPORATION OF

Developme INDIA

nt Banks of EXIM BANK

India NATIONAL
SMALL
INDUSTRIES
CORPORATIO
N
NATIONAL
INDUSTRIAL
DEVELOPMEN
T
CORPORATIO
N
 ROLE OF DBs IN INDIA

 Development banks in India play a crucial role in the Indian

financial system by providing long-term finance to various
sectors of the economy. Some of the important functions of
development banks in India are:
 Promoting and developing small-scale industries (SSI) in India.
 Financing the development of the housing sector in India.
 Facilitating the development of large-scale industries (LSI) in India.
 Helping in the development of the agricultural sector and rural India.
 Development banks in India are expert financial bodies that perform
the dual functions of granting medium and long-term
finances to private entrepreneurs and performing promotional
roles for the economic development of the country
 RBIs measures for NBFCs

 Scale-Based Regulation (SBR) Directions 2023:

• Introduced by the Reserve Bank of India (RBI) to reshape the NBFC landscape.
• Four-layer categorization: NBFC-Base Layer, NBFC-Middle Layer, NBFC-Upper
Layer, and NBFC-Top Layer.
• Effective from October 2022.
• End of Systemically Important Classification: Elimination of the
categorization of systemically important and non-systemically important NBFCs.
• Mandatory Listing Requirement: Top 15 NBFCs must list on stock exchanges.
• Asset Size Consideration: NBFCs with over INR 1,000 crore assets fall into the
mid-layer.
• Consolidation and Transparency: Aim to consolidate regulations into a
consistent and transparent framework1.
 Proposed Four-Tier Structure for NBFC Regulation:
 Aim: Protect financial stability while allowing smaller NBFCs to
grow with ease.
 Base Layer (NBFC-BL): Lower layer of NBFCs.
 Middle Layer: NBFCs with assets between INR 1,000 crore and
INR 10,000 crore.
 Upper Layer: Top 10 NBFCs with stringent conditions.
 Top Layer: NBFCs with assets exceeding INR 10,000 crore
 CAPITAL ADEQUACY RATIO/
CAPITAL-TO-RISK WEIGHTED

ASSETS RATIO
Definition:
 The CAR or CRAR compares a bank’s capital to its risk-weighted assets.
 It helps determine a bank’s risk of failure and is essential for
safeguarding depositors and promoting financial system stability.
 Types of Capital Measured:
 Tier-1 Capital: Represents core funds available to manage losses,
allowing a bank to continue operating.
 Tier-2 Capital: Acts as a secondary supply of funds available from asset
sales when a bank closes down.
 Calculation:
 CAR is calculated by dividing a bank’s capital by its risk-weighted assets.
 Currently, the minimum CAR requirements are:
 Basel II: 8% (of risk-weighted assets).
 Basel III: 10.5% (including a 2.5% conservation buffer).
 Risk-Weighted Assets:
 These are determined by evaluating a bank’s loans and assigning
weights based on credit risk.
 For example, loans to the government have a weight of 0.0%,
while loans to individuals are assigned a weight of 100.0%.
 Importance:
 CAR ensures that banks have a sufficient financial cushion to
absorb losses before becoming insolvent.
 It’s used by regulators for stress tests and capital adequacy
assessments.
MODULE - 02
FINANCIAL
SERVICES
MEANING, OBJECTIVES, FUNCTIONS, CHARACTERISTICS, TYPES – MERCHANT
BANKING – FUNCTIONS AND OPERATIONS, LEASE FINANCING, MUTUAL FUNDS,
VENTURE CAPITAL AND CREDIT RATING
 TRANSFORMATION OF
SAVINGS INTO INVESTMENTS
Wide range of
activities

Provided by
Transforming banks,
them into financial
investments institution,
Intermediaries

Mobilize and Within a

allocate financial
savings system
TRI-FOLD CONTRIBUTION

Employme
nt
Generation
Capital
Formation

Economic
Growth
OBJECTIVES

Asset
Diversificati
on

Generating
Income

Safeguardin
g Capital

Initiating
growth
 CREDIT RATING
 Credit rating involves assigning values to credit instruments (such as bonds,
debentures, or loans) by assessing the solvency of the borrower.
 Solvency refers to the borrower’s ability to repay debt.
 These assessments are expressed through pre-determined symbols (such as AAA,
BBB, etc.) that indicate the creditworthiness of the issuer
.
 Characteristics of Credit Rating:
 Assessment of Issuer’s Capacity to Repay
 Data Driven Evaluation
 Symbolic representation
 Expert evaluation
 Guidance, not recommendation
FUNCTIONS OF CREDIT RATING
AGENCY
 Risk assessment - evaluate the creditworthiness of borrowers by indicating the
level of risk associated with specific debt instruments.
 Influence on borrowing costs - Borrowers with better credit ratings can access
credit at more favorable terms.
 Market transparency - Investors can compare risks across different issuers and
make informed choices.
INVESTMENT GRADE RATINGS

 These ratings indicate that the issuer (borrower) has a relatively low risk of
defaulting on its debt obligations.
 The most common investment-grade ratings include:
 AAA: The highest rating, signifying extremely low credit risk.
 AA: High credit quality but slightly less secure than AAA.
 A: Upper-medium credit quality.
 BBB: Lower-medium credit quality but still investment-grade.
Speculative or Non-Investment-Grade
Ratings (High Yield):
 These ratings suggest a higher risk of default.
 Common non-investment-grade ratings include:
 BB: Speculative, with moderate credit risk.
 B: More speculative, indicating higher credit risk.
 CCC: Substantial credit risk; vulnerable to default.
 D: Indicates that the issuer has already defaulted.
 Bonds with these ratings are often referred to as “junk bonds.”
 NR
 Some issuers may not have a credit rating assigned by any agency.
 NR indicates that no specific rating is available.

 Country-Specific Variations:
 Different countries may have their own rating scales or variations.
 For example, in the United States, the Securities and Exchange Commission
(SEC) recognizes the ratings provided by major credit rating agencies such as
Standard & Poor’s, Moody’s, and Fitch. (Global CRA)
 Factors Considered in Assigning Ratings:
 Credit rating agencies evaluate various factors, including financial stability, repayment
history, industry trends, and economic conditions.
 Ratings are subject to periodic reviews and updates based on changing circumstances.
 CREDIT RATING AGENCIES IN
INDIA
 India’s credit rating industry comprises several agencies regulated by the Securities and
Exchange Board of India (SEBI). Here are some key players:
 CRISIL (Credit Rating Information Services of India Limited): CRISIL provides
independent ratings for various debt instruments, covering corporate, financial, and
structured sectors. It also assesses real estate investment trusts (REITs), external
commercial borrowings (ECBs), insurance hybrids, and more.
 ICRA (Investment Information and Credit Rating Agency): ICRA focuses on credit
ratings for Indian companies and debt instruments. It plays a crucial role in assessing credit
risk and guiding investors.
 CARE (Credit Analysis and Research Limited): CARE is known for its credit ratings
across various sectors, including infrastructure, finance, and manufacturing. It helps
investors make informed choices.
 SMERA (Small and Medium Enterprises Rating Agency): SMERA specializes in
assessing credit risk for small and medium-sized enterprises (SMEs). It provides ratings to
help SMEs access capital markets.
 Fitch India: Fitch operates in India and globally, offering credit ratings and
research services. It evaluates the creditworthiness of Indian entities and their debt
instruments.
 Brickwork Ratings: Brickwork provides credit ratings for various financial
instruments, including bonds, debentures, and commercial paper. It focuses on
Indian companies and projects.
MODULE 04 –
FINANCIAL
MARKETS AND
SERVICES
MEANING AND DEFINITION, ROLE AND FUNCTIONS OF FINANCIAL
MARKETS, CONSTITUENTS OF FINANCIAL MARKETS; MONEY MARKET
AND ITS INSTRUMENTS, CAPITAL MARKET AND ITS INSTRUMENTS; SEBI
– INTRODUCTION, GUIDELINES FOR LISTING OF SHARES AND ISSUE OF
COMMERCIAL PAPERS.
What Financial Market is?

Market
place

Buyers and
sellers
come
together

To trade
financial
assets
 What it does?
(Roles and functions)
 Mobilize funds: allows for efficient allocation of capital and
drives economic growth.
 Price discovery: Financial markets determine the fair market
value of financial instruments, reflecting current economic
conditions and future expectations (trend).

 Uptrend signifies sentiment of optimism (Buying pressure) –

benefit from Continued price appreciation.
 Downtrend signifies sentiment of pessimism (selling pressure) –
to avoid further losses.
Constituents of Financial
Markets Financial
Markets

Capital Market Money Market

Secondary
Primary market
market Call Money
(New issues Treasury bills
(Stock Market
market)
Exchange)

Commercial Certificate of
papers deposits

Repurchase
Reverse repos
agreements

Government
Commercial bill
securities
market
market

Inter corporate
deposits
Let us remember a little!!

• What are • Clarity on

Securities? what are
those
financial
Financial instruments?
instrument
Includes
representin
stocks,
g
bonds and
ownership/
debentures
debt in a
company.
Security
market can
Company be a
Stock primary
market market/
Secondary
• What are market • What is a
primary and security
secondary market?
market?
Securities and Exchange
Board of India (SEBI)

Ministry of Finance

Regulatory authority of
securities markets

Primary role – Protect

interests of investors,
Promote fair Practices,
Ensure orderly functioning
of capital market.
 Further details of SEBI

Established on Securities and

12th April, 1988 – Exchange Board
Non - Statutory of India Act 1992

Statutory
powers were
given on 30th
January, 1992
through an Act –
SEBI - 1992
 Operational location

HQ- Bandra
Kurla
complex,
Mumbai

Northern Eastern Southern Western

New Delhi Kolkata Chennai Ahmedabad
17 local
offices 1 of 16 is in
spread operation at
across the Indore
nation
Constituent Body of SEBI

Chairman
GOI

2 Members 1 Member 5 Members

nominated by GOI –
Union Finance Reserve Bank of at least 3 whole-
Ministry India time.
Guidelines for Listing of
Shares in SEBI

What Is the
When can
eligibility
you list?
criteria?

* 1 – NPSE
* 5 – PSE
* Track of
Public Profit
* Meet the
requirements
of SE.
Listing process

Appoint a MB

LISITNG PROCESS
Docs

Filing the docs

with SEBI

Campaign

Launch
Who is a Merchant Banker?

As a
Advising
Manager -
the
Involved in
Person/ corporation
selling, Consultant
Body s on Issue
buying and
Managemen
subscribing
t
securities
 Merchant banking activity in India is regulated by the SEBI
(Merchant Bankers) Rules, 1992.
MODULE 05 –
STOCK
MARKETS
MEANING OF STOCK, NATURE AND FUNCTIONS OF STOCK EXCHANGE;
STOCK MARKET OPERATIONS – TRADING, SETTLEMENT AND CUSTODY
(NSDL AND CDSL); BRIEF DISCUSSION OF BSE, NSE AND OTCEI.
Fundamental of Stock
Exchange

Trading
Stock
platform

Exchang
e
Nature and Functions of Stock
Exchange

Reg
it y ula
Liq
uid n tio

In on
Ma rm
y
er
ov e

fo
di Pric

rk a t i
et
sc
Trading and Settlement

Place an
order
through
broker

Market
orders and
limit orders

Order
matching and
trade
execution
Settlement cycle

Order

Clearing
T+2
houses