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Certified Investment Banking
What do you mean by bank ?
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans.
Lending activities can be directly performed by the bank or indirectly through capital markets.
Lending activities can be directly performed by the bank or indirectly through capital markets.
How many types of banks are there?
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Lets understand banks in details
• These banks are governed by a law enacted by the state government. They provide short-term loans to agriculture and related industries
• Cooperative banks’ principal purpose is to enhance social welfare by providing low-interest loans
• They are arranged in a three-tiered system
• State Cooperative Banks, Tier 1 (State Level) (regulated by RBI, State Govt, NABARD)
• The RBI, the government, and the National Bank for Agriculture and Rural Development (NABARD) all contribute to the project’s funding. After then, the money is allocated to the general population
• These banks are subject to CRR and SLR concessions. (SLR: 25%, CRR: 3%)
• The state owns the company, and the senior management is chosen by the members
• Central/District Cooperative Banks, Tier 2 (District Level)
• Tier 3 (Village Level) – Agriculture (Primary) Cooperative Banks
• Cooperative banks’ principal purpose is to enhance social welfare by providing low-interest loans
• They are arranged in a three-tiered system
• State Cooperative Banks, Tier 1 (State Level) (regulated by RBI, State Govt, NABARD)
• The RBI, the government, and the National Bank for Agriculture and Rural Development (NABARD) all contribute to the project’s funding. After then, the money is allocated to the general population
• These banks are subject to CRR and SLR concessions. (SLR: 25%, CRR: 3%)
• The state owns the company, and the senior management is chosen by the members
• Central/District Cooperative Banks, Tier 2 (District Level)
• Tier 3 (Village Level) – Agriculture (Primary) Cooperative Banks
• The Banking Companies Act of 1956 established the company
• They function on a commercial basis, with profit as their primary goal
• They are owned by the government, state, or any private company and have a unified structure
• They look after all sectors, from rural to urban
• Unless the RBI directs otherwise, these banks do not charge concessional interest rates
• These banks’ primary source of funds is public deposits
• Commercial banks are further classified into three types:
Public sector banks are those in which the government or the country’s central bank owns the majority of the stock
• Banks in the private sector are those in which a private entity, an individual, or a group of people owns the majority of the stock
• Foreign Banks – This category includes banks with headquarters in other nations and branches in the United States
• They function on a commercial basis, with profit as their primary goal
• They are owned by the government, state, or any private company and have a unified structure
• They look after all sectors, from rural to urban
• Unless the RBI directs otherwise, these banks do not charge concessional interest rates
• These banks’ primary source of funds is public deposits
• Commercial banks are further classified into three types:
Public sector banks are those in which the government or the country’s central bank owns the majority of the stock
• Banks in the private sector are those in which a private entity, an individual, or a group of people owns the majority of the stock
• Foreign Banks – This category includes banks with headquarters in other nations and branches in the United States
• These are unique types of commercial banks that lend to agriculture and the rural economy at a reduced rate.
• RRBs were founded in 1975 and are governed by the 1976 Regional Rural Bank Act.
• RRBs are 50/50 joint ventures between the federal government and state governments (15%), as well as a commercial bank (35 percent ).
• Between 1987 and 2005, 196 RRBs were established.
• From 2005 forward, the government began merging RRBs, bringing the total number of RRBs to 82.
• A single RRB cannot open branches in more than three districts that are geographically connected.
• RRBs were founded in 1975 and are governed by the 1976 Regional Rural Bank Act.
• RRBs are 50/50 joint ventures between the federal government and state governments (15%), as well as a commercial bank (35 percent ).
• Between 1987 and 2005, 196 RRBs were established.
• From 2005 forward, the government began merging RRBs, bringing the total number of RRBs to 82.
• A single RRB cannot open branches in more than three districts that are geographically connected.
• In India, it was first introduced in 1996.
• The private sector organizes these.
• Local Area Banks’ primary goal is to make a profit.
• Local Area Banks are governed by the 1956 Companies Act.
• There are now just four Local Area Banks in existence, all of which are located in South India.
• The private sector organizes these.
• Local Area Banks’ primary goal is to make a profit.
• Local Area Banks are governed by the 1956 Companies Act.
• There are now just four Local Area Banks in existence, all of which are located in South India.
• Certain banks exist just to serve a certain purpose. Specialized banks are the name for several types of financial institutions. These are some of them:
SIDBI (Small Industries Development Bank of India) – SIDBI can provide a loan for a small-scale enterprise or business. With the support of this bank, small businesses can get current technology and equipment.
• Export and Import Bank (EXIM Bank) – EXIM Bank stands for Export and Import Bank. This type of bank can provide loans or other financial help to foreign countries that are exporting or importing goods.
• NABARD (National Bank for Agricultural and Rural Development) – People can resort to NABARD for any type of financial support for rural, handicraft, village, and agricultural development.
• Other specialist banks exist, each with a unique function to play in the financial development of the country.
SIDBI (Small Industries Development Bank of India) – SIDBI can provide a loan for a small-scale enterprise or business. With the support of this bank, small businesses can get current technology and equipment.
• Export and Import Bank (EXIM Bank) – EXIM Bank stands for Export and Import Bank. This type of bank can provide loans or other financial help to foreign countries that are exporting or importing goods.
• NABARD (National Bank for Agricultural and Rural Development) – People can resort to NABARD for any type of financial support for rural, handicraft, village, and agricultural development.
• Other specialist banks exist, each with a unique function to play in the financial development of the country.
This sort of bank, as the name implies, provides loans and financial help to micro industries, small farmers, and the unorganized sector of society. The country’s central bank oversees these institutions.
The following is a list of our country’s small finance banks:
• AU Small Finance Bank
• Equitas Small Finance Bank
• Jana Small Finance Bank
• Ujjivan Small Finance Bank
• Esaf Small Finance Bank
• Fincare Small Finance Bank
The following is a list of our country’s small finance banks:
• AU Small Finance Bank
• Equitas Small Finance Bank
• Jana Small Finance Bank
• Ujjivan Small Finance Bank
• Esaf Small Finance Bank
• Fincare Small Finance Bank
The Reserve Bank of India conceptualized the payments bank, a newly developed form of banking. People who have a payment bank account can only deposit up to Rs.1,00,000/- and cannot apply for loans or credit cards through this account.
Payment banks provide services such as internet banking, mobile banking, ATM card issuance, and debit card issuance. The following is a list of our country’s few payment banks:
• Airtel Payments Bank
• India Post Payments Bank
• Fino Payments Bank
• Jio Payments Bank
• Paytm Payments Bank
• NSDL Payments Bank
Payment banks provide services such as internet banking, mobile banking, ATM card issuance, and debit card issuance. The following is a list of our country’s few payment banks:
• Airtel Payments Bank
• India Post Payments Bank
• Fino Payments Bank
• Jio Payments Bank
• Paytm Payments Bank
• NSDL Payments Bank
CENTRAL BANK
Which is Central Bank of India ?
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The central bank’s principal role is to serve as the government’s bank and to oversee and regulate the country’s other banking institutions. The functions of a country’s central bank are listed below:
• assisting other financial institutions
• Issuing money and enforcing monetary policies
• The financial system’s supervisor
In other words, the country’s central bank is also known as the banker’s bank because it assists other banks in the country and runs the country’s financial system under the supervision of the Government.
What are the monetary policies of RBI ?
The monetary policy is a policy formulated by the central bank, i.e., RBI (Reserve Bank of India) and relates to the monetary matters of the country. The policy involves measures taken to regulate the supply of money, availability, and cost of credit in the economy.
The policy also oversees distribution of credit among users as well as the borrowing and lending rates of interest. In a developing country like India, the monetary policy is significant in the promotion of economic growth.
The policy also oversees distribution of credit among users as well as the borrowing and lending rates of interest. In a developing country like India, the monetary policy is significant in the promotion of economic growth.
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objectives of monetary policy?
Since the monetary policy controls the rate of interest and inflation within the country, it can impact the savings and investment of the people. A higher rate of interest translates to a greater chance of investment and savings, thereby, maintaining a healthy cash flow within the economy.
By helping industries secure a loan at a reduced rate of interest, monetary policy helps export-oriented units to substitute imports and increase exports. This, in turn, helps improve the condition of the balance of payments.
The two main stages of a business cycle are boom and depression. The monetary policy is the greatest tool using which the boom and depression of business cycles can be controlled by managing the credit to control the supply of money. The inflation in the market can be controlled by reducing the supply of money. On the other hand, when the money supply increases, the demand in the economy will also witness a rise.
Since the monetary policy can control the demand in an economy, it can be used by monetary authorities to maintain a balance between demand and supply of goods and services. When credit is expanded and the rate of interest is reduced, it allows more people to secure loans for the purchase of goods and services. This leads to the rise in demand. On the other hand, when the authorities wish to reduce demand, they can reduce credit and raise the interest rates.
As the monetary policy can reduce the interest rate, small and medium enterprises (SMEs) can easily secure a loan for business expansion. This can lead to greater employment opportunities.
Helping with the development of infrastructure: The monetary policy allows concessional funding for the development of infrastructure within the country.
Under the monetary policy, additional funds are allocated at lower rates of interest for the development of the priority sectors such as small-scale industries, agriculture, underdeveloped sections of the society, etc.
The entire banking industry is managed by the Reserve Bank of India (RBI). While RBI aims to make banking facilities available far and wide across the nation, it also instructs other banks using the monetary policy to establish rural branches wherever necessary for agricultural development. Additionally, the government has also set up regional rural banks and cooperative banks to help farmers receive the financial aid they require in no time.
Monetary Policy Tools
To control inflation, the Reserve Bank of India needs to decrease the supply of money or increase cost of fund in order to keep the demand of goods and services in control.
Quantitative tools
Banks are required to set aside this portion in cash with the RBI. The bank can neither lend it to anyone nor can it earn any interest rate or profit on CRR
In order to control money supply, the RBI buys and sells government securities in the open market. These operations conducted by the Central Bank in the open market are referred to as Open Market Operations.
When the RBI sells government securities, the liquidity is sucked from the market, and the exact opposite happens when RBI buys securities. The latter is done to control inflation. The objective of OMOs are to keep a check on temporary liquidity mismatches in the market, owing to foreign capital flow.
When the RBI sells government securities, the liquidity is sucked from the market, and the exact opposite happens when RBI buys securities. The latter is done to control inflation. The objective of OMOs are to keep a check on temporary liquidity mismatches in the market, owing to foreign capital flow.
Banks are required to set aside this portion in liquid assets such as gold or RBI approved securities such as government securities. Banks are allowed to earn interest on these securities, however it is very low.
Qualitative tools
Unlike quantitative tools which have a direct effect on the entire economy’s money supply, qualitative tools are selective tools that have an effect in the money supply of a specific sector of the economy.
The RBI prescribes a certain margin against collateral, which in turn impacts the borrowing habit of customers. When the margin requirements are raised by the RBI, customers will be able to borrow less.
By way of persuasion, the RBI convinces banks to keep money in government securities, rather than certain sectors.
Controlling credit by not lending to selective industries or speculative businesses.
Market Stabilisation Scheme (MSS)
Policy Rates:
The interest rate at which RBI lends long term funds to banks is referred to as the bank rate. However, presently RBI does not entirely control money supply via the bank rate.
It uses Liquidity Adjustment Facility (LAF) – repo rate as one of the significant tools to establish control over money supply.
Bank rate is used to prescribe penalty to the bank if it does not maintain the prescribed SLR or CRR
RBI uses LAF as an instrument to adjust liquidity and money supply. The following types of LAF are:
1. Repo rate : Repo rate is the rate at which banks borrow from RBI on a short-term basis against a repurchase agreement. Under this policy, banks are required to provide government securities as collateral and later buy them back after a pre-defined time.
2. Reverse Repo rate : It is the reverse of repo rate, i.e., this is the rate RBI pays to banks in order to keep additional funds in RBI. It is linked to repo rate in the following way: Reverse Repo Rate = Repo Rate – 1
1. Repo rate : Repo rate is the rate at which banks borrow from RBI on a short-term basis against a repurchase agreement. Under this policy, banks are required to provide government securities as collateral and later buy them back after a pre-defined time.
2. Reverse Repo rate : It is the reverse of repo rate, i.e., this is the rate RBI pays to banks in order to keep additional funds in RBI. It is linked to repo rate in the following way: Reverse Repo Rate = Repo Rate – 1
MSF or Marginal Standing Facility enables banks to borrow funds from RBI (Reserve Bank of India) in emergency situations when their liquidity absolutely dries up. This short-term borrowing scheme facilitates the scheduled banks to get funds from the central bank of India overnight in case of serious cash shortage by offering their approved government securities. Liquidity shortfalls are often faced by banks resulted from the financial gap created due to deposit and loan portfolio mismatch. Such shortfalls don’t last long and to manage such emergency conditions banks can approach RBI for quick money for a period of one day within the limits of the Statutory Liquidity Ratio (SLR).
Key differences between Bank Rate VS REPO RATE
Bank Rate
is charged against loans offered by the central bank to commercial banks
No collateral is involved while charging Bank Rate
Repo Rate is always lower than the Bank Rate.
Increase in Bank Rate directly affects the lending rates offered to the customer, restricting people to avail loans and damages the overall economic growth
Bank Rate caters to long term financial requirements of commercial banks
repo rate
is charged for repurchasing the securities sold by the commercial banks to the central bank
securities, bonds, agreements and collateral is involved when Repo Rate is charged
Repo Rate is always lower than the Bank Rate.
Increase in Repo Rate is usually handled by the banks and doesn’t affect customers directly
Repo Rate focuses on short term financial needs
