Principles and Practices of Banking Paper 1 | JAIIB STUDY MATERIAL 2022

Principles and Practices of Banking Paper 1 | JAIIB STUDY MATERIAL 2022

You will learn about module 1. Here we going to complete 2 units of Module A with the help of the JAIIB Paper-1 Syllabus for 2022. Here you will acknowledge about Indian Financial System and Banking regulations.

Unit 1-

Indian Financial system:

• Financial services industry is the largest in the world. Increased global attention was drawn to the financial services sector due to the impact of the global financial crisis recent Eurozone crisis and the UK’s Brexit issues on the economies of many countries.

• The global financial sector has undergone a turbulent period because of the bankruptcies and the liquidity problems in many countries.

• Failure of banks and financial institutions has raised serious questions about the stability of the financial system.

• India is one of the fastest-growing economies in the world. the contribution of the services sector to the GDP of the economy is gradually increasing whereas the contribution from other sectors has declined.

• As per the economic survey 2016 of the Govt. of India the services sector has emerged as the most dynamic sector globally and is the key driver of India’s economic growth.

• Economic growth depends on a wide range of activities like hotel and restaurant, trade, transport, storage and communication, financing, insurance, real estate, business services, and construction services. Etc.

• This service sector contributed almost 52% of the gross value added in 2015-16.

• This sector is a net foreign exchange earner in India and is considered the most attractive sector for foreign direct investment inflows.

An Overview:

Indian financial systems consist of financial markets and financial institutions. 

• In financial markets people buy and sell financial instruments such as shares, bonds, and futures contracts. Financial markets can be informal, like a flea market, or highly organized like the gold market.

• In financial institutions are firms such as commercial banks, credit unions, insurance companies, pension funds, mutual funds, and finance companies that provide financial services to consumers, businesses, and government units.
• The distinguishing factor of these firms is that they invest their funds in financial assets, such as business, loans, stocks, or bonds, rather than in real estates such as manufacturing facilities and equipment.

Background:

Banks and other depository institutions, such as insurance companies gather money from customers in small denominations, aggregate it and then make loans in the much bigger denomination. Savings by consumers in small denominations are the origin of much of the money that funds large business loans.

• The important function of the financial system is to allocate money to the most productive investment projects in the economy. if the financial system is working properly only projects with high risk-adjusted rates of returns are refunded.
• Banks are profit-making organizations. Banks and other lenders earn much of their profits from the spread between lending and borrowing rates.

Talking about the financial system it is an institutional framework existing in a country to enable financial transactions in an economy. It comprises four main components;

• Financial institutions (banks, mutual funds, insurance companies, etc.).

• Regulation is another aspect of the financial system (RBI, SEBI, IRDA, and FMC).

• Financial markets (money market, capital market, forex market, etc.)
• Financial services (merchant banking, factoring, and housing finance.) 

So financial institutions include banking institutions, insurance, non-banking institutions, and mutual funds. So the banking sector itself is big there are scheduled commercial banks, non-commercial banks cooperative banks, regional rural banks, and foreign banks. Under the schedule commercial banks, are classified into the public sector and private sector banks.

Then there are non-banking financial companies which include NDFC discount, finance industries, and then mutual funds companies so all the institutions which are all dealing in the matter of money and are not offering any product or services they would be called the parts of the financial system.

So under the financial markets, we have a broader capital market and money market. 

The capital market is further classified as the primary market and secondary market. Another way of classifying the capital market is the equity market, the debt market, and the deliberative market, which is the market for future and options of stock that are being traded are dealt with. Inequity market we have a primary market where public issues, initial public offers, and any time place where first-time shares are issued, come under the primary market. Then we have a secondary market, which Are existing shares of the company which are being traded in the stock exchange. So earlier there was a monopoly kind of system which is one single stock exchange that is Bombay stock exchange but later on, in 1995 there were a few more stock exchanges that come into existence as NIC came in. Then in the debt market, there is the corporate debt market and government securities market.  The government securities market is to be regulated by RBI and there is a corporate debt market where corporate who want to borrow money can. The science of the corporate debt market is still not very large and deep that’s a point of concern of the financial regulations right now. 

Then in a money market, there are such instruments that are to be treated within one year. An instrument like notice money certificate of deposit commercial papers treasury bills so these are governed by RBI and all the central banks and commercial banks are participating.

Regulators:

So these regulators are governing the financial markets and institutions and products overall.

• SEBI- so SEBI is the regulator for financial markets where it is dealing with capital markets and stock exchanges broadly. so they are providing guidelines, they are designing a framework, and they are thinking about investors who could be taken care of and not been get cheated.

• RBI-so RBI is a central banking agency for the banking sector they are giving rules and regulations about how the money should flow also taking care of inflation taking care of monetary policy which is signed by the government. 

• IRDAI- insurance regulated development authority of India which related to insurance which is regulating insurance personally.

• PFDA- which is provident fund development authority MOF (ministry of finance) is there MOC (ministry of cooperating) affairs exist which is also looking at how to cooperate are reporting information’s, how the company is formed, they are giving guidelines related to cooperating governance company’s act and CSRN, they are taking care of all these things.

  
  

Functions of the financial system:

• Mechanism for mobilizing savings- a financial system has demanders of funds in certain sectors and suppliers of funds in certain other sectors.it channelizes the savings from the surplus sector to the deficit sector. 

• Mechanism for storing wealth- it facilitates the investors to store their wealth in the form of financial instruments. 

• Liquidity – financial instruments can be converted into cash or vice versa via financial markets.

• Credit mechanism- it facilitates the process of extending credit through the banking sector as well as through financial institutions to the household, business firms, and government.
• Payment system is a mechanism for making payments for goods and services.

Unit 2 –

Banking system

So here we will learn about how the banking system works in India. As we all know RBI reserve bank of India is the apex of all banks. It’s the central bank of India which is also known as a banker’s bank. RIB controls monetary and all financial policies under the Indian government.

RBI was established on 1st April 1935 under the RBI act 1934 and nationalized on 1st January 1949. At the time when RBI was nationalized its capital was 5crores. 

Central Board Directors – there are two central board directors.

• Official director– A governor who is appointed for four years along with four deputy governors.

• Nonofficial directors-ten directors from various fields and two government officials.

Functions of RBI:

• Bankers to government- RBI is the central government and the state government banks. RBI transacts government, and business and manages public debts. It also provides ways and means (providing short-term loans to any commercial bank in need) to advance facilities for the government.

• Insurance of currency- RBI issues currency on the behalf of the government. the stock of currency is distributed with the help of a currency chest(it’s like a bank branch in which money is saved and details are sent to RBI) 
• Controllers of banks- all banks have to take a license from RBI before starting their business. RBI can also cancel the license at any time, it issues the guidelines to banks and exercises management control.

• Foreign exchange reserve-this is maintained by RBI to keep equilibrium in the reserve system. It includes foreign currency and SDR to transact foreign transactions.