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Lord Stephen Green, Minister for Trade and Investment, UK, distinguished panelists, distinguishedguests, ladies and gentlemen. First of all my thanks to Mint, Mumbai, and to my good friends Tamal andR Sukumarfor inviting me to initiate todays debate Banking & Beyond: New Challenges Before IndianFinancial System with a panel of luminaries on the stage. Over the years, Mint, through its ClarityThrough Debate trail-blazer series has been flagging topical public policy issues and challenges andacquired a niche of its own in the corporate mindscape as a thought leader in the financial sector. Goodwork. Kudos and my best wishes for the Mint Team.
2. Winston Churchill once said that in finance, everything that is agreeable is unsound and everythingthat is sound is disagreeable. I suspect many of my views may spark a strong feeling of disagreementbut will hopefully stimulate passionate public debate. I am more convinced than ever that financialmarkets require a healthy dose of regulation to function efficiently. I am more convinced than ever thattoo-big-to-fail, or too-big-to-save banks represent veritable systemic risk concerns, which are sure to bringin more unpredictability in the system, need to be credibly and effectively tackled. And I am moreconvinced than ever that central banks operate most effectively and optimally when insulated from anyexternal interference.
3. Even though it is a bit customary now-a-days to have a discussion on any topic w ith the tag next orbeyond, this particular issue holds enormous importance for all of us in India. However, in todays
integrated world, what I shall be talking would be very much relevant for other emerging markets also.Hence, I would dwell upon the issues that stare the global economic recovery in the face and the keyelements that will shape the emerging new financial architecture. These issues are pretty much similar towhat banks in India are / will be struggling with.
4. Although, the recent global financial crisis and the resultant recession had its origin in the developedwestern world; but its contagion did not spare the emerging economies like India. Once in a life-time crisiswarranted a commensurate response in terms of a major overhaul of the financial system involving almosteverything from regulation to risk management to mergers / acquisition to capitalization to executivecompensation to financial engineering to governance.
5. In this connection, interface between banks and financial markets, has undergone a fundamental shiftin the recent times - banks have become intricately linked to financial markets and hence more vulnerable
to financial markets stress. At the same time, functioning of markets has become intricately linked tobanks which then emerge as the carrier for most of risks within the financial markets. We have seen thesecorrelations at their most devastating during the sharp deepening of recession triggered off by thecollapse of the apparently infallible Lehman Brothers which encompassed the whole world in its whirlwindspiral. However, I would restrict myself to sharing my thoughts in terms of next issues and, that too, tothe banking system, which are somewhat already visible in the global financial firmament.
Financial Inclusion
6. Before I address other individual issues, I shall highlight a very basic and core issue for the Indianbanking system and that is the challenge of achieving Financial Inclusion. Without being inclusive,financial and economic stability cannot be sustainable. Financial inclusion is about credible access toappropriate financial products and services needed by vulnerable groups such as weaker sections and
low income groups at an affordable cost in a fair and transparent manner from mainstream institutionalplayers. More recently, there has been a strategic shift in sustainable financial inclusion to the adoption ofmarket oriented approach viewing financial inclusion as a viable business proposition. It has been madepossible by the availability of Information and Communication Technology required by the formal financialsector for penetrating widespread unbanked areas in a cost effective way and the realization that thePoor is eminently Bankable. Financial inclusion is related to financial stability also through the key offinancial education and literacy. In my opinion, financial literacy is an integral part of financial inclusion ofthe public or users of financial products/services. Financial literacy is instrumental in expanding financialinclusion and financial inclusion is itself helpful in further expanding financial literacy thus mutuallyreinforcing each other in a positive manner. The knowledge about the risk and return framework holds the
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key to prudent participation in the market and welfare maximisation within the given constraints for eachmarket player. As financial literacy involves imparting the required knowledge of risks and returns offinancial products to the users andsuppliers of these products, it would help in controlling risks in thefinancial system thus helping in maintaining systemic stability. It would be inappropriate to assume thatfinancial literacy and inclusion are not global challenges. At the present juncture as the global financialsystem is dealing with the aftereffects of financial crisis, it is not so much a question of access butadvanced countries are more in need of financial literacy/education than ever before. In India, it is aquestion both of access to financial products and services and financial literacy. It implies not justproviding access but also to educate all stakeholders about the fairness and other characteristics of thefinancial products/services, such as their risks and returns.
Capital
7. Let me now turn to some other specific issues. First issue staring in the face of banking industry iscapital. Even though reasonably well capitalized today, banks will be facing the challenge of growing theirbusiness due to capital constraints. Indias financial system is better at capital allocation than most of theemerging market players. It has some high performing banks, very low stock of gross non-performingloans of about 2.5% and deep and liquid equity markets that efficiently discover price in stocks of globallycompetitive companies in BPO, IT, R&D, pharmaceuticals, automobiles, telecom and hospitality space.
Still one of the challenges will be capital raising by corporate sectors but not at the expense of agriculture,small industries and business. Debate over channeling larger portion of available credit to the mostpotentially productive sector or to the sectors where the investment efficiency is lower is yet to be fullyresolved. In any case, to make banks allocate increased credit to the productive sectors of the economyis strongly predicated on the bank capital strength. To do so, more capital would be required to be infusedinto banks. With requirements of Basel III looming large, banks would be facing challenges in raisingadditional capital for meeting the funding needs of Indian economy potentially growing at 9% plus.
8. Post-crisis, regulators worldwide are discussing a macro-prudential framework that would involve aregulatory policy focused on the system as a whole, rather than individual players. Capital buffers are anextremely important component of the new macro-prudential regulatory framework. The new frameworkaims at improving both quality and quantity of capital. Let us understand that capital is a competitivecharge on the resources available for lending with a bank and hence, stepping up counter-cyclical capital
requirements and providing capital buffers comes with a cost for the banking system. Capitalenhancement, however, is a prudential requirement, as financial products and transactions are becomingincreasingly complex and prudent risk management has assumed considerable importance. With higherand modified nature of capital requirements proposed through the new Basel III accord in the aftermath ofthe financial turmoil, keeping banks well capitalised would be an added challenge.
9. Banks are already suffering from inadequacy of capital as the return on such capital does notencourage new investors. Era of cheap capital is over and investors are also wary of the volatility ofreturns. Newer instruments and techniques would be required to attract investors. While creation ofenabling conditions for capital flow to the sector would continue to remain on the top of the reformagenda, banks would need to grow their balance sheets by raising capital from the markets rather thancount on government. Considering the back-to-basics common equity focus of Basel II, growing bankbalance sheets will increasingly pose the challenge of balancing interests of shareholder and depositors/financial stability.
Liquidity Management
10. Traditionally, capital adequacy requirements have been imposed to ensure solvency. However, that isnot the only issue. Thenext issue that will continue to engage substantial management attention is themanagement of liquidity. Is liquidity an offshoot of economic crisis or management crisis? I think a bit ofboth. In short, banks and FIs are destined to be facing the unpredictability they like to believe as non-existent. Liquidity crises, although recurrent, are yet to be effectively managed. Responses are varied andsuch crises leave a trail of devastation clearly visible in the post crisis stage. Issue of liquidity
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management requires much defter response than what is so far seen. How the banks will graduate fromlazy banking (as response to credit market growing more unsecure) to crazy banking (when it becamemore fashionable to jump onto retail lending bandwagon with some of the banks burning their fingers) toedgy banking is an issue which is yet to find a resolution. The truth is that the liquidity ma nagementrequires more sophisticated, comprehensive, nuanced and razor-sharp approach in order to prevent itfrom being the carrier of contagion.
IFRS Implementation
11. The third issue that is going to cast a spell over the financial sector players is the compliance withIFRSor International Financial Reporting Standards. Globalization of financial markets has meant anincreased focus on international standards in accounting and has intensified efforts towards a single setof high quality, globally acceptable set of accounting standards. Financial statements prepared in differentcountries according to different set of rules, mean numerous national sets of standards, each with its ownset of interpretation about a similar transaction, making it difficult to compare, analyse and interpretfinancial statements across nations.
12. In respect of banks and NBFCs, in view of the special issues involved (finalisation of IFRS 9 expectedin the middle of 2011), a separate road map was prepared in March 2010 for convergence with IFRS for
the banking industry and NBFCs. The convergence process would be from period beginning April 1,2013, with a phased approach for urban banks and NBFCs. This gives the banking system some time toadapt to the standards in a smooth and non-disruptive manner. It has to be noted, however, that bankswill be significantly affected by the IAS 39 replacement project and a number of other accountingdevelopments including those relating to financial instruments, fair value measurement, financialstatement presentation and consolidation. Some of the major changes pertain to certain critical areassuch as classification and valuation of financial assets, classification and valuation of liabilities,impairment provisions and fair value measurement. One area of concern has been the drawback of theincurred loss model of IAS 39 and the need to introduce more forward looking provisioning. We haveseen the how concept of marked to market turned to be useless at the time of real crisis through thepotential futility of the idea of marked to model as being divorced from real market and virtually endedup with a situation that can best be described as marked to madness. The IFRS convergence processwill involve significant challenges for the banking system in general. Banks would need to upgrade their
infrastructure, including IT and human resources, to face the complexities and challenges of IFRS. Somemajor technical issues arising for Indian banks during the convergence process would be differencesbetween the IFRS and current regulatory guidelines on classification and measurement of financialassets, focus in the standard on the business model followed by banks and the challenges formanagement in this area, application of fair values for transactions where not much guidance is availablein India in terms of market practices or benchmarks, and expected changes in impairment rules.
Beyond CBS
13. Today we cannot think of banking services without technology. IT has become the central cog inwhatever banks are doing or strategizing to do in future. All of us would agree that technology has nolonger remained just a means for automating processes. It has revolutionized every industry in the worldby rendering faster and cost effective delivery of products and services to customers, who in the normal
course could not have afforded the same. Technology is the surest and most appropriate way of bringinginclusion in respect of any product and/or service. Is technology in banks being leveraged adequately?
14. Technological advancement enables a broader and inclusive banking sector and in the process, is akey driver for the sustained and inclusive growth of the economy. Technology by itself is not a panacea.But technology has evolved to such an extent that it can hold the key to achieving goals if banks arewilling to accept the changes that they will need to make to get there. Banks have implemented CoreBanking Solutions (CBS) which marked a paradigm shift in more senses than one and branch customersare now bank customers as they can access their accounts from any branch for defined purposes. It wasenvisaged that the CBS would offer new opportunities for information management, better customer
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service and improved risk management. However, banks have not been able to reap the benefits of thistechnology in terms of reduction in costs of small value transactions, speed with which the transactionsare done if both successful and unsuccessful transactions are considered, improved customer servicesand effective flow of information within the banks as also to the regulator. Banks have not gained in termsof efficiency partly because the much needed business process re-engineering was not done. Further,banks have deployed technology for transaction processing and the same has not been exploredextensively for analytical processing like customer relationship management and decision making. Thus,there is a need to take care of what we could not achieve in the first round of technology implementationand think beyond CBS. Supported by the latest technology, banks would need to identify new businessniches, to develop customized services, to implement innovative strategies and to capture new marketopportunities.
15. Optimum leveraging of technology would critically hinge upon the following:
a. Skilled resourcesb. Supportive HR policyc. Appropriate IT governance structured. Effective business continuity plan
Banks & FIs would require review of the issues relating to recruit appropriate skill, retain then over alonger time horizon by offering them a clear career growth opportunities and supporting enabling process.However, it is equally important to embed inside the management structure a proper IT Governancestructure which will also enable the technology strength of the banks to play a supporting role with adegree of assurance and sustainability.
Risk Management
16. Issue of risk management in banks and financial institutions would, however, continue to be at thecentre of an ongoing search for the right policy prescription. While newer skill set for managing newerareas and unfamiliar elements of risks would continue to pose questions even to the most savvy of banks.Banks will have to adopt a converged approach to risk where they will reevaluate their risk managementacumen in a manner that calls for higher levels of transparency, structural integrity and operational
control. To combat internal fraud and protect clients and accounts, behavior and rules-based tools willhave to be brought in. Better risk management and surveillance applications that address systemic andcustomer-oriented risks, potential conflicts of interest, financial valuation, volatility of market movementsand regulations will have to be embedded into the operational structure. Future pricing will be dependenton risk minimization even while relationship-based pricing will continue to hold sway. Today banks andFIs are facing with the risks of mis-pricing, adverse selection and mis-selling. On the one hand, banks areoperating in the market where only about one-third of the adult population are within the banking foldleaving out the market potential to grow twice the current size and, on the other, banks propensity to takebanking services to the silent majority is very slow. While expanding market is a matter of survival, furtherchallenge for the banks would be to ring-fence its operations by establishing a sound risk managementsystem that is not only protective but also inclusive and acts as a business enabler. But for this tohappen, analytics have to be developed and data integrity has to be improved.
17. Going forward, more focused approach would have to be given to strict adherence of AML / KYCnorms so as to prevent the elements of fragility to come into the system. Strong tracking system forverifying the movement of funds, especially cross border transaction and skillful analytical capabilities willbe the prescription of the future. Along with that, the most important issue will be customer protection.When I talk of the customer protection, I mean making banking services or banks economically feasiblefor the customers and protect them from the bad banking practices. Can we devise a system by whichpoor subsidizing the rich can be reversed? When banks make huge profit, it is because the customerspaying through their nose. When the banks incur loss, again it is the customers who are made to takeless for their deposits or pay more the loans. When the banks go out of business, it is the millions of taxpayers hard-earned money that goes down the drain. Customer protection also needs to be seen from
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protecting customer information and transaction security. The writing on the wall is clear: keep yourcustomers happy and survive.
Risks and Rewards
18. Next important issue that warrants a really careful consideration is the issue of executive
compensation. How much compensation is too much? Can the industry have a different kind ofcompensation structure for the same job? Can there be uniform board level accountability? Flawedincentive compensation practices in the financial sector were one of the important factors contributing tothe recent global financial crisis. I am aware that booms are propelled by greed and busts are born out offear. This quirk of human nature will always ignite the euphoria that fuels the ups and exacerbates thedowns. Employees were too often rewarded for increasing the short-term profit without adequaterecognition of the risks the employees activities posed to the organizations.
19. These perverse incentives amplified the excessive risk taking that severely threatened the globalfinancial system. The compensation issue has, therefore, been at the centre stage of the regulatoryreforms. Issue of appropriate compensation commensurate with risk or built-in checks to avoid excessiverisk taking would have to be managed through a sound corporate governance framework based on strongcorporate ethics principles and with reference the principles laid down by Financial Stability Board (FSB).
The principles are intended to reduce incentives towards excessive risk taking that may arise from thestructure of compensation schemes. The principles call for effective governance of compensation and itsalignment with prudent risk taking and effective supervisory oversight and stakeholder engagement. Theprinciples have been endorsed by the G-20 countries and the Basel Committee on Banking Supervision(BCBS) and are under implementation across jurisdictions. However, banks and other financial systemplayers need to appreciate that good governance is more a matter of practice rather than a matter ofcompliance.
20. Now the question is: with so much of constraints and problems, whether the system will survive? Theanswer is an emphatic yes because banking is a highly regulated business. But having flagged some ofthe challenges before the banks, it is incumbent upon me that I flag certain challenges for regulators. Weall know that:
the financial system is growing to be highly complex and opaquesometimes making it difficult toassess the extent of exposures and potential spillovers. This opacity magnified the shock toconfidence as the recent crisis unfolded.
the financial system has a propensity to become over-leveraged and heavily interconnected,leading to massive deleveraging and easily available propagation channels, both domesticallyand globally.
liquidity risks, both the funding risks incurred by institutions and the associated market liquidityrisks of assets, are often much higher than recognized.
financial intermediation has increasingly shifted to the non - or less- regulated shadow bankingsector, in large part to avoid the more stringent requirements imposed on banks.
there is a critical absence of effective mechanisms to deal with institutions that were deemed toobig to fail.
How do regulators meet the above challenges?
21. Central banks must take a long-term view of the economy and craft appropriate policy responses. Wemust have the latitude to raise interest rates when others want cheap credit and rein in risky financialpractices when others want easy profits. There has to be greater societal consensus on taking toughcorrective actions.
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22. While progress on macro and micro-prudential regulations will be the key for moving forward, somework is still needed from the regulators in providing guidance to the market in instituting a mechanism inthe area of managing not only several known unknowns but also a number of unknown unknowns.
23. With the benefit of hindsight, low nominal interest rates, abundant liquidity and a favorablemacroeconomic environment encouraged the private sector to take on ever-increasing risks. Financial
institutions provided loans with inadequate checks on borrowers ability to pay and developed new andhighly complex financial products in an attempt to extract ever higher returns. Meanwhile, many financialregulators and supervisors were lulled into complacency and did not respond to the building up ofvulnerabilities. We have to develop more sensitivity in our policy tools to capture and quickly correct ourpolicy stance to control such covert signs of overheating.
Conclusion
24. In summing up, I would like to reiterate that though each one of the key challenges facing the Indianfinancial system begins with the banking system, it does not and should not stop at the banking system.Banks have to look beyond the way banking is traditionally defined in a narrow fashion; they need to looktowards the vulnerable and other excluded sections of the population as bankable. Stakeholders otherthan banking too need to involve themselves in the process of expanding the outreach of the financial
services, and thus partner with banks in the process of inclusive economic growth. That is the keychallenge.
Thank you for your kind attention.
Financial System of any country consists of financial markets, financial intermediation and financialinstruments or financial products. This paper discusses the meaning of finance and Indian Financial
System and focus on the financial markets, financial intermediaries and financial instruments. The breview on various money market instruments are also covered in this study.
The term "finance" in our simple understanding it is perceived as equivalent to 'Money'. We read ab
Money and banking in Economics, about Monetary Theory and Practice and about "Public Finance". finance exactly is not money, it is the source of providing funds for a particular activity. Thus publicfinance does not mean the money with the Government, but it refers to sources of raising revenue the activities and functions of a Government. Here some of the definitions of the word 'finance', bota source and as an activity i.e. as a noun and a verb.
The American Heritage Dictionary of the English Language, Fourth Edition defines the term as und
1:"The science of the management of money and other assets.";
2: "The management of money, banking, investments, and credit. ";3: "finances Monetary resources; funds, especially those of a government or corporate body"4: "The supplying of funds or capital."
Finance as a function (i.e. verb) is defined by the same dictionary as under-
1:"To provide or raise the funds or capital for": financed a new car2: "To supply funds to": financing a daughter through law school.
3: "To furnish credit to".
Another English Dictionary, "WordNet 1.6, 1997Princeton University " defines the term as und
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1:"the commercial activity of providing funds and capital"
2: "the branch of economics that studies the management of money and other assets"3: "the management of money and credit and banking and investments"
The same dictionary also defines the term as a function in similar words as under-
1: "obtain or provide money for;" " Can we finance the addition to our home?"2:"sell or provide on credit "
All definitions listed above refer to finance as a source of funding an activity. In this respect providior securing finance by itself is a distinct activity or function, which results in Financial Management,
Financial Services and Financial Institutions. Finance therefore represents the resources by way fun
needed for a particular activity. We thus speak of 'finance' only in relation to a proposed activity.Finance goes with commerce, business, banking etc. Finance is also referred to as "Funds" or "Capit
when referring to the financial needs of a corporate body. When we study finance as a subject for
generalising its profile and attributes, we distinguish between 'personal finance" and "corporate finai.e. resources needed personally by an individual for his family and individual needs and resourcesneeded by a business organization to carry on its functions intended for the achievement of its
corporate goals.
INDIAN FINANCIAL SYSTEM
The economic development of a nation is reflected by the progress of the various economic units,
broadly classified into corporate sector, government and household sector. While performing theiractivities these units will be placed in a surplus/deficit/balanced budgetary situations.
There are areas or people with surplus funds and there are those with a deficit. A financial system financial sector functions as an intermediary and facilitates the flow of funds from the areas of surpto the areas of deficit. A Financial System is a composition of various institutions, markets, regulat
and laws, practices, money manager, analysts, transactions and claims and liabilities.
Financial System;
The word "system", in the term "financial system", implies a set of complex and closely connected o
interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economThe financial system is concerned about money, credit and finance-the three terms are intimatelyrelated yet are somewhat different from each other. Indian financial system consists of financial
market, financial instruments and financial intermediation. These are briefly discussed below;
FINANCIAL MARKETS
A Financial Market can be defined as the market in which financial assets are created or transferred
against a real transaction that involves exchange of money for real goods or services, a financial
transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instrumen
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represents a claim to the payment of a sum of money sometime in the future and /or periodic paymin the form of interest or dividend.
Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-te
instrument. Funds are available in this market for periods ranging from a single day up to a year. market is dominated mostly by government, banks and financial institutions.
Capital Market - The capital market is designed to finance the long-term investments. Thetransactions taking place in this market will be for periods over a year.
Forex Market - The Forex market deals with the multicurrency requirements, which are met by the
exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds taplace in this market. This is one of the most developed and integrated market across the globe.
Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and loterm loans to corporate and individuals.
Constituents of a Financial System
FINANCIAL INTERMEDIATION
Having designed the instrument, the issuer should then ensure that these financial assets reach the
ultimate investor in order to garner the requisite amount. When the borrower of funds approaches financial market to raise funds, mere issue of securities will not suffice. Adequate information of th
issue, issuer and the security should be passed on to take place. There should be a proper channel
within the financial system to ensure such transfer. To serve this purpose, Financialintermediariescame into existence. Financial intermediation in the organized sector is conducted b
widerange of institutions functioning under the overall surveillance of the Reserve Bank of India. In initial stages, the role of the intermediary was mostly related to ensure transfer of funds from the
lender to the borrower. This service was offered by banks, FIs, brokers, and dealers. However, as financial system widened along with the developments taking place in the financial markets, the sco
of its operations also widened. Some of the important intermediaries operating ink the financial ma
include; investment bankers, underwriters, stock exchanges, registrars, depositories, custodians,portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers, satell
dealers, self regulatory organizations, etc. Though the markets are different, there may be a fewintermediaries offering their services in move than one market e.g. underwriter. However, the serv
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offered by them vary from one market to another.
Intermediary Market Role
Stock Exchange Capital MarketSecondary Market tosecurities
Investment Bankers Capital Market, Credit MarketCorporate advisory services,
Issue of securities
UnderwritersCapital Market, MoneyMarket
Subscribe to unsubscribedportion of securities
Registrars, Depositories,
CustodiansCapital Market
Issue securities to theinvestors on behalf of the
company and handle sharetransfer activity
Primary Dealers SatelliteDealers
Money MarketMarket making ingovernment securities
Forex Dealers Forex MarketEnsure exchange inkcurrencies
FINANCIAL INSTRUMENTS
Money Market Instruments
The money market can be defined as a market for short-term money and financial assets that are nsubstitutes for money. The term short-term means generally a period upto one year and near
substitutes to money is used to denote any financial asset which can be quickly converted into mon
with minimum transaction cost.
Some of the important money market instruments are briefly discussed below;
1. Call/Notice Money
2. Treasury Bills3. Term Money
4. Certificate of Deposit5. Commercial Papers
1. Call /Notice-Money Market
Call/Notice money is the money borrowed or lent on demand for a very short period. When money borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sund
are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day
(irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lefor more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cov
these transactions.
2. Inter-Bank Term Money
Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money marke
The entry restrictions are the same as those for Call/Notice Money except that, as per existingregulations, the specified entities are not allowed to lend beyond 14 days.
http://www.stcionline.com/working-of-money-market.htmlhttp://www.stcionline.com/working-of-money-market.htmlhttp://www.stcionline.com/call-notice-money-inter-bank-term-money.htmlhttp://www.stcionline.com/deposit-market-inter-corporate-market.htmlhttp://www.stcionline.com/commercial-papers-market.htmlhttp://www.stcionline.com/commercial-papers-market.htmlhttp://www.stcionline.com/commercial-papers-market.htmlhttp://www.stcionline.com/deposit-market-inter-corporate-market.htmlhttp://www.stcionline.com/call-notice-money-inter-bank-term-money.htmlhttp://www.stcionline.com/working-of-money-market.htmlhttp://www.stcionline.com/working-of-money-market.html7/30/2019 Challenges Before Indian Financial Managers
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3. Treasury Bills.
Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is
IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the
stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued discount to the face value, and on maturity the face value is paid to the holder. The rate of discoun
and the corresponding issue price are determined at each auction.
4. Certificate of Deposits
Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in dematerialised f
or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution f
specified time period. Guidelines for issue of CDs are presently governed by various directives issuethe Reserve Bank of India, as amended from time to time. CDs can be issued by (i) scheduled
commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) sel
all-India Financial Institutions that have been permitted by RBI to raise short-term resources withinumbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirementsFI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other
instruments viz., term money, term deposits, commercial papers and intercorporate deposits shouldexceed 100 per cent of its net owned funds, as per the latest audited balance sheet.
5. Commercial Paper
CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt
obligation is transformed into an instrument. CP is thus an unsecured promissory note privately plawith investors at a discount rate to face value determined by market forces. CP is freely negotiable endorsement and delivery. A company shall be eligible to issue CP provided - (a) the tangible net w
of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the workincapital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The
minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or suchequivalent rating by other agencies. (for more details visit www.indianmba.com faculty column)
Capital Market Instruments
The capital market generally consists of the following long term period i.e., more than one year per
financial instruments; In the equity segment Equity shares, preference shares, convertible preferenshares, non-convertible preference shares etc and in the debt segment debentures, zero coupon bodeep discount bonds etc.
Hybrid Instruments
Hybrid instruments have both the features of equity and debenture. This kind of instruments is calleas hybrid instruments. Examples are convertible debentures, warrants etc.
Conclusion
In India money market is regulated by Reserve bank of India (www.rbi.org.in) and Securities ExchaBoard of India (SEBI) [www.sebi.gov.in ] regulates capital market. Capital market consists of prima
market and secondary market. All Initial Public Offerings comes under the primary market and allsecondary market transactions deals in secondary market. Secondary market refers to a market wh
http://www.indianmba.com/http://www.rbi.org.in/http://www.sebi.gov.in/http://www.sebi.gov.in/http://www.rbi.org.in/http://www.indianmba.com/7/30/2019 Challenges Before Indian Financial Managers
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securities are traded after being initially offered to the public in the primary market and/or listed on
Stock Exchange. Secondary market comprises of equity markets and the debt markets. In thesecondary market transactions BSE and NSE plays a great role in exchange of capital marketinstruments. (visitwww.bseindia.com and www.nseindia.com ).
(The author acknowledges Prof. R K Mishra, Director, Institute of Public Enterprise, Osmania Univer
Hyderabad, for his immense help and encouragement through out this study and Dr. S S S Kumar,Assistant Professor, Finance and Accounting Area, Indian Institute of Management, Kozhikode, for hmotivation and inspiration)
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6. Mishra R K, "Development of financial services in India some perspectives", Financial services inIndia Delta, Hyderabad, 1998.
7. Mishra R K, "Global financial services Industry and the specialized financial services institutions inIndia, Utkal University, 1997.
8.www.bseindia.com9.www.nseindia.com
10.www.rbi.org.in11.www.sebi.gov.in
12.www.indiainfoline.com
Financial Systemis an institutional
framework
http://www.bseindia.com/http://www.nseindia.com/http://www.bseindia.com/http://www.bseindia.com/http://www.nseindia.com/http://www.nseindia.com/http://www.rbi.org.in/http://www.rbi.org.in/http://www.sebi.gov.in/http://www.sebi.gov.in/http://www.indiainfoline.com/http://www.indiainfoline.com/http://www.indiainfoline.com/http://www.sebi.gov.in/http://www.rbi.org.in/http://www.nseindia.com/http://www.bseindia.com/http://www.nseindia.com/http://www.bseindia.com/7/30/2019 Challenges Before Indian Financial Managers
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existing in a
country to enable
financial
transactions.Thereare three main
parts inIndian financial
system. They areas follows:
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Financial assets
comprises ofloans, deposits,
bonds, equities,etc.
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Financial
institutions such
as banks, mutual
funds, insurancecompanies, etc.
Financial marketsinclude money
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market, capital
market, forex
market,
etc.Regulation isanother aspect of
the financialsystem. The
regulatoryauthorities are
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RBI, SEBI,
IRDA,and
FMC.The
economicdevelopment of a
nation is reflectedby the progress of
the variouseconomic
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units,broadly
classified into
corporate sector,
government andhousehold
sector. Whileperforming
their activitiesthese units will be
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placed in a
surplus/deficit/bal
anced budgetary
situations.
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Meaning of Financial Management
Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and uof funds of the enterprise. It means applying general management principles to financial resources of the enterprise.
Scope/Elements
1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets apart of investment decisions called as working capital decisions.
2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on source, period of financing, cost of financing and the returns thereby.
3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits aredivided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion
and diversification plans of the enterprise.
Objectives of Financial ManagementThe financial management is generally concerned with procurement, allocation and control of financial resources of aconcern. The objectives can be-
1. To ensure regular and adequate supply of funds to the concern.2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price
of the share, expectations of the shareholders.3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum
possible way at least cost.4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of
return can be achieved.5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is
maintained between debt and equity capital.
Functions of Financial Management
1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital
requirements of the company. This will depend upon expected costs and profits and future programmes andpolicies of a concern. Estimations have to be made in an adequate manner which increases earningcapacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital structure have to
be decided. This involves short- term and long- term debt equity analysis. This will depend upon theproportion of equity capital a company is possessing and additional funds which have to be raised fromoutside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many choices like-
a. Issue of shares and debenturesb. Loans to be taken from banks and financial institutionsc. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and period of financing.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so thatthere is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in
two ways:a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.b. Retained profits - The volume has to be decided which will depend upon expansional, innovational,
diversification plans of the company.6. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is
required for many purposes like payment of wages and salaries, payment of electricity and water bills,
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payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials,etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has
to exercise control over finances. This can be done through many techniques like ratio analysis, financialforecasting, cost and profit control, etc.
The financial managerperforms the following functions:
1. Finance manager manages the funds in such a way to ensure their optimum utilisation with
the available resources.
2. He forecasts the requirement of funds for both short term and long term purposes.
3. He also actively takes part in budgeting, risk management and financial reporting.
4. He makes financial reports, have and eye on profits and losses, etc.
5. He decides how much of the firms profits should be invested, how much should be given to
the shareholders in the form of dividends and how much should be kept as reserves.
6. He also monitors the cash flows, prepares accounts and works on financial models.
7. He decides what type of capital structure is required be the company and decides whether
to raise funds from loans/borrowing or from share capital.
8. He also ensures that adequate funds at cheap rates are supplied to various parts of the
organization at the right time.
9. He constantly reviews the financial performance of various units of the organization.
10. He also ensures that no excess cash is lying idle.
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Financial Analytics: The New Role of
FinancePrint
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In today's ever-changing business environment, financial executives are exploring ways in which the financial function
can bring greater value to their organizations. To this end, they are transforming their organizations from focusing
primarily on regulatory reporting to most effectively providing the information that internal management needs to more
effectively "run" the business.
Financial executives must now think beyond the traditional financial information contained in general ledger systems
and consider how best to provide for the comprehensive measures and analytical methods needed to drive decisions
throughout complex, dynamic companies.
To achieve these objectives, accounting, finance, tax and other financial areas are developing data warehouses
combined with advanced analytics to serve the needs of the entire enterprise. We refer to this advanced decision
support capability for finance as financial analytics. This article examines the evolution of financial analytics and its
effect on the state of data warehousing.
Today's Busin ess Environment
The evolution of financial analytics has been driven by the emergence of new business models, the changing role of
the traditional finance department, modifications to business processes and advances in technology. This dynamic
environment presents the finance function with tremendous opportunities and challenges.
New Business Models
With the introduction of the Internet, three new e-business models emerged: business-to-business (B2B), business-
to-consumer (B2C) and business-to-employee (B2E). These new models are shaping the future of financial analytics.
These new business models, which I discussed in the August 2000 DM Review column entitled, "E-Analytics The
Next Generation of Data Warehousing," require a translucent connection and fluidity of information between
departments and partner organizations. Underlying these new business models is a fundamental shift in values, from
physical assets to intangible assets such as patents, trademarks, franchises, computer programs, research and
development, business intelligence and relationships. Consequently, the value of information is soaring (see Figure
1).
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Figure 1: From Bricks-and-Mortar to Clicks-and-Mortar E-Business Changes the Focus of Financial Capital
Analysis (Source: PricewaterhouseCoopers, LLP)
For instance, let's focus on the B2C model. Many "pure" B2C organizations do not develop the products or services
they sell. Instead, these companies outsource their manufacturing and other non-core operations. They focus their
resources on developing a brand, managing a network of customers and other differentiated aspects of running the
business. That said, these objectives can only be achieved through the more effective use of information.
Financial analytics has traditionally focused on how a company utilizes tangible assets such as cash, real estate,
machinery, etc. However, many companies competing in the new electronic economy are valued based on their
intangible assets. These increasingly important assets are often difficult to measure and manage. As a result, dot -
coms are relying on financial analytics to help them:
Understand the overall performance of the organization,
Identify ways to measure and maximize the value of intangible assets,
Reduce operating costs and effectively manage enterprise-wide investments,
Anticipate variations in the marketplace,
Optimize the capabilities of information systems, and
Improve business processes.
At the same time, the Internet companies that are not leveraging their information assets are struggling for survival.
Chang ing Role of the Finance Department
As the economy continues to evolve, so does the role of the finance function within an organization. Driven by
investments in enterprise resource planning (ERP), shared services and changes in its reporting role, most finance
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functions are becoming more efficient requiring fewer resources to manage them and closely aligning with the
company's business structure. This is especially true in the area of transaction processing where improved
automation of financial transactions has enabled finance staff to expand their role and spend more time supporting
decision-making processes, rather than just processing and reconciling transactions.
More and more global organizations are integrating and standardizing their business processes and systems,
allowing end users with both finance and non-finance functions to update and obtain financial information from any
geographic location. This has significantly improved decision support within the organization.
Consequently, the role of the finance professional will evolve into a "coaching" role responsible for transferring the
appropriate analytical tools and methods to decision-makers (see Figure 2). Some CFOs have gone so far as to
predict that, with time, major parts of the finance function will merge into the business as the role of finance
employees continues to extend throughout the enterprise.
Figure 2: Reshaping the Finance Function (Source: PricewaterhouseCoopers, LLP)
Over time, we anticipate a convergence of the information that is communicated to the financial markets (Wall Street),
the information that is used to manage the organization and the information that is reported formally in fiscal-year
reports. This type of reporting will require the full integration of financial, strategic and operational analytics.
Bu siness Processes
As business processes evolve and business questions become more complex, the analytics necessary to answer
and act on these questions require a higher level of data integration and organizational collaboration. For in-stance,
historically, finance departments were oftentimes the only departments with access to accurate information about a
company's financial results. However, this information was usually at an aggregated level and wasn't available until
several days, sometimes weeks, after the end of the month.
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During the past decade, however, companies have been successfully integrating back-office processes and
information flows across the enterprise by replacing function-based legacy systems with a single ERP system,
reengineering business processes and streamlining business transactions. This has enabled executives and
managers to access more accurate and consistent detailed financial, as well as non-financial, information about the
organization throughout the month.
In the mid-nineties, new software products capable of maximizing the value of the Internet were introduced in the
marketplace. Companies began implementing supply chain management (SCM), customer relationship management
(CRM) and other sophisticated system solutions to optimize their end-to-end operations. At the same time,
organizations each with its own legacy systems began strengthening their relationships with customers and
suppliers. All of this contributed to the new challenge organizations are facing today: a complex information
environment that forces organizations to adopt a new level of integration across the entire value chain.
Additionally, organizations realized there is an overlap in the analytical processes of the organization (see Figure 3).
Figure 3: Analytical Processes Can Overlap (Source: PricewaterhouseCoopers, LLP)
Recent developments in financial analytics have been made in these areas of "overlap." For example, by combining
traditional financial measures (revenue and cost) with CRM information (customer history) and applying predictive
modeling tools and techniques, companies can now project the future profitability associated with an individual
customer or household. We refer to this as customer value management (CVM). CVM enables organizations to
continuously monitor each customer's value to the business and act accordingly. "Value" may be measured using a
weighted customer value index, which combines financial and non-financial measures and considers how many
resources are used to maintain a certain type of customer. Managers need to know what value may be lost or gained
before making decisions about nurturing specific customers relationships.
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Technology
During the nineties, there were major advances in technology including ERP, data warehousing, portals and, of
course, the Internet.
ERP systems have become more common and the Internet has expanded the sources of financial data to include up-
to-date information on numerous subjects from market trends to currency fluctuations.
ERP vendors are aggressively developing financial analytic extensions to their core applications, each introducing its
own version of an integrated financial architecture that covers performance measurement, planning and forecasting,
management and statutory reporting, and financial consolidation. The sharing and integration of data is crucial for
these ERP systems.
With portals, it is envisioned that people with finance roles will have access to critical performance information
refreshed on a continuous basis and combined with relevant external sources of information such as competitor
comparisons, media comments, economic indicators and benchmarks. Portals will allow the finance professional to
receive personalized data through a common user interface and benefit from enhanced communication, search and
team-building activities in increasingly fragmented environments.
Explosive growth in portal technology is likely to continue, fueled in part by the adoption of the extensible markup
language (XML) standard to facilitate more open information sharing within and between enterprises.
The Role of the Data Wareho use
Until recently, data warehousing solutions have been primarily focused on building key analytical infrastructure
components such as data stores, data marts and reporting applications. The next generation of data warehousing will
leverage these data stores by incorporating rich analytical capabilities.
In early initiatives, the business needs driving data warehousing investments were often not clearly defined. It was
also difficult for many financial analysts to think beyond traditional financial data. Consequently, it was frustrating for
all concerned to define questions to be asked against the data or even define the analytical requirements to be
supported.
The requirements driving the data warehousing implementation mainly focused on the need for specific data
elements and/or necessary predefined reports. Data warehouses and online analytical processing (OLAP) tools were
designed to support specific groups within the organization. Each group, including finance, used these incongruentsystems to perform their business functions and store and access their own information. This resulted in
redundancies and inconsistencies in data as well as a proliferation of data marts.
Decision support is most effective when the data and business processes of an organization are integrated across all
business functions. Today, the benefits of this approach are easy to appreciate. And as companies come to grips with
this need for consistent, integrated information, the finance function is most often at the center of this convergence.
This recognizes the fact that financial information is important to help measure and manage every segment of the
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business and also recognizes finance's role as being the primary steward of a company's information assets. As
such, finance executives can clearly see the benefits of fully integrating financial analytics with the rest of the
organization's technology and processes. Data warehousing practitioners will be tasked with the challenge of
developing an information architecture that delivers this new level of integration.
With integrated financial analytics, organizations will obtain the most value possible from their ERP, data
warehousing and CRM investments.
Integrated Analyt ic s
Today's complex information environment is forcing organizations to reach for a new level of integrated financial
analytics to stay competitive in the marketplace.
With integrated financial analytics, organizations are able to aggregate, analyze and share information from and with
sources inside and outside the organization. As the role of the finance function continues to evolve, financial analytics
will be actively used throughout the organization. We will see organizations strive for an environment that integrates
all analytics, not just financial analytics, in order to thrive in the new economy. A data warehouse is crucial for
realizing this powerful new environment