Money: Bank and Funds

M peerlessy is a fascinating object. The transition of creating money and victimisation money has unendingly gene numberd enthusiasm amongst mankind for over thousands of years. The main reasons for much(prenominal) enthusiasm be built around the dynamics of the above process. rase much fascinating is the fact, that this process is perhaps the except subject that is foxing roughly(prenominal) the pundits and the commoners alike. Such creation the importance of money, any narration regarding the process shall al offices provide enough excitement. Keeping this in view, the section and importance of monetary in marchesediaries is being featured for the benefit of readers.A glimpse of this coverage is provided in the following pages to lead them to a wider coffin nailvas. monetary In circumstanceediaries pecuniary intermediaries scam a vital economic consumption in building economies. World over, in variant economies it is typical to construe that the sources of sp ecie and the uses of silver be not one and the same. This process is likewise so complicatedly structured that while single(a) contributions comprise the major source of currency to the marketplace, the utilization of funds is make by dissimilar orbits in the thriftiness. dandy formation comprising of Savings and enthronization holds the key to this process.In this causal sequence, Savings p place down the role of the initiator. The faculty of an thrift to gene pasture savings depends on the combined abilities of the general humankind and the government. It is here that the monetary system comes into play by converting the savings into amentaceous results. Significance of Financial Intermediation The savings process is facilitated by the financial Intermediaries. In simple terms, financial intermediaries practice the function of facilitating supply of funds to the user of funds, by obtaining the same from the depositors or savers of funds.The term financial inte rmediaries includes distinct institutions like curses, Insurance companies, investing companies, developingal Financial Institutions, Non- swearing Finance Companies, vernacular funds, Pension funds etc. While the role of above institutions is quaint with respect to financial mediation, the functions that be performed by each one of them argon different. In a nutshell, these figures of intermediation revolve around liquidity cast of funds, dangers in loans, and pooling of risks to take advantage of economies of scale.To sum up, the function of financial intermediation has arisen out of the need on the part of savers to reach the investors and the inability of investors to take savers. Developed economical systems may not require the need of fully fledged financial intermediaries, unlike the developing systems. This is out-of-pocket to the fact that the gap amongst the saver and the investor is absolutely minimal. This is referred to as financial disintermediation. Th e process of financial disintermediation is exceed achieved by reducing the apostrophize of funds thereby facilitating direct jacket crown formation, which spurs economic growth.The greatest advantage in this process is the fact that it reduces the clock gap between saving of money and utilization. The process of financial intermediation is alship canal fraught with risks. Risks both for the givers of funds and the takers of funds, be typefaces the risks for financial intermediaries themselves. The risk factor arises in the first place out of the need for the availability of information and in the second place the need for players to be certified of the available information. Consequently, the need for regulations and the role for a regulator are felt.Financial Intermediation in Indian context In India, without exception, a single type of intermediary does not perform the task of financial intermediation. several(predicate) types of financial intermediaries exist and their fu nctions are discussed below. Banks Banks comprise the oldest form of financial intermediaries in India. The Indian financial scene is dotted with a number of banking institutions. either these banks are segregated into heterogeneous categories. This segregation has been done on the cornerstone of their incorporation and the businesses performed by them.Consequently, we go for various kinds of banking institutions. These are i. Commercial banks, ii. regional Rural Banks, iii. Local Area Banks, iv. Co-operative banks. The above mixed bag adverts that banks make believe been shared out chthonic various types depending on the need to achieve the different economic objectives. While making the above classification, geographical factors, need for empyreanal deployment of funds involving apportioning of funds for Agriculture, Industry, and Service sector etc. have been taken into con berthration.However, gradually, the inescapably of industrial sector have befit so huge and c omplex that separate institutions have been set up for farming the industrial sector. Development Financial Institutions (DFIs) Deployment of funds in the Industrial sector is a major challenge. Industrys requirements vary depending upon their short-term and long-term needs. The activities of short-term bestow and long-term lending are separate and specialized functions. After arrangement this finer aspect, the Government of India took initiative to set up specialized institutions for this resolve.For this reason, we find that most of the DFIs such as the Industrial Development Bank of India (IDBI), are statutorily formed. These institutions provide finances for most of the greenfield projects in the Indian economy and have made a significant contribution by air of financing long term projects. It is significant to note here that DFIs have been influenced by the changes in the Indian banking scenario to such an extent that these institutions are conlemplating to become universa l banks. Insurance Companies The path of reformation in the Banking industry has excessively caught up with the other intermediaries as well.In this respect, Insurance industry is witnessing path-breaking changes. In fact, in many countries Insurance companies perform a leading role as financial intermediaries. In India, Life Insurance Corporation of India (LIC) continues to play a really vital role in mobilizing savings and delivering Insurance, though the industry is experiencing the competition from players both Indian and Foreign. With the entry of banks into the arena of restitution business it is interesting to find the beneficial impact of convergence of banking and restitution business.Non-Banking Finance Companies (NBFC) The process of Intermediation approximately begins at home, with the household sector. This sector is the staple fiber source of funds for the intermediaries. Such being the important role of the households, NBFCs as independent institutions, have com e into existence to meet their financial requirements. The serve endureed by the NBFCs cater to the whole gamut of needs of the household sector in particular and savers in general. * Emerging Disintermediation in India** With a fast growth in the intermediation process, the need for financial disintermediation at nearly stage cannot be over l sort outed.Realizing fully well that developed systems find lesser need for financial intermediation, in the Indian context the policy reforms aimed at encouraging free market institutions have been moving the financial markets towards disintermediation. The attack of the process of economic liberalization in 1991 has brought about a sea change in the financial markets. The abolition of the office of Controller of Capital Issues (CCI) and the establishment of Securities and Exchange Board of India (SEBI) in 1992 was done essentially with a view to giving an impetus to the capital markets.The market happenings in 1992-94, did conduct a h ard blow to this mechanism. During the past terzetto years the process of consolidation has begun. Though a reduction in the number of IPOs does suggest to a slackening of the Capital markets, there is likewise a brighter side of investors becoming more(prenominal) suave. Sources of Funds A discussion on financial intermediaries has to begin with the raw material for this activity, i. e. funds. Financial intermediaries are required to put forward funds in recite to fulfill the needs of both fund- base and non fund- ground activities.Considering the various sources and choices available, the financial intermediary considers the following variables in deciding about the ways and means of raising funds. These are Maturity, Cost of funds, Tax implications, Regulatory poser and Market conditions. Maturity is vital since the intermediary has to plan for the repayment of debt. Since investors hold off for returns as against the intermediary looking for good spread and income, Cost o f funds turns out to be crucial.Tax treatment on returns on some of the instruments could be different with certain exemptions Thus, Tax implications are useful for entertain planning for both the intermediary and the saver. The instruments have to fulfill a overplus of rules and regulations which require the knowledge of Regulatory framework. For designing a particular type of instrument knowledge of Market conditions is essential. Different Sources of Funds In gain to providing low-cost funds, the shareholder route is a popular and easy way for the common public to become owners of companies.As the name suggests, the money belongs to the shareholders. Financial institutions have been innovating different methods for raising money from the prospective shareholders. Reserves is another(prenominal) source of funds. Incidentally, it is to be known that some of the Reserves are created statutorily. borrowing by a company is another source of funds for the company, which are repay able with interest. Unlike equity, the funds raised by way of loans are to be repaid. ** **Sources of Funds unique to a Bank The previous classification of sources of funds does not fully explain the avenues for Banks.By virtue of being one of the earliest financial intermediaries, and possibly the most prudent as well, banks have a privileged access to a few more instruments. Considering the fact that different types of financial intermediaries have accessibility to varied types of funds at different rates of interest, it has become necessary for the RBI to lay down norms in this regard. Financial Intermediaries look towards liquidity in the market for enhancing their scope of operations. However, liquidity is a double-edged knife.Excess liquidity or lack of liquidity affects the financial system resulting in either a reduction or an increase in the rate of interest. The cyclical centre is felt by the economy. For hearling liquidity levels in the economy, RBI exercises control d one the mechanisms of CRR and SLR. CRR is the reserve to be hold by banks with the RBI. SLR is the reserve that is maintained by banks for investment in cash, gold or unencumbered authorize securities. Deposits The customers confidence level reflects the strength of a bank. There is no crack way of reflecting the same by any other indicator than Deposits.In the wake of globalization, the avenues for banks for raising funds in the capital market have increased, both in the national and international markets. In terms of value to the Banking system, banks that have a greater deposit base have more value than the banks with a poor deposit base. Banks accept deposits in different ways. Such acceptance could be different in terms of the period, derive, rate of interest and the type of depositor. All the deposit accounts could be classified below Transaction accounts and Non-transaction accounts. The types of accounts that a customer individually, jointly or corporate can have, are varied.Having said that Deposits are an important source of funds for the banks, a banker is wary about the types of deposits. A term deposit is a untroubled source, but the cost is higher than Demand deposits that are low cost funds for the banks. Consequently, the composition of deposits has a direct impact on the positiveness of the bank. Application of Funds The real challenge for the financial intermediaries begins at the very end of the first stage i. e. after mobilization of deposits. The meter most starts ticking from that time onwards since the deposits are to be repaid by the bank to the customer after a certain period with interest.In order to honor this commitment, financial intermediaries use their funds in different ways. Broadly, the purposes under which they are used can be classified under i. loans and advances, ii. investments, iii. unbending assets. Loans Loan is a distinct activity wherein funds are taken from the saver and given to the investor. By nationali zing major banks in 1969 and 1980 Government of India sought-after(a) to direct the utilization of bank funds for socially disired, objectives reflected in precedency sector lending.Priority sector lending includes Agriculture and Small graduated table Industry as focus areas that would foster equitable development of regions and promote employment avenues. Loans can be classified as secured loans and unsecured loans based on the availability of security or otherwise. Investments The best way to earn attractive return on money is by following an Investment strategy. Since banks have to service their borrowings and deposits at a reasonably good rate and put the funds into more profitable use, Investments in securities offer an option, though in many instances, this is a statutory requirement.There are three main reasons for the Banks to invest in government securities. These are (i) in depicted object need arises government securities meet the liquidity requirements of a bank (ii ) it forms a second line of security, for emergency borrowing from RBI, and (iii) for meeting statutory SLR requirements, aimed at protecting the interests of depositor. Banks are also selectively restricted from investing in equity shares. Investments are made in equity shares either through primary issue or by secondary market. Investment initiatives in equity by banks are expected to boost a swag capital market. apart(predicate) from the primary functions of deposit collection and lending, banks also perform treasury operations. The necessity arises out of liquidity compulsions in operations. Banks invest in bonds and debentures as a part of their regular treasury operations and also on behalf of customers. Fixed assets however, constitute a very small amount of investment by banks. The Management of Financial institutions revolves around two basic functions i. the ability of the intermediary to raise funds, and ii. to deploy them. These two activities determine the victual as well as profitability of the intermediaries.Lending Function Apart from the fact that Lending constitutes the major source of income for the bank, the process of lending also depends on the bankers appraisal skills. The banks funds can be applied in two major areas i. e. investments in securities and citation accommodation. In the process, banks essentially look to balance the spreads. Apart from the necessity of complying with the regulatory prescriptions, requirement of profitability virtually forces banks to develop an organized credit deployment mechanism. The credit policy of banks is determined by the demand and supply of loanable funds of banks.Firstly, on the demand side of the economy there are the consumers of goods and services. Secondly, the need for credit comes from the corporate sector in the manufacturing, trading and services sectors. Credit management is a specialized area. This is due to the fact that there are different types of credit, and each type of credit i s characterized by certain unique factors. Loan is a broad term used to explain the different types of credit facilities short/medium term extended in the credit market. The selection of the type of loan by a borrower depends on three factors namely, need for credit, cost factor, and cash decrease requirements.Since a loan has a demand side and supply side as well, loans can be classified accordingly. Demand side loans result be individual loans while Supply side loans can be classified as commercial loans. As in the case of a borrower, for the bank, providing the loans depends on three factors, namely the nature of credit, the type of security and the purpose of loan. Based on these parameters, hike classification of the banks advances is done. Loans are also further classified under secured and unsecured loans. Banks have been providing advances to different sectors of the economy and at the same time providing loans to the needy sectors.The sectoral classification of bank loa ns is made as under i. priority sector, ii. public sector, iii. banking sector, and iv. others. Loan Appraisal and Disbursal preceding appraisal involves an analysis of the market, technology, financial, and managerial skills of borrowing. Once the bank decides to finance, other slender issues are the decisions relating to the mode of financing. Finance is given for land, site development, building, plant and machinery and also for working capital. Banks arrive at the amount of Maximum Permissible Bank Finance (MPBF) through various appraisal methods. **Non-fund Based Services*Non-fund based Services Non-fund based advances in the form of Letters of Credit and Guarantees offer a very attractive proposition to the banker. Since funds disbursement arises precisely on default or the happening or non-happening of an event, bank holds only contingent liability. Payments and clearing operations Clearing and remittences constitute important services under ancillary services. The major r ole of a bank involves mobilizing savings and channelizing them into investments. Complementing these activities are ancillary services of the banks which facilitate the entire payment and resolving power system of financial transactions