Indian Financial System (IFS)

1
Notes
On
PAPER 2.5 INDIAN FINANCIAL SYSTEM
Submitted to
DIRECTORATE OF DISTANCE & CORRESPONDENCE EDUCATION
BANGALORE UNIVERSITY
By
Dr. M. Muninarayanappa
Professor – Department Of Commerce
Bangalore University, Bangalore.

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PAPER 2.5
INDIAN FINANCIAL SYSTEM
SYLLABUS
Object ive: The object ive of this subject is to familiarize the students with
regard to structure, organizat ion and working of financial system in India.
Unit 1: FINANCIAL SYSTEM
Introduction – Meaning – Classification of Financial System.Financial Markets – Functions
and Significance of Primary Market, Secondary Market, Capital Market, & Money Market.
Unit 2: FINANCIAL INSTITUTIONS
Types of Banking and Non-Banking Financial Institutions.Constitution, objectives &
functions of IDBI, sfcs, sidcs, LIC, EXIM Bank.Meaning and scope of Mutual Funds.
Unit 3: COMMERCIAL BANKS
Introduction – Role of Commercial Banks – Functions of Commercial Banks – Primary
Functions and Secondary Functions – Investment Policy of Commercial Banks.
UNIT 4: CO-OPERATIVE BANKS
Meaning – definition – features - functions – types – merits and demerits - Lending policies –
priority areas of lending – role of co-operative banks for agricultural development.
UNIT 5: RURAL FINANCE
RRBS: Meaning – definition – features - functions – types – merits and demerits- Lending
policies – priority areas of lending – Role of RRBS in rural development. Micro finance:
micro finance products and services – role of Self Help Groups – post office –role of
companies in micro finance as a part of social responsibilities.
UNIT 6: CAPITAL MARKET
Stock market: Meaning – functions – primary – secondary – functionaries in stock market -
D-mat Accounts – listing requirements – role of stock exchange in capital mobilization
.
Unit 7: REGULATORY INSTITUTIONS
Introduction.RBI – Organization – Objectives – Role and Functions.The Securities and
Exchange Board of India – Organization and Objectives – IRDA and its functions.
Unit 8: FINANCIAL SERVICES
Introduction – Meaning – Features – Importance. Types of Financial Services – factoring,
leasing, venture capital, Consumer finance; housing & vehicle.

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Content
1.1 Introduction to Financial System
1.2 Meaning
1.3 Financial Institutions
1.4 Capital Markets
1.5 Primary Market
1.6 Secondary Market
1.7 Long Term Loan Market
1.8 Money Market
1.9 Stock Exchange
2.1 Monetary Establishments
2.2 Banking Institutions
2.3 The Organised Non-Banking Financial Institutions
2.4 Mutual Funds
3.1 Introduction
3.2 Functions Of Commercial Banking
3.3 Types Of Deposits
3.4 Lending Of Funds
3.5 Discounting Of Bills Of Exchange
3.6 Investment Of Funds On Securities
3.7 Creation Of Credit Or Creation Of Money
3.8 Secondary Functions Of Commercial Banks
3.9 Miscellaneous Or General Utility Services
3.10 Investment Norms:
4.1 Introduction
4.2Meaning
4.3 Definition
4.4 Types & Perform Of Co-Operative Banks, India
4.5 Primary Co-Operative Credit Society
4.6 Central Co-Operative Banks
4.7 State Co-Operative Bank
4.8 Land Development Banks
4.9 Urban Co-Operative Banks
4.10 Functions Of Co-Operative Banks
4.11 Problems Of Co-Operative Banks
4.12 Advantages Of Cooperative Banks
4.13 Disadvantages Of Cooperative Banks:
4.14 Role Of Co-Operative Banks For Agricultural Development.
5.1 Regional Rural Banks:
5.2 Objectives Of RRB’s
5.3 Areas Of Operations Of RRB
5.4Micro Finance: Meaning
5.5Micro Finance Products
5.6Role of Self help group
5.7Micro Finance-the role of Post Offices
5.8Role of Companies in Micro Finance
6.0 Meaning
6.1 Choices Of Capital Market
6.2 Importance Of Capital Market
6.3 Classification Of Capital Market
6.4 Primary Market

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6.5 Functions Or Services Of Primary Market Or New Issue Market
6.7 Functioning Of Secondary Market
6.8 Primary And Secondary Markets – Similarities
6.9 Characteristics/ Functions Of Capital Market
6.10 Demat Account
6.11 Procedure
7.1 Meaning And Significance:
7.2 Need / Importance:
7.3 Types
7.4 Organization Of Rbi:
7.5 Objectives:
7.6 Functions:
7.7 Main Functions:
7.7 Supervisory Functions:
7.8 Promotional Functions:
7.9 Methods Of Credit Control
7.10 Quantitative Methods:
7.11 Securities And Exchange Board Of India (SEBI)
8.1 Introduction
8.2 Meaning
8.3 Choices Of Economic Services
8.4 Importance Of Economic Services
8.5 Styles Of Economic Services
8.6 Factoring:
8.7Partitioning Mechanism
8.8 Steps In Partitioning
8.9 Services Rendered By The Difficulty
8.10 Features Of Leasing
8.11 Venture Capital:
8.12 Features Of Venture Capital

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Unit 1
FINANCIAL SYSTEM
Structure
1.10 Introduction
1.11 Meaning
1.12 Financial Institutions
1.13 Capital Markets
1.14 Primary Market
1.16 Long Term Loan Market
1.17 Money Market
1.18 Stock Exchange
Introduction – Meaning – Classification of Financial System. Financial Markets – Functions
and Significance of Primary Market, Secondary Market, Capital Market, & Money Market.
OBJECTIVES: You understand the financial systems how it works in the Indian market. The
importance of primary, secondary market and shorter money market are explained. The roles
of stock exchanges in the primary and secondary market can also be understood. The role of
intermediaries and the importance of financial instruments in the financial market are also
explained in brief.
1.1 INTRODUCTION

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Organization of the financial system
Financial Intermediaries Financial Markets Financial
Assets/Instruments
Banks NBFC
Mutual
Funds
Insurance
Organization
Leasing Companies
Hire-Purchase/Consumer Finance
Companies
Housing Finance Companies
Venture Capital Funds
Merchant Banking Organization
Credit Rating Agencies
Factoring and Forfeiting Org.,
Stock broking firms
Depositories
Money
Market
Capital/Securities Market
Primary Market Secondary
Market
Primary/Direct Indirect Derivatives
Equity
Preference
Debentures
Innovative debt
instruments
Forward
Futures
Options
Convertible Debentures
Non- Convertible
Debentures
Secured Premium Notes
Warrants
Mutual Fund-units
Security Receipts
Pass Through
Certificates
Source: Prof. Augustin Amaladas & Prof. Amala Shanthi - slide share, St. Joseph’s College
of Commerce, Bangalore.
The financial system links between the savers and users to promote faster economic development.
A lender (saver) believes that he/she could enjoy the future money than present money. A
borrower (user) believes that he gets maximum enjoyment of the present than future money. A
well organised financial system is a backbone of the Economic development of any country. Its
Financial inputs from financial system for the production of goods and servic es which in turn
promote the well being and standard of living of the people of a country. Financial markets and
financial institutions are supportive mechanism of a financial system which requires money and
money assets. Mobilisation of savings and investing in productive ventures are the responsibility
of a financial system.

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Post-1991 Phase Organization of the Indian financial System
Privatization of
financial
institution
Banks
Mutual-Fund
Insurance
Companies
Reorganization of Structure
DFIs/PFIs Banks NBFCs Mutual-funds Capital
Market
Money-
Market
Primary
Stock-exchange
Investor Protection:
SEBI
Prudential Norms:
Credit/advance
portfolio
Investment
Portfolio
Capital adequacy
Exposure
Norms:
Securitisation,
Asset
Reconstruction
And Enforcement
Of Security
Interest
Asset-Liability
Management Credit Risk
Management
Country Risk
Management
Source: Prof. AugustinAmaladas& Prof. AmalaShanthi - Slide Share, St. Joseph’s College of
Commerce, Bangalore.
1.2 MEANING
The term national economy may be a set of inter-related activities or services
operating along to realize some pre-determined purpose or goal. It includes totally different
markets the establishments, instruments, services and mechanisms that influence the
generation of savings, investments, capital formation and growth.
1.2.1 DEFINITION
Van Horne has outlined the national economy as “the purpose of economic markets to assign
savings expeditiously in an economy to final users either for investment in real assets or for
consumption”.
2. Consistent with Robinson, the first operate of the system is “to give a link between savings
and investment for the creation of latest wealth and allow portfolio adjustment within the
composition of the prevailing wealth”.

1.2.2 ROLE OF FUNCTIONS OF ECONOMIC SYSTEM
A national economy performs the subsequent functions:
1. It is a link between savers and investors. It helps in utilizing the mobilized savings of the
scattered savers in additional economical and effective manner. It channelizes flow of savings
in to productive investment.
2. It provides a payment mechanism for the exchange of products and services.
3. It provides a mechanism for the transfer of resources across geographic boundaries.
4. It provides a mechanism for managing and dominant the chance concerned in mobilizing
savings and allocating credit.
5. It promotes the method of capital formation by transferrable along the availability of
savings and also the demand for investible funds.
6. It helps in lowering the value of transactions and increase returns. Reduced value
motivates folks (groups) to save lots of additional.
7. It provides elaborated info to the operators/players within the market like people, business
homes, government etc.
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1.2.3 CLASSIFICATION OF ECONOMIC SYSTEM
The following are the four major classification of Indian monetary System:
1. Monetary establishments
2. Monetary Markets
.
3. Monetary Instruments/ assets/ securities
1. Financial Services

1.3 FINANCIAL INSTITUTIONS
Financial establishments are the intermediaries who facilitate sleek functioning of the
national economy by creating investors and borrowers meet. They mobilize savings of the
excess units and apportion them in productive activities promising a stronger rate of returns.
Financial establishments are termed as money intermediaries as a result of they act as
middleman between the savers and borrowers.
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Financial market
1.3.1 MEANING
A market could be a place or mechanism that
facilitates the transfer of resources from one
entity to a different. A money market is an
establishment or arrangement that facilitates the
exchange of monetary instruments like shares,
debentures, loans etc. In different words, a
market wherever in money instruments like
money claims, assets and securities are unit listed is understood as “a money market”.
Money market transactions might occur either at a selected place or location.
Eg: banks, stock exchanges or through different mechanisms like telephone, telex or fax or
different electronic media.
1.3.2 DEFINITION
In line with Brigham Eugene. F. “The place wherever individuals and organizations needing
to borrow money are unit brought alongside those having surplus funds is named a money

market”. One in every of the necessary requisites for the accelerated development of
associate economy is that the existence of a dynamic money market. A money market is of
nice use for a rustic because it helps the economy in many ways that.
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1.3.3 ROLE OR IMPORTANCE OF MONEY MARKET
The role or importance of money market is as follows:
1. Transfer of resources:
Money market facilitates the transfer of resources from one person to another.
2. Growth in income:
Money market permits the lender to earn interest and dividend on their surplus investible
funds, so conducive to extend in their financial gain.
3. Productive usage:
Money market yield the productive use of funds employed in finance system, so enhancing
the financial gain and therefore the gross national production.
4. Capital formation:
Money market provides a channel through that the new savings flow to help capital
formation.
5. Worth discovery or worth determination:
Money markets yield the determination of the worth of listed money assets through the
interaction of various set of participants.
6. Sale mechanism:
Money market provides a mechanism for commerce of monetary assets by associate capitalist
and provides the advantages of marketability and liquidity of such assets.
7. Data availability:
The data generated in money market is helpful to numerous parties participating in economic
system. Thus, a money market could be a primary constituent of monetary system. The
money market not solely helps within the transfer of savings from new trade or production,
however conjointly provides opportunities for money investment to earn financial gain.
In different words, money markets perform each money and non-financial functions. The
money market permits finance of not solely physical capital formation i.e. Tangible mounted
assets and inventories, however conjointly consumption expenditure.
That is why money markets manage the flow of funds not solely between individual savers

and investors however conjointly between institutional savers and investors.
1.3.4 CLASSIFICATION OF MONETARY MARKETS
The Classification of monetary markets in India is as follows:
1. Unorganized markets:
In these markets there are unit variety of money lenders, bankers, and traders etc. United
Nations agency lends money to the general public. Bankers conjointly collect deposits from
the general public. There are non-public finance firms, invoice funds etc, whose activities
aren't controlled.
2. Organized markets:
In the organized markets, there are unit standardized rules and rules governing their money
dealings. There's conjointly a high degree of institutionalization and instrumentalisation.
These markets are unit subject to strict oversight and management by the run batted in or
different restrictive bodies.
These organized markets may be additional classified into 2 viz.
I. Capital market.
II. Securities Market.
1.4 CAPITAL MARKET
The capital market could be a marketplace
for monetary assets that have a protracted
or indefinite maturity. Typically it deals
with long run securities that have a
maturity amount of higher than one year.
It includes establishments and mechanism
for the effective pooling of long term funds from people and institutional investors and
creating them accessible industrial undertakings. Capital market in brief, deals in shares,
debentures, bonds and securities.
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1.4.1 OPTIONS OF CAPITAL MARKET
1. It deals in long and medium term funds.
2. It consists of primary market and secondary market and special monetary establishments.
3. It covers each individual and institutional investor.
4. It makes funds accessible to industrial and industrial undertakings.

1.4.2 IMPORTANCE OF CAPITAL MARKET
Absence of capital market acts as a deterrent issue to capital formation and economic process.
Resources would stay idle if finances don't seem to be funneled through capital market.
The importance of capital market may be in brief summarized as follows:
1. The capital market is a vital supply for the productive use of economy’s savings. It
mobilizes the savings of the folks for more investment, and therefore avoids their wastage in
unproductive uses.
2. It provides incentives to saving and facilitates capital formation by giving appropriate rates
of interest because the value of capital.
3. It provides anas avenue for investors, significantly the social unit sector to speculate in
monetary assets that are a lot of productive than physical assets.
4. It facilitates increase in production and productivity within the economy and therefore
enhances the economic welfare of the society.
5. The operations of various establishments within the capital market induce economic
process. They furnish qualitative directions to the flow of funds and convey concerning
rational allocation of scarce resources.
6. A healthy capital market consisting of knowledgeable intermediaries promotes stability in
values of securities representing capital funds.
7. Moreover, it is a vital supply for technological upgradation within the industrial sector by
utilizing the funds endowed by the general public.
Thus, a capital market is a vital link between |people who} save and people who draw a bead
on to speculate these savings.
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1.4.3 CLASSIFICATION OF CAPITAL MARKET
Capital market may be classified into three, viz,
i. Industrial exchange.
ii. Government exchange.
iii. Long run loan market.
iv. Industrial securities market:
It implies, It is a marketplace for industrial securities, viz,
i. Equity shares or stock
ii. Preferred shares.
iii. Debentures or bonds.

It is a market wherever industrial considerations raise their capital or debt by
supplying applicable instruments. It may be more divided into two:-
• Primary market or new issue market
• Secondary market or exchange.
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1.5 PRIMARY MARKET
Primary market may be a marketplace for
new issue or new monetary claims. Thus It is
additionally known as New Issue Market.
The first market deals with those securities
that are unit issued to the general public for
the primary time. Within the primary market,
borrowers exchange new monetary securities
for future funds. Thus, the first market facilitates capital formation.
There are three ways by that an organization might raise capital in a very primary market.
They are:
 Public issue.
 Rights issue.
 Private placement.
The foremost common methodology of raising capital by new corporations is through sale of
securities to the general public. It is known as public issue. Once associate existing company
needs to boost extra capital, securities are unit initial offered to the present shareholders on
preventive basis. It is known as offer. Non-public placement may be a manner of
commercialism securities in private to little cluster of investors.
1.5.1 FUNCTIONS OR SERVICES OF PRIMARY MARKET OR NEW ISSUE
MARKET
1. The transfer: A vital perform rendered by primary market is to permit the transfer of
resources from capitalist to entrepreneurs who establish new corporations. It is additionally
known as the perform of origination. The transfer perform is expedited by specialist agencies
that assist in numerous activities related to such transfer.
2. Investigatory services: The investment bankers and different agencies concerned in
primary market offer the investigatory services. These embrace, economic analysis, technical

analysis, monetary associate analysis of the businesses wherever a capitalistants to take a
position. This data helps the investors in creating a transparent selection on the kind, quality
and amount of investment to form.
3. Consultative and data services: Numerous consultative services are unit out there in
primary market with a read to up the standard of capital problems in primary market. The
relevant services embrace crucial the kind, the mix, the price, the timing, the size, the
commercialism ways and therefore the terms and conditions of issue of securities etc.
4. The guarantee: If the corporate, getting into capital market isn't positive of raising full
quantity of funds from the market, there are unit bound mechanism there by success of such
issue are secured. It is known as underwriting. Underwriting aims at guaranteeing the
subscription of public issue. Underwriters guarantee roaring subscription of the problem by
endeavor to require up the securities within the event of the general public failing to
subscribe a similar. It advantages all those concerned in primary market just like the
provision company, the investment public and capital market generally. The perform of
underwriting is undertaken for a commission.
5. The distribution: The perform that facilitates the sale of securities from company to
investors is termed ‘Distribution’. The perform of distribution is rendered by the specialised
agencies like brokers and dealers in securities. They maintain a relentless and an in depth link
with the issuers on the one hand and therefore the final investors on the opposite.
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1.6 SECONDARY MARKET
Secondary market may be a marketplace for secondary sale of securities. In different words,
securities that have already competent the new issue market are unit listed during this market.
Generally, such securities are unit quoted within the exchange and it provides a nonstop and
regular marketplace for shopping for and commercialism of securities. This market consists
of all stock exchanges recognized by the government of India. The stock exchanges in India
are regulated under the Securities Contracts (Regulation) Act 1956. The Bombay exchange is
that the principal exchange in India that sets the tone of the opposite stock markets.
The secondary market provides liquidity to monetary instruments that are unit already issued
in primary market. In a very exchange, purchases and sales of securities whether or not of
state or semi-government bodies or different public bodies and additionally shares and

debentures issued by non-public joint stock corporations are unit done.
Functioning of secondary market:
For the effective functioning of secondary market, correct management should be exercised.
At present, management is exercised through the subsequent 3 necessary processes.
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1. Recognition of stock exchanges:
As an area of secondary market operation the stock exchanges got to be recognized by
regulatory agency. The securities that are unit issued in primary market are listed solely in
recognized exchanges like Bombay stock exchange, NSE, Bombay exchange etc. In indiasebi
is recognizing the stock exchanges.
2.Listing of securities available exchanges:
Once the stock exchanges are recognized the securities that are needed to be listed like shares
debentures etc. Should be listed available exchanges
3.Recognition of broker:
The intermediaries, WHO facilities swish functioning of secondary market like brokers, deal
in secondary market. Sub-brokers got to be recognized by SEBI, them solely the desire be
able to interchange stock exchanges.
1.6.1 FUNCTIONS OR SERVICES OF SECONDARY MARKET
The Secondary market or exchange occupies a important position within the national
economy. In perform many economic functions and render valuable services to the investors,
corporations and to the economy as whole. They are as follows:
1. Liquidity of Securities:
Stock exchanges offer liquidity to securities, since securities is regenerate in to money at any
time in step with the discretion of the capitalist by commercialism tem at the listed costs.
2. Marketability to Securities:
Secondary market facilitate shopping for and commercialism of securities at listed costs by
providing continuous marketability to the investors in respect of securities they hold or will
hold. Therefore they produce a prepared marketplace for securities.
3. Safety of Funds happiness to investors:
Stock exchanges facilitate in maintaining safety of funds endowed as a result of they need to
perform below strict rules and rules and therefore the bye-laws are meant to make sure safety
of investible funds. These rules are framed by SEBI. This is able to strengthen the investor’s
confidence and promote larger investment.

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4. Availableness of future funds to companies:
The securities listed within the stock, market are negotiable and transferable. Because it is
transferred from one capitalist to a different, one capitalist is substituted by another; however
the corporate is secured of future availableness of funds.
5. Flow of funds to profitable projects:
The profit and recognition of corporations are mirrored available costs. The costs quoted
indicate the relative profit and performance of corporations. Funds tend to be attracted
towards securities of profitable corporations and this facilitates of profitable corporations and
these facilities the flow of capital in to profitable channels.
6. Motivation for improved performance by companies:
The performance of an organization is mirrored on worths the costs quoted within the
exchange price of economic assets depends upon the company’s performance. These costs
are additional visible within the eyes of the general public. Exchange provides space for this
worth quotation for those securities listed by it. This airing makes an organization tuned in to
its standing within the market and it acts as a motivation to enhance its performance
additional.
7. Promotion of investment opportunities:
Stock exchanges mobilize the savings of the general public and promote investment through
capital problems. Unless there's a good secondary market, investment opportunities won't be
with investors.
8. Availableness of Business Information:
The dynamical business conditions within the economy are immediate mirrored on the
secondary market/stock exchanges. Booms and depressions is known through the dealings
within the stock exchanges. Relying upon the prevailing data policies is taken by the
government. Therefore an exchange reflects the prevailing economic state of affairs to ball
involved. In order that appropriate actions is taken.
9. Promoting of latest problems by companies:
If the new problems are listed available exchanges They are without delay acceptable to the
general public, since, listing is finished when analysis of such securities by involved
exchange authorities. Prices of underwriting such problems would be less public response to
such new problems would be comparatively terribly high. Therefore a exchange helps within
the promoting of latest problems additionally.

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10. Different services:
Exchange allows the investors to scale back their risks by heterogeneous portfolio of
investment. It additionally develops savings habits among the community and paves the
manner for capital formation. It helps the investors in selecting securities by supply the daily
quotation of listed securities and by revealing the trends of dealings on the exchange. It
allows corporations and therefore the government to boost funds by providing a prepared
marketplace for their securities.
1.6.2 Primary and Secondary Markets – Similarities:
Both the first and secondary markets are closely reticular. This is often clear from the
following:
1. Trading:
If securities are to be listed within the stock exchange/ secondary market, It is necessary that
They are initial issued within the primary market.
2.Listing:
Solely those shares that are capable of listing in some purported stock exchanges are totally
signed in primary market.
3.Regulation:
The rules with reference to each primary yet as secondary market are regulated by the SEBI
and exchange. The thing is to motivate orderliness in each primary and secondary market.
4. Marketability:
The advantage of marketability provided by the secondary market greatly helps the
subscribers within the primary market. As an example, the positive trends prevailing within
the secondary market vastly facilitate the investors to scale back their holdings and acquire
new shares within the secondary market.
5. Conditional Prevailing:
The conditions prevailing within the secondary market have an effect on success or failure of
the problem created within the primary market. Consequently, wherever the conditions are
therefore favorable within the secondary market that prime market costs prevail, the
problems created within the primary market can end up to be encouraging and roaring.
Problems would fetch smart premiums.
6. Survival:
The survival of the secondary market depends upon the potency of the first market. There
may well be no stock exchanges if there's no primary market, within the same manner there'll
be no primary market within the absence of associate economical functioning of exchange.

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1.6.2 DIFFERENCES BETWEEN PRIMARY AND SECONDARY MARKET
Features Primary market Secondary market
Primary issues vs
Secondary issues
It deals only with new or fresh
issues of shares made by the
companies for the first time
Deals is existing securities which are
already issued by
companies/corporations.
Fixed/flexible
Geographical
location
There are no fixed geographical
location for primary market
It has a fixed place for trading
Eg. Bangalore Stock
Exchange/BSE/NSE
Whether transferable
For the first time securities are
issued
Securities are transferred from one
person to another through stock
exchange(s).
Market entry
All companies can enter primary
market
Only those companies which have
issued securities in primary market
can enter into secondary market for
trading purpose.
Administration and
management
No definite administration Has a definite administration set up
by recognized Indian stock
exchanges.
Purpose
It helps long term instruments for
savings and investments.
It Provides liquidity for those
instruments which are already issued
by companies.
1.6.3 Government securities market or gilt edged securities market:
It is a market wherever government securities are listed. In India there are several forms of
government securities- short term and long term. Long term securities are listed during this
market, whereas short term securities are listed in market.
Securities issued by the central government, state governments, semi-Government authorities
like town companies, port trusts etc. Improvement trusts,
state electricity boards
Trusts state electricity boards. All India and state level
money establishments and public sector enterprises are
dealt during this market.
Government securities are issued in denominations of
Rs. 100. Interest is owed half-yearly and that they carry
tax exemptions conjointly. The role of brokers in
promoting these securities in much terribly restricted

and also the major participant during this market is that the “Commercial Banks” as a result
of they hold to satisfy their SLR necessities.The secondary marketplace for these securities is
incredibly slender since most of the institutional investors tend to retain these securities till
maturity.
The government securities are in several forms viz,
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A. Stock certificates.
B. Speech act notes.
C. Bearer bonds which might be discounted.
1.7 LONG TERM LOANS MARKET
Development banks and industrial banks play a major role during this market by activity long
term to company customers. Long run loans market might any be classified into:
a. Term loans market:
In India, several industrial funding establishments are
created by the government each at the national and
regional levels to provide long run and medium term
loans to company customers directly likewise as
indirectly. These development banks dominate the
commercial finance in Republic of India.
Establishments like IDBI, IFCI, ICICI, and different
state money firms return below this class.
B. Mortgages:
The mortgages market refers to those centers that provide real estate loan chiefly to
individual customers. A real estate loan may be a loan against the protection of immoveable
property like property. The transfer of interest in an exceedingly specific immoveable
property to secure a loan is named mortgages.
C. Money Guarantee Market:
A Guarantee market may be a centre wherever finance is provided against the guarantee of a
purported person within the money circle. Guarantee may be a contract to discharge the
liability of a third party just in case of his default. Guarantee acts as a security from the

creditors’ purpose of read. Just in case the borrowers fail to repay the loan, the liability fails
on the shoulders of the warranter. Hence, the warranter should be acknowledged each to the
recipient and also the below and he should have suggests that to discharge his liability.
1.8 MONEY MARKET
Money market contains a marketplace for short term loan or money assets. It is a marketplace
for the disposition and borrowing of short terms funds. Because
the name implies, it doesn't truly deal in money or money.
However it truly deals with close to substitutes for money or
close to money like trade bills, speech act notes and government
papers drawn for a brief amount not exceptional one year. These
short term instruments are often reborn into money promptly
with none loss and at low dealings value.
The money market doesn't seek advice from a specific place
wherever short term funds are affect. It includes all individual,
establishments and intermediaries handling short term funds.
The transactions between borrowers, lenders and middlemen
happen through telephone, telegraph, mail and agents.
No personal contact or presence of the two parties is important for negotiations in a very
market. However, a geographical name is also given to a market in step with its location. For
instance, the London markets operators from Lombard Street and also the big apple money
market operators from Wall Street. But, they attract funds from everywhere the world.
Similarly, the Mumbai market is that the center for short-run loan ready funds of not solely
Mumbai, however conjointly the complete of India.
1.8.1 Definition
Geoffrey Crow her in his book “A define of money” has explicit “Money market could be a
collective name given to numerous the varied the assorted forms and establishments that deal
within the various grades of close to money”.
The assets that are used as credit instruments are referred to as “Near money assets”.
1.8.2 Features of a money market:
The subsequent are the overall options of a market are:
1. It is a market strictly for brief term funds or money assets referred to as close to money.
2. It deals with money assets having a maturity amount up to 1 year solely.
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3. It deals with solely those assets which might be reborn into money promptly while not loss
and with minimum dealings value.
4. Typically transactions happen through i.e., language, relevant documents and written
communications are often changed later. There is no formal place like stock market as within
the case of a capital market.
5. Transactions have to be compelled to be conducted while not the assistance of brokers.
6. It is not one homogenized market. It contains of many sub-markets, every specializing in a
very specific style of finance. Eg: decision market, acceptance market, bill market and
shortly.
7. The elements of a market are the financial organization, industrial banks, non-banking
money corporations, discount homes and acceptance homes. Industrial banks typically play a
dominant role during this market.
1.8.3 Significance/importance/functions of money market
A developed business plays a crucial role within the financial set-up of a rustic by provision
short term funds adequately and quickly to trade and industry. The money market is associate
integral a part of a country’s economy. Therefore, a developed market is very indispensable
for the speedy development of the economy. A developed market helps within the swish
functioning of the financial set-up in any economy within the following ways:
1. Economic development:
The money market provides short term funds to each public and personal establishments.
These establishments would like money to finance their capital wants [ In alternative words,
the money market assures offer of funds, the finance is completed through discounting of the
trade bills, industrial banks, acceptance homes, discount houses]. During this means, the
money market facilitates within the economic development by providing money help to trade,
commerce and business.
2.Profitable investment:
The industrial banks affect the deposits of their customers(The banks are needed to place
their assets into money type to fulfill the directions of the financial organization on the one
hand, whereas on the opposite, they need to place their excess reserves into productive
channels to earn financial gain on them). The aim of the industrial banks is to maximise
profits. The surplus reserves of the banks are endowed in close to money assets. The aim is to
make sure liquidity while not fore going profits utterly.
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3. Borrowings by the government:
The money market helps the government in borrowing short term funds at terribly low
interest rates. The borrowing is completed on the idea of treasury bills.
4. Importance for central bank:
If the money market is well developed, the financial organization implements the financial
policy with success. It is solely through the money market that the financial organization will
manage the industry and therefore contribute to the event of trade and commerce.
5. Mobilization of funds:
The money market helps in transferring funds type one sector to another. The event of any
economy depends on accessibility of finance. No country will develop its trade, commerce
and business till and unless the money resources are mobilized.
6. Independency of economic banks:
Just in case of the prevalence of a developed market, the industrial banks need not borrow
from the financial organization. Just in case the industrial banks have insufficiency of
resources, they will meet their necessities by recalling a number of their loans from rather
than borrowing from the financial organization at the next rate of interest.
7. Savings and investments:
Another purpose of importance of the money market is that it helps in promoting liquidity
and safety of economic assets. By doing therefore, it will facilitate in encouraging savings
and investment.
1.8.4 Objectives Of Money Market
The subsequent are the necessary objectives of a market are:
1. To supply a parking place to use short-run surplus funds, primarily of economic banks.
2. To supply space for overcoming short-run deficits.
3. To alter the financial organization to influence and regulate liquidity within the economy
through its intervention during this market.
4. To supply an affordable access to users of short-run funds to fulfill their necessities
quickly, adequately and at affordable prices.
1.8.5 Characteristics/Features of a developed money market
So as to meet the on top of objectives, the money market ought to be totally developed and
economical.(In each country of the globe some style of market exists. A number of them are
extremely developed, whereas others don't seem to be well developed. Prof. S.N. subunit has
22

represented bound essential options of a developed market. They are as follows:
1. Extremely organized banking system:
The industrial banks are the nerve centre of the complete market. They are the most suppliers
of short-run funds. Their policies concerning loans and advances have impact on the whole
market. The industrial banks function an important link between the financial organization
and also the varied segments of the money market. Consequently a well-developed market
and a extremely organized industry co-exist.
2. Presence of a central bank:
The financial organization acts because the banker’s bank. It keeps their money reserves and
provides them money accommodation in times of difficulties by discounting their eligible
securities. Through its open market operations, the financial organization absorbs surplus
money throughout off- seasons and provides extra liquidity within the busy seasons. Thus, the
financial organization is that the leader, guide and controller of the money markets.
3. Accessibility of correct credit instruments:
A developed market needs a nonstop accessibility of promptly acceptable negotiable
securities like bill of exchange, treasury bills etc…. Within the market. There ought to be
variety of dealers within the market to interact in these securities. Accessibility of negotiable
securities and also the presence of dealers and brokers in giant numbers to interact in these
securities are required for the existence of a developed market.
4. Existence of sub-markets:
The quantity of sub-markets determines the event of a market. The larger the quantity of sub-markets,
the broader and additional development is the structure of money market. The
many sub-markets along create a coherent (united) market.
5. Ample resources:
There should be accessibility of spare funds to finance transactions within the sub-markets.
These funds could return from among the country and conjointly from foreign countries. The
London, New York and Paris money markets attract funds from everywhere the globe.
6. Existence of secondary market:
There ought to be a vigorous secondary market in these instruments.
7. Demand and provide of funds:
There ought to be an oversized demand and provide of short-run funds and it ought to have
adequate quantity of liquidity within the variety of large amounts maturing among a brief
amount.
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8. Alternative factors:
Besides the on top of, alternative factors conjointly contribute to the event of a market.
Speedy industrial development resulting in the emergence of stock exchanges giant volume
of international trade resulting in the system of bills of exchange, political stability,
favourable conditions for foreign investment, worth stabilization etc… are the opposite
factors that facilitate the event of money market within the country.
London market could be a extremely developed market as a result of it satisfies all the
necessities of a developed market. If anyone or additional of those factors are absent, then the
money market is named associate beneath developed one.
1.8.6 Composition of Money Market
The money market could also be sub-divided into four, viz..,
1. Decision money market:
The decision securities industry could be a marketplace for very short amount loans say in
some unspecified time in the future to 14 days. So, It is extremely liquid. The loans are due
on demand at the opinion of either the loaner or the recipient. In India, decision money
markets are related to the presence of stock exchanges and thence, they are situated in major
industrial cities like Mumbai, Calcutta, Chennai, Delhi, Ahmadabad etc… the special options
of this market is that the rate of interest varies from day to day and even from hour to hour
and Centre to Centre. It is terribly sensitive to changes in demand and provide of decision
loans.
2. Industrial bills market:
It is a marketplace for bills of exchange (arising out of real trade transactions). Within the
case of credit sale, the vendor could draw a bill of exchange on the customer. The customer
accepts such a bill promising to pay at a later date per the bill. The sellers needn't to attend till
the maturity date of the bill. Instead, he will get money by discounting the bill.
In India, the bill market is beneath developed. The run has taken several steps to develop a
sound bill market. The run has enlarged the list of participants within the bill market. The
discount and finance house of India was setup in 1988 to push secondary market in bills. In
spite of these, the expansion of the bill market is slow in India. There are not any specialised
agencies for discounting bills. The industrial banks play a major role during this market.
3. Treasury bills market:
It is a marketplace for treasury bills that have ‘short term’ maturity. A Treasury bill could be
a certificate of indebtedness or a finance bill issued by the government. It is extremely liquid
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as a result of its reimbursement is secure by the government.. It is a crucial instrument for
short borrowing of the government.. There are 2 sorts of treasury bills viz.,
a) Ordinary or regular and
b) Adhoc treasury bills popularly called ‘adhocs’.
Normal treasury bills are issued to the general public, banks and different monetary
establishments with a read to raising resources for the central government to fulfill its short
monetary desires.
Adhoc treasury bills are issued in favour of the run solely. They are not sold through tender
or auction. They will be purchased by the run solely. Adhocs do not seem to be marketable in
India, however holders of those bills will sell them back to run.
Treasury bills have a maturity amount of ninety one days or 182 days or 364 days solely.
Monetary intermediaries will park their temporary surpluses in these instruments and earn
financial gain.
4. Short loan market:
It is a market wherever short are given to company customers for meeting their capital needs.
Industrial banks play a major role during this market. Industrial banks give short loans within
the variety of money credit and order of payment.
Order of payment facility is especially given to business folks wherever as money credit is
given to industrialists. Order of payment is only a short lived accommodation and It is given
within the accounting itself. However money street credit is for a amount of 1 year and It is
sanctioned during a separate account.
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1. 9 STOCK EXCHANGES:
Stock exchanges could be a market during which securities are bought &sold and It is a vital
marketplace for developing a capital market.
The Securities Contracts (Regulation) Act 1956 defines stock market as “an association
organization or body of people whether or not incorporated or not, established for the aim of

helping, control and dominant business in shopping for mercantilism and dealing in
securities”.
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1. 9.1 FUNCTIONS OF STOCK EXCHANGES
A stock market discharges many functions. It provides a market place to sell and get freely
the stocks & shares through the licensed brokers. The important functions of stock exchanges
are as follows:
1. Market place for stock:
Stock exchanges provides a market place for mercantilism and shopping for of securities
freely by the brokers for his or her purchasers.
2. Prepared and continuous market:
Stock exchanges offer prepared and continuous marketplace for stocks & shares. This
provides prepared liquidity, price, continuity and negotiability to the capital bolted up in
securities.
3. Assessment of securities:
The stock exchanges ensures correct appraisal of security. The free play of demand for &
offer of securities determines value ceaselessly.
4.Stock exchanges forecast the future:
Besides, providing continuous market, stock exchanges, render statement operate. The worth
movements for securities replicate and forecast the longer term happenings in business
operations.
5. Mobilization of savings:
The stock markets are excellent markets that facilitate to mobilize the savings of the
individuals to productive channels.
Besides causation public to avoid wasting & invest in securities, the exchange promotes
capital formation and provides necessary funds to the necessitous industries.
7. Economic barometer:

Like measuring instrument that indicates the variation in temperature of the surroundings at
any purpose of your time, the stock market indicates the health of the economy. Value trends
on a stock market replicate the economic progress & socio-political conditions of a rustic. It
indicates the boom or depression existing within the country.
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8. Management of company enterprises:
To induce the stocks & shares listed on stock exchanges, the businesses got to follow sure
rules and laws. “Listing” means that obtaining the name of the corporate registered with the
stock market to trot out its securities formally on the exchange. When listing the safety, the
corporate has got to follow the official policies of the exchange whereas managing its
securities. Thus, exchange exercise healthy management over the businesses.
9. Speculation:
The operators on the stock market are licensed agents. They are referred to as by totally
different names. These operators hold company securities new and previous for a brief
amount significantly the new shares, owing to temporary holding by monetary intermediaries
referred to as “speculators”. Speculators can have a seasoning amount. The speculators who
would like to form profit out of variation in costs of securities, operate skillfully and offer
sensible liquidity position to the securities. Speculation, though affects the share costs badly
at sure time, it plays an important role in moving the capital markets. These facilities are for
speedy economic development & honest dealing on shopping for & mercantilism of
securities.
10. Management of public deposits:
The government of India & all state governments are engaged in planned economic
development. Owing to this planned growth, government need Brobdingnagian capital &
they need to float loan, bonds & alternative securities to induce a locality of finance for these
securities to induce a locality of finance for these comes. These securities also are trot out
within the stock exchanges. The governments’ monetary desires within the variety of debt are
glad by stock exchanges by providing marketplace for these securities.

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11. Alternative functions:
Stock market offer facilities like giving business info of the company sector. Each listed
company of the company sector. Each listed company has got to submit annually the audited
monetary statements to the exchange. Numerous styles of reports also are submitted to the
exchange. This can be complied by the exchange and acts as a information of company
sector. This ensures most promotional material of company operations and dealing.
1. 9.2 NATIONAL STOCK EXCHANGE(NSE):
Stock exchanges may be a market throughout that
securities are bought & sold-out & it is a important
marketplace for developing a capital market.
The Securities Contracts (Regulation) Act 1956
defines stock exchange as “an association organization
or body of individuals whether or not or not
incorporated or not, established for the aim of serving
to, management and dominant business in buying & mercantilism & dealing in securities”.
1. 9.3 FUNCTIONS OF STOCK EXCHANGES
A stock exchange discharges several functions. It provides a market place to sell and find
freely the stocks & shares through the commissioned brokers. The vital functions of stock
exchanges are as follows:
1. Market place for stock:
Stock exchanges provide a market place for mercantilism and buying of securities freely by
the brokers for his or her purchasers.
2. Ready and continuous market:
Stock exchanges supply ready and continuous marketplace for stocks & shares. This provides
ready liquidity, price, continuity and negotiability to the capital fastened up in securities.
3. Assessment of securities:
The stock exchanges ensures correct appraisal of security. The free play of demand for &
supply of securities determines price endlessly.

4. Stock exchanges forecast the future:
Besides, providing continuous market, stock exchanges, render statement operate. The price
movements for securities replicate and forecast the long term happenings in business
operations.
5. Mobilization of savings:
The stock markets are glorious markets that facilitate to mobilize the savings of the people to
productive channels.
Besides deed public to avoid wasting & invest in securities, the exchange promotes capital
formation and provides necessary funds to the indigent industries.
7. Economic barometer:
Like measuring device that indicates the variation in temperature of the environment at any
purpose of it slow, the stock exchange indicates the health of the economy. Price trends on a
stock exchange replicate the economic progress & socio-political conditions of a country. It
indicates the boom or depression existing at intervals the country.
8. Management of company enterprises:
To induce the stocks & shares listed on stock exchanges, the companies need to follow
certain rules & laws. “listing” implies that getting the name of the company registered with
the stock exchange to upset its securities formally on the exchange. Once listing the security,
the company has to follow the official policies of the exchange whereas managing its
securities. Thus, exchange exercise healthy management over the companies.
9. Speculation:
The operators on the stock exchange are commissioned agents. They are said as by whole
totally different names. These operators hold company securities new and former for a short
quantity considerably the new shares, because of temporary holding by financial
intermediaries said as “speculators”. Speculators will have a seasoning quantity. The
speculators who would love to create profit out of variation in prices of securities, operate
skillfully & supply wise liquidity position to the securities.
Speculation affects the share prices badly at certain time. It plays a very important role in
moving the capital markets. This facilities increase the speed of economic development,
honest dealing on buying and mercantilism of securities.
10. Management of public deposits:
The Government of India and all state governments measures are engaged in planned
economic development. Because of this planned growth, government would like broadening
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of capital & they have to float loan, bonds & various securities to induce a region of finance
for these securities. These securities are also upset at intervals the stock exchanges. The
government’s financial needs at intervals the range of debt is met by stock exchanges by
providing marketplace for these securities.
11. Various functions:
Stock markets supply facilities like giving business data of the corporate sector Every listed
company has to submit annually the audited financial statements to the exchange. Varied
types of reports are also submitted to the exchange. This may be complied by the exchange
and acts as a info of company sector. This ensures most publicity of company operations and
dealing.
Summary
The financial system consists of financial institutions, intermediaries and financial
instruments. There are various financial markets such as primary, secondary, capital, money
and money markets. Primary market plays an important role in the initial issue whereas
secondary market plays in the resale of stock s and shares of the holders. The secondary
market plays a vital role in identifying the development and growth of the company and
economy. Short term market is known as money market. Stock exchanges are regulated by
SEBI.
KEYWORD/GLOSSARY
National economy as “the purpose of economic markets to assign savings expeditiously in
an economy to final users either for investment in real assets or for consumption”.
Financial institutions: Financial establishments are the intermediaries who facilitate sleek
functioning of the national economy by creating investors and borrowers meet.
Money market facilitates the transfer of resources from one person to another.
Unorganized markets: In these markets there are unit variety of money lenders, bankers,
and traders etc.
Organized markets: In the organized markets, there are unit standardized rules and rules
governing their money dealings.
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The capital market could be a marketplace for monetary assets that have a protracted or
indefinite maturity.
Primary market may be a marketplace for new issue or new monetary claims.
Secondary market may be a marketplace for secondary sale of securities.

Government securities market or gilt edged securities market: It is a market wherever
government securities are listed.
Long term loans market: Development banks and industrial banks play a major role during
this market by activity long term to company customers.
Stock Exchanges: It provides a market place to sell and get freely the stocks & shares
through the licensed brokers.
Speculation: The operators on the stock market are licensed agents.
National stock exchange(nse): The aim of serving to, management and dominant business in
buying & mercantilism & dealing in securities. Securities are bought & sold-out & it is a
important marketplace for developing a capital market.
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ANSWER TO CHECK YOUR PROGRESS
(2 MARKS)
1) What do you mean by financial system?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………
2) What is primary market?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………
3) What is the classification of financial system?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………
4) What do mean by capital market?
………………………………………………………………………………………
………………………………………………………………………………………

………………………………………………………………………………………
………………………………………
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5) What is money market?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………
QUESTIONS (5 MARKS)
1. Write a note on primary market.
2. Write a note on secondary market.
3. What are the functions of primary market?
4. Write a note on financial institutions.
5. What are the differences between primary and secondary market?
6. Distinguish between capital market and money market.
SUGGESTED BOOKS/ ARTICLES
1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill
2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill
3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl
4. M Y Khan: Indian Financial System, TMH
5. E Gardon & K Natarajan: Financial Markets & Services.
Web:
All pictures are taken from Google Images as on 14/10/2014

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Unit 2
FINANCIAL INSTITUTIONS
2.3 The organised Non-Banking Financial Institutions
2.4 Mutual Funds
Types of Banking and Non-Banking Financial Institutions.Constitution, objectives &
functions of IDBI, SFCS, SIDCS, LIC, EXIM Bank.Meaning and scope of Mutual Funds.
Objectives of the study
Financial establishments are termed as monetary intermediaries as a result of they act as
middleman between the savers and borrowers. There are banking and non-banking financial
institutions. There are long term lending institutions such as IDBI, IFC, LIC and commercial
banks lends for short term as well as long term. We understand all of the above how they
function for the economic development of our country.
2.0 Introduction
The principle objective of SFC’s is to provide medium short term and long term financial
assistance to small industries particularly in a circumstance when normal banking assistance
is not available. SIDC are setup in various states under the companies Act of 1956 to later the
primary development needs of tiny, small, village industries in the state.
Insurance organization in India comprise of government organization namely, life
insurance corporation of India and general insurance corporation of India. LIC collects large
amount of funds from the public and deploys to the savings, the best advantage of the policy
holders for the industrial development as a whole. EXIM bank provides re- finance facilities
to the commercial banks and other financial institutions against their export and import
financial activities. A mutual fund collects the savings from little investors, invest them in
government and alternative company securities and earn financial gain through interest and
dividends, besides capital gains. It works on the principle of ‘small drops of water build an
enormous ocean’.

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A financial organization is essentially a term financial institution, providing medium and
future monetary help to industrial and business units, for promoting industrial and economic
development within the country.
Financial establishments are the intermediaries World Health Organization facilitates swish
functioning of the national economy by creating investors and borrowers meet. They
mobilize savings of the excess units and allot them in productive activities promising a more
robust rate of returns.
2.1.1 FORMS OF MONETARY INSTITUTIONS
Monetary establishments may be classified into 2 categories:
1. Banking institutions

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2. Non-banking institutions.
Indian banking system is subject to the financial institution. I.e., banking company of
our country RBI because the apex bank establishment organizes runs, supervises, regulates
and develops the medium of exchange and therefore the national economy of the country.
The most legislation governing industrial banks in India is the Banking Regulation Act,
1949. The banking establishments is loosely classified into two categories:
A. Organized sector.
B. Unorganized sector.

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2.2.1 ORGANIZED SECTOR
The organized sector consists of economic banks, co-operative banks & regional rural banks.
I. Industrial banks
Traditionally, industrial banks accepted deposits and met the short and medium term funding
wants of the business. But now, since 1990’s banks are funding the future wants of the
business notably the infrastructure sector. The alleviation measures initiated within the Indian
economy, light-emitting diode to the entry of enormous non-public sector banks in 1993. This
has exaggerated competition among non-public and public sector banks and quality of
services has improved.
II. Co-operative banks
Source: Google image as on 15/10/2014
An important section of the organized sector of Indian Banking is that the co-operative
banking. This section is delineate by a gaggle of societies registered underneath the acts
of the states about co-operative societies. Co-operative societies could credit or non-credit
societies.
Different kinds of co-operative credit societies are in operation within the Indian
economy. These establishments may be classified into two broad categories:
a. Rural credit societies that are primarily agricultural
b. Urban credit societies that are primarily non- agricultural.

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III. Regional Rural Banks
RRBS were found out by the regime and therefore the sponsoring business banks with the
target of developing the agricultural economy. RRBS give credit facilities and banking
services to little farmers, little entrepreneurs within the rural areas. The regional rural
banks were found out with a read to produce credit facilities to weaker areas.
IV. Foreign banks:
Foreign banks are in India from British days. These banks have targeting company
purchasers and are specializing in areas about International banking.
2.2.2 Unorganized sector
People engaged in unorganized banking sector are the indigenous bankers, money
lenders, Seth, sahukars effecting the operate of banking.
Indigenous bankers are the forefathers of contemporary business banks. These are the
people or partnership corporations playing the banking functions. They are the native
bankers. The geographical region coated by the native bankers is far larger than the realm
coated by the business banks. Few characteristics of native are as follows:
• Indigenous bankers are often seen from the actual fact that they not solely provided
credit to trade & commerce, however now and then to the government of the day
additionally.
• Indigenous bankers raise funds from the general public additionally.
• They raise funds from the general public additionally.

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• They give finance for productive functions directly and indirectly to trade and trade.
• They detain bit with traders and little industrialists and finance, selling on a sizeable scale.
Disposition is conducted on the premise of dedication notes.
2.2.3 Money Lenders
Money lenders rely entirely on their own funds for the capital. Money lenders is also rural or
urban, skilled or non-professional. They embody giant farmers, traders, merchants,
goldsmiths, village shopkeepers, sardars of laborers etc. The most characteristics of money
lenders are the following:
• Their funds are own funds.
• Their purchasers are principally the weaker sections of the society.
• Their loans are extremely exploitive. They charge terribly high rate of interest.
• Their operations are entirely unregulated.
• The credit is prompt & versatile.
2.2.2 Non-banking Institutions
The non-banking establishments is also classified loosely into 2 groups:
A. Organized monetary establishments.
B. Unorganized monetary establishments.
A. Organized monetary Institutions:

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Source: http://www.cfp.altius.ac.in/fpsb_india.html
2.3 The Organized Non-Banking Financial Institutions include
2.3.1 Development Finance Institutions:
• The establishments like IDBI, ICICI and IIBI in any respect India level.
• SFCS, SIDCS at the state level.
• Agricultural development finance establishments as NABARD, LDBS etc.
Development money establishments give medium and future finance to the company and
industrial sector and additionally take up promotional activities for economic development of
the country.

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• IDBI- Industrial Development Bank of India.
• ICICI- Industrial Credit Investment Corporation of India.
• IIBI- Industrial Investment Bank of India.
• SFCS- State Finance Corporation
• SIDCS- State Industrial Development Corporation.
• LDBS- Land Development Banks.
• NABARD- National Bank for Agriculture & Rural Development.
• LDBS-Land Development Banks
2.3.2 Investment Institutions
It includes those money establishments that mobilize savings of the general public at
giant through varied schemes and invest these funds in company and government
securities. These embrace LIC, GIC, UTI and Mutual funds.
2.3.2.1 INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
It is started by run in 1964. Later in 1975 it had been taken by Central government. (Indira
Gandhi emergency period) In 1995, seventy two of capital is maintained by government and
also the remaining is given to others i.e., 28%. LIC, GIC etc. For public.
It was established in July 1964 underneath IDBI Act as an entirely closely-held by run and it
had been separated by run in 1975.
A Government of India taken and disinvested its shares in 1995 to the extent of twenty eighth
& maintained to the extent of seventy two.
Role:
1. It is allotted the role of principle financial organisation for coordinative the activities of all
the financial organisation engaged in funding promoting and developing the industries.

2. It helps within the designing, promoting & developing the industries to fill the gaps within
the industrial development.
3. It provides technical & body help for the promotion, management & enlargement of
business.
4. It undertakes market & investment researches, surveys & techno-economic studies to
contribute to the event of the business.
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Constitution:
1. The share capital of IDBI was control by run until 1975.
2. The share capital was transferred to the government of India and it became government
closely-held establishment.
3. Nowadays government holds seventy two of the share capital LIC, UTI, SBI and EXIM
bank along hold Sep 11 foreign establishment investors third and also the balance is control
by the general public.
Financial Resources: The main sources of funds to the IDBI are some capital, reserves &
surplus, borrowing from run, market borrowing each in India & abroad by supply certificate
of deposits, mounted deposits & financial gain bonds. Ex: IDBI flexi bonds.
Functions: IDBI performs sort of functions all those are teams into three categories:
i) Direct functions
ii) Indirect functions
iii) Promotional activities.
I) Direct functions:
• They embrace, Term loans are provided to the industries for a amount starting from 10-
12 years together with capital.
• Underwriting the securities direct subscription to shares and debentures guarantees the
loan, risk capital.
• Equipment leasing/ lease financing: It provides lease for the acquisition of equipme nts
for amount of 5-8 years.

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II) Indirect function:
• Refinancing of commercial loans to the IFCI, SFC, business banks, SIDC’s and co-operative
banks from 10-25 years.
• Resource support to the money establishments by subscribing shares and lo ans of
economic establishments.
• Discounting of bills.
III) Promotional Activities:
It refers to the efforts taken by the IDBI to market the expansion of industries within the
country by giving help to backward areas, little scale sectors and through different
development of entrepreneurs.
Direct help to backward areas within the type of concessional loans, longer
reimbursement amount, versatile debt equity quantitative relation.
IDBI conducting service of the backward space for assessing the commercial potential,
resource accessible, infrastructure facilities then on. Help to little scale sector industries
includes re-finance to state level establishments, finance to SFC’s, contribution to shares
and debentures, putting in of national equity fund and introducing of single window
theme for grant of loans.
Development of entrepreneurs has been one in all the foremost activities of IDBI by
providing seed capital help, re- finance against loans up to 21lakhs, 100% re- finance in
respect of composite loans, offer of knowledge, preparation of project profiles, technical
and management practice and coaching programs to the entrepreneurs.
Recent Trends of IDBI:
After 1991, IDBI enlarged their activities to hide merchandiser banking (advice & service
for rising capital, issue management informative services for mergers and acquisition and
loan syndication), debentures, trust territory, for-ex services, facility participant, started
subsidiaries, IDBI capital market securities restricted and IDBI investment management
company restricted was started for rising the debt, public issue and investment company
schemes.

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2.3.2.2 STATE FINANCIAL CORPORATION (SFC)
State Financial Corporation are established under the state financial corporation Act of
1951 with the view to providing medium and long term finance to the medium and small
industries. There are 18 SFCs operating in different states of our country.
At the time of setting up of IFCI the necessity to for assisting smaller industrial establishment
has been recognized because it was not possible for a single institution to satisfy the capital
needs of small concerns spread all over the country.
Punjab government took the lead in organizing the financial corporation and setup state
financial corporation in 1953. Gradually, financial institutions started in different states.
Normally, the area of operation of an SFC is confined to one stage to extend financial helps
to small enterprises. However, the activities of some of the state financial corporations cover
the neighboring states / unions territories which do not have SFCs of their own.
To reach the small concerns financial needs SFCs are opened number of regional / branch
officers.
Objectives and Scope:
1. The principle objective of SFC’s is to provide medium short term and long term
financial assistance to small industries particularly in a circumstance when normal
banking assistance is not available.
2. SFCs collectively serve the broad national objectives of economic growth through the
promotion of small industries balanced regional growth and widening of industries
through the encouragement of new entrepreneurs.
3. To provide assistance to new as well as existing industries for the purpose of
establishment, modernization, renovation, expansion and diversification of public

limited companies, private companies, partnership and proprietor concerns engaged in
manufacturing, mining, hotel, road transport, generation and distribution of electricity
development of lands, fishing and to provide technical services.
4. To provide for discounting of bills of exchange and direct subscription to equity as
debentures of industries and to enhance the loan ceiling from 30, 00,000 to 90,
00,000.
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Functions:
1. Granting loans and advances / subscribing to debentures of industrial concerns,
repayable within 20 years.
2. Guarantying the loans raised by the industrial concerns on such terms and conditions
as may be mutually agreed upon.
3. Guarantying of such deferred payment of any industrial concern.
4. Underwrite the issue of shares and debentures.
5. Provides foreign exchange loans.
6. Participating in equity capital of small scale industrial units coming up in back ward
areas.
7. Besides, the SFC A ct as an agent of the Central government, State government, IFCI
on any other institution providing financial assistance to the industries.
Operational policies of State Financial Corporation:
1. Policy on size of assistance is Rs.60, 00,000 in case of co-operative societies.
2. Policy on forms of assistance, through granting and guarantying.
3. Policy on duration of assistance to the maximum of 20 years.
4. Policy on nature of industrial products to be assisted to the small scale units.
5. Policy on security: They provide secured loans on fixed assets.
6. Their interest rate policy: The lending rates of the SFC’s are normally linked to the
bank rate.
7. Policy on assistance to technical entrepreneurs- they provide financial assistance at a
concessional rate to develop technical industries.

2.3.2.3 SMALL SCALE INDUSTRIES DEVELOPMENT CORPORATION OR
STATE INDUSTRIAL DEVELOPMENT CORPORATION (SIDC)
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Constitution:
SIDC are setup in various states under the companies Act of 1956 to later the primary
development needs of tiny, small, village industries in the state.
In Tamil Nadu SIDC was setup in 1970 for the promotional development of small scale
industries in the state.
Objectives:
1. To promote develop medium and small scale tiny and village industries.
2. To extend financial assistance in the form of rupees, loans, underwriting, guarantees,
letter of credit etc.
3. To take up promotional activities including flexibility reports, surveys, training and
development.
4. To provide a package of developmental services like technical guidance, assistance to
plant location, co-ordination with other organization.
5. To provide infrastructural facilities.
6. To setup industrial growth centre.
7. To keep the pace with the changing economic environment.
8. To initiate various measures to expand the scope of their activities.
Functions:
1. Formation of Industrial States: SIDC constructing industrial work sheds with all
infrastructural facilities in selected locations.
2. Marketing assistance: SIDC participates in the tenders floated by the government
departments on behalf of small scale units and obtain order for them.
3. Higher purchase and equipment leasing and scheme: Under this scheme SIDC
renders the package assistance to the allotes of industries for the supply of
machineries and on hire purchase on lease.
4. Export House: SIDC has been recognized as export house it identifies the potential
industrial units supplying export worthy products and prospective buyers of the
product abroad.

5. Industrial development in backward areas: It provides employments to the rural
educated youth’s constructing industrial estates in rural areas in order to develop the
backward areas.
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2.3.2.4 LIFE INSURANCE CORPORATION OF INDIA (LIC):
Insurance organization in India comprise of government organization namely, life
insurance corporation of India and general insurance corporation of India.
LIC was started in India on 1st September 1956 as a fully owned by government of India.
Functions:
LIC collects large amount of funds from the public
and deploys to the savings, the best advantage of the
policy holders for the industrial development as a
whole.
LIC provides funds to the industries in 3 forms:
1. Direct lending to industries: LIC helps small
scale and medium scale industries by granting loans
by setting up of co-operative industrial estates and
provides loans and advances in the form of long term
medium term and short term loans to the industries. Total loan made up to 31st March
2005 was 3152crores.
2. Purchase of Shares and Debentures in the stock market: LIC also finance private
industries by subscribing the shares and debentures till 1964 it was a single large

buyer of the securities of different company’s total investment made by LIC by way
of subscription to share and debentures was 48,000crores as on 31st March 2005.
3. Subscription to the shares and bonds of financial institutions : LIC finance
industries indirectly by investing in the shares and bonds of state level financial
institution like IDBI, IFCI, ICICI etc.
LIC provides financial assistance to state electricity board for power generation by way of
loans or subscription bonds. LIC has been extending financial assistance to state level co-operative
housing societies, housing development corporation, National Housing Bank.
Providing finance for the infrastructure projects pertaining to the port, roads, railways,
airports etc. And other private projects. It was started LIC mutual scheme in June 1989 with a
view to provide various investment media’s to all the investors particularly small investors in
rural and semi-urban areas. It was started LIC housing finance limited in June1989 with the
main objective of providing finance of construction / purchase of individual houses.
47
2.3.2.5 EXIM BANK (EXPORT AND IMPORT BANK OF INDIA)
Constitution: It was started on 1st Jan 1982 to take over the operations of the international
financial wing of IDBI
It provides financial assistance to exporters and
importers and functions as the principle financial
institutions for coordinating the working of other
institution engaged in financing exports and imports
of goods and services.
EXIM bank provides re- finance facilities to the commercial banks and other financial
institutions against their export and import financial activities.
Functions:
1. Financing of export and import of goods and services.
2. Financing of Joint ventures, in foreign countries.
3. Financing of export and import of machinery and equipment.

4. Provides loans to the Indians to enable them to contribute to the share capital of joint
48
ventures in foreign countries.
5. Undertaking merchant banking functions.
6. Providing technical administrative & financial assistance in connection with export &
import.
7. A programme to finance R&D of export oriented companies and concessional interest
rates.
8. Working capital finance for export companies.
9. Financing packages for knowledge based industries such as information technology,
computer software and pharmaceuticals.
10. Cooperation agreement with US EXIM bank for promoting bilateral trade between
USA & India.
11. Cooperation agreement with other developing and SAARC nations.
12. It acts as consultant to share its own experience in institution building.
Objectives:
1. To translate national foreign policies into concrete action plans.
2. To provide alternate financing solution to the Indian exports aiding him his efforts to
be internationally competition.
3. To develop mutually beneficial relationship with the international financial
community.
4. To initiate and participate in debates on issues related to Indians international trade.
5. To forge close working relationship with other export development and financing
agencies, multilateral funding agencies and national trade and investment promotion
agencies.
6. To anticipate and absorb new developments in banking export financing and
information technology.
7. To be responsive to export problems of Indian exporters and pursue policy
resolutions.
8. To utilize all possible financing mechanisms to promote export capabilities including
post shipment credit, export marketing, financing etc.
2.4 MUTUAL FUNDS

49
Meaning
To state in easy words, a mutual funds collects the savings from little investors, invest them
in government and alternative company securities and earn financial gain through interest and
dividends, besides capital gains. It works on the principal of ‘small drops of water build an
enormous ocean’. For example, if one has Rs. O ne thousand to take a position, it's going to
not fetch greatly on its own. But, once it's pooled with Rs. One thousand every from plenty of
others, then, one might produce a ‘big fund’ giant enough to take a position in a very wide
kinds of shares and debentures on a commanding scale so, to fancy the economies of huge
scale operations. Hence, a fund is nothing however a type of collective investment. It's
shaped by the approaching along of variety of investors World Health Organization transfer
their surplus funds to a professionally qualified organization to manage it. To urge the excess
funds from investors, the fund adopts an easy technique. Every fund is split into atiny low
fraction known as “units” of equal price. Every capitalist is allotted units in proportion to the
scale of his investment. Thus, each capitalist, whether or not massive or little, can have a
stake within the fund and may fancy the wide portfolio of the investment control by the fund.
Hence, mutual funds change legion little and huge investors to partic ipate in and derive the
advantage of the capital market growth. It's emerged as a preferred vehicle of creation of
wealth because of high come, lower price and distributed risk.
Definition
The SEBI laws, 1993 defines a mutual funds as “a fund established within the type of a trust
by a sponsor, to boost monies by the trustees through the sale of units to the general public,
beneath one or a lot of schemes, for investment in securities in accordance with these
regulations”.
In step with Weston J. Fred and Brigham, Eugene, unit trusts are “corporations that settle for
greenbacks from savers and so use these greenbacks to shop for stocks, future bonds, short

term debt instruments issued by business or government units; these companies pool funds
and so scale back risk by diversification”.
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Scope of fund
As started earlier, a fund is nothing however a pool of the investors’ funds. The special
feature of a fund is that the contributors and also the beneficiaries of the fund are one and also
the same category of individuals i.e. Investors. No one else will claim that fund. Since the
investors themselves contribute to the pool of fund and revel in it and its fruits, the term
‘mutual’ has been used.
The vital options of a fund are the following:
1. A fund belongs to people who have contributed to it fund and so, the possession of the
fund lies within the hands of the investors.
2. Since all investors cannot participate within the management of the fund, it's left within the
hands of investment professionals World Health Organization earn a fee for his or her
services.
3. The pool of funds collected is endowed in a very portfolio of marketable securities.
4. The investors share within the fund is drawn by “units” similar to shares wit hin the case of
share capital of a corporation. The unit price depends upon the worth of the portfolio control
by the fund. Hence, the worth changes nearly daily and it's known as web plus value.
5. Typically the investment portfolio of the fund is formed in step with the target of the fund.
For instance a sectoral fund invests its funds in a very specific sector adore it sector, oil sector
etc.
Summary
middleman between the savers and borrowers. There are banking and non-banking financial
institutions. There are long term lending institutions such as IDBI, IFC, LIC and commercial
banks lends for short term as well as long term. We understand all of the above how they
function for the economic development of our country. The principle objective of SFC’s is to
provide medium short term and long term financial assistance to small industries particularly
in a circumstance when normal banking assistance is not available. SIDC are setup in various
states under the companies Act of 1956 to later the primary development needs of tiny, small,

village industries in the state. Insurance organization in India comprise of government
organization namely, life insurance corporation of India and general insurance corporation of
India. LIC collects large amount of funds from the public and deploys to the savings, the best
advantage of the policy holders for the industrial development as a whole. EXIM bank
provides re- finance facilities to the commercial banks and other financial institutions against
their export and import financial activities. A mutual funds collects the savings from little
investors, invest them in government and alternative company securities and earn financial
gain through interest and dividends, besides capital gains. It works on the principal of ‘small
drops of water build an enormous ocean’.
KEYWORDS/GLOSSARY
• Financial establishments are the intermediaries World Health Organization facilitate swish
functioning of the national economy by creating investors and borrowers meet. They
mobilize savings of the excess units and assign them in productive activities promising a
higher rate of returns.
• Financial establishments also are termed as money intermediaries as a result of they act as
• Commercial banks accepted deposits and met the short and medium term funding wants of
the business. But now, since 1990’s banks also are funding the future wants of the business
significantly the infrastructure sector. The easement measures initiated within the Indian
economy, diode to the entry of huge non-public sector banks in 1993. This has raised
competition among non-public and public sector banks and quality of services has improved.
• RRBS were established by the regime and also the sponsoring business banks with the
target of developing the agricultural economy. RRBS offer credit facilities and banking
services to little farmers, little entrepreneurs within the rural areas. The regional rural banks
were established with a read to produce credit facilities to weaker areas.
• Foreign banks are in Asian nation from British days. These banks have targeting company
purchasers and are specializing in areas about International banking.
• Indigenous bankers are the forefathers of recent business banks. These are the people or
partnership corporations acting the banking functions. They're the native bankers.
• State money Corporation are established beneath the state money corporation Act of 1951
with the read to providing medium and future finance to the medium and little industries.
51

There are eighteen SFC’s in operation in several states of our country.
• The principle objective of SFC’s is to produce medium short term and future money help to
little industries significantly in a very circumstance once traditional banking help isn't on the
market.
• SIDC are units setup in varied states beneath the businesses Act of 1956 to later the first
development wants of small, small, village industries within the state. In province SIDC was
setup in 1970 for the promotional development of little scale industries within the state.
• LIC was started in Republic of India on first September 1956 as a completely owned by
government of India.
• LIC collects great amount of funds from the general public and deploys to the savings, the
simplest advantage of the policy holders for the economic deve lopment as an entire.
• LIC provides money help to state electricity board for power generation by manner of loans
or subscription bonds. LIC has been extending money help to state level co-operative housing
societies, development corporation, National Housing Bank.
• EXIM bank was started on first Gregorian calendar month 1982 to require over the
operations of the international money wing of IDBI.
• EXIM bank provides money help to exporters and importers and functions because the
principle money establishments for coordinative the operating of alternative establishment
engaged in funding exports and imports of products and services.
• EXIM bank provides re-finance facilities to the business banks and alternative money
establishments against their export and import money activities.
• The main sources of funds to the IDBI are some capital, reserves & surplus, borrowing from
run batted in, market borrowing each in Asian nation & abroad by supplying certificate of
deposits, mounted deposits & financial gain bonds. Ex: IDBI flexi bonds.
• A fund belongs to people who have contributed to it fund and so, the possession of the fund
lies within the hands of the investors.
• Mutual funds collects the savings from little investors, invest them in government and
alternative company securities and earn financial gain through interest and dividends, besides
capital gains.
52
2 marks questions
1) What are financial institutions?

……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
…………
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2) What is banking?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
………
3) State the two objectives of IDBI?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
………
4) What is non-banking?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
………
5) What is EXIM bank?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
………
6) Define mutual fund?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……….
7) Identify from the picture Indian and foreign banks

54
5 marks questions
1) State the functions of IDBI.
2) Discuss the objectives and functions of LIC.
3) Explain the functions of EXIM bank.
4) Write a note on mutual fund.
5) What are the differences between banking and non-banking?
SUGGESTED BOOKS/ ARTICLES
1. Meir Kohn: Financial Institutions and Markets, Tata mcgrah Hill
2. L M Bhole: Financial Institutions and Markets, Tata Mcgrah Hill
3. D.K. Murthy &Venugopal : Indian Financial System , I.K. Intl
4. M Y Khan: Indian Financial System, TMH
5. E Gardon& K Natarajan: Financial Markets & Services.

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Unit 3
COMMERCIAL BANKS
Structure
3.1 Introduction
3.2 Functions of Commercial Banking
3.3 Types of Deposits
3.4 Lending of Funds
3.5 Discounting of Bills of Exchange
3.6 Investment of Funds on Securities
3.7 Creation of Credit or Creation Of Money
3.8 Secondary Functions of Commercial Banks
3.9 Miscellaneous or General Utility Services
3.10 Investment Norms
Introduction – Role of Commercial Banks – Functions of Commercial Banks – Primary
Functions and Secondary Functions – Investment norms
Objectives of the study:
You understand the role and functions of commercial banks. Commercial bank receives
deposits for the purpose of lending. You will understand different forms of deposits such as
savings, recurring and fixed deposits. You also understand cash credit, overdraft and the rules
related to borrowing of loans and advances. Some of the non-banking operations of bank.
3.1 Introduction
Commercial banks are the oldest banking establishment within the organized sector. They
represent the predominant section of the banking industry in India.
BANK
A bank may be a financial organisation that deals in financial. It means a bank receives
financial within the variety of deposits from the general public and lends financial for
development of trade & commerce.

56
BANKER
Dr. H.L. Hart (Native of England) defines the term banker as “one World Health
Organization is within the normal of his business honourscheques drawn upon him by
persons from & for whom he receives financial on accounting.”
BANKING
Consistent with Section five (1) (b) of the Banking Regulation Act of 1949, the term banking
is outlined as “Accepting for the aim of disposal or investment of deposits of financial from
the general public owed on demand or otherwise & withdrawable by cheques, drafts, orders
or otherwise.”
FINANCIAL INSTITUTION
Section 5(1) (c) of the Banking Regulation Act of 1949, defines the term financial institution
as “Any company that transacts the business of banking in India.”
BUSINESS BANKING
It refers thereto banking that thinks about with the acceptance of deposits from the general
public owed on demand or once the ending of sure amount & the granting of chiefly short
term credit to trade, commerce and trade through a network of branches throughout the
country.
3.2 Functions Of Commercial Banking
The operate of business banking is loosely classified into 2 classes, viz.,
A. Principal/Primary/Basic/Fundamental operation.
B. Subsidiary/Secondary/Supplementary/Ancillary operation.
A. Primary functions
The primary functions of business banks are referred to as ancient functions or core
functions. They are the following:-
1) Acceptance of deposits from the general public.
2) Lending of funds.
3) Investment of funds on securities.
4) Creation of credit/money.

57
5) Use of cheque system.
6) Remittance of funds.
I. Acceptance of deposits – supply of funds:-
Accepting deposits is one amongst primary operate of an advertisement bank. Banks receive
deposits from people, households, & company & non-corporate customers, government &
different agencies & therefore, they mobilize the savings within the country for productive
functions. Business banks provide totally different sorts of deposits to suit to the wants of
various classes of consumers. Deposits function the main supply of provide of funds to the
business banks. The various sources of provide of funds to the business banks are:-
i) Deposits of varied sorts.
ii) Borrowings from the Federal Reserve Bank of India.
iii) Borrowings from different monetary establishments.
iv) Borrowings from fellow bankers.
v) Borrowings from abroad.
3.3 Types of Deposits
Banks also are referred to as custodians of public financial. Basically, the financial is
accepted as deposit for keeping. However since the Banks use this financial to earn interest
from those that want financial, Banks share a neighborhood of this interest with the
depositors. However, accepting deposits and keeping track of the financial involves lots of
book-keeping and different operations.
The deposits are of various types:
Saving deposits
Saving accounts are opened for the aim of mobilizing savings. This account is also single or
joint. But, the speed of interest is low i.e., 4-5% p.a. Withdrawals are subject to sure
restrictions. It is appropriate for earnings and wage earners.
Fixed deposits

Fixed depos its are depos its at one t ime for a fixed per iod spec ified in advance.
The rate of intere st is high whic h var ies wit h the per iod of depos its. No
withdrawa l is a llowed during the pe r iod. The depos itor get a fixed depos it
rece ipt which is non-transferable. Those who have a surplus fund open fixed deposit
account.
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Current deposits
– Bus ine s sme n ope n c ur re nt a c co unt to ope ra t e any numbe r o f t imes
during a working da y. It is a lso ca lled demand depos it account beca use bank has
to re turn the depos it on demand. Withdrawa ls are free ly a llowed. No interes t is
paid. In fact, there are services charges. Overdraft facilities are given in case of current
accounts only. Businessmen operate it.
Recurring deposits
– I n r e c u r r i n g d e p o s i t a c c o u nt a c e r t a i n s um o f mo ne y i s
periodically deposited into the banks. Salaried persons and petty traders operate such type of
account. Withdrawa ls are pe rmitted only a fter the expir y of ce rta in per iod. A
high rate of interest is paid.
3.4 Lending of Funds
Lending of funds constitutes the main business of commercial banks. The major portion of
the funds of commercial banks is employed by way of advances, as advances from the
primary source of profits for banks. Banks lends funds to the public by way of
A) Loans.
B) Overdraft

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