Money: Bank and Funds

Money is a fascinating object. The process of creating currency and using money has always gene placed enthusiasm amongst mankind for over thousands of years. The main reasons for such enthusiasm ar built around the dynamics of the higher up process. Even more fascinating is the fact, that this process is perhaps the just now subject that is foxing both the pundits and the commoners alike. Such being the importance of money, any narration regarding the process shall always pass on enough excitement. Keeping this in emplacement, the role and importance of pecuniary intermediaries is being featured for the benefit of readers.A glimpse of this coverage is translated in the following pages to lead them to a wider canvas. Financial Intermediaries Financial intermediaries childs play a vital role in building economies. World over, in distinguishable economies it is typical to find that the sources of cash and the uses of currency be not one and the same. This process is as we ll as so complexly structured that eyepatch individual discontinues comprise the major source of cash to the market, the utilization of funds is done by varied firmaments in the economy. Capital formation comprising of Savings and investing holds the key to this process.In this causal sequence, Savings play the role of the initiator. The ability of an economy to generate savings depends on the combined abilities of the general domain and the government. It is here that the pecuniary system comes into play by converting the savings into productive results. Significance of Financial mediation The savings process is facilitated by the financial Intermediaries. In simple terms, financial intermediaries come the turn tail of facilitating supply of funds to the user of funds, by obtaining the same from the depositors or savers of funds.The term financial intermediaries includes contrasting institutions like Banks, Insurance companies, Investment companies, Developmental Fin ancial Institutions, Non-banking Finance Companies, Mutual funds, Pension funds etc. While the role of above institutions is singular with respect to financial intermediation, the functions that ar carry outed by each one of them ar diametrical. In a nutshell, these types of intermediation revolve around liquid position of funds, risks in loans, and pooling of risks to take set of economies of scale.To sum up, the function of financial intermediation has arisen out of the ingest on the part of savers to reach the investors and the inability of investors to find savers. highly-developed economical systems may not require the look at of full-fledged financial intermediaries, unlike the developing systems. This is payable to the fact that the gap between the saver and the investor is absolutely minimal. This is referred to as financial disintermediation. The process of financial disintermediation is exceed achieved by reducing the cost of funds in that respectby facilitati ng direct capital formation, which spurs economic growth.The greatest advantage in this process is the fact that it reduces the time gap between saving of money and utilization. The process of financial intermediation is always fraught with risks. Risks both for the givers of funds and the takers of funds, be views the risks for financial intermediaries themselves. The risk factor arises in the first place out of the affect for the availability of information and in the second place the need for players to be aware of the available information. Consequently, the need for regulations and the role for a regulator are felt.Financial Intermediation in Indian context In India, without exception, a single type of intercessor does not perform the task of financial intermediation. Different types of financial intermediaries exist and their functions are discussed below. Banks Banks comprise the oldest form of financial intermediaries in India. The Indian financial scene is dotted with a n umber of banking institutions. All these banks are segregated into dissimilar categories. This segregation has been done on the basis of their incorporation and the businesses performed by them.Consequently, we have dissimilar kinds of banking institutions. These are i. technical banks, ii. Regional Rural Banks, iii. Local Area Banks, iv. Co-operative banks. The above sort refers that banks have been divided low assorted types depending on the need to achieve the different economic objectives. While making the above classification, geographical factors, need for sectoral deployment of funds involving allocation of funds for Agriculture, Industry, and Service sector etc. have been taken into consideration.However, gradually, the needs of industrial sector have become so huge and complex that separate institutions have been set up for farming the industrial sector. Development Financial Institutions (DFIs) Deployment of funds in the Industrial sector is a major challenge. Indus trys requirements vary depending upon their short-term and long-term needs. The activities of short-term lending and long-term lending are separate and vary functions. After chthonianstanding this finer aspect, the brass of India took initiative to set up specialized institutions for this purpose.For this reason, we find that most of the DFIs such as the Industrial Development Bank of India (IDBI), are statutorily formed. These institutions provide finances for most of the greenfield projects in the Indian economy and have made a significant contribution by way of financing long term projects. It is significant to note here that DFIs have been influenced by the changes in the Indian banking scenario to such an extent that these institutions are conlemplating to become universal banks. Insurance Companies The path of rehabilitation in the Banking industry has also caught up with the other intermediaries as well.In this respect, Insurance industry is witnessing path-breaking chan ges. In fact, in many countries Insurance companies perform a leading role as financial intermediaries. In India, Life Insurance Corporation of India (LIC) continues to play a very vital role in mobilizing savings and delivering Insurance, though the industry is experiencing the competition from players both Indian and Foreign. With the entry of banks into the arena of insurance business it is fire to find the beneficial impact of convergence of banking and insurance business.Non-Banking Finance Companies (NBFC) The process of Intermediation approximately begins at home, with the household sector. This sector is the basic source of funds for the intermediaries. Such being the important role of the households, NBFCs as independent institutions, have come into existence to meet their financial requirements. The services offered by the NBFCs cater to the self-colored gamut of needs of the household sector in particular and savers in general. * Emerging Disintermediation in India** W ith a rapid growth in the intermediation process, the need for financial disintermediation at some stage cannot be overlooked.Realizing in full well that developed systems find lesser need for financial intermediation, in the Indian context the insurance policy reforms aimed at encouraging free market institutions have been moving the financial markets towards disintermediation. The onset of the process of economic liberalization in 1991 has brought about a sea change in the financial markets. The abolition of the office staff of Controller of Capital Issues (CCI) and the establishment of Securities and Exchange Board of India (SEBI) in 1992 was done essentially with a view to giving an impetus to the capital markets.The market happenings in 1992-94, did strike a hard blow to this mechanism. During the medieval three years the process of consolidation has begun. Though a reduction in the number of IPOs does suggest to a s deprivationening of the Capital markets, there is also a brighter side of investors becoming more suave. Sources of bullion A discussion on financial intermediaries has to begin with the raw material for this activity, i. e. funds. Financial intermediaries are undeniable to raise funds in order to fulfill the needs of both fund-based and non fund-based activities.Considering the various sources and choices available, the financial intermediary considers the following variables in deciding about the ways and means of natural elevation funds. These are Maturity, Cost of funds, levyation implications, regulative framework and Market conditions. Maturity is vital since the intermediary has to plan for the repayment of debt. Since investors look for returns as against the intermediary looking for good spread and income, Cost of funds turns out to be crucial.Tax interference on returns on some of the instruments could be different with reliable exemptions Thus, Tax implications are useful for tax planning for both the intermediary an d the saver. The instruments have to fulfill a plethora of rules and regulations which require the knowledge of Regulatory framework. For designing a particular type of instrument knowledge of Market conditions is essential. Different Sources of Funds In addition to providing low-cost funds, the shareholder route is a popular and easy way for the common public to become owners of companies.As the name suggests, the money belongs to the shareholders. Financial institutions have been innovating different methods for raising money from the prospective shareholders. Reserves is another source of funds. Incidentally, it is to be known that some of the Reserves are created statutorily. Borrowing by a company is another source of funds for the company, which are repayable with interest. Unlike equity, the funds raise by way of loans are to be repaid. ** **Sources of Funds unique to a Bank The previous classification of sources of funds does not fully explain the avenues for Banks.By virtu e of being one of the earliest financial intermediaries, and possibly the most prudent as well, banks have a privileged access to a few more instruments. Considering the fact that different types of financial intermediaries have accessibility to varied types of funds at different rates of interest, it has become necessary for the RBI to lay down norms in this regard. Financial Intermediaries look towards liquidity in the market for enhancing their scope of operations. However, liquidity is a double-edged knife.Excess liquidity or lack of liquidity affects the financial system resulting in either a reduction or an increase in the rate of interest. The cyclical effect is felt by the economy. For admitling liquidity levels in the economy, RBI exercises control through the mechanisms of CRR and SLR. CRR is the reserve to be maintained by banks with the RBI. SLR is the reserve that is maintained by banks for investment in cash, gold or unencumbered approved securities. Deposits The cust omers confidence level reflects the strength of a bank. There is no better way of reflecting the same by any other indicator than Deposits.In the wake of globalization, the avenues for banks for raising funds in the capital market have increased, both in the national and international markets. In terms of value to the Banking system, banks that have a greater deposit base have more value than the banks with a poor deposit base. Banks accept deposits in different ways. Such acceptance could be different in terms of the period, amount, rate of interest and the type of depositor. All the deposit accounts could be classified down the stairs Transaction accounts and Non-transaction accounts. The types of accounts that a customer individually, jointly or corporate can have, are varied.Having said that Deposits are an important source of funds for the banks, a banker is wary about the types of deposits. A term deposit is a dependable source, but the cost is higher than Demand deposits th at are low cost funds for the banks. Consequently, the report of deposits has a direct impact on the profitability of the bank. Application of Funds The real challenge for the financial intermediaries begins at the very end of the first stage i. e. after mobilization of deposits. The meter virtually starts sound from that time onwards since the deposits are to be repaid by the bank to the customer after a certain period with interest.In order to honor this commitment, financial intermediaries use their funds in different ways. Broadly, the purposes under which they are used can be classified under i. loans and advances, ii. investments, iii. fixed assets. Loans Loan is a decided activity wherein funds are taken from the saver and given to the investor. By nationalizing major banks in 1969 and 1980 Government of India sought to direct the utilization of bank funds for socially disired, objectives reflected in priority sector lending. antecedency sector lending includes Agriculture and Small Scale Industry as focus areas that would promote straightforward development of regions and promote employment avenues. Loans can be classified as secured loans and unsecured loans based on the availability of security or otherwise. Investments The best way to earn attractive return on money is by following an Investment strategy. Since banks have to service their borrowings and deposits at a reasonably good rate and put the funds into more profitable use, Investments in securities offer an option, though in many instances, this is a statutory requirement.There are three main reasons for the Banks to invest in government securities. These are (i) in faux pas need arises government securities meet the liquidity requirements of a bank (ii) it forms a second musical note of security, for emergency borrowing from RBI, and (iii) for meeting statutory SLR requirements, aimed at protecting the interests of depositor. Banks are also selectively restrict from investing in equi ty shares. Investments are made in equity shares either through primary winding issue or by secondary market. Investment initiatives in equity by banks are expect to boost a sagging capital market.Apart from the primary functions of deposit collection and lending, banks also perform treasury operations. The necessity arises out of liquidity compulsions in operations. Banks invest in bonds and debentures as a part of their regular treasury operations and also on behalf of customers. Fixed assets however, make water a very baseborn amount of investment by banks. The Management of Financial institutions revolves around two basic functions i. the ability of the intermediary to raise funds, and ii. to deploy them. These two activities determine the sustenance as well as profitability of the intermediaries. add Function Apart from the fact that Lending constitutes the major source of income for the bank, the process of lending also depends on the bankers appraisal skills. The banks fun ds can be applied in two major areas i. e. investments in securities and recognition accommodation. In the process, banks essentially look to balance the spreads. Apart from the necessity of complying with the regulatory prescriptions, requirement of profitability virtually forces banks to develop an organized credit deployment mechanism. The credit policy of banks is determined by the demand and supply of loanable funds of banks.Firstly, on the demand side of the economy there are the consumers of goods and services. Secondly, the need for credit comes from the corporate sector in the manufacturing, trading and services sectors. acknowledgment management is a specialized area. This is due to the fact that there are different types of credit, and each type of credit is characterized by certain unique factors. Loan is a broad term used to explain the different types of credit facilities short/medium term increase in the credit market. The selection of the type of loan by a borrow er depends on three factors namely, need for credit, cost factor, and cash flow requirements.Since a loan has a demand side and supply side as well, loans can be classified accordingly. Demand side loans will be individual loans magical spell Supply side loans can be classified as commercial loans. As in the case of a borrower, for the bank, providing the loans depends on three factors, namely the nature of credit, the type of security and the purpose of loan. Based on these parameters, further classification of the banks advances is done. Loans are also further classified under secured and unsecured loans. Banks have been providing advances to different sectors of the economy and at the same time providing loans to the needy sectors.The sectoral classification of bank loans is made as under i. priority sector, ii. public sector, iii. banking sector, and iv. others. Loan Appraisal and Disbursal Preliminary appraisal involves an analysis of the market, technology, financial, and man agerial skills of borrowing. in one case the bank decides to finance, other critical issues are the decisions relating to the mode of financing. Finance is given for land, site development, building, plant and machinery and also for working capital. Banks arrive at the amount of Maximum Permissible Bank Finance (MPBF) through various appraisal methods. **Non-fund Based Services*Non-fund based Services Non-fund based advances in the form of Letters of Credit and Guarantees offer a very attractive proposition to the banker. Since funds disbursement arises only on failure or the happening or non-happening of an event, bank holds only contingent liability. Payments and clearing operations Clearing and remittences constitute important services under ancillary services. The major role of a bank involves mobilizing savings and channelizing them into investments. Complementing these activities are ancillary services of the banks which facilitate the entire payment and settlement system of financial transactions