- .,.

Cha
Chapter

UNIT-I
1. Indian Financial System 1-32
2. Financial Markets and Regulatory Framework 33-68

UNIT- II
3. Banking Institutions and RBI 69-87
4. Development Banks and Commercial Banks 88-153

UNIT- Ill

s. Introduction to Insurance and Insurance Sector 154-187

6. Life Insurance 188-203
7. General Insurance and Innovations in Sector 204-221
,
UNIT-IV

8. Introduction to [Link] Fund 222-248

9. Analysis of Mutual Fund 249-263

Model Question Paper 264-265

Answers to_the puzzle on Banking Words 266

.,._JI•
 • I: FINANCIAL SYSTEM

Chapter 1

INDIAN FINANCIAL SYSTEM

► Introduction to Financial System

► Role and Importance of Financial System in Economic

Developmen·t

► Functions of Financial System

► Growth and Development of Indian Financial System

► Constituents of Indian Financial System

► Types of Financial Services

► Characteristics of Financial Services

► Scope of Finandal Services

► _Financial intermediaries in Capital Market

► Financial Innovation

► Challenges Faced by Financial' Sector

► Challenges to Regulation and Supervision

► Challenges in Payment and Settlement Systems

Summary
Questions
 i QUESTIONS I
(I} NII In the blanks:
(a) Which of the following are functions of a financial system?
(I) The operation of a payments system.
(ii) Providing the means of portfolio adjustment.
(ill) Helping to reduce unemployment.
~ Channelllng funds between lenders and borrowers.
(v) Helping speculators to bet on price movements.
(b) Which of the following are characteristic of a financial intermediary?
...J It introduces borrowers to lenders. · .
(ii) It has assets which exceed liabilities. ·
(iii) It increases liquidity for lenders.
(iv) It reduces 'transaction costs for borrowers and lenders.
(v) It makes excess profit.
(c) The central banking functions in India are performed by the
(i) Central Bank of India · ,
~ Reserve Bank of India
(iii) State Bank of India
(iv) Punjab National Bank
(d) The BSE Sensex con_?.ists of a pasket of _ _ _·_ stocks.
(i) so
(ii) 100
~ 30
(iv) 66
(e) ____ is the function of financial system
J Saving ·function
(ii) Nationalization of financial institutions
(iii) Establishment of Development banks
(iv) Intermediaries control . ·
· deals with short term daims with a maturity of lels thlft
-----
~at.
 P'rlm•ry~
Secondary ~arket ·
(Iv) Capital Market
(I) The _____ deals In new financial claim; thllWurtf ft
new Issue market
(I) Money Market
~ ,Pri_mary Ma,rket
(iii) Secondary Market
(iv) Capital Market
(h) - act' as intermedia_ries in purchase and sale of securit'
in the primary and secondary markets.
(i) Underwrite'rs
, &(
l

·Merchant Bank~r '(

(iii) Broker ~

(iv) Factoring
(i) _ _ _ _ is the purchase of exporter's receivable~ at a discounted
._· price by paying cash.
(i) Underwriters
(ii) Merchant Banker
. . · (iii) Forfeiting
. '"'~ Factoring
·(j) ---,---- agrees to take a specified number of shares or
debentures offere~ to the public, if the issue is not fully subscribed
by the public
(i) Underwriters
· !~~Merchant Banker
J,Ki) Forfeiting. .
. (iv) Factoring
[Ans.: (a - iv), (b - · i), (c ~ ii), (d - iii), (e - i), .(/- i), (g - ii), (h - ii},
(i - iv), (j- iii)] .. ·
!----
(2) True or Fal·se:
(a) Stocks are securities that are a claim on the earnings and assets
corporation. T
Financial system is a set of complex and closely interlinked
1nstitutions, financial markets, financial instru~ ~ .,.
which facilitate the transfer of funds. h
 I, M•ment cyde is now T+1. -f
IUlt,the leader of the financial system, was established as a private ; .
Institution in 1945.
(e) Financial Innovation is a broad term that is used to describe the
generation of new and creative approaches to different financial
circumstances.
(f) Bill Discounting is the purchase of exporter's receivables at a
discounted price by paying cash.
+
(g) Fund based and fee based are types of financial services.
(h) Secondary market deals with ,listed securities.
(i) Financial instruments are those instruments issued by government. ~
(j) Mutual fund is a way of reducing your potential financial los~ or
hardship.
[Ans.: (a) True, (b) True, (c) False, (d) False, (e) True, (!) False, (g) True,
(h) True, (i) False, (j) False.]
(3) Match the Columns:
Column 'A' Column 'B'
(a) Financial Market (i) Risky Capital ~
(b) Primary Market 6 (ii) 1935 r
(c) RBI ?, (iii) LeaseFinancing r1,
(d) Fund Based ?., (iv) Fee-Based Services ~~
(e) Merchant Banking !.-)- (v) Capital & Money Market t:
(f) Venture Capital j_ (vi) New issue market 0 I

(g) Equity Shares 'L (vii) Money Market ~

(h) T-Bill .7 (viii) Capital Market i
(i) Securitization 10 (ix) Financial lntermediar!es J
(j) Banks q (x) Financial Innovation I
[Ans.: (a - v), (b - vi), (c - ii), {d - iii), (e - iv), (f - i), (g - viii), (h - vii), (i - x),
(j - ix)}
(4) Fill in the Blanks:
(a) _ _ _ _ is a set of complex and closely connected or ln~ermixed
institutions, agents, practices, markets, transactions, claims and
liabilities in the economy.
 Viand'•™ Bas cs of Flnandal servitii
x Institution to
(1:) _ _ _ _ has been set up In July 1 88 as an ape
ote housing
mobilise resources for the housi".18 se or and to prom
finance Institutions.
for buying and selling of
id) The arrangements that provide facilit ,~es
_ _ _.
financial claims and services are known as _
efore it is called new
(e) _ _ _ _ deals in new financial claim; ther
issue market.
a mat urity of less than
(f) _ _ _ _ deals with short term claims with
one year.
ntial financial loss or
(g) _ _ _ _ is a way of reducing yov r pote
'
'

hardship~
issuers of capital and
{h) _ _ _ _ act as intermediaries between the
the investors who purchase these securities.
re there is a substantial
(i) Capital that is invested. in a project whe
of profits and cash
element of risk relating to the future creation
flows is known as - - - -
n, touched or heard which
{j) Services are those which cannot be Sf~e
means they are _ _ _ _ in nature.
Nat iona l Housing Bank {NHB),
[Ans.: (a) Financial System, (2) 1949, (c) The
arket, (f) Mon ey Mar ket,
(d) Financial Markets, (e) Primary M
1

ture Capital, (j) Inta ngib le]

(g) Insurance, (h) Mer cha nt bankers, (i) Ven
~ of Financial System?
(5) Explain in detail the role and importance
ncial System?
(6) Wh at are the various Functions of Fina
in the financial system?
(7) Explain various financial services offered
t of Indian financial system?
(8) Phase out the gro wth and developmen
an financial System?
(9) Elaborate the various constituents of Indi
lved in financial system.
(10) State·various financial ,intermediaries invo
U.U What are the characteristics of financia l services?
tft) Wh~t are the various challenges faced ~Ivfinancial s~ctor?
••llntn in detail Scope of Financial Serv es?
l'IOtes on:
19lllllln4'1Vation.
f ...

Chap

FINANCIAL MARKETS AND

REGULATORY FRAMEWORK

► Introduction

► Introduction to Financial Markets

► Classification of Financial Markets

o Organized and Unorganized

o Capital and Money Market

o Primary and Secondary Market

► Factors Responsible for Growth of Capital Market in India

► Role of Capital Market

► Regulatory Framework for Financial Markets

► RBI: Role and Functions

► SEBI: Objectives, Composition, Powers and Functions,
Achievements
► Securities Contracts (Regulation) Act, 1956
► Organizations regulating securities markets in India:

Summary
Questions
 ~ lmPOrtant money markei l~~ lf.,~ .- •
money, treasury bill, commercial paper, cert

lnstltu tlons, financial markets, financial instruments and flnanda1

services are all regulated by regulators like Minist ry of Finance, the
Company Law Board, RBI, SEBI, IRDA, Dept. of Economic Affairs,
Department of Company Affairs etc. The two major Regulatory and
Promotional Institu tions in India are Reserve Bank of India (RBI) and
Securities Exchange Board of India (SEBI).

II QUESTIONS II
(1) Fill in the· blanks:
(a) _ _ _ _ is mainly used by the banks to meet their temporary
requir ement of cash.
(i) Short money
~ ii) Call money
(iii) put money
(iv) financial instruments
(b) _The Primary Marke t consists of arra-ngements, which facilitate the
prqcu remen t of long-term funds by companies by making
of shares and debentures.
----
.J fresh issue
(ii) IPO
(iii) secondary issue
(iv) Public issue
(c) Certificate of Deposit (CDs) are short- term instruments issued by

(i) Development banks

) Commercial banks
Cc>-operative banks
RRB's
 :.....------- II an unsecured instrument issued fn Ille
twomINDf'Y note.
Cl) Development banks
(II) Commercial banks
'9") Commercial Paper
(Iv) RRB's
(e) A _ _ _ _ is a promissory note issued by the RBI to meet the
short-term requirement of funds.
vfl) Treasury bills
(ii) Commercial banks
(iii) Com,:nercial Paper
(iv) RRB's
(f) RBI has been given the statutory function of _ _ _ _ on a
monopoly basis.
(i) Treasury bills
, jii) Note issue
(iii) Promot)onal activities
(iv) RRB's
. (g) _ _ _ _ is the nodal agency to regulate the capital market and
other related issues in India.
' '

(i) RBI
~ SEBI
(iii) Promotional activities
(iv) RRB's
(h) _ _ _ _ plays an equally important role in mobilising long-term
funds by providing the n·ecessary liquidity to holdings in shares and
debentures.
(i) fresh issue
(ii) IPO

(iii) secondary issue

'-"') Secondary Market

(I) In the _ _ _ _ there are standardized rules and regulations

governing their financial dealings.
fresh issue
 ~ Oraanlzed Markets
(Iv) Secondary Market
O) In the _ _ _ _ there are no standardized rules and r
governing their financial dealings.
I
(I) fresh issue

~ ) Unorganized Markets
(iii) Organized Markets
I

(iv) Secondary Market

[Ans.: (a - ii), {b - i), (c - ii), (d - iii), (e - i), (!- ii), (g - ii), (h - iv), (i . _
(j-ii)J
(2) True or False:
(a)

(b)
The primary market deals in new financial claim; therefore it is call
new issue market.I
Money market includes the Treasury Bill Market, Call Money Mark
I
and Commercial Bill Market and Government Bond Market. T
(c) Call Money is a promissory note issued by the RBI to meet the sho
term requirement of funds. ;:.=.
(d) Commercial paper (CP) is a popular instrument for financing worki
capital requirements of companies.
(e) SEBI came into existence on 1st April, 1935 as per the Reserve Ba
of India act 1935. f
(f) Department of Economic Affairs (DEA) is responsible for ~
economic management of the country and is the arm of
government that is concerned with the orderly functioning _of
financial markets as a whole. T
(g) Cash Credit is mainly used by the banks to meet their tempo
requirement of cash. f
(h) Ministry of Corporate Affairs (MCA) which is at the apex of a
tier structure that has responsibility for the registration
oversight of incorporated entities J
(i) Banking regulation Act to prevent undesirable transact'
securities by regulating the business of dealing therein, by
for certain other matters connected therewith. F
 Rtgulltoty FranieYlork l f f"
':°"'"'en:laJ Paper are highly liquid instruments, that means, at any
time the hol~er can transfer of or get it discounted from RBI.
t
/Ans.: (a) True, (b) True, (c) False, {d) True, (e) False, (/) Truet (g) False,
(h) True, (i) False, (j) False]
(3) Match the Columns:
Column 'A' . Column 'B'
(a) Unorganized Markets (i) Central Bank h
(b) Capital _Market (ii) Short term borrowings ~
(c) Money Market (iii) Long term borrowings b
(d) Call Money (iv) 1949 J
(e) ·T-bills (v) Investor Protection j'
(f) Commercial Paper (vi) Issued by Commercial Banks '7
p . C-. -'
(g) Certificate of deposits (vii) rom,ssory note ·
(h) RBI (viii) Indigenous Bankers r~
(i) SEBI (ix) Liquid Instruments f
(j) Banking Regulation act (x) Daily basis ri.
[Ans.: (a - viii}, (b - iii), (c - ii}, (d - x}, (e - ix}, (f - vii), (g - vi), (h - i), (i - v),
(j - iv)}
(4) Fill in the Blanks:
(a) _ _ _ _ is the queen bee of the Indian financial system which
influences the commercial banks' management.
(b) NABARD was set up in [Link] _ _ __
(c) _ _ _ _ is a Systemically Important Payment System (SIPS)
where the inter-bank payments settle on a 'real' time and on gross
basis in the books of the RBI.
(d) _ _ _ _ is a Central Counterparty (CCP) which was set up in April
2001 to provide clearing and settlement for transactions in
Government securities.
(e) _ _ _ _ provides a degree of protection to the investors and
safeguard their rights.
(f) _ _ _ _ is a security derived from a debt instrument, share,
loan, whether secured or unsecured, risk instrument or contract for
differences or any other form of security.
co-extensive with the stock market and it is also wider
----
tltltl the stock
is
markets.
 Vl,-1'•™ Basics of Finandat ~_,..•

lflfflary Market is also knows as _ _ _ _ market.

(I) 4nte tnarket where securities are traded known as --- -
0) Securities market is · divided into _ _ _ _ and
market.
(Ans.: (a) Rese"(e Bank of India, (b) 1982, (c) RTGS, (d) CC/L, (e) SEBI,
(/) Derivative, (g) Capital market, (h) New issue, (i) Securities market
(j) Primary and Secondary market]
(5) Explain in detail the organized and unorganized financial markets?
(6) Elaborate capital markets and its instruments?
(7) Elaborate money markets and its instruments?
(8) Explain in detail the ·operations of Primary market in India?
(9) What are the various·operations carried out in Secondary Market?
(10) What are the factors responsible for growth of Capital market?
(11) Elaborate the role of capital Market in economic development?
(12) Explain in detail the regulatory framework for financial markets?
{13) What are the powers of SEBI as a regulatory institution?
(14) Describe various functions of RBI being Centr~I bank of Indian economy?
_(15) State promotional functions performed by RBI.
' '

(16) Write short notes on:

(a) RBI.
(b) SEBI.

ill
l _1

• H: COMIIEIICIII. I I ,
I'

, i
I

AND DEVELOPMENT BANIS

Chapter 3

BANKING INSTITUTIONS AND

RESERVE BANK OF INDIA (RBI)

► ·introduc tion to Banks

► Importa nce of Banks

► History of Indian Banking Sector

► Indian Banking sector

► Classification of Banking industry..

► Reserve Bank of India

0 Organization and Manage ment of RBI

► Commercial Banks
o Schedule Banks
o Non Schedule Banks

► Co-operative Banks

► Foreign Banks

► Regional rural Banks

► Summa ry

► Questions
 •m-•
tNti~ 1934. Those b
schedule of the Reserve Bank
tdu'" banks.
Nnb •r• a part of the set of institutions, which are enpltd
II -dna rural and agriculture development.. The foreign banks are
branches of Joint stock companies incorporated abroad, but operating in
tndta fhe government of India set up Regional Rural Banks (RRBs) so as to
provide credit to the weaker sections of the rural areas, particularly the
small and marginal farmers, agricultural labourers, and small
entrepreneurs.

II QUESTIONS II .
(1) Fill in the blanks:

· (a) Banking Regulation Act, 1949 conferred wide powers upon

_ _ _ _ to supervise and control affairs of banking companies in
India.
(i) Comr:nercial banks
~RBI
(iii) Private banks
(b) _ _ _ _ is chairman of central board of directors of RBI.
~ Finance Mini~ter
(ii) Governor
(iii) President
(c) _ _ _ _ means a b~·nk included in the second schedule of the
Reserve Bank of India Act, 1934.
(i) Schedule
~ Non-Schedule
·\
(iii) Co-operative
(iv) Commercial
Those banks wh,
:h are not included in the second schedule of the
.Reserve Bank of India Act are termed as
Schedule
----
 __.__ art I Plrt of th• set of Institutions, which are
1ft ftnancln1 rural and agriculture development.
fl) f Schedule
(II) Non-Schedule
vAffl} Co-operative
(Iv) Commercial
(f) The Central Co-operative Bank works at the Level.
(i) Base
----
(ii) first
(iii) Co-operative
~ Apex ..

(g) The _ are branches of joint sto·ck companies incorporated

abroad, but operating in India
(i) Schedule
..JR( Foreign
(iii) Co-operative
(iv) Commercial
(h) All presidency banks were amalgamated to form the Imperial Bank
of . India which was run by European Shareholders in the year

(i) 1990
✓i 1921
(HO 1935
(iv) 1949
(i) _ _ _ _ banking structure is viewed as a vehicle for
democratization of the Indian financial system.

(i) Schedule
(ii) Foreign
· ~ Co-operative
(iv) Commercial
[Link].: (a~ ii), (b _ i), (c- ii), (d- ii), (e - iii), (/- iv), (g- ii), (h- ii), ti· -;ii}]
 w,. l'a™ Basia of flnlnc:flttWafer,~- ,
Iii
True or F11H:
ed by the Government
(1) Since n1tlon1Hz1tlon In 1949, RBI ls fully own
of India. 'f
of money lenders anct
(b) The organized sector is largely made up
Indigenous bankers F
the second schedule Of
(c) A scheduled bank means a bank [Link] in
the Reserve Bank of India Act, 1934 J

(d) The Central Co-operative Bank works at

the apex Level. F
been set up to supplement
(e) The Regional Rural Banks (RRBs) have not
s to provide credit to
the efforts of cooperative and commercial bank
rural sector. f
k and was established in ~
(f) The reserve bank of India is a central ban
s of reserve bank of
April 1, 1935 in accordance with the provision
India act i934 f""
the private sector banks are ""'
(g) All nationalized banks and almost all
commercial scheduled banks .in India. /
(h) Those banks which are not included
in the second schedule of the •
-scheduled banks ~
Reserve Bank of India Act are 'termed as non
of inst ituti ons..,.....which are --
(i) . Cooperative banks are a part of the set
elopment (
engaged 'in financing rural and agriculture dev
(j) The Central board of dire,,,- ctors is at the top of the Reserve Bank's
organizational structure I
(e) False, (f) True, (g) True,
[Ans.: (a) True, (b) False, (c) True, {d} False,
(h) True, (i) False, (j) True]

(3) Match the Columns:

Column 'A' Column 'B'

(a) 1870 (i) Nationalizatio~ of SBI subsidiaries. ~ Ie / ;

over 200
(b) 1935 (ii) Nationalization of seven banks with deposits
•
crores j
1949 (iii) Enactment of Banking Regulation Act.
1955 (Iv) Nationalization of State Bank of lndi a.d
.,
1959 (v) Bank of Hindustan (l
!961 (vi) Insurance cover extended to dep osit s~
1"9 (vif) Nationalization of 14 maj or Banks. j
1171 (vlll) Creation of cred it guarantee corporation.
 [Link] of re11on11 rur.a, b
(x) Reserve [Link] India. 1:» ._,
: (a - vJ, (b - x), (c _ i), (d • Iv} (
IJ •UJ] - ' e.:. I}, fl· vi), (g - vii), (h - viii), {I - /},
-CC) FIii in the Blanks:

(a) A . .
is an institution whi h
public and in turn advances I c accepts deposits from the
oans by creating credit.
(b) The - - - - is at the top of h
structure. t e Reserve Bank's organizational

(c) A - - - - means a bank included . th

Reserve Bank of India Act, _ m e second schedule of the
1934
(d) · banks · are a part
- - - - .- . . 0f ·.th
e set of institutions, which ar
engaged in financing rural and agriculture development. e

(e) The . . are been set up to supplement the efforts of

coop~rat1ve and commercial banks to provide credit to rural sector.
(f) The unorganized sector is largely made up of - - - - and

(g) Since nationalization in RBI is fully owned by the

Government of india.
(h) A State Co-operative Bank works at the _ _ _ _ level.
(i) Th e _ _ _ _ are branches of joint stock companies incorporated
abroad, but operating in India.
(j) The _ _ _ _ set up Regional Rural Banks (RRBs) so as to provide
credit to the weaker sections of the,rural areas, particularly the small
and marginal farmers, agricultural labourers, and small
entrepreneurs.
[Ans.: (a) Bank, (b) The Central Board of Directors, (c) Scheduled bank, (d}
Cooperative, (e) Regional Rural Banks (RRBs), (!) money lenders and
indigenous bankers, (g) 1949, (h) Apex, (i) foreign banks, (j) Government of
India]
Elaborate the organization and Management of RBI?
Explain in detail commercial banks structure.
State role of RRB's in Indian banking sector?
iWll~~•!line the structure of Indian Banking industry?