BA 4001 Security Analysis & Portfolio Management – Full Study Notes

UNIT I – INVESTMENT SETTING

1. Meaning of Investment

 Financial sense: Allocation of funds to financial instruments (equity, bonds,

derivatives) for future returns.
 Economic sense: Using capital for creating productive assets that increase the
economy’s wealth.

2. Characteristics of Investment

 Risk
o Market Risk: Loss due to market fluctuations.
o Interest Rate Risk: Bond values fall when interest rates rise.
o Inflation Risk: Purchasing power of returns decreases.
o Liquidity Risk: Difficulty in selling the investment quickly.
o Business Risk: Uncertainty of profits due to business operations.
o Financial Risk: Use of debt increases volatility of returns.
 Return – Income (dividends/interest) + Capital appreciation.
 Safety – Assurance of principal and promised returns.
 Liquidity – Ease of converting into cash without loss.
 Marketability – Ability to trade in established markets.
 Time Horizon – Duration the investor plans to hold.

3. Objectives of Investment

 Income generation.
 Capital appreciation.
 Safety of principal.
 Liquidity.
 Hedge against inflation.

4. Investment Process

1. Identify investor profile (risk-return preference).

2. Select securities/asset classes.
3. Construct portfolio.
4. Monitor & revise.
5. Types of Investment

 Real assets: Land, building, gold.

 Financial assets: Shares, bonds, derivatives.
 Marketable vs. Non-marketable securities.

6. Investment Alternatives

 Equity shares, preference shares, debentures, govt. securities.

 Mutual funds, insurance, derivatives.
 Real estate, commodities, bank deposits.

7. Risk and Return Concepts

 Risk: Deviation from expected return.

 Types:
o Systematic risk (market, interest, inflation).
o Unsystematic risk (business, financial).
 Return = Income + Capital gain.
 Expected Return = Weighted average of possible returns.
 Risk measures: Variance, Standard deviation, Beta.

8. Valuation of Bonds and Stocks

 Bond Valuation:

Vb=∑C(1+r)t+F(1+r)nV_b = \sum \frac{C}{(1+r)^t} + \frac{F}{(1+r)^n}Vb=∑(1+r)tC

+(1+r)nF

 Stock Valuation:
o Dividend Discount Model (DDM).
o Price/Earnings (P/E) method.

UNIT II – FUNDAMENTAL ANALYSIS

1. Economic Analysis

 Study of macroeconomic factors affecting investment decisions.

 Forecasting tools: Economic indicators, time series, econometric models.

2. Industry Analysis
  Classification: Growth, cyclical, defensive, speculative industries.
 Industry Life Cycle: Pioneering → Expansion → Maturity → Decline.
 Key factors: Demand, competition, regulations, technology.

3. Company Analysis

 Earnings measurement: EPS, ROI.

 Forecasting: Trend, regression, management outlook.
 Valuation tools: P/E ratio, P/B ratio, DDM, Earnings yield.
 Graham & Dodd ratios: E/P, P/E, P/BV, Debt/Equity, Current ratio.

UNIT III – TECHNICAL ANALYSIS & EFFICIENT MARKET THEORY

1. Fundamental vs Technical

 Fundamental = intrinsic value.

 Technical = market psychology & price patterns.

2. Dow Theory

 Market trends: Primary, Secondary, Minor.

3. Charting Methods

 Line, bar, candlestick, point & figure charts.

4. Chart Patterns

 Reversal: Head & shoulders, double top/bottom.

 Continuation: Flags, pennants, triangles.

5. Trends & Reversals

 Uptrend, downtrend, sideways.

 Support & resistance.

6. Market Indicators

 Breadth, advance-decline line, volume analysis.

7. Moving Averages

 Simple Moving Average (SMA).

 Exponential Moving Average (EMA).

8. Oscillators

 RSI (Relative Strength Index).

  ROC (Rate of Change).
 MACD (Moving Average Convergence Divergence).

9. Efficient Market Hypothesis (EMH)

 Forms: Weak, Semi-strong, Strong.

 Tests: Serial correlation, filter rules, event studies.
 Implication: Prices reflect information → beating the market is hard.

UNIT IV – PORTFOLIO CONSTRUCTION & SELECTION

1. Portfolio Analysis

 Diversification reduces unsystematic risk.

2. Portfolio Risk

 Total risk = Systematic + Unsystematic.

 Measured by variance, standard deviation, covariance.

3. Markowitz Model

 Feasible set & efficient frontier.

 Optimal portfolio = maximum return for given risk.

4. Single Index Model

Ri=α+β(Rm)+eR_i = \alpha + \beta (R_m) + eRi=α+β(Rm)+e

 Beta = sensitivity to market returns.

5. Multi-Index Model

 Uses multiple macro factors (inflation, interest, GDP).

UNIT V – PORTFOLIO MANAGEMENT & EVALUATION

1. Capital Asset Pricing Model (CAPM)

E(Ri)=Rf+βi(Rm−Rf)E(R_i) = R_f + \beta_i (R_m - R_f)E(Ri)=Rf+βi(Rm−Rf)

 CML (Capital Market Line).

 SML (Security Market Line).

2. Arbitrage Pricing Theory (APT)

  Multi-factor asset pricing model.

3. Portfolio Evaluation

 Sharpe’s Index = (Rp – Rf) / σp

 Treynor’s Index = (Rp – Rf) / βp
 Jensen’s Alpha = Rp – [Rf + βp(Rm – Rf)]

4. Mutual Funds

 Types: Equity, debt, hybrid.

 NAV (Net Asset Value) = (Assets – Liabilities) ÷ Units outstanding.

5. Portfolio Revision

 Restructuring to maintain optimal risk-return balance.

BA 4002 FINANCIAL MARKET

UNIT I – FINANCIAL MARKETS IN

INDIA
1. Indian Financial System

The Indian financial system is a network of institutions, markets, instruments, and services
that facilitate the flow of funds from savers to borrowers in the economy.

Functions:

 Mobilizes savings from households and businesses.

 Provides credit for productive investment.
 Facilitates price discovery through financial markets.
 Ensures liquidity and risk management through various instruments.

Components:

1. Financial Institutions: Banks, NBFCs, insurance companies, mutual funds.

2. Financial Markets: Capital market, money market, derivatives market.
3. Financial Instruments: Equity, bonds, debentures, commercial papers, government
securities.
4. Regulatory Bodies: RBI, SEBI, IRDA, PFRDA, CCIL.

2. Structure of Financial Markets in India

Financial markets are broadly classified into:

A. Money Market

 Deals with short-term funds (up to 1 year).

 Instruments: Treasury bills, commercial papers, call money, certificates of deposit.
 Participants: RBI, commercial banks, corporate treasuries, mutual funds.
 Functions:
o Provides liquidity for short-term borrowing.
o Facilitates implementation of monetary policy.

B. Capital Market

 Deals with long-term funds (more than 1 year).

 Instruments: Shares, debentures, bonds, preference shares.
 Participants: Companies, investors, SEBI, stock exchanges.
 Functions:
o Mobilizes long-term funds for economic development.
 o Enables wealth creation for investors.

C. Securities Market

 Subset of capital market.

 Includes primary market (new issues) and secondary market (trading of existing
securities).
 Key entities: Stock Exchanges (NSE, BSE), Depositories (NSDL, CDSL).

3. Participants in Financial Markets

1. Regulators: RBI, SEBI, IRDA, CCIL.

2. Financial Institutions: Commercial banks, mutual funds, insurance companies.
3. Corporates: Issue securities for funding expansion.
4. Investors: Retail and institutional investors (mutual funds, FII, HNI).
5. Intermediaries: Brokers, underwriters, depositories.

4. Regulatory Environment

 RBI (Reserve Bank of India): Regulates money market, issues currency, implements
monetary policy.
 CCIL (Clearing Corporation of India Ltd.): Provides clearing and settlement
services for money, government securities, and forex markets.
 SEBI (Securities and Exchange Board of India): Regulates the capital market,
protects investors, ensures fair trading.
 Government’s Philosophy: Encourages market stability, transparency, investor
protection, and economic growth.

5. Financial Instruments

 Equity Shares: Ownership in a company, dividend entitlement, voting rights.

 Debentures/Bonds: Debt instruments, fixed interest, priority over equity in
repayment.
 Government Securities (G-Secs): Low-risk securities issued by the government.
 Commercial Papers: Short-term unsecured corporate debt.
 Derivatives: Futures, options for hedging or speculation.

6. Key Points

 Financial markets in India are well-regulated to maintain investor confidence.

 The RBI dominates monetary policy and money market operations.
  Capital markets facilitate long-term funding and wealth creation.
 Effective clearing and settlement systems like CCIL ensure market stability.
 Government promotes markets for economic growth and efficient allocation of
capital.

UNIT II: INDIAN CAPITAL MARKET – PRIMARY

MARKET
1. Primary Market Overview

 The Primary Market (New Issue Market) is the segment of the capital market where
new securities are issued and sold for the first time.
 Purpose: Helps companies raise fresh capital for expansion, modernization, or debt
repayment.

2. Primary Market System

The primary market involves a process and intermediaries that ensure smooth issuance of
securities.

Key Components:

1. Issuing Company – Wants to raise funds.

2. Regulators – SEBI (Securities and Exchange Board of India) regulates issue
processes.
3. Investors – Institutional and individual investors.
4. Intermediaries – Banks, merchant bankers, brokers, rating agencies.

3. Types of Securities Issued

1. Equity Shares – Represent ownership.

2. Preference Shares – Fixed dividend; priority over equity.
3. Debentures/Bonds – Debt instruments.
4. Convertible Securities – Can convert into equity later.
5. Rights Issues & Bonus Shares – To existing shareholders.

4. Issue of Capital

Process of Raising Capital in Primary Market:

1. Planning & Approval – Company decides amount, type of security.

2. Filing with SEBI – Draft Prospectus submission.
 3. Appointment of Intermediaries – Merchant bankers, registrars, brokers.
4. Marketing & Pricing – Methods include fixed price or book building.
5. Subscription & Allotment – Investors apply; shares allotted.
6. Listing – Securities listed on stock exchanges for trading.

Regulation:

 SEBI guidelines, Companies Act provisions, Disclosure requirements.

 Aim: Protect investors and ensure transparency.

5. Pricing of Issues

 Fixed Price Issue: Price decided beforehand.

 Book Building Method: Price determined based on investor demand.
o Price range indicated.
o Investors bid within this range.
o Final price = strike price, based on demand.

6. Methods of Floating New Issues

1. Public Issue – Open to all investors.

2. Rights Issue – Offered to existing shareholders.
3. Private Placement – Sold to selected investors.
4. Preferential Allotment – To strategic investors or promoters.

7. Primary Market Intermediaries

Intermediary Role
Commercial Banks Accept subscription money, facilitate payments.
Development Banks Provide long-term finance & guidance.
Merchant Bankers Manage issue, underwriting, and advisory services.
Issue Managers Oversee smooth execution of the issue.
Rating Agencies Evaluate creditworthiness of securities.

8. Role of Primary Market

 Mobilizes savings into productive investments.

 Provides companies with long-term capital.
 Promotes economic growth.
 Encourages wider shareholding and public participation.
9. Regulation of Primary Market

 Governed mainly by SEBI (Securities and Exchange Board of India).

 Key regulations:
1. Mandatory prospectus and disclosure.
2. Pricing norms (fixed or book building).
3. Investor protection: Fraud prevention, transparency.
4. Listing requirements: Securities must meet exchange criteria.

10. Diagram: Structure of Primary Market

ISSUING COMPANY
│
┌──────┴────────┐
│ │
Intermediaries Regulators (SEBI)
│
┌────────┴─────────┐
│ │ │
Commercial Merchant Rating
Banks Bankers Agencies
│ │ │
Investors (Individuals + Institutions)

UNIT III: SECONDARY MARKET (Stock Market in

India)
1. Overview of Secondary Market

 The Secondary Market is where already issued securities are bought and sold
among investors.
 Provides liquidity, price discovery, and continuous trading opportunities.
 Main participants: Individual investors, institutions, brokers, and intermediaries.

2. Stock Exchanges in India

History & Development:

1. BSE (Bombay Stock Exchange) – Established in 1875; oldest in Asia.

2. NSE (National Stock Exchange) – Established in 1992; modern electronic trading.
3. OTCEI (Over-the-Counter Exchange of India) – 1990; for small & medium
enterprises.
4. ISE (Interconnected Stock Exchange) – Regional stock exchange network.

Listing of Securities:
  Process where a company’s securities are admitted for trading on a stock exchange.
 Criteria: Net worth, profitability, shareholding pattern, compliance with SEBI
regulations.

3. Depositories

 Electronic holding of securities.

 NSDL and CDSL are major depositories in India.
 Functions: Dematerialization, transfer, pledge, and settlement of securities.

4. Stock Exchange Mechanism

Trading:

 Conducted via order-driven (NSE) or quote-driven (OTCEI) systems.

 Can be floor-based or electronic.

Settlement:

 T+1/T+2 system: Transaction settlement within 1–2 days.

Risk Management:

 Margin requirements, circuit breakers, and clearing corporations (e.g., CCIL) reduce
default risk.

Pricing Mechanism:

 Determined by supply & demand.

 Market orders, limit orders, and bid-ask spreads affect price.

5. Players in the Stock Market

Player Role
FIIs (Foreign Institutional
Bring foreign capital, influence market liquidity.
Investors)
Mutual Funds (MFs) Pool investor funds, invest in equities/bonds.
Investment Bankers Advise on issues, mergers, and trading strategies.
Brokers/Traders Facilitate transactions between buyers & sellers.
Provide platform, enforce rules, maintain
Stock Exchanges
transparency.
6. Regulation of Stock Exchanges

 SEBI (Securities and Exchange Board of India) regulates all stock market
activities.
 Functions:
1. Protect investors.
2. Promote fair trading practices.
3. Regulate brokers, MFs, and FIIs.
4. Monitor listing, trading, and insider trading.

7. Major Stock Exchanges

Exchange Role/Features
BSE Oldest exchange, Sensex index.
NSE Electronic trading, Nifty 50 index.
OTCEI SMEs, regional companies.
ISE Connects regional exchanges electronically.

8. Stock Market Indices

 Reflect market trends by tracking a basket of representative stocks.

 Popular Indices: Sensex (BSE), Nifty 50 (NSE).
 Calculation Methods:
1. Price-weighted Index – e.g., Dow Jones.
2. Market-cap weighted Index – e.g., Sensex, Nifty.

Formula (Market-cap Weighted):

Index Value=∑(Market Price of Stock×No. of Shares)Divisor\text{Index Value} = \frac{\

sum (\text{Market Price of Stock} \times \text{No. of Shares})}{\
text{Divisor}}Index Value=Divisor∑(Market Price of Stock×No. of Shares)

9. Diagram: Secondary Market Structure

STOCK EXCHANGE
/ | \
Brokers Depositories Regulators (SEBI)
| | |
Investors (Retail & Institutional)
| |
FIIs & MFs Investment Bankers

UNIT IV: DEBT MARKET AND FOREX MARKET

1. Debt Market in India

Also called the fixed income market, where companies and governments raise long-term or
short-term debt through bonds, debentures, or treasury instruments.

1.1 Government Bond Market

 Facilitates borrowing by the government.

 Types of Instruments:
1. G-Secs (Government Securities) – Long-term securities issued by
RBI/Government.
2. T-Bills (Treasury Bills) – Short-term securities (91, 182, 364 days).
 Interface with Capital Market: Provides safe instruments for investors; interest rate
trends influence equity and corporate bond markets.

1.2 Components of Bond Market

Instrument Features

G-Secs Risk-free, long-term government bonds.

T-Bills Short-term, zero-coupon instruments.

Corporate Bonds Issued by companies, higher yield, moderate risk.

1.3 Yield Conventions

 Yield to Maturity (YTM): Total expected return if held till maturity.

 Current Yield: Annual coupon ÷ Market price.
 Price-Yield Relationship: Inverse; price rises → yield falls, and vice versa.

1.4 Primary Dealers

 Licensed entities (e.g., banks) that deal in government securities.

 Functions:
o Underwriting new issues.
o Market making for liquidity.
o Advising investors.

1.5 Auction Markets

 Government securities often issued via auction.

 Competitive bidding: Large investors bid interest rates.
 Non-competitive bidding: Smaller investors accept weighted average yield.
1.6 Pricing of Bonds
Price of Bond=∑Coupon Payment(1+r)t+Face Value(1+r)T\text{Price of Bond} = \sum \frac{\
text{Coupon Payment}}{(1+r)^t} + \frac{\text{Face Value}}
{(1+r)^T}Price of Bond=∑(1+r)tCoupon Payment+(1+r)TFace Value

Where:

 rrr = discount rate/yield

 ttt = period
 TTT = maturity

2. Foreign Exchange (Forex) Market

 Market for buying and selling foreign currencies.

 Facilitates trade, investment, and hedging of currency risk.

2.1 Basics of Exchange Rate Theory

 Spot Rate: Current exchange rate.

 Forward Rate: Agreed exchange rate for future transaction.
 Cross Rate: Exchange rate between two currencies derived from a third currency
(usually USD).

Factors Influencing Exchange Rates:

 Inflation differentials.
 Interest rate differentials.
 Trade balance.
 Political stability.
 Speculation and capital flows.

2.2 Forex Risk Exposures

Type Description

Transaction Exposure Risk due to payment/receipt in foreign currency.

Translation Exposure Risk from converting foreign assets/liabilities.

Economic Exposure Long-term impact on firm’s market value due to currency changes.
2.3 Basics of Corporate Forex Risk Management

 Hedging Instruments:
o Forward contracts
o Currency swaps
o Options and futures
 Objectives:
o Minimize loss from currency fluctuation.
o Stabilize cash flows.

3. Diagram: Indian Debt & Forex Market Structure

DEBT MARKET FOREX MARKET
┌───────────────────┐ ┌───────────────────┐
│ Government Bonds │ │ Spot & Forward │
│ Treasury Bills │ │ Market │
│ Corporate Bonds │ │ Currency Dealers │
└─────────┬─────────┘ └─────────┬─────────┘
│ │
Primary Dealers Banks / Brokers
│ │
Investors Corporates / FIIs

UNIT V: MUTUAL FUNDS, DERIVATIVES

MARKETS, AND VENTURE CAPITAL/PRIVATE
EQUITY

1. Mutual Funds in India

A mutual fund pools money from multiple investors and invests in stocks, bonds, or other
securities.

1.1 Institutions

 SEBI Registered Mutual Funds regulate operations.

 Popular AMCs: SBI Mutual Fund, HDFC Mutual Fund, ICICI Prudential, Aditya
Birla Sun Life.

1.2 Types of Mutual Funds

Type Features

Equity Funds Invest primarily in stocks; higher risk, high return.

Debt Funds Invest in bonds, G-Secs; moderate risk.

Hybrid Funds Mix of equity & debt.

 Type Features

Index Funds / ETFs Track stock market indices.

Liquid Funds / Money Market Funds Short-term instruments; high liquidity, low risk.

1.3 Basics of Portfolio Management

 Objective: Maximize return for a given level of risk.

 Process: Asset allocation → Security selection → Monitoring & rebalancing.

1.4 Performance Metrics for Fund Managers

 Return Measures: Absolute return, CAGR.

 Risk-Adjusted Measures: Sharpe ratio, Treynor ratio, Jensen’s alpha.
 Other: Expense ratio, portfolio turnover ratio.

2. Derivatives Markets

Derivatives: Financial contracts whose value depends on underlying assets like stocks,
bonds, currencies, or commodities.

2.1 Size of Derivatives Market

 Highly liquid globally; India’s NSE and BSE derivatives markets are fast-growing.
 Traded instruments: Futures, Options, Forwards, Swaps.

2.2 Types of Derivatives

Instrument Key Feature

Forwards Customized contracts to buy/sell at a future date.

Futures Standardized exchange-traded forwards.

Options Right (not obligation) to buy/sell at a specified price.

Swaps Exchange of cash flows or liabilities (interest rate, currency swaps).

3. Venture Capital (VC) & Private Equity (PE)

3.1 Venture Capital

 Funding for start-ups and early-stage firms with high growth potential.
 Objective: Support innovation; exit via IPO or acquisition.
3.2 Private Equity

 Investment in mature companies not listed on stock exchanges.

 Objective: Buy, improve operations, and sell for profit.

3.3 Role in Financial Markets

 Promote entrepreneurship and innovation.

 Provide long-term funding alternatives outside public markets.
 Encourage growth in SME and start-up sectors.

4. Diagram: Mutual Funds, Derivatives & VC/PE Market Structure

MUTUAL FUNDS DERIVATIVES VC / PE
┌─────────────────┐ ┌─────────────────┐ ┌───────────────┐
│ Equity / Debt / │ │ Futures / Options│ │ Start-ups
│
│ Hybrid / Index │ │ Forwards / Swaps │ │ Mature Cos
│
└───────┬─────────┘ └─────────┬───────┘ └─────┬─────────┘
│ │ │
Investors Traders Investors /
Funds
│ │ │
Fund Managers Exchanges VC / PE
Firms

UNIT I: FINANCIAL MARKETS IN INDIA

1. Indian Financial System

 The Indian financial system channels savings into productive investments.

 Components: Financial institutions, markets, instruments, and regulators.

Objectives:

 Mobilize savings.
 Facilitate capital formation.
 Ensure efficient allocation of resources.

2. Structure of Financial Markets

1. Money Market (Short-term)

o Deals with short-term funds (up to 1 year).
 o Instruments: Treasury bills, commercial paper, call money, certificates of
deposit.
o Participants: RBI, banks, financial institutions.
2. Capital Market (Long-term)
o Deals with long-term funds (more than 1 year).
o Instruments: Equity shares, debentures, bonds.
o Segments: Primary market (new issues), Secondary market (trading of existing
securities).

3. Types of Financial Markets

Market Type Function

Money Market Short-term funds, liquidity management.
Capital Market Long-term funds for corporate/government projects.
Foreign Exchange Market
Currency conversion and hedging.
(Forex)
Derivative Market Risk management using forwards, futures, options, swaps.
Trading in commodities like gold, oil, and agricultural
Commodity Market
products.

4. Participants in Financial Markets

Participant Role
RBI Central bank; controls liquidity, interest rates.
Commercial Banks Mobilize deposits, provide loans.
Financial Institutions LIC, SIDBI, NABARD – long-term finance.
Stock Exchanges Provide platform for trading securities.
Investors Retail and institutional participants.
Primary Dealers / Merchant Bankers Issue and manage securities.

5. Regulatory Environment

 RBI (Reserve Bank of India): Monetary policy, money market regulation.

 SEBI (Securities and Exchange Board of India): Capital market regulation,
investor protection.
 CCIL (Clearing Corporation of India Ltd.): Ensures smooth settlement and
reduces counterparty risk.

6. Government Philosophy and Financial Market

 Encourage savings mobilization and financial stability.

 Promote efficient capital allocation.
  Facilitate growth of equity and debt markets.

7. Financial Instruments

Type Description
Equity Shares representing ownership.
Debt Bonds, debentures, G-Secs.
Derivatives Options, futures, swaps.
Money Market Instruments T-bills, CPs, CDs.

8. Diagram: Structure of Indian Financial System

INDIAN FINANCIAL SYSTEM
┌───────────────────────────────┐
│ REGULATORS │
│ RBI, SEBI, CCIL │
└─────────────┬─────────────────┘
│
┌────────┴─────────┐
│ │
FINANCIAL MARKETS FINANCIAL INSTITUTIONS
│ │
┌────┴─────┐ ┌──────┴────────┐
│ Money │ │ Banks, LIC, │
│ Market │ │ SIDBI, NABARD │
│ Capital │ └───────────────┘
│ Market │
│ Forex │
│ Derivatives│
│ Commodity │
└───────────┘

BA4003 BANKING AND L T P C

3 0 0 3
FINANCIAL SERVICES
UNIT I: INDIAN BANKING SYSTEM &
PERFORMANCE EVALUATION
1. Overview of Indian Banking System

 The Indian Banking System is a network of institutions facilitating financial

intermediation between savers and borrowers.
 It plays a crucial role in economic growth, financial stability, and credit allocation.

2. Structure of Indian Banking System

Level Institution Role

Monetary policy, lender of last resort,
Central Bank RBI
regulator
Scheduled Commercial Public & Private sector Accept deposits, provide loans,
Banks banks payments
Promote credit in agriculture and small
Cooperative Banks Urban & Rural
business
Regional Rural Banks
Regional Banks Rural credit, financial inclusion
(RRBs)
Development Banks SIDBI, NABARD Long-term financing, sectoral support
International banks in Specialized services, foreign trade
Foreign Banks
India financing

3. Functions of Banks

1. Accepting Deposits: Savings, Current, Fixed, Recurring.

2. Lending: Personal, corporate, agriculture, trade finance.
3. Credit Creation: Banks create money through lending.
4. Payment & Settlement: Cheques, RTGS/NEFT, cards.
5. Other Services: Investment, wealth management, insurance distribution.

4. Key Regulations in Indian Banking Sector

Regulation Key Provisions

RBI Act, 1934 / 2006 Establishment of RBI, monetary policy framework
Licensing, management, amalgamation, control over
Banking Regulation Act, 1949
banking operations
Negotiable Instruments Act,
Governs cheques, promissory notes, bills of exchange
1881 / 2002
CRR (Cash Reserve Ratio) Mandatory reserve with RBI for liquidity management
Guidelines for classification of Non-Performing Assets and
NPA Provisioning
provisioning norms

5. Overview of Bank Financial Statements

 1. Balance Sheet: Shows assets, liabilities, and equity.
o Assets: Cash, loans & advances, investments, fixed assets.
o Liabilities: Deposits, borrowings, capital, reserves.
2. Income Statement (Profit & Loss): Shows revenue & expenses.
o Income: Interest income, fees, trading profits.
o Expenses: Interest paid, operating expenses, provisions for NPAs.

6. Bank Performance Evaluation – CAMEL Framework

CAMEL is a widely used framework to evaluate banking performance and financial health:

Component Description
Bank’s capital relative to risk-weighted assets; regulatory
C – Capital Adequacy
requirement (CRAR)
A – Asset Quality Evaluation of NPAs, loan portfolio quality
M – Management
Efficiency of management in operations, decision-making
Quality
E – Earnings Profitability, Return on Assets (ROA), Return on Equity (ROE)
Ability to meet short-term obligations; liquid assets to deposits
L – Liquidity
ratio

7. Diagram: Structure of Indian Banking System

INDIAN BANKING SYSTEM
┌───────────────┬───────────────┬───────────────┐
│ Central Bank │ Commercial │ Cooperative / │
│ (RBI) │ Banks │ Regional Banks│
│ │ Public/Private│ (RRBs) │
└───────────────┴───────────────┴───────────────┘
│
Development Banks / Foreign Banks

UNIT II: MANAGING BANK FUNDS, PRODUCTS &

RISK MANAGEMENT

1. Capital Adequacy

 Ensures banks have sufficient capital to cover risks.

 Measured by CRAR (Capital to Risk-Weighted Assets Ratio).
 Regulatory requirement: Basel III norms.
2. Sources of Bank Funds

Type Description
Deposit Sources Savings accounts, current accounts, fixed deposits, recurring deposits
Non-Deposit Sources Borrowings from RBI, interbank market, bonds, equity capital

3. Deposit Products and Pricing

 Designing Deposit Schemes: Based on tenure, liquidity, interest rate, customer

segment.
 Pricing of Deposits: Interest rate linked to cost of funds, liquidity requirement, and
competitive environment.

4. Loan Management

 Loan Portfolio: Personal loans, corporate loans, trade finance, agriculture finance.
 Monitoring: Credit appraisal, repayment schedule, collateral management.
 Asset Classification: Standard, Sub-standard, Doubtful, Loss (linked to NPA
management).

5. Investment Management

 Banks invest in G-Secs, corporate bonds, and interbank instruments.

 Objective: Maximize return with minimum risk; maintain liquidity.

6. Asset and Liability Management (ALM)

 Purpose: Balance liquidity, interest rate risk, and profitability.

 Techniques: Gap analysis, duration analysis, scenario testing.
 Ensures funds are matched with obligations and risk appetite.

7. Financial Distress & Signaling

 Signals to Borrowers: Interest rate hikes, credit rationing, or warning notices

indicate financial stress.
 Prediction Models: CAMEL, Z-score, credit scoring models to anticipate distress.

8. Risk Management in Banks

 Risk Type Description
Interest Rate Risk Changes in rates affecting income and valuation of assets/liabilities
Forex Risk Currency fluctuations impacting foreign transactions
Credit Risk Default risk of borrowers
Operational Risk Fraud, system failures, human errors
Solvency Risk Risk of inability to meet long-term obligations

9. Non-Performing Assets (NPAs)

 Definition: Loans overdue beyond 90 days.

 Management: Provisioning norms, restructuring, write-offs.
 Current Issues: High NPAs in corporate loans, restructuring packages, government
interventions.

10. Banks & Securities Market

 Mergers & Acquisitions (M&A): Banks expanding into investment services.

 Integration with capital markets for investment banking, underwriting, and
trading.

11. Diagram: Bank Fund Management & Risk Framework

BANK FUNDS & RISK MANAGEMENT
┌───────────────┬───────────────┐
│ Capital Adequacy │ Deposit & Non-Deposit Sources │
└───────────────┴───────────────┘
│
┌───────┴─────────┐
│ Loan Management │
│ Investment Mgmt │
│ ALM │
└───────┬─────────┘
│
┌───────┴─────────┐
│ Risk Management │
│ Interest Rate │
│ Forex │
│ Credit │
 │ Operational │
│ Solvency │
└─────────────────┘

UNIT III: DEVELOPMENT IN BANKING

TECHNOLOGY

1. Payment Systems in India

 Facilitate efficient and safe transfer of funds.

Types:

1. Paper-Based Payments:
o Cheques, demand drafts, pay orders, bills of exchange.
2. Electronic Payments (E-Payments):
o RTGS (Real Time Gross Settlement)
o NEFT (National Electronic Funds Transfer)
o IMPS (Immediate Payment Service)
o UPI (Unified Payments Interface)

2. Electronic Banking

 Internet Banking: Online access to account, funds transfer, bill payments.

 Mobile Banking: Banking via smartphone apps.
 Core Banking Solutions (CBS): Integration of all branches with central database.

3. Plastic Money & E-Money

 Plastic Money: Credit cards, debit cards, prepaid cards.

 E-Money: Digital wallets, stored-value systems, cryptocurrencies.

4. Forecasting Cash Demand at ATMs

 Objective: Ensure ATMs are adequately stocked with cash.

 Methods: Historical usage data, seasonal trends, event-based forecasting.
5. IT & Banking Regulations

 Information Technology Act, 2000:

o Legal recognition for electronic records and signatures.
o Provides framework for cybercrime and e-commerce.
 RBI Financial Sector Technology Vision:
o Promote digital banking, cybersecurity, interoperability.

6. Security Threats in E-Banking

Threat Type Description

Phishing Fraudulent emails or websites to steal credentials
Malware Viruses, trojans targeting banking systems
Identity Theft Unauthorized access to personal banking info
Cyber Attacks Hacking, DDoS attacks on banking infrastructure

RBI Initiatives:

 Security guidelines for banks

 Awareness programs
 Encryption standards and two-factor authentication

7. Diagram: Banking Technology Ecosystem

BANKING TECHNOLOGY
┌─────────────┬───────────────┬───────────────┐
│ Paper-based │ Electronic │ Plastic Money │
│ Payments │ Payments │ / E-Money │
│ Cheques/DDs │ RTGS/NEFT/UPI │ Cards / Wallets│
└─────────────┴───────────────┴───────────────┘
│
┌───────┴─────────┐
│ E-Banking │
│ Internet/Mobile │
│ Core Banking │
└───────┬─────────┘
│
┌───────┴─────────┐
│ Security & IT │
│ IT Act 2000 │
│ RBI Tech Vision │
│ Cybersecurity │
└─────────────────┘

UNIT IV: ASSET-BASED FINANCIAL SERVICES

1. Introduction

 Financial services support economic activity by providing specialized services

beyond traditional banking.
 Focus: Credit, investment, risk management, and asset financing.

2. Need for Financial Services

 Facilitate capital formation and mobilization.

 Reduce financial gaps for individuals, corporates, and SMEs.
 Offer risk mitigation and advisory services.
 Enhance financial market efficiency.

3. Financial Services Market in India

 Rapidly growing segment with diverse products:

o Leasing, hire purchase, factoring, mutual funds, insurance, investment
banking.
 Regulated by RBI, SEBI, IRDAI, depending on the service.

4. Non-Banking Financial Companies (NBFCs)

 Definition: Financial institutions providing banking services without full banking

license.
 Services: Loans, asset financing, investment, hire purchase, leasing.
 Regulatory Framework:
o RBI Act & NBFC regulations.
o Prudential norms: Capital adequacy, exposure limits, NPA provisioning.

5. Leasing and Hire Purchase

 Leasing: Transfer of asset use for a period against lease rentals; ownership remains
with lessor.
 Hire Purchase: Asset is acquired in installments; ownership transfers to buyer after
last installment.
 Financial Evaluation: Assess cost of funds, tax benefits, depreciation, ROI.

6. Underwriting
  Purpose: Guarantee the sale of securities (equity, bonds) by assuming risk.
 Participants: Merchant bankers, banks, insurance companies.
 Process: Risk assessment, pricing, and subscription guarantee.

7. Mutual Funds

 Role: Pool investor funds and invest in diversified portfolio.

 Relation to Asset-Based Services: Provides structured investment solutions to retail
and institutional clients.

8. Diagram: Asset-Based Financial Services Ecosystem

ASSET-BASED FINANCIAL SERVICES
┌─────────────┬──────────────┬───────────────┐
│ NBFCs │ Leasing & HP │ Underwriting │
│ Loans, │ Asset finance│ Risk guarantee│
│ Investment │ │ Securities │
└─────────────┴──────────────┴───────────────┘
│
┌───────┴─────────┐
│ Mutual Funds │
│ Pooled Investment│
│ Structured Products│
└─────────────────┘

UNIT V: INSURANCE & OTHER FEE-BASED

FINANCIAL SERVICES

1. Insurance in India

 Regulatory Framework:
o Insurance Act, 1938: Governs insurance operations, solvency, and
policyholder protection.
o IRDA (Insurance Regulatory and Development Authority): Regulates
insurance companies, products, and distribution channels.
 Products & Services:
o Life Insurance: Term insurance, endowment, ULIP.
o General Insurance: Health, motor, property, liability.
o Reinsurance: Risk-sharing between insurers.

2. Venture Capital Financing

  Provides equity financing for start-ups and high-growth firms.
 Focuses on early-stage investments with higher risk and return potential.
 Key role in fostering innovation and entrepreneurship.

3. Bill Discounting & Factoring

Service Description
Bill Banks/financial institutions provide immediate funds by purchasing trade
Discounting bills at a discount before maturity.
Financial institution manages receivables, provides cash advances, and
Factoring
assumes collection risk.

4. Merchant Banking

 Definition: Advisory and financial services for corporate clients.

 Services: Issue management, underwriting, portfolio management, M&A advisory.
 Regulator: SEBI oversees merchant banking activities in India.

5. Role of SEBI

 Securities and Exchange Board of India:

o Regulates capital markets.
o Approves merchant bankers and public issues.
o Protects investor interests.
o Monitors compliance with listing and trading regulations.

6. Diagram: Fee-Based Financial Services Ecosystem

FEE-BASED FINANCIAL SERVICES
┌──────────────┬───────────────┬───────────────┐
│ Insurance │ Venture Capital│ Bill Discounting│
│ Life/General │ Financing │ Factoring │
└──────────────┴───────────────┴───────────────┘
│
┌───────┴─────────┐
│ Merchant Banking │
│ Advisory, Issue │
│ Management │
└───────┬─────────┘
│
Regulator: SEBI / IRDA