A Glimpse of the Financial Sector
Synopsis
- Introduction
- Country's Production
- Banking
- Stock Markets
- Mutual Funds
- Insurance
- Financial Acts
- Bank Cash Fundamentals
- Foreign Investments
- Financial Terms
- Bank Accounts
- Bank Account Holders
- Bank Loans
- Period of Bank Loans
- Various Banking
- Banking Operations
- Bank Promotion Tools
- Safe Deposit Locker
- Funds Transfer
- Cheques System
- Account Closing
- Financial Budget
- 2020-2021 Budget Sample
- Conclusion
- Reference
Introduction
The financial sector encompasses banks, stock markets, mutual funds, insurance, and much more. Let's take a glimpse of the financial sector, and for further in-depth studies on these topics, consider conducting self-research.
Country's Production
- Gross Domestic Product (GDP)
- Per Capita GDP
- GDP Growth Rate
Gross Domestic Product (GDP): Goods and services produced within a country during a specific period in the local currency.
Per Capita GDP: Calculated by dividing the GDP of a country by its population.
GDP Growth Rate: Involves forecasting GDP from one year to another, focusing on changes or growth in production.
Banking
*Banks offer various services such as depositing money, withdrawing money, borrowing money, and exchanging money.
*The Reserve Bank of India, as the central bank, is responsible for printing and supplying Indian rupees, along with regulating the Indian banking system.
Stock Markets
*A Stock Market Index calculates the value of a country’s stock market through a weighted average of selected stocks.
*The Stock Market Index assists investors in analysing the market and comparing various investment options.
*The three types of Stock Index are,
- Global Index
- Regional Index
- National Index
Global Index - Track equities from all around the World.
*Top World Stock Markets
- FTSE All-World Index
- S&P Global 100 Index
- S&P Global 1200 Index
- Dow Jones Global Titans 50
Regional Index - Track equities from particular regions around the World.
*Asian Stock Market
- S&P Asia 50 Index
- Dow Jones Asian Titans 50 Index
- FTSE ASEAN 40 Index
National Index - Track equities from individual countries around the World.
*Indian National Stock Markets
- Bombay Stock Exchange (BSE)
- National Stock Exchange (NSE)
- Multi Commodity Exchange of India Index (MCX)
Mutual Funds
*Mutual funds are jointly managed joint ventures that raise money from several investors and invest it in stocks, bonds, and other debt instruments.
*Mutual funds comprise a financial management system that trades in instruments following the accumulated money, and the total gains or losses are generally distributed annually to investors.
Insurance
*Insurance refers to the opportunity to minimize the liabilities of individuals to meet unforeseen expenditures.
*Individuals pay a regular amount to insurance companies, and these companies pay back when the need arises, such as the death of a person, loss, or damage of products.
*Few types of Insurance coverage policies are,
- Life Insurance
- Motor Insurance
- Health Insurance
- Travel Insurance
- Property Insurance
Financial Acts
*Reserve Bank of India Act 1934: An act that lays the foundation for the Reserve Bank of India.
*Banking Regulation Act 1949: An act that regulates all banking firms in India.
*Foreign Exchange Management Act 1999: An act that regulates all cross-border activities of banks.
*Securities and Exchange Board of India Act 1992: An act that regulates the securities market in India.
*Negotiable Instruments Act 1881.
*Recovery of Debts Due to Banks and Financial Institutions Act 1993.
*Bankers Books Evidence Act 1891.
*Payment and Settlement Systems Act 2007.
*Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002.
*Banking Ombudsman Scheme 2006.
Bank Cash Fundamentals
- Cash Reserve Ratio
- Statutory Liquidity Ratio
- Repo Rate
- Reverse Repo Rate
- Net Demand and Time Liabilities
*Cash Reserve Ratio - Percentage of Cash given by Banks to RBI as cash reserve deposits.
*Statutory Liquidity Ratio - Percentage of Net Demand and Time Liabilities (NTDL) in form of Government-approved Securities, Bonds, and Gold.
*Repo Rate - RBI lends money to Banks.
*Reverse Repo Rate - RBI borrows money from Banks.
*Net Demand and Time Liabilities = (Demand + Time + Other Banks) Deposits.
Demand Deposits - Can withdraw on demand.
Time Deposits- Can't withdraw immediately.
Other Banks Deposits - Bank assets with other Banks.
CRR / SLR Example
Rs. 100 (In Bank) - Rs. 21.5 (SLR to RBI) - Rs. 4 (CRR to RBI) = Rs. 100 - Rs. 25.5 = Rs. 74.5 (Amount used by Banks)
Foreign Investments
Different ways to invest foreign funds in India are,
- Foreign Direct Investors (FDI)
- Foreign Institutional Investors (FII)
- Foreign Currency Convertible Bond (FCCB)
- Non-Residents Indian (NRI)
*Foreign Direct Investors - Foreign companies set up production facilities or invests in a company located in another country.
*Foreign Institutional Investors - Foreign companies buy stocks of a company from the local stock market of another country.
*Foreign Currency Convertible Bond - Convertible bonds are issued in a currency different than the issuer's domestic currency.
*Non-Residents Indians - Individuals investing their earnings back to India through diversified investments.
Financial Terms
- Balance of Payments
- Balance of Trade
- Terms of Trade
- Derivatives
- Currency Basket
- Forex
- Fiscal Policy
- Monetary Policy
- Inflation
- Deflation
*Balance of Payments - Financial transactions between the home country and the rest of the world.
*Balance of Trade - Difference between the value of a country's imports and exports for a given period.
*Terms of Trade - Ratio between the value of export prices and import prices on an average.
*Derivatives - Contract between two or more parties whose value is derived from the value of another underlying asset.
*Forex - Buying and selling currencies from different countries against each other.
*Break-Even - No profit or loss at the end of the business activities.
*Monetary Policy - Central Bank (for India it is RBI) manages the money supply and Interest rates.
*Inflation - Increase in the general pricing and value of money decrease in the Market.
*Deflation - Decrease in the general pricing and value of money increase in the Market.
Bank Accounts
- Savings Account
- Current Account
- Fixed Deposit (FD) Account
- Recurring Deposit (RD) Account
*Savings Account - Opened by individuals for saving purposes by depositing an amount for some time with an agreed interest rate which is payable on demand.
*Current Account - Opened by individuals (or) business concerns including non-profit organisations where the frequent transaction takes place with no interest.
*FD Account - Deposit fixed amount that is locked in and payable after FD matures and maturity period ranges from 7 days to 10 years.
*RD Account - Deposit fixed amount for every month that is payable after the fixed tenure.
Account Holders
- Individual Account
- Joint Account
- Students' Account
- Proprietorship Account
- Limited Company Account
- Non-Resident External (NRE) Account
- Non-Resident Ordinary (NRO) Account
- Foreign Currency Non-Resident (FCNR) Account
*Individual Account - A single person who is responsible for debits and credits.
*Joint Account - More than one person, each individual has the right to deposit and withdraw funds.
*Students Account - Students who are pursuing higher education can open an account.
*Proprietorship Account - Unincorporated business owned by a single person who is responsible for its liabilities and entitled to its profits.
*Limited Company Account - Private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested.
*NRE Account - Bank account that an NRI opens to deposit his overseas earnings in India.
*NRO Account - Bank account that an NRI opens to manage his money earned in India.
*FCNR Account - Deposit account to deposit foreign currency-denominated revenue earned overseas.
Bank Loans
- Loan against Properties
- Loan against Insurance
- Loan against Fixed Deposits
- Loans against Mutual Funds
- Educational Loan
- Personal Loan
- Housing Loan
- Vehicle Loan
- Gold Loan
*Bank loans should be repaid with interest on or before a fixed date.
*Customers applying for Bank loans should have a Bank account in running position.
*Unsecured loans are offered without any collaterals based on credit scores while Secured loans are offered with collaterals.
Period of Bank Loans
- Short Term Finance (STF)
- Medium Term Finance (MTF)
- Long Term Finance (LTF)
Short Term Finance
*Receives the savings of people and lends it for the short term to its customer.
*STF is given for one year or less in duration.
Medium Term Finance
*MTF is provided for the expansion of an existing business or for the purchase of new equipment.
*MTF is given for a period of 1 year to 3 years.
Long Term Finance
*LTF is provided for big projects, construction of business, and purchase of machines.
*LTF is given for more than five years.
Various Banking
- Social Banking
- Micro Banking
- MSME Banking
- Personal Banking
- Corporate Banking
- Agricultural Banking
- International Banking
*Social Banking for a positive contribution to the potential of all human beings to develop.
*Micro Banking for unemployed or low-income individuals.
*MSME Banking for the development of Micro, Small, and Medium Enterprises.
*Personal Banking executes transactions directly with consumers.
*Corporate Banking deals with different Banking services that are used by companies, governments (or) other big institutions.
*Agricultural Banking is established to assist agricultural development, particularly by granting loans
*International Banking is the process in which financial institutions allow foreign clients of both companies and individuals to use their services
Banking Operations
- Daily Transactions
- Vouchers
- Advice
- Statements
*Daily Transactions - Record all transactions of deposits and withdrawals.
*Vouchers - The remittance department prepares debit and credit vouchers for every transaction and these vouchers are recorded on the computer.
*Advice - Record all advice received from inter-branch or intra branch and Remittance is subject to receipt of advice from the corresponding branch to materialise transactions.
*Statements - Close the daily records by printing statements like inter-branch transactions, a summary of credit, debit, balance account, profit, and transfer amounts.
Bank Promotion Tools
- Advertising
- Personal Selling
- Public Relations
*Advertising - Newspapers, Magazines, Radio, Television, Emails, and Social Media.
*Personal Selling - Marketing officers meet the potential clients for the purpose of financial transactions.
*Public Relations - Public Relations officers focus on a product-centric approach and customer-centric approach.
Safe Deposit Locker
*Deposit amount is paid to use the locker facilities inside the Bank premises.
*Lockers are high in demand as it is widely used by customers for the safekeeping of valuables.
Funds Transfer
- Real Time Gross Settlement (RTGS)
- National Electronic Funds Transfer (NEFT)
- Immediate Payment Service (IMPS)
Real-Time Gross Settlement
*Continuous settlement of fund transfers individually on an order by order basis.
*Real-time means the processing of instructions at the time they are received.
*Gross settlement means the settlement of funds transfer instructions occurs individually.
*For transactions up to 2 Lakhs and payment is irrevocable.
National Electronic Funds Transfer
*NEFT facilitates one-to-one funds transfer.
*Individuals, firms, and corporates can electronically transfer funds from any bank branch to any individual, firm, or corporate having an account with any other Bank branch.
*For transactions more than 2 Lakhs.
Immediate Payment Service (IMPS)
*IMPS facilitates instant inter-bank electronic funds transfer.
*IMPS maximum limit per transaction is 2 Lakhs.
*IMPS service is available 24 x 7 including the holidays.
Cheques System
*Magnetic Ink Character Recognition (MICR) is used to make easy processing of cheques which are read by passing through a machine with a magnetic field that recognises the characters.
*Purpose of MICR is to enhance security and avoid losses caused by fraudulent cheques or colored photocopied cheques.
*Cheque truncation system (CTS) speeds up the process of collection of cheques resulting in better service to customers and reducing the scope for clearing-related frauds or loss of instruments in transit.
*Benefit of CTS is that lowers the cost of collection of cheques, and removes settlement and logistics-related problems.
Account Closing
*Bank accounts can be closed at any time by giving notice or submitting an account closure form
*Bank will pay credit balances of account and any interest due to account
Financial Budget
*Financial Budget that our country puts in is always the Deficit Budget.
*Government buys domestic loans and foreign loans so the cost is higher than the credit.
*Infrastructure, Railways, Judiciary, Home Affairs, External Affairs, Petroleum, Energy, Information Technology, Food Corporation of India, Agriculture, Space, Education, State funding, Union funding, and a lot more sector needs billions of dollars.
*Sector-based GDP and sector-based budgets are like twins.
*Four major areas which occupy the bulk of the Government budget are,
- Interest on the Loans
- Government Subsidy
- Employees' Pension
- Defence Ministry
2020-2021 Budget Sample
- Interest on the Loans = 7,08,203 Crores
- Fertiliser Subsidy = 71,309 Crores
- Food Subsidy = 1,15,570 Crores
- Petroleum Subsidy = 40,915 Crores
- Other Subsidies = 34,315 Crores
- Employees Pension = 2,10,682 Crores
- Defence Ministry = 3,23,053 Crores
1 to 7 Total = 15,04,047 Crores (~50%)
Total 2020-2021 Budget = 30,42,230 Crores
Conclusion
Living human beings are powerful enough to create more generations and likewise, inanimate money has the power to make more money through Investments and Returns.
Reference
What Are the Major World Stock Market Indexes?
CRR, SLR, RR, RRR
Banking Laws And Regulations, India
Types Of Insurance
How Does Share Markets Work?
2020-2021 Budget Analysis
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