Banking, Financial Markets

and Systems
Set - 1
The Financial System an overview
P C Narayan

IIMB PCN BFMS L01

SAVERS/
INVESTORS

BORROWERS
Government
Business
Households

Households
Business

IIMB PCN BFMS L01

INDIRECT FINANCE
Financial
Intermediaries

SAVERS/
INVESTORS

BORROWERS
Government
Business
Households

Households
Business

IIMB PCN BFMS L01

Financial Intermediaries
Banks
Financial Institutions
Insurance companies
Mutual Funds
Pension Funds
---------------------------------------------- Objective : To intermediate funds from
savers to Borrowers in the most risk free
manner
IIMB PCN BFMS L01

INDIRECT FINANCE
Financial
Intermediaries

SAVERS/
INVESTORS

BORROWERS
Government
Business
Households

Households
Business
DIRECT FINANCE
Financial Markets

IIMB PCN BFMS L01

Financial Markets
Money market
Foreign Exchange Market
Debt market (G-Sec and Corporate Bonds)
Stock Market
Derivatives Market
Private Equity Market
---------------------------------- Over The Counter (OTC)
Exchange Traded
Primary / secondary
IIMB PCN BFMS L01

Let us break out

the balance sheet and P&L
of a Bank

IIMB PCN BFMS L01

Balance Sheet of ABC Bank Ltd as of

( All figures in Rs. Lakhs)

Capital and Liabilities

Capital
Reserves & Surplus
Deposits
Borrowings
Other Liabilities & Provisions
Total

1
2
3
4
5

25,00
234,09
3865,55
29,00
102,11
4255,75

6
7

781,01
8,49

8
9
10
11

1392,33
2017,45
11,71
44,76
4255,75

12

371,78

Assets
Cash & balances with RBI
Balances with banks &
money at call / notice
Investments
Advances
Fixed Assets
Other assets
Total

Contingent Liabilities

IIMB PCN BFMS L01

Balance Sheet of ABC Bank Ltd as of

( All figures in Rs. Lakhs)

Capital and Liabilities

Capital
Reserves & Surplus
Deposits
Borrowings
Other Liabilities & Provisions
Total

1
2
3
4
5

25,00
234,09
3865,55
29,00
102,11
4255,75

6
7

781,01
8,49

8
9
10
11

1392,33
2017,45
11,71
44,76
4255,75

12

371,78

Assets
Cash & balances with RBI
Balances with banks &
money at call / notice
Investments
Loans & Advances
Fixed Assets
Other assets
Total

Contingent Liabilities

IIMB PCN BFMS L01

Schedule 8

Investments

Investments
Govt. Securities
983,52
Other Approved Securities 378,04
Shares
15,60
Debentures and Bonds
15,17
Total

1392,33

IIMB PCN BFMS L01

10

P & L Account of ABC Bank Ltd.as of

1.

(All figures in lakhs)

Income

2.

Interest Earned
Other Income
Total

13
14

489,52
50,12
539,64

15
16

232,48
164,19
73,98
470,65

Expenditure

3.

Interest Expended
Operating Expenses
Provisions and Contingencies
Total

Profit

4.

Net Profit for the year

Profit brought forward
Total

68,99
35,00
103,99

Appropriation

Transfer to Statutory reserve

Bal carried to B/S
IIMB PCN BFMS L01
Total

13,80
90,19
103,99

11

P & L Account of ABC Bank Ltd.as of

1.

(All figures in lakhs)

Income

2.

Interest Earned
Other Income
Total

13
14

489,52
50,12
539,64

15
16

232,48
164,19
73,98
470,65

Expenditure

3.

Interest Expended
Operating Expenses
Provisions and Contingencies
Total

Profit

4.

Net Profit for the year

Profit brought forward
Total

68,99
35,00
103,99

Appropriation

Transfer to Statutory reserve

Bal carried to B/S
IIMB PCN BFMS L01
Total

13,80
90,19
103,99

12

Schedule 13

Interest Earned

Interest/ discount on Advances/bills

Income from Investments
Interest on balance with RBI and Banks

311,43
143,62
34,47

Total

489,52

IIMB PCN BFMS L01

13

Schedule 14

Other Income

Commission, exchange and brokerage

Profit from sale of Investments
Profit/loss on revaluation of Investments

50,52
1,75
-2,15

Total

50.12

IIMB PCN BFMS L01

14

INDIRECT FINANCE
Financial
Intermediaries

SAVERS/
INVESTORS

This is where
the
trouble starts

BORROWERS
Government
Business
Households

Households
Business
DIRECT FINANCE
Financial Markets

IIMB PCN BFMS L01

15

INDIRECT FINANCE
Financial
Intermediaries

SAVERS/
INVESTORS

Monetary Policy and Regulation

BORROWERS
Government
Business
Households

Households
Business
DIRECT FINANCE
Financial Markets

IIMB PCN BFMS L01

16

Money supply
Interest rate
Exchange Rate
Inflation
Credit flow
Supervision

SAVERS /
INVESTORS

INDIRECT FINANCE
Financial
Intermediaries

Monetary Policy and Regulation

BORROWERS
Government
Business
Households

Households
Business
DIRECT FINANCE
Financial Markets

IIMB PCN BFMS L01

17

Money
supply
Money
supply
Interest
rate
Interest
rate
ExchangeRate
Rate
Exchange
Inflation
Inflation
Credit
Credit
flowflow
Supervision
Supervision

SAVERS

Risk Management
INDIRECT FINANCE

Clearing & settlement

Advisory

Financial
Intermediaries

Monetary Policy and Regulation

Households
Business

BORROWERS
Government
Business
Households

DIRECT FINANCE
Financial Markets

IIMB PCN BFMS L01

18

Money supply
Interest rate
Exchange Rate
Inflation
Credit flow
Supervision

SAVERS

Risk Management
INDIRECT FINANCE

Clearing & settlement

Advisory

Financial
Intermediaries

Monetary Policy and Regulation

Households
Business

BORROWERS
Government
Business
Households

DIRECT FINANCE
Financial Markets
Trading
Hedging
IIMB PCN BFMS L01

19

Session-wise schedule
Session 1

Overview of the Financial System

Session 2,3

Theory and Structure of Interest rates

Session 4,5

The Financial Intermediation process

Session 6, 7, 8, 9

Financial Markets

Session 10, 11

Derivatives and its application

Mid-Term Exam

Date and venue to be informed PGP office

Session 12,13

Liquidity and Solvency of Banks

Session 14,15

Risk Management measurement and mitigation

Session 16

Capital Adequacy and Basel II

Session 17, 18, 19

Asset Securitization, CDOs, etc., Basel III

Session 20

Regulation and Monetary Policy

End Term Exam

Date and venue to be informed by PGP office

IIMB PCN BFMS L01

20

Course Material and

Reference Books
Financial Markets and Institutions Frederic Mishkin & Stanley
Eakins, 6th Edition, Prentice Hall
Additionally, course handouts will be given for most topics at the
start of the term
All PPT slides used in Class will be made available in PDF format, via
email
Reference Text Books
Financial Institutions, Markets and Money
Kidwell, Peterson and Blackwell (Harcourt College Publishers)

Financial Markets and Institutions

Anthony Saunders and Marcia Cornett, Tata McGraw Hill

Financial Markets and Institutions

Jeff Madura ( Thomson Publishing)
IIMB PCN BFMS L01

21

Course Evaluation
Mid- Term Exam (25 marks)
End- term Exam (50 marks)
Quiz X 2 (10 marks each), after session 5 and
session 15
Duration 30 minutes per quiz

Attendance (5 Marks)

20 sessions : 5/5 marks

19 sessions : 4/5 marks
18 sessions: 3/5 marks
17sessions: 2/5 marks
16 sessions: 1/5 mark
15 sessions or less: 0/5 marks

Caught for proxy during the term 0/5 marks; inform

PGP Chair
IIMB PCN BFMS L01
22