[Gauhati University B.Com 1st Sem NEP FYUGP]

COMMERCE

Paper: BCM0100304

2023

(Indian Financial System)
Full Marks: 60
Time: 2½ hours

The figures in the margin indicate full marks for the questions.
Answer either in English or in Assamese.

1. Answer the questions from the following as per direction: 1x8=8

(a) "Financial System is basically involved with the transfer of funds from the surplus sector to the deficit sector of the economy."
(Choose whether the statement is True or False)
Answer: True

(b) Money Market in India is regulated by RBI.
(Write True or False)
Answer: True

(c) Name the first development bank of India.
Answer: The first development bank of India is the Industrial Finance Corporation of India (IFCI).

(d) Which of the following is not a nationalized commercial bank?
(i) Punjab National Bank
(ii) United Bank of India
(iii) Bank of Baroda
(iv) Federal Bank
Answer: (iv) Federal Bank

(e) Asset-based and -based Service Constitute Financial Services.
(i) Cash
(ii) Fee
(iii) Share
(iv) Debenture
Answer: (iii) Share

(f) High interest rate is paid on the Current Account.
(Choose whether the statement is Correct or Incorrect)
Answer: (ii) Incorrect

(g) In India, mutual fund scheme was first started in:
(i) 1964
(ii) 1987
(iii) 1992
(iv) None of the above
Answer: (ii) 1987

(h) The National Stock Exchange (NSE) was established in the year:
(i) 1995
(ii) 1992
(iii) 1997
(iv) 1990
Answer: (i) 1995

2. Answer any six questions of the following in about 50 words each: 2×6=12

(a) What is the financial system?
A financial system refers to the set of institutions, markets, instruments, and regulations that facilitate the flow of funds between savers, borrowers, and investors. It plays a key role in channeling resources for investment, fostering economic growth, and ensuring liquidity. The system includes banks, insurance companies, stock markets, and other financial institutions.

(b) Mention two distinguishing features of the capital market.

Long-term investment: Capital markets deal with long-term funds, typically for periods exceeding one year.
Risk and return: Investments in the capital market generally involve higher risk but offer higher returns in comparison to the money market.

(c) Explain two sub-markets of the Indian money market.

Call Money Market: This market deals with short-term borrowings between commercial banks and financial institutions, typically for a period of one day.
Treasury Bills Market: Government-issued short-term securities, with maturities ranging from 91 days to 364 days, are traded in this market to manage short-term liquidity.

(d) State two differences between the money market and the capital market.

Duration: The money market deals with short-term funds (up to one year), whereas the capital market handles long-term funds (over one year).
Purpose: The money market is used for liquidity management, while the capital market facilitates long-term investment and raising funds for businesses.

(e) Give the meaning of Financial Services.
Financial services encompass a wide range of services provided by the finance industry, including banking, investment, insurance, asset management, and advisory services. These services facilitate the management, investment, and transfer of financial assets and help individuals and businesses make informed financial decisions.

(f) What is leasing?
Leasing is a financial arrangement where one party (the lessor) allows another party (the lessee) to use an asset, such as machinery, property, or vehicles, for a specified period in exchange for periodic rental payments. It provides businesses with access to capital-intensive assets without the need for upfront investment.

(g) State two objectives of IRDAI.

Regulating the insurance sector: Ensuring the protection of policyholders and promoting the growth of the insurance industry in India.
Licensing and regulation: Issuing licenses to insurance companies and ensuring compliance with regulations to maintain market stability and consumer trust.

(h) State two objectives of SEBI.

Investor protection: Ensuring fair practices in the securities market to safeguard investors' interests.
Market development: Promoting the growth and efficiency of the securities market through regulation, transparency, and creating a conducive environment for investors and issuers.

(i) What is a Balanced Mutual Fund?
A Balanced Mutual Fund is a type of investment fund that invests in a mix of equity (stocks) and debt (bonds) to offer a balance of risk and return. It aims to provide both capital appreciation and income generation, suitable for investors with moderate risk tolerance.

(j) Give the meaning of Pension Fund with examples.
A Pension Fund is a pool of funds collected from employees or individuals to provide retirement income. The money is invested in various assets to grow over time. Examples include the Employees' Provident Fund (EPF) in India and the Social Security Fund in the US.

3. Answer any four of the following questions in about 200 words each: 5×4=20

(a) Describe the functions of the Indian financial system.
The Indian financial system plays a crucial role in the economy by facilitating the flow of funds between savers and borrowers, promoting investment, and ensuring economic stability. Its primary functions include:

1. Mobilization of savings: The financial system channels savings from households and businesses into investments, promoting economic growth. Institutions like banks, insurance companies, and mutual funds collect and invest savings in productive areas.

2. Facilitating investments: It provides various investment opportunities, such as bonds, stocks, and mutual funds, to individuals and businesses. This enhances capital formation, crucial for development.

3. Providing liquidity: The financial system ensures that individuals and organizations can easily convert their financial assets into cash when required. It includes instruments like Treasury Bills, repurchase agreements, and other short-term securities.

4. Risk management: Through financial products like insurance, hedging, and derivatives, the system helps individuals and firms manage financial risks associated with uncertainties such as illness, accidents, or market fluctuations.

5. Price discovery and market efficiency: Financial markets, such as the stock market, help in the discovery of prices for various financial instruments, ensuring that resources are allocated efficiently. This process is vital for capital formation and economic growth.

6. Regulation and supervision: Regulatory bodies such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Insurance Regulatory and Development Authority of India (IRDAI) ensure that the financial system operates efficiently and fairly, protecting the interests of consumers.

(b) Explain the classification of the Capital Market.
The capital market is classified into two broad categories:

1. Primary Market: This market is where new securities are issued for the first time. It is also known as the new issue market. Companies, governments, and other organizations issue new bonds, stocks, or other securities to raise capital. The primary market plays a vital role in helping businesses expand and in funding government projects. Methods of issuing securities include public offers, private placements, and rights issues.

2. Secondary Market: The secondary market is where previously issued securities are traded among investors. It is also referred to as the stock market. Here, investors buy and sell securities that were initially issued in the primary market. The secondary market ensures liquidity for securities, allowing investors to trade their assets and thus encouraging market participation. It also provides an indication of the financial health of companies through stock prices.

The capital market is essential for long-term financial growth, offering investors the opportunity to grow wealth through equity (stocks) and fixed-income (bonds) investments. It helps businesses raise the necessary funds for expansion and operations, contributing to the overall economic development.

(c) Explain the characteristics of Non-Banking Financial Institutions.
Non-Banking Financial Institutions (NBFIs) are financial entities that provide various financial services but do not have a banking license to accept deposits. They play a significant role in the financial system, offering services like loans, asset management, and investment advisory. Some key characteristics of NBFIs include:

1. Provision of Financial Services: NBFIs offer a variety of financial services such as loans, hire purchase, leasing, venture capital, and mutual fund management. They provide funding to businesses and individuals who may not have access to traditional bank loans.

2. No Deposit Acceptance: Unlike banks, NBFIs do not accept deposits from the public. They raise funds through borrowings, capital markets, and other means to finance their operations.

3. Regulation: While not allowed to accept deposits, NBFIs are still regulated by the Reserve Bank of India (RBI) and other authorities. They must adhere to certain operational standards and comply with regulations related to capital adequacy, liquidity, and disclosure.

4. Diverse Products: NBFIs provide specialized products, including hire purchase, leasing, factoring, and venture capital funding. These products cater to specific financial needs, particularly for small and medium-sized enterprises (SMEs) and individuals.

5. Role in Economic Development: NBFIs significantly contribute to the growth of the economy by providing financial assistance to sectors like infrastructure, housing, and small enterprises, which may face challenges in obtaining funding from banks.

6. Higher Risk: NBFIs may take on higher risks compared to traditional banks as they operate in niche markets or lend to non-traditional borrowers. However, their flexibility allows them to serve underserved markets.

(d) State the benefits of venture capital.
Venture capital (VC) is a type of private equity financing provided to early-stage, high-potential startups or businesses in exchange for equity ownership. The benefits of venture capital include:

1. Capital for Growth: Venture capital provides the necessary funds for startups and small businesses that may not have access to traditional financing avenues like bank loans. It helps companies scale quickly and efficiently.

2. Expertise and Guidance: VC investors often bring valuable industry experience, strategic advice, and mentorship to the businesses they invest in. This guidance helps entrepreneurs avoid common pitfalls and navigate challenges effectively.

3. Networking Opportunities: Venture capital firms often have extensive networks and connections, including potential customers, partners, and other investors. These networks can be crucial for business growth, collaboration, and access to new markets.

4. Risk Sharing: By investing in startups, venture capitalists share the risks associated with business ventures. For entrepreneurs, this means less financial strain and fewer barriers to growth, as the VC takes on a portion of the risk.

5. Increased Credibility: Startups backed by venture capital gain increased credibility in the market, which can help attract customers, talented employees, and further investment. Being associated with reputable VC firms can enhance the company's profile.

6. Exit Opportunities: Venture capitalists typically seek an exit strategy, such as selling their stake during a public offering (IPO) or a merger/acquisition. This provides entrepreneurs with the opportunity to achieve a significant return on their investment.

(e) State the features of financial services.
Financial services refer to a broad range of economic services provided by the finance industry. Key features of financial services include:

1. Diversity of Products: Financial services include a wide variety of products such as banking, insurance, mutual funds, pension funds, leasing, and investment advisory. These products cater to different financial needs and risk appetites of individuals, businesses, and governments.

2. Intermediary Role: Financial services often act as intermediaries between individuals who have surplus funds (savers) and those who need funds (borrowers or investors). This role helps allocate capital efficiently in the economy.

3. Risk Management: Many financial services, such as insurance, derivatives, and hedging, help individuals and businesses manage risks associated with economic activities, like health risks, financial market fluctuations, and asset protection.

4. Regulation and Compliance: Financial services are heavily regulated by government bodies like the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Insurance Regulatory and Development Authority of India (IRDAI) to ensure transparency, fairness, and stability in the financial markets.

5. Technological Integration: Financial services increasingly leverage technology to enhance service delivery, such as mobile banking, online trading platforms, and digital wallets. This improves accessibility, efficiency, and customer experience.

6. Liquidity: Financial services provide liquidity through various instruments, including mutual funds, securities, and money market funds. These services ensure that customers can convert assets into cash when needed.

7. Customization: Many financial services are customized to meet the specific needs of different clients, from retail banking products for individuals to complex financial instruments for large corporations or governments.

(f) Explain the regulatory role of PFRDA.
The Pension Fund Regulatory and Development Authority (PFRDA) is a statutory body established to regulate and promote pension schemes in India. Its regulatory role is crucial in ensuring the efficient functioning and growth of pension systems. The key functions of PFRDA include:

Regulating Pension Schemes: PFRDA regulates the National Pension Scheme (NPS) and other pension schemes offered by various pension funds. It ensures that these schemes are safe, transparent, and adhere to prescribed standards.
Setting Guidelines: PFRDA sets guidelines for pension fund managers, including the investment norms, fund management, and the functioning of pension schemes. It ensures that pension funds are managed prudently to protect the interests of subscribers.
Protecting Subscribers’ Interests: PFRDA works to safeguard the rights of pension subscribers by ensuring that pension funds are invested wisely and are not subject to undue risks. It monitors the performance of pension schemes and takes corrective actions when necessary.
Expanding Coverage: The PFRDA aims to increase the coverage of pension schemes by making them more accessible to different sections of the population, including government employees, private sector employees, and the unorganized sector.
Promoting Financial Literacy: PFRDA plays a role in educating the public about the importance of saving for retirement and the benefits of participating in pension schemes.
Creating a Robust Pension Ecosystem: The PFRDA also focuses on developing an efficient and reliable pension ecosystem, with the establishment of a central record-keeping agency and ensuring seamless portability for subscribers across sectors.

(g) Discuss the organizational setup of the RBI.
The Reserve Bank of India (RBI) is the central bank of India, established in 1935, and plays a crucial role in the country's financial and monetary system. The organizational setup of the RBI is structured as follows:

Governor: The Governor is the head of the RBI and is responsible for overseeing all of its functions. The Governor is appointed by the Government of India, and the position is crucial in shaping India's monetary policy and regulatory framework. The current RBI governor has a significant role in steering the Indian economy through monetary policy decisions, financial stability, and managing inflation.
Deputy Governors: The RBI has four Deputy Governors who assist the Governor in managing its functions. They handle specific areas such as monetary policy, financial regulation, currency management, and development, each overseeing various departments within the RBI.
Executive Directors: These are senior officers responsible for various operational departments in the RBI, ensuring that daily banking operations, policy implementation, and regulatory activities are efficiently managed.
Board of Directors: The RBI is governed by a board of directors, which includes the Governor, Deputy Governors, and other members appointed by the Government of India. The board provides guidance on policy issues and supervises the operations of the RBI.
Departments: The RBI operates through a number of functional departments. These include:

Monetary Policy Department: Responsible for formulating and implementing monetary policy.
Financial Market Operations Department: Handles foreign exchange management and government securities.
Department of Banking Supervision: Oversees and regulates commercial banks and financial institutions.
Currency Management Department: Ensures the proper issuance and supply of currency notes and coins.

Regional Offices: The RBI operates through regional offices spread across various parts of India to ensure its operations cover the entire country. These offices play an important role in monitoring the local financial environment and implementing RBI's policies.
Advisory Committees: RBI also works with various advisory committees, such as the Monetary Policy Committee, to guide its decisions and ensure effective implementation of policies.

(h) Discuss the various types of banks.
Banks in India can be classified into various types based on their functions, ownership, and the services they offer. The major types of banks include:

Commercial Banks: These banks are primarily engaged in providing financial services such as accepting deposits, granting loans, and other financial transactions. Commercial banks are further divided into:

Public Sector Banks: Owned and operated by the Government of India (e.g., State Bank of India, Punjab National Bank).
Private Sector Banks: Privately owned and managed banks, such as HDFC Bank, and ICICI Bank.
Foreign Banks: Banks that operate in India but are based in other countries, like Citibank and HSBC.

Cooperative Banks: Cooperative banks are financial institutions established on a cooperative basis. They primarily provide financial services to rural areas and members of cooperatives. They are further classified into urban cooperative banks and rural cooperative banks.
Development Banks: These are specialized banks that provide long-term financing to industries, businesses, and infrastructure projects. They are set up to promote economic development. Examples include the Industrial Development Bank of India (IDBI) and the Small Industries Development Bank of India (SIDBI).
Regional Rural Banks (RRBs): These banks were established to provide financial services to rural areas, particularly for agriculture and rural development. RRBs operate in specific regions and aim to increase the reach of banking services in underbanked areas.
Specialized Banks: These banks focus on specific sectors such as agriculture, export financing, and infrastructure development. Examples include the National Bank for Agriculture and Rural Development (NABARD) and the Export-Import Bank of India (EXIM Bank).
Non-Banking Financial Companies (NBFCs): While not technically banks, NBFCs provide a wide range of financial services, such as loans, asset management, and wealth management. They are regulated by the RBI but do not accept deposits like traditional banks.
Microfinance Banks: These banks specialize in providing small loans and financial services to individuals or small businesses in underdeveloped and rural areas. They aim to improve financial inclusion for the poor.

4. Answer any two questions in about 600 words each: 10×2=20

(a) Discuss Various Components of a Developed Financial System.

A developed financial system is crucial for the efficient functioning of an economy. It facilitates the allocation of resources, the flow of capital, and ensures financial stability. It encompasses a wide range of institutions, markets, instruments, and regulatory bodies. The various components of a developed financial system are as follows:

1. Financial Institutions: Financial institutions are the backbone of the financial system. They include banks, insurance companies, pension funds, investment firms, and non-banking financial companies (NBFCs). These institutions act as intermediaries between savers and borrowers, facilitating the flow of funds in the economy.

Commercial Banks: These provide basic banking services, such as savings and checking accounts, loans, and mortgages. They also play a significant role in money creation by lending out deposited funds.
Investment Banks: Investment banks help businesses raise capital by issuing securities, facilitating mergers and acquisitions, and providing advisory services.
Insurance Companies: These institutions provide risk management products, ensuring financial protection against various risks like health, property damage, or life insurance.
Pension Funds: Pension funds manage retirement savings for individuals and ensure the smooth transition of funds for post-retirement living.
NBFCs: Non-banking financial companies offer financial services like loans and credit facilities but do not hold a banking license.

2. Financial Markets: Financial markets are platforms where financial instruments such as stocks, bonds, commodities, and currencies are bought and sold. The primary markets and secondary markets are the two key components of financial markets:

Primary Market: This market facilitates the issuance of new securities. Companies raise capital by offering new stocks or bonds to the public through initial public offerings (IPOs).
Secondary Market: After securities are issued in the primary market, they are traded in the secondary market, providing liquidity to investors. Stock exchanges like the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in India are examples of secondary markets.

3. Financial Instruments: Financial instruments are contracts that represent a claim to a financial asset. They include a wide variety of instruments such as:

Equity Securities (Stocks): Stocks represent ownership in a company. Investors in stocks earn dividends and can sell them for capital gains.
Debt Securities (Bonds): Bonds are debt instruments issued by governments, corporations, or other entities to raise funds. Investors in bonds receive regular interest payments and the return of principal upon maturity.
Derivatives: These are financial contracts whose value is derived from the price of an underlying asset, such as options or futures contracts.

4. Financial Regulators: To ensure the stability and proper functioning of the financial system, regulators are in place to enforce laws and regulations. These regulators include:

Central Banks: The Reserve Bank of India (RBI) in India, or the Federal Reserve in the U.S., is responsible for regulating the money supply, setting interest rates, and ensuring financial stability.
Securities and Exchange Commissions (SECs): These bodies oversee the regulation of securities markets, ensuring that companies disclose accurate financial information and that investors are protected from fraudulent activities.
Financial Stability Oversight Council (FSOC): This is responsible for identifying risks to the financial system and coordinating actions across regulators to maintain stability.

5. Payment and Settlement Systems: These systems ensure that transactions between buyers and sellers, borrowers and lenders, or investors and issuers are completed smoothly. Payment systems include mechanisms like electronic funds transfer (EFT), Real-Time Gross Settlement (RTGS), and National Electronic Funds Transfer (NEFT). Efficient payment systems are crucial for reducing transaction costs and ensuring liquidity.

6. Financial Services: A range of services supports the functioning of a financial system, including asset management, credit rating, investment advisory, and risk management. These services help allocate resources efficiently and manage financial risks effectively.

A developed financial system contributes to economic development by promoting savings, investments, and the efficient allocation of resources. It fosters capital formation, which leads to industrial growth, job creation, and innovation. Moreover, it enhances the economic stability and growth of a country by providing liquidity and enabling smooth financial transactions.

(b) Discuss the Constituents of the Money Market and Their Role in the Economic Development of a Country.

The money market refers to a segment of the financial market where short-term borrowing and lending occur, typically in instruments with maturities of one year or less. It plays a vital role in the liquidity management of businesses, financial institutions, and governments. The constituents of the money market include various instruments and institutions that facilitate the smooth functioning of the short-term credit system.

1. Treasury Bills (T-Bills): Treasury Bills are short-term debt securities issued by the government with maturities of 91, 182, or 364 days. They are issued at a discount to their face value and redeemed at par on maturity. T-Bills are considered one of the safest instruments in the money market, as they are backed by the government. T-Bills help the government manage short-term liquidity needs while providing investors with a low-risk investment option.

Role in Economic Development: T-Bills provide a stable and low-risk investment for both individual and institutional investors, encouraging savings. They also allow the government to finance its short-term obligations without resorting to inflationary measures like printing money.

2. Repurchase Agreements (Repos): A repurchase agreement is a short-term borrowing arrangement where one party sells securities (usually government securities) to another with an agreement to repurchase them at a higher price after a short period. The difference in price represents the interest on the loan.

Role in Economic Development: Repos provide liquidity to financial institutions, allowing them to meet their short-term funding needs. This ensures the smooth functioning of the financial system by stabilizing interest rates and providing cash flow to banks, thereby fostering economic growth.

3. Commercial Papers (CPs): Commercial papers are unsecured promissory notes issued by corporations to raise short-term funds, typically for working capital needs. They are issued at a discount to face value and have a maturity ranging from a few days to a year.

Role in Economic Development: Commercial papers enable businesses to access short-term funding at competitive rates, promoting investment in productive activities. This facilitates economic growth by ensuring that businesses can meet their financial needs and expand operations.

4. Certificate of Deposits (CDs): A certificate of deposit is a time deposit offered by banks that pays a fixed interest over a specified period. CDs are negotiable and can be sold in the secondary market before maturity.

Role in Economic Development: CDs attract savings from individuals and institutions, which banks can use to finance lending activities. By fostering savings, CDs contribute to capital formation and investment, which are key drivers of economic development.

5. Call Money: Call money refers to short-term loans that are repayable on demand, typically overnight. These loans are usually made between financial institutions and are unsecured.

Role in Economic Development: Call money provides financial institutions with a means to manage short-term liquidity imbalances. It ensures that banks have sufficient reserves to meet withdrawal demands and facilitates the smooth operation of the banking system.

6. Interbank Market: In the interbank market, banks lend to and borrow from each other to meet short-term liquidity needs. This market helps maintain the stability of the financial system by ensuring that banks have access to funds when required.

Role in Economic Development: The interbank market promotes efficient resource allocation by ensuring that excess liquidity in one bank can be transferred to another facing a liquidity shortage. This helps maintain stability in the banking system and fosters economic growth.

Role of the Money Market in Economic Development:

The money market plays a critical role in economic development by providing the following benefits:

Liquidity Management: The money market ensures that businesses, governments, and financial institutions have access to short-term funds, promoting smooth financial transactions.
Monetary Policy Transmission: Through the money market, central banks can implement monetary policy, such as adjusting interest rates and controlling money supply, to stabilize the economy.
Efficient Allocation of Resources: By facilitating short-term lending and borrowing, the money market helps allocate resources efficiently, supporting business operations and economic growth.
Economic Stability: The money market helps mitigate the risks of inflation and deflation by controlling short-term liquidity, thus maintaining financial stability.

In conclusion, the money market is an essential component of the financial system, contributing significantly to the economic development of a country by promoting efficient liquidity management, fostering investment, and stabilizing the financial environment.

(c) Describe the Functions of a Bank.

Banks perform various vital functions that are crucial to the economy. These functions can be categorized into primary and secondary functions, all of which are interrelated and help in maintaining economic stability and growth.

Primary Functions of a Bank:

1. Accepting Deposits: One of the core functions of a bank is to accept deposits from individuals, businesses, and government institutions. Banks offer various types of deposit accounts, including:

o Savings Accounts: These accounts provide interest on deposits and are mainly for individual savers.

o Current Accounts: These are primarily for businesses and institutions that require frequent transactions without any interest being paid on the deposits.

o Fixed Deposits (FDs): These accounts involve depositing a fixed amount of money for a set term, with a higher interest rate compared to savings accounts.

o Role in Economic Development: Accepting deposits helps banks mobilize funds from the general public, contributing to the pool of savings, which can then be used for productive investments, leading to economic growth.

2. Granting Loans and Advances: After accepting deposits, banks lend a portion of the funds to borrowers in the form of loans and advances. These loans can be for personal use, business expansion, home purchases, or education, among others. The types of loans provided include:

o Personal Loans: For individual needs like medical emergencies, vacations, or education.

o Business Loans: For companies to expand their operations or cover working capital needs.

o Home Loans: To help individuals purchase homes.

o Overdraft and Cash Credit: For short-term business financing.

o Role in Economic Development: By granting loans, banks channel savings into productive ventures, fostering investment, entrepreneurship, and consumption. This boosts economic activity and promotes job creation and wealth generation.

Secondary Functions of a Bank:

1. Agency Functions: Banks also perform various agency functions, which involve acting on behalf of their clients for specific transactions. These include:

Collection of Cheques, Bills, and Promissory Notes: Banks collect payments on behalf of clients and deposit them into their accounts.
Payment of Bills: Banks pay utility bills, taxes, and other recurring expenses for their clients.
Buying and Selling Securities: Banks buy and sell government and corporate securities for their customers.
Acting as Executors: Banks can act as trustees or executors of estates, helping to manage assets according to the will of deceased individuals.

2. Utility Functions:

Issuing Credit and Debit Cards: Banks issue credit and debit cards to facilitate easy and secure transactions for their customers.
Foreign Exchange Transactions: Banks facilitate international trade by exchanging foreign currencies for businesses and individuals involved in cross-border transactions.
Investment Services: Banks provide investment advisory services, including mutual funds, stocks, and bonds, to their clients.

Role in Economic Development:

Banks contribute significantly to economic development by:

Providing financing for businesses and individuals, stimulating economic activity.
Facilitating investment in infrastructure, education, and industry.
Ensuring smooth transactions and liquidity in the economy by acting as intermediaries between savers and borrowers.
Promoting financial inclusion by offering services to underserved populations and small businesses.

In summary, the functions of banks are designed to foster economic stability and growth, ensuring the efficient allocation of resources and facilitating financial transactions in the economy.

(d) Discuss the Role of RBI as a Regulator and Supervisor in the Financial System of Our Country.

The Reserve Bank of India (RBI) is the central bank of India, and it plays a crucial role in the regulation and supervision of the financial system in the country. The primary goal of RBI is to ensure the stability, growth, and proper functioning of the financial system, as well as to maintain the overall monetary and financial stability of the economy.

Role as a Regulator:

1. Monetary Policy Implementation: The RBI is responsible for formulating and implementing monetary policy in India. It uses tools such as interest rates, open market operations, and the cash reserve ratio (CRR) to control inflation, manage liquidity, and stabilize the currency. The RBI's monetary policy directly influences the cost of borrowing, investment levels, and overall economic growth.

Role in Economic Development: By managing inflation and liquidity, the RBI helps maintain economic stability, encouraging both domestic and foreign investments and fostering sustainable economic growth.

2. Regulating Banks and Financial Institutions: The RBI has regulatory authority over commercial banks, non-banking financial companies (NBFCs), and other financial institutions operating in India. It sets the regulatory framework, including prudential norms related to capital adequacy, risk management, and asset classification. This ensures that these institutions operate soundly and efficiently.

Role in Economic Development: The RBI’s regulatory framework promotes the safety and soundness of the financial system, ensuring that financial institutions function effectively and provide services to the economy without facing systemic risk.

3. Management of the Foreign Exchange Market: The RBI manages India’s foreign exchange reserves and oversees the foreign exchange market. It regulates the foreign exchange market by implementing policies that control currency exchange rates and the flow of foreign capital.

Role in Economic Development: By managing foreign exchange reserves, the RBI ensures that the country has sufficient resources to meet external obligations and finance imports, while also stabilizing the rupee and encouraging foreign investment.

4. Issuance and Control of Currency: The RBI is solely responsible for issuing currency notes in India (except for one-rupee coins and notes). It monitors the supply of currency in the economy, ensuring that the money supply aligns with the country’s economic needs.

Role in Economic Development: Effective management of the currency supply helps control inflation, stabilize the economy, and ensure that there is sufficient money circulation to meet the transaction demands of the economy.

Role as a Supervisor:

1. Supervision of Banks and Financial Institutions: The RBI supervises and inspects financial institutions to ensure their compliance with regulatory norms and that they follow sound banking practices. It conducts periodic inspections of commercial banks, NBFCs, and other financial entities to assess their financial health and risk management practices.

Role in Economic Development: By ensuring the health of financial institutions, the RBI safeguards the stability of the financial system and prevents the collapse of institutions that could lead to economic instability.

2. Financial Consumer Protection: The RBI works to protect the interests of financial consumers by ensuring transparency in banking operations and preventing malpractices. It has set guidelines for fair practices and addresses consumer complaints related to banking services.

Role in Economic Development: Protecting consumers builds trust in the financial system, encouraging greater participation from individuals and businesses, which boosts savings, investment, and overall economic growth.

3. Crisis Management and Financial Stability: The RBI plays a critical role in managing financial crises and ensuring financial stability. It acts as a lender of last resort for commercial banks in times of liquidity stress and takes proactive measures to prevent systemic risk.

Role in Economic Development: By maintaining financial stability, the RBI ensures the smooth functioning of the financial system, even in times of economic uncertainty, thus fostering confidence in the economy.

4. Developmental Role in Financial Inclusion: The RBI plays a key role in promoting financial inclusion by ensuring that banking services reach all sections of society, especially the unbanked and underbanked populations. Initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY) aim to provide basic banking services to the unbanked, promoting inclusive growth.

Role in Economic Development: Financial inclusion allows greater access to credit, savings, and other financial services for disadvantaged groups, which can enhance their standard of living and contribute to overall economic development.

(e) Discuss in Detail the Functions of SEBI

The Securities and Exchange Board of India (SEBI) is the regulatory body responsible for overseeing and regulating the securities markets in India. Established in 1988 and granted statutory powers in 1992, SEBI plays a crucial role in ensuring the integrity and stability of the capital markets, protecting investor interests, and promoting the growth of the securities market in the country. SEBI's primary objective is to protect the interests of investors in securities, regulate the securities market, and promote the development of the capital market.

SEBI’s functions can be broadly categorized into three areas: Regulatory Functions, Developmental Functions, and Protective Functions.

1. Regulatory Functions of SEBI:

SEBI's regulatory functions are essential to maintaining fairness, transparency, and accountability in the securities market. It works to regulate and supervise the operations of various market participants, such as brokers, merchant bankers, and stock exchanges, to ensure that they operate in compliance with regulations and that the securities market functions smoothly.

Regulation of Stock Exchanges:

SEBI regulates the functioning of stock exchanges in India. It ensures that the operations of exchanges are fair, transparent, and in the interest of investors. It oversees the listing, trading, and settlement processes, ensuring that they comply with prescribed guidelines.

Role in Market Integrity: By regulating exchanges, SEBI ensures that investors' transactions are processed fairly, minimizing the risk of market manipulation and ensuring market liquidity.

Regulation of Market Intermediaries:

SEBI regulates various market intermediaries, such as brokers, sub-brokers, portfolio managers, and mutual funds. It ensures that these intermediaries are qualified, licensed, and follow the rules and regulations set by SEBI.

Role in Investor Protection: By ensuring that intermediaries act in a transparent and ethical manner, SEBI prevents fraudulent activities and mismanagement, safeguarding investor interests.

Control over Insider Trading:

Insider trading refers to buying or selling securities based on non-public, material information about the company. SEBI has strict regulations to prevent insider trading and punish those who indulge in such activities.

Role in Market Fairness: By regulating insider trading, SEBI ensures a level playing field for all investors and fosters investor confidence in the market.

Approval of Prospectus and Issuance of Securities:

SEBI approves the prospectuses issued by companies when they seek to raise capital from the public through Initial Public Offerings (IPOs), Follow-on Public Offers (FPOs), or Rights Issues. It ensures that companies disclose accurate and comprehensive information about their financial health, business plans, and risks.

Role in Investor Information: By regulating the issuance of securities, SEBI ensures that investors have access to adequate and accurate information before making investment decisions.

2. Developmental Functions of SEBI:

In addition to its regulatory functions, SEBI also plays a key developmental role in promoting the growth of the securities markets in India. It works towards improving market infrastructure, encouraging innovation, and creating a conducive environment for investments.

Promoting Market Efficiency and Growth:

SEBI takes various steps to enhance the efficiency of the capital markets by introducing modern trading systems, reducing transaction costs, and ensuring that trading practices are transparent. It encourages the development of new financial instruments, such as exchange-traded funds (ETFs) and derivatives, to provide investors with more investment options.

Role in Market Development: SEBI’s initiatives aim to create a dynamic and efficient market environment that attracts both domestic and foreign investments, driving economic growth.

Encouraging Institutional Investors:

SEBI encourages the participation of institutional investors such as mutual funds, pension funds, and foreign institutional investors (FIIs) in the securities market. By promoting institutional investments, SEBI helps in diversifying the investor base, increasing market liquidity, and ensuring the long-term stability of the market.

Role in Capital Market Growth: Institutional investors bring stability to the market by making long-term investments, which encourages businesses to raise capital for expansion and development.

Investor Education and Awareness:

SEBI promotes investor education and awareness through various programs, campaigns, and initiatives. It organizes seminars, workshops, and educational programs to inform investors about their rights and the risks involved in investing in the securities market.

Role in Market Participation: By educating investors, SEBI ensures that they make informed decisions, which leads to more participation and greater confidence in the capital markets.

Developing the Infrastructure of the Securities Market:

SEBI plays a pivotal role in improving the infrastructure of the securities market. This includes promoting automation of stock exchanges, improving the settlement system, and ensuring that market participants have access to modern technological tools for trading and clearing.

Role in Market Innovation: SEBI's development initiatives help modernize market practices, making them more accessible, efficient, and investor-friendly.

3. Protective Functions of SEBI:

SEBI's protective functions are designed to safeguard the interests of investors, maintain market integrity, and prevent fraudulent practices. It works to ensure that the securities markets operate in a manner that promotes investor trust and confidence.

Protection Against Fraudulent Activities and Malpractices:

SEBI regulates and monitors the activities of market participants to prevent fraudulent activities, such as market manipulation, misleading advertisements, and scams. It takes stringent action against those found violating securities laws, including imposing fines and penalties.

Role in Investor Trust: By preventing fraudulent activities, SEBI creates a safe investment environment, encouraging more participation from retail and institutional investors.

Investor Grievance Redressal:

SEBI provides a mechanism for investors to lodge complaints regarding unfair practices in the securities market. It has established a dedicated platform, the "SEBI Complaints Redress System (SCORES)," for the speedy resolution of investor grievances.

Role in Investor Confidence: By offering a grievance redressal system, SEBI ensures that investors have a reliable means to resolve issues and complaints, thus protecting their interests.

Regulation of Collective Investment Schemes (CIS) and Mutual Funds:

SEBI regulates collective investment schemes and mutual funds to ensure that investors' money is managed efficiently and transparently. It ensures that mutual funds operate within the framework of the law and provide accurate and timely information to investors.

Role in Investment Security: SEBI ensures that mutual funds and other collective investment schemes are well-regulated, protecting investors' interests and maintaining market stability.

Corporate Governance:

SEBI plays a critical role in improving corporate governance practices in listed companies. It mandates the disclosure of financial information, board structure, and related-party transactions, among other things, to ensure transparency and accountability in the functioning of companies.

Role in Corporate Integrity: By enforcing good corporate governance, SEBI ensures that companies operate ethically, which boosts investor confidence and fosters long-term market growth.

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The Treasure Notes

GU Indian Financial System Solved Question Paper 2023 [Gauhati University BCom 1st Sem NEP FYUGP]