Page 11 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes The Financial Market can also be classified according to instruments, such as the debt market
and the equity market. The debt market is also known as the Fixed Income Securities Market and
its segments are the Government Securities Market (Treasury bills and bonds) and the Private
Debt Securities Market (commercial paper, private bonds and debentures). Another distinction
can also be drawn between primary and secondary markets. The Primary Market is the market
for new issues of shares and debt securities, while the Secondary Market is the market in which
existing securities are traded.
The Reserve Bank of India through its conduct of monetary policy influences the different
segments of the Financial Market in varying degrees. The Reserve Bank's policy interest rates
have the greatest impact on a segment of the Money Market called the inter-bank call money
market and a segment of the Fixed Income Securities Market, i.e. the Government Securities
Market.

Financial Instruments

The main financial instruments can be categorized as under:

Deposits

Deposits are sums of money placed with a financial institution, for credit to a customer's account.
There are three types of deposits — demand deposits, savings deposits and fixed or time deposits.

Demand deposits are mainly used for transaction purposes and for the safekeeping of funds.
Funds can be withdrawn on demand. Demand deposits do not earn interest, but banks provide
a number of services to demand deposit- holders like cheque facilities, standing orders, Automated
Teller Machine (ATM) cards and debit cards to facilitate withdrawals and payments.
Savings deposits earn interest, which may be calculated on a daily, weekly, monthly or annual
basis. Funds may be withdrawn from savings accounts at any time. However, if the number of
withdrawals exceeds four in any month, interest will not be paid for that particular month.
Financial institutions issue passbooks or statements detailing transactions to savings deposit
holders and also provide services such as ATM and debit cards.

Fixed or time deposits are funds placed at financial institutions for a specified period or term.
Fixed/time deposits earn a higher rate of interest than savings deposits. Fixed/time deposits
can be for short, medium or long term. Funds can only be withdrawn before the maturity date
with prior notice and a penalty may be imposed. A fixed/time deposit holder has a facility to
borrow funds from the financial institution using the deposit as collateral.
Loans

A loan is a specified sum of money provided by a lender, usually a financial institution, to a
borrower on condition that it is repaid, either in installments or all at once, on agreed dates and
at an agreed rate of interest. In most cases, financial institutions require some form of security
for loans.

Treasury Bills and Bonds

Treasury bills are government securities that have a maturity period of up to one year. Treasury
bills are issued by the central monetary authority (the RBI), on behalf of the Government of
India. Treasury bills are issued in maturities of 91 days, 182 days and 364 days. Treasury bills are
zero coupon securities and are sold at a discount to face value, which is paid at maturity. The
difference between the purchase price and the face value is the interest income to the owner.

6 LOVELY PROFESSIONAL UNIVERSITY