Page 40 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 3: Financial Institutions

Notes
The reduction in holdings was most significant in short-term negotiable instruments that
included dollar-denominated treasury bills. Holdings of short-term negotiable securities
in February this year were $1.8 billions. In January, the holdings amounted to $11.794
billions.
But the liquidation of custodial assets by Indian institutions coincided with the phased
withdrawal of the US Federal Reserve Board's collateralised liquidity support to the financial
markets. The withdrawal signified exit from quantitative expansion with the potential to
gradually harden the dollar yield, implying losses if held further. Traders said that part of
the reduction in February was also on account of the year-end inter country adjustments.
The reduction in the holdings could also be partly attributed to the RBI's note purchase
agreement with the International Monetary Fund (IMF) in July 2009.
India finally subscribed to the IMF notes in March this year. The shift to multilateral
agency debt instruments, traders said, was partly on account of better yields. Short term
dollar treasury bills offer low yields of barely 0.5 per cent. Interest rates on SDR (special
drawing rates of the IMF) are currently about 1.3 per cent. In February, however, India's
holdings of the dollar treasury securities dropped only $1.1 billions. Traders said that
there was also some shift to the longer end of the yield curve. This was evident from the
sharp reduction in short term securities to only a slight reduction in long term securities.
The shift notwithstanding, India's long term investments were entirely in the dollar treasury
notes. The dollar treasury notes have a maximum maturity of ten years. The shift to the
longer end was partly driven by better yields. The yield on ten-year dollar treasury notes
in February was as high as 3.75 per cent. The shift was also partly on account of the longer
term nature of the accretion to the India's foreign exchange reserves. Long-term accretions
included foreign direct investments and accretions to non resident non-repatriable deposits
in the banking system.

Source: www.thehindubusinessline.com

3.6 Financial Innovation in Commercial Banks

The term "financial innovations" refers to the various innovative activities in respect of strategic
decision making, system arranging, institutional setting, personnel preparing, mode of
management, business flow and financial products and so on, which are carried out by commercial
banks through bringing in new technologies, applying new methods, expanding new markets
and establishing new organizations in order to adapt to the development of economics, and
which are finally embodied into continuous improvement of the risk management capacities of
banks, and the creations and updating of service products and service methods offered to customers.

Notes Modern day commercial banking, was itself a significant financial innovation some
three centuries ago in Europe, as it originated from the practice of goldsmiths issuing
receipts against the gold deposited with them by customers.

These 'goldsmith receipts' were an accepted means of payment. Goldsmiths soon found
that as long as they maintained gold to satisfy occasional redemptions, they could issue
receipts for more than the value of the gold deposited with them. Such receipts were
effectively loans made to customers and being an accepted means of exchange, it promoted
economic activity and trade and incidentally earned a good profit also for the goldsmiths.

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