BANKING AND INSURANCE

MBA 4TH SEM UNIT 1

Reserve bank of India (RBI): Role, functioning, regulation of money and credit, monetary and fiscal policies. Overview of financial services: Introduction, nature, scope and uses, regulatory framework in financial services.

===================================================================== INDIAN FINANCIAL SYSTEM The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities. Financial System

The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below. Financial System refers to the financial needs of different sectors of the economy and the ways and means to meet such needs efficiently and economically. Funds are required for meeting various monetary needs. The financial needs are met from different sources and agencies. Indian financial system are given in the diagram below.

The formal financial system consists of four components: 1. 2. 3. 4. Financial institutions, Financial markets, Financial instruments and Financial services.

The financial system acts as a connecting link between savers of money and users of money and thereby promotes faster economic and industrial growth. Thus financial system may be defined as a set of markets and institutions to facilitate the exchange of assets and risks. Efficient functioning of the financial system enables proper flow of funds from investors to productive activities which in turn facilitates investment. Classification of Financial Market in India Type of financial market are given in the diagram below.

The financial markets are classified into two groups: Capital Market 1. Corprate Market Primary Market Secondary Market 2. Government Securities Markets 3. Long Term Loans Markets Term Loan Markets Mortgages Markets Financial Guarantees Markets Money Market 1. Unorganized Market

Money Lenders Indigenous Bankers Chit Funds 2. Organized Money Market Treasury Bills Commercial Paper (CP) Certificate Of Deposit (CD) etc Call Money Market Commercial Bill Market Capital Market A capital market is an organized market. It provides long term finance for business. According to Shri, K.S. Capital Market refers to the facilities and institutional arrangements for borrowing and lending long-term funds. Capital Market is divided into three groups: 1. Industrial / Corporate Securities Market It is a market for industrial securities. Corporate securities are equity and preference shares, debentures and bonds of companies. Industrial security's market is very Sensitive and Active Financial Market. It can be divided into two groups: Primary and Secondary Market

Primary Market: It is a market for new issue of securities, which are issued to the public for first time. It is also called as New Issue Market. Secondary Market: In the secondary market, there is a sale of secondary securities. It is also called as Stock Market. It facilitates buying and selling of securities.

2. Government Securities Market In this market, government securities are bought and sold. It is also called as Gilt-Edged Securities Market. The securities are issued in the form of bonds and credit notes. The buyers of such securities are Banks, Insurance Companies, Provident funds, RBI and Individuals. These securities may be of short-term or long term. 3. Long-Term Loans Market Banks and Financial institutions provide long-term loans to firms, for modernization, expansion and diversification of business. Long-Term Loan Market can be divided into:

Term Loans Market: Banks and Financial Institutions provide term loans to companies for a period of one year. The financial institutions help in recognizing investment opportunities to motivate emerging businessmen. They also give encouragement to modernization. Mortgages Market: It provides loans against securities of immovable assets like land and buildings. Financial Guarantees Market: Financial Institutions (FIS) and banks provide financial guarantees on behalf of their clients to third parties.

Money Market Money Market is the market for short term funds i.e. for a period up to one year. The money market is divided into two: Unorganized and Organized Money Market. 1. Unorganized Market Unorganized market consists of: Money lenders, Indigenous Bankers, Chit Funds, etc.

Money Lenders: Money Lenders lend money to individuals at a high rate of interest. Indigenous Bankers: They operate like money lenders. They also accept deposits from public. Chit Funds: These collect funds from members and provide loans to members and others.

2. Organized Money Market Organized Markets work as per the rules and regulations of the RBI. RBI keeps a strict control over the Organized Financial Market in India. Organized Market consists of: Treasury Bills, Commercial Paper (CP), Certificate Of Deposit(CD), Call Money Market, Commercial Bill Market.

Treasury Bills: To raise short term funds treasury bills are issued by Government. It is purchased by Commercial Banks. At present, Government issues 91 days and 364 days treasury bills. Commercial Paper (CP): Commercial paper is issued by companies who are listed on Stock Exchange. CP is issued at discount and repaid at face value. The maturity period ranges from 7 days to one year. CP's are issued in multiple of 5 lakh. The company issuing CP must have tangible net worth of at least 4 crore. Certificate Of Deposit (CD): CD's are used by Commercial Banks and Financial Institutions to raise finance from the market. The maturity period for CD's is between 7 days to 1 year. CD's is issued at a discount and repaid at face value. CD's is issued for a minimum of 25 lakhs.

Call Money Market: A loan which is taken or given for a very short period, that is for one day is called Call Money Market. It involves lending and borrowing of money on a daily basis. No security is required for these very short-term loans. Commercial Bill Market (CBM): This market deals with Bills of exchange. The drawer of the bill can get the bills discounted with Commercial Banks. The Commercial Banks can get the bills rediscounted with Financial Institutions.

FINANCIAL MARKETS A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend. Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions. Capital Market - The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year. Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe. Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.

Constituents of a Financial System

FINANCIAL INSTRUMENTS Money Market Instruments The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost. Some of the important money market instruments are briefly discussed below; Money Bills Money Deposit

1. 2. 3. 4. 5. Commercial Papers

Call/Notice Treasury Term Certificate of

1. Call /Notice-Money Market Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions. 2. Inter-Bank Term Money Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days. 3. Treasury Bills. Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction. 4. Certificate of Deposits Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to

time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and intercorporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. 5. Commercial Paper CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. (for more details visit www.indianmba.com faculty column) Capital Market Instruments The capital market generally consists of the following long term period i.e., more than one year period, financial instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible preference shares etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc. Hybrid Instruments Hybrid instruments have both the features of equity and debenture. This kind of instruments is called as hybrid instruments. Examples are convertible debentures, warrants etc. FINANCIAL INTERMEDIATION

Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor in order to garner the requisite amount. When the borrower of funds approaches the financial market to raise funds, mere issue of securities will not suffice. Adequate information of the issue, issuer and the security should be passed on to take place. There should be a proper channel within the financial system to ensure such transfer. To serve this purpose, Financial intermediaries came into existence. Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve Bank of India. In the initial stages, the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower. This service was offered by banks, FIs, brokers, and dealers. However, as the financial system widened along with the developments taking place in

the financial markets, the scope of its operations also widened. Some of the important intermediaries operating ink the financial markets include; investment bankers, underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers, satellite dealers, self regulatory organizations, etc. Though the markets are different, there may be a few intermediaries offering their services in move than one market e.g. underwriter. However, the services offered by them vary from one market to another. Intermediary Role Secondary Market to Stock Exchange Capital Market securities Corporate advisory services, Investment Bankers Capital Market, Credit Market Issue of securities Capital Market, Money Subscribe to unsubscribed Underwriters Market portion of securities Issue securities to the Registrars, Depositories, investors on behalf of the Capital Market Custodians company and handle share transfer activity Primary Dealers Satellite Market making in government Money Market Dealers securities Ensure exchange ink Forex Dealers Forex Market currencies Market

RESERVE BANK OF INDIA The Reserve Bank of India is the central banking system of India and controls the monetary policy of the rupee as well as US$300.21 billion (2010 of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934[2] and plays an important part in the development strategy of the government. It is a member bank of the Asian Clearing Union. Main function 1.Monetary authority:-he Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors. The national economy depends on the public sector and the central bank promotes an expansive monetary policy to push the private sector since the financial market reforms of the 1990s.[26] The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking

services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins.[27] 2,Manager of exchange control:-The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. 3.Issuer of currency:-The bank issues and exchanges or destroys currency and coins not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves. 4. Developmental role:-The central bank has to perform a wide range of promotional functions to support national objectives and industries.[7] The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of this problems are results of the dominant part of the public sector.[28] 5. Related functions:-The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition.] The institution maintains banking accounts of all scheduled banks, too. There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above. The recent financial turmoil world-over, has however, vindicated the Reserve Bank's role in maintaining financial stability in India. RBI has various tools to control which are listed below (a) Bank Rate: RBI (Reserve Bank of India) lends to the commercial banks through its discount window to help the banks meet depositors demands and reserve requirements. The interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system, it will increase the bank rate. The current rate is 6%. (b) Cash Reserve Requirements (CRR): Every commercial bank has to keep certain minimum cash reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to affect a decrease or an increase in the money supply. An increase in CRR will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 6%.

(c) Statutory Liquidity Requirements (SLR): Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. RBI has stepped up liquidity requirements for two reasons: - Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and The RBI functions within the framework of a mixed economic system. With regard to framing various policies, it is necessary to maintain close and continuous collaboration between the government and the RBI. In the event of a difference of opinion or conflict, the government view or position can always be expected to prevail. The Preamble of the RBI Act, 1934 states that Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in (India) and generally to operate the currency and credit system of the country to its advantage. To elaborate, the main functions of the RBI are: Role of RBI 1. Barring the emergence of any adverse and unexpected developments in various sectors of the economy, assuming that capital flows are effectively managed, and keeping in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in 2008-09 will broadly continue to be: 2. To ensure a monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum. 3. To respond swiftly on a continuing basis to the evolving constellation of adverse international developments and to the domestic situation impinging on inflation expectations, financial stability and growth momentum, with both conventional and unconventional measures, as appropriate. 4. To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion.

REGULATION OF MONEY AND CREDIT

Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth.[1] In India, the central monetary authority is the Reserve Bank of India (RBI). is so designed as to maintain the price stability in the economy. Other objectives of the monetary policy of India, as stated by RBI, are: 1. Price Stability :- Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favourable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.

2. Controlled Expansion Of Bank Credit :-One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output. 3. Promotion of Fixed Investment :-The aim here is to increase the productivity of investment by restraining non essential fixed investment. 4. Restriction of Inventories :- Overfilling of stocks and products becoming outdated due to excess of stock often results is sickness of the unit. To avoid this problem the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in the organization 5. Promotion of Exports and Food Procurement Operations :-Monetary policy pays special attention in order to boost exports and facilitate the trade. It is an independent objective of monetary policy. 6. Desired Distribution of Credit:-Monetary authority has control over the decisions regarding the allocation of credit to priority sector and small borrowers. This policy decides over the specified percentage of credit that is to be allocated to priority sector and small borrowers. 7. Equitable Distribution of Credit :-The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social and economic class of people

MONETARY POLICY Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.The official goals usually include relatively stable prices and low unemployment. Monetary economics provides insight into how to craft optimal monetary policy. Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing. TOOLS Monetary base :-Monetary policy can be implemented by changing the size of the monetary base. Central banks use open market operations to change the monetary base. The central bank

buys or sells reserve assets (usually financial instruments such as bonds) in exchange for money on deposit at the central bank. Those deposits are convertible to currency. Together such currency and deposits constitute the monetary base which is the general liabilities of the central bank in its own monetary unit. Usually other banks can use base money as a fractional reserve and expand the circulating money supply by a larger amount. Reserve requirements :-The monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve with the central bank. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve changes the availability of loanable funds. This acts as a change in the money supply. Central banks typically do not change the reserve requirements often as it can create volatile changes in the money supply and may disrupt the banking system. Discount window lending :-Central banks normally offer a discount window, where commercial banks and other depository institutions are able to borrow reserves from the Central Bank to meet temporary shortages of liquidity caused by internal or external disruptions. This creates a stable financial environment where savings and investment can occur, allowing for the growth of the economy as a whole. The interest rate charged (called the 'discount rate') is usually set below short term interbank market rates. Accessing the discount window allows institutions to vary credit conditions (i.e., the amount of money they have to loan out), thereby affecting the money supply. Through the discount window, the central bank can affect the economic environment, and thus unemployment and economic growth. Interest rates : The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates. Monetary authorities in different nations have differing levels of control of economy-wide interest rates. In the United States, the Federal Reserve can set the discount rate, as well as achieve the desired Federal funds rate by open market operations. This rate has significant effect on other market interest rates, but there is no perfect relationship. In the United States open market operations are a relatively small part of the total volume in the bond market. One cannot set independent targets for both the monetary base and the interest rate because they are both modified by a single tool open market operations; one must choose which one to control. A meta-analysis of 70 empirical studies on monetary transmission finds that a one-percentage-point increase in the interest rate typically leads to a 0.3% decrease in prices with the maximum effect occurring between 6 and 12 months.[43] In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By raising the interest rate(s) under its control, a monetary authority can contract the money supply, because higher interest rates encourage savings and discourage borrowing. Both of these effects reduce the size of the money supply. Currency board :-A currency board is a monetary arrangement that pegs the monetary base of one country to another, the anchor nation. As such, it essentially operates as a hard fixed

exchange rate, whereby local currency in circulation is backed by foreign currency from the anchor nation at a fixed rate. Thus, to grow the local monetary base an equivalent amount of foreign currency must be held in reserves with the currency board. This limits the possibility for the local monetary authority to inflate or pursue other objectives. The principal rationales behind a currency board are threefold: 1. To import monetary credibility of the anchor nation; 2. To maintain a fixed exchange rate with the anchor nation; 3. To establish credibility with the exchange rate (the currency board arrangement is the hardest form of fixed exchange rates outside of dollarization). In theory, it is possible that a country may peg the local currency to more than one foreign currency; although, in practice this has never happened (and it would be a more complicated to run than a simple single-currency currency board). A gold standard is a special case of a currency board where the value of the national currency is linked to the value of gold instead of a foreign currency. The currency board in question will no longer issue fiat money but instead will only issue a set number of units of local currency for each unit of foreign currency it has in its vault. The surplus on the balance of payments of that country is reflected by higher deposits local banks hold at the central bank as well as (initially) higher deposits of the (net) exporting firms at their local banks. The growth of the domestic money supply can now be coupled to the additional deposits of the banks at the central bank that equals additional hard foreign exchange reserves in the hands of the central bank. The virtue of this system is that questions of currency stability no longer apply. The drawbacks are that the country no longer has the ability to set monetary policy according to other domestic considerations, and that the fixed exchange rate will, to a large extent, also fix a country's terms of trade, irrespective of economic differences between it and its trading partners. Hong Kong operates a currency board, as does Bulgaria. Estonia established a currency board pegged to the Deutschmark in 1992 after gaining independence, and this policy is seen as a mainstay of that country's subsequent economic success (see Economy of Estonia for a detailed description of the Estonian currency board). Argentina abandoned its currency board in January 2002 after a severe recession. This emphasized the fact that currency boards are not irrevocable, and hence may be abandoned in the face of speculation by foreign exchange traders. Following the signing of the Dayton Peace Agreement in 1995, Bosnia and Herzegovina established a currency board pegged to the Deutschmark (since 2002 replaced by the Euro). Unconventional monetary policy at the zero bound :-Other forms of monetary policy, particularly used when interest rates are at or near 0% and there are concerns about deflation or deflation is occurring, are referred to as unconventional monetary policy. These include credit easing, quantitative easing, and signaling. In credit easing, a central bank purchases private sector assets to improve liquidity and improve access to credit. Signaling can be used to lower market expectations for lower interest rates in the future. For example, during the credit crisis of 2008, the US Federal Reserve indicated rates would be low for an extended period, and the Bank of Canada made a conditional commitment to keep rates at the lower bound of 25 basis points (0.25%) until the end of the second quarter of 2010.

FISCAL POLICY In economics and political science, fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors. These changes can affect the following macroeconomic variables in an economy:

Aggregate demand and the level of economic activity; The distribution of income; The pattern of resource allocation within the government sector and relative to the private sector.

Fiscal policy refers to the use of the government budget to influence economic activity. Methods of funding Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits. This expenditure can be funded in a number of different ways:

Taxation Seigniorage, the benefit from printing money Borrowing money from the population or from abroad Consumption of fiscal reserves Sale of fixed assets (e.g., land)

Borrowing A fiscal deficit is often funded by issuing bonds, like treasury bills or consols and gilt-edged securities. These pay interest, either for a fixed period or indefinitely. If the interest and capital requirements are too large, a nation may default on its debts, usually to foreign creditors. Public debt or borrowing refers to the government borrowing from the public. Consuming prior surpluses A fiscal surplus is often saved for future use, and may be invested in either local currency or any financial instrument that may be traded later once resources are needed; notice, additional debt is not needed. For this to happen, the marginal propensity to save needs to be strictly positive.

FINANCIAL SERVICES: INTRODUCTION Financial Services is a term used to refer to the services provided by the finance market. Financial Services is also the term used to describe organizations that deal with the management of money. Examples are the Banks, investment banks, insurance companies, credit card companies and stock brokerages. These are the types of firms comprising the market, that provide a variety of money and investment related services. Financial services are the largest market resource within the world, in terms of earnings. Defining Financial Services can also be termed as, any service or product of a financial nature that is the area under discussion to, or is governed by a measure maintained by a Party or by a public body that exercises regulatory or supervisory authority delegated by law. Understanding Financial Services Financial Services are generally not limited to the field of deposit-taking, loan and investment services, but is also present in the fields of insurance, estate, trust and agency services, securities, and all forms of financial or market intermediation including the distribution of financial products. Aligned with a background of sharp risk, market and regulatory pressures, Financial Services organizations are striving to grow and enhance their shareholder values. Day by day the customer needs and expectations are growing. Thus, making the mark in increasing personal wealth, a mature population and the desire that can more easily be reached to the personalized financial products and services. Intense competition has squeezed market margins and forced most companies to cut costs while enhancing the quality of customer choice and service. As Financial Services organizations strive to become more innovative and entrepreneurial, the war for talent is intensifying. The risks increase as the products become more complex, the organizations and the business environment ever more uncertain. At the same time, regulation is the tightening highlight within the reach of public and government pressure for improved supremacy, transparency and accountability. In this environment, the winners will be companies that can turn the challenges into opportunities to build stronger and more enduring customer relationships, sharpen their process efficiency, unlock talent and creativity, use improved risk management processes to deliver more sustainable returns and use used regulatory demands as a catalyst for strengthening the business and enhancing market confidence.

The fast pace of change aspect element within the global Financial Services market has created the need for a new generation of solutions that can operate in real time with a very flawless reliability. The challenges faced by the Financial Services market are forcing market participants to keep pace with technological advances, and to become more proactive and efficient while keeping in mind to reduce costs and risks. The Financial Services have been able to represent an increasingly significant financial driver, and a significant consumer of a wide range of business services and products. The current Fortune 500 has listed 40 commercial banking companies with revenues of almost a $341 trillion, up a modest 3% since last year. Another $700 trillion or so comes from the 57 companies comprising the savings institutions, insurance and diversified financial companies. The market in Financial Services is not only a powerful economic force, but can also be considered as a driver of other industries' success, standards, and operations. Virtually each and every company uses financial services institutions for not only their own, but their customers business purposes, and the practices, regulations and standards that the market adopts affects the way that their own customers. To have an effective network strategy in place enables the Financial Services organizations to become more customer-oriented. This helps to increase their profitability, enhance the alertness factor, also lessen total ownership costs, and deal with used business challenges. There are many companies working with financial organizations worldwide to develop a sound networking strategy for connecting companies with customers, suppliers, partners, and employees too. Thus concluding here that the Financial Services market is diverse and dynamic. An everchanging versatile, high-growth market, Financial Services consist of everything from individual or group consultants to banks, credit cards and alternative financing providers. Businesses that have differing needs and the diversity and range of the financial services market has several selections available to better suit them all. There is a lot you can learn about the Financial Services industry. It is an exciting, important industry that has a direct impact on the way businesses operate and grow, and subsequently, the economy of our nation too.