Answer the following
1) Explain the problems faced by the money market in India.
Ans: Compared to advanced countries, the Indian money market is less developed in terms of volume and liquidity.
Following points explain the problems of the Indian Money Market:
Dual Structure of the Money Market: Presence of both, the organized and unorganized sectors in the money market leads to disintegration, lack of transparency, and increased volatility. The unorganized markets lack coordination and do not come under the direct control and supervision of the RBI.
Lack of uniformity in the rates of interest: The money market comprises various entities such as commercial banks, co-operative banks, non-bank finance companies, development finance institutions, investment companies, etc. The category of borrowers is also different.
Shortage of funds: Money market faces a shortage of funds due to inadequate savings. Low per capita income, poor banking habits among the people, indulgence in wasteful consumption, inadequate banking facilities in the rural areas, etc. have also been responsible for the paucity of funds in the money market.
Seasonal fluctuations: Demand for funds varies as per the seasons. During the peak season, from October to June, finance is required on a large scale for various purposes such as trading in agricultural produce, investment in business activities, etc. This results in wide fluctuations in the money market.
Lack of financial inclusion: Banking facilities in the country are still inadequate and inaccessible to the vulnerable groups such as the weaker sections and the low-income groups. This shows a lack of financial inclusion.
Delays in technological up-gradation: Use of advanced technology is a pre-requisite for the development and smooth functioning of financial markets. Delays in the up-gradation of technology hamper the working of the money market.
2) Explain the functions of commercial bank.
Ans: The functions of commercial banks are classified into two main divisions.
(A) Primary functions:
Accepts deposit – The bank takes deposits in the form of saving, current, and fixed deposits. The surplus balances collected from the firm and individuals are lent to the temporary requirements of commercial transactions.
Provides Loan and Advances – Another critical function of this bank is to offer loans and advances to the entrepreneurs and business people and collect interest. For every bank, it is the primary source of making profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit, and short-run loans, etc.
Credit Cash – When a customer is provided with credit or loan, they are not provided with liquid cash. First, a bank account is opened for the customer, and then the money is transferred to the account. This process allows a bank to create money.
(B) Secondary functions:
Discounting bills of exchange – It is a written agreement acknowledging the amount of money to be paid against the goods purchased at a given point of time in the future. The amount can also be cleared before the quoted time through a discounting method of a commercial bank.
Overdraft Facility – It is an advance given to a customer by keeping the current account to overdraw up to the given limit.
Purchasing and Selling of the Securities – The bank offers you the facility of selling and buying the securities.
Locker Facilities – Bank provides lockers facility to the customers to keep their valuable belongings or documents safely. Banks charge a minimum of an annual fee for this service.
Paying and Gathering the Credit – It uses different instruments like a promissory note, cheques, and bill of exchange.
3) Explain the role of capital market in India.
Ans: Following are the Role of Capital Market in India:
Mobilizes long term savings: There is an increasing demand for investment funds by industrial organizations and the government. But the availability of financial resources is insufficient to meet this growing demand. The capital market helps to mobilize long term savings from various sections of the population through the sale of securities.
Provides equity capital: Capital market provides equity capital or share capital to entrepreneurs which could be used to purchase assets as well as fund business operations.
Operational efficiency: Capital market helps to achieve operational efficiency by lowering the transaction costs, simplifying transaction procedures, lowering settlement timings in the purchase and sale of stocks.
Quick valuation: Capital market helps to determine a fair and quick value of both equity (shares) and debt (bonds, debentures) instruments.
Integration: Capital market leads to integration among real and financial sectors, equity and debt instruments, government and private sector, domestic and external funds, etc.
4) Explain the problems of capital market in India.
Ans: Following points explain the problems faced by the Indian Capital Market :
Financial Scams: Increasing number of financial frauds have resulted in an irreparable loss for the capital market. Besides this, it has also led to public distrust and loss of confidence among the individual investors.
Insider trading and price manipulation: Insider trading means buying or selling of a security by someone who has access to non-public information or ‘unpublished information’ for personal benefit. Price manipulation or price rigging on the other hand means to simply raise the prices of shares through buying and selling of shares within certain individuals themselves for personal gains. Such illegal practices have also affected the smooth functioning of the capital market.
Inadequate debt instruments: Debt instruments include bonds, debentures, etc. There is not much trading in the debt securities due to a narrow investor base, high cost of issuance, lack of accessibility to small and medium enterprises.
Decline in the volume of trade: Regional stock exchanges have witnessed a sharp decline in the volume of trade because investors prefer to trade in securities listed in premier stock exchanges like BSE, NSE, etc.
Lack of informational efficiency: A market is said to be informationally efficient if a company’s stock prices incorporate all the available information into the current prices. However, the stock market in India lacks informational efficiency compared to advanced countries.