II M.

COM – UNIT – III

Financial Market – meaning – features – capital market – primary market – secondary market
– present position of stock market in India – Money market – characteristics of development
money market – importance – problems faced by Indian money market – difference between
capital market and money market.

Financial Markets - Meaning

A Financial Market is referred to space, where selling and buying of financial assets
and securities take place. It allocates limited resources in the nation’s economy. It serves as
an agent between the investors and collector by mobilizing capital between them.
In a financial market, the stock market allows investors to purchase and trade publicly
companies share. The issues of new stocks are first offered in the primary stock market, and
stock securities’ trading happens in the secondary market.
Features of Financial Markets
A financial market is as vital to the economy as blood is to the body. To know more about it,
let us understand its following features:

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1. Acts as a Link:
Financial markets connect the investors to the borrowers and bridge the gap between
the two for mutual benefits.
2. Easy Accessibility:
These markets are readily available anytime for both the investors and the borrowers.
3. Trades in Marketable and Non-Marketable Securities:
Financial markets initiate buying and selling of marketable commodities, some of
these are bonds, debentures and shares along with non-marketable securities like bank
deposits, post office deposits and other loans and advances.
4. Government Rules and Regulations:
The government controls the operations of a financial market in the country by
imposing different rules and regulations.
5. Involves Financial Intermediaries:
These markets require Financial Intermediaries such as a bank, non-banking
financial companies, stock exchanges, Mutual Fund companies, insurance companies,
brokers, etc. to function.
6. Deals in Long and Short-Term Investment:
For the investors, financial markets provide an opportunity of putting in their funds
into various securities or schemes for short or Long-tern Investing benefits.
What is Capital Market?
Capital markets are financial markets that bring buyers and sellers together to trade
stocks, bonds, currencies, and other financial assets. Capital markets include the stock market
and the bond market. They help people with ideas become entrepreneurs and help small
businesses grow into big companies.
Features of Capital Markets
1) The Capital Market provides a common ground for lenders and borrowers to connect.
2) It is a market of financial assets involving long maturity.
3) The market functions as per the regulations set by the Government.
4) The Capital Market uses several intermediaries, such as brokers, sub-brokers,
depositories, collection bankers, underwriters, etc.
5) The market determines the rate of capital formation.
6) Functions of Capital Market

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Functions of Capital Market
1. Links Borrowers and Investors: Capital markets serve as an intermediary between
people with excess funds and those in need of funds.
2. Capital Formation: The capital market plays an important role in capital formation. By
timely providing sufficient funds, it meets the financial needs of different sectors of the
economy.
3. Regulate Security Prices: It contributes to securities' stability and systematic pricing. The
system monitors whole processes and ensures that no unproductive or speculative activities
occur. A standard or minimum interest rate is charged to the borrower. As a result, the
economy's security prices stabilize.
4. Provides Opportunities to Investors: The capital markets have enough financial
instruments to meet any investor's needs, regardless of the risk level. Capital markets also
provide investors with the opportunity to increase their capital yields. The interest rate on
most savings accounts is extremely low compared to the rate on equities. Therefore, investors
can earn a higher rate of return on the capital market, though some risks are involved as well.
5. Minimizes Transaction Cost and Time: Long-term securities are traded on the capital
market. The whole trading process is simplified and reduced in cost and time. A system and
program automate every aspect of the trading process, thus speeding up the entire process.
6. Capital Liquidity: The financial markets allow people to invest their money. In exchange,
they receive ownership of a stock or bond. Bond certificates cannot be used to purchase a car,
food, or other assets, so they may need to be liquidated. Investors can sell their assets for
liquid funds to a third party on the capital markets.
Types of Capital Markets
Capital markets are mainly divided into 2 different types.
1. Primary Markets: The primary market is the part of the capital market that deals
with the issuance and sale of securities to investors directly by the issuer. An investor
buys securities that were never traded before. Primary markets create long term
instruments through which corporate entities raise funds from the capital market.
2. Secondary Markets: The secondary market, also called the aftermarket and follow
on public offering is the financial market in which previously issued financial
instruments such as stock and bonds are bought and sold

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Primary Market - Meaning
The primary market is also known as new issues market, which refers to the market
where securities, such as stocks, primary bonds, and debentures, are created and issued for
the first time by companies or governments in order to raise capital. In finance we refer to the
market where new securities are bought and sold for the first time as primary market.
Functions of Primary Market
The primary market performs several important functions in the economy. Let’s learn
about these functions of primary market in details. The following are few of the objectives of
primary market:
1. Raising capital
The primary market is a vital source of capital for companies looking to expand their
operations, invest in new projects, or pay off existing debt. By issuing new securities in the
new issues market, companies can raise the funds they need to grow their businesses.
2. Price discovery
The new issues market helps to establish the fair market value of newly issued
securities by setting the initial price through the IPO or other mechanisms. This process helps
to ensure that investors are paying a fair price for the securities they are buying.
3. Facilitating the transfer of risk
In the primary market, the risk is transferred from the company to the investors who
purchase the newly issued securities. This allows companies to reduce their financial risk and
transfer it to investors who are willing to take on that risk in exchange for the potential for
higher returns.

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4. Providing investment opportunities
The new issues market offers a range of investment opportunities to investors,
including equity shares, bonds, and other debt instruments. These securities can be purchased
by individuals, institutional investors, and other market participants who are looking to
diversify their portfolios and achieve their investment objectives.
5. Regulations of primary market
The primary market is regulated by government bodies such as the Securities and
Exchange Board of India (SEBI) in India. These regulatory bodies are responsible for
ensuring that securities issuances are conducted in a fair, transparent, and efficient manner.
Furthermore, those investors are protected from fraud and other abuses.
Advantages of Primary Market
1. Potential for higher returns: Investing in the primary market securities can provide the
opportunity for possibly higher returns. This is compared to other investment options like
fixed deposits or bonds.
2. First access to securities: By investing in the new issue market, investors have the first
opportunity to buy securities issued by companies. This can provide a competitive advantage
over secondary market investors.
3. Potential for capital appreciation: If the company performs well and its stock price
increases, investors can benefit from capital appreciation, resulting in an increase in the value
of their investment.
4. Control over investment decisions: Investors have more control over their investment
decisions in the new issues market. This is because they can choose which securities to invest
in based on their own research and analysis.
Disadvantages of Primary Market
1. High risk: Investing in the new issues market can be risky as there is no track record of the
company’s performance, and there is a higher probability of the company failing.
2. Lack of liquidity: Securities in the new issues market may have limited liquidity, making
it difficult for investors to sell their holdings quickly.
3. Limited information: Investors may have limited information about the company, its
financial performance, and future prospects. This can make it difficult to make informed
investment decisions.

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Secondary Market (or) Aftermarkets - Meaning
Secondary market, also known as aftermarkets, plays a crucial role in the global
economy. The meaning of secondary market is in the form of and refers to the financial
markets where securities, such as shares and bonds, are bought and sold after they have been
issued in the primary market. Primary markets are where newly issued securities are sold to
the public for the first time. Secondary market examples include stock exchanges (BSE,
NYSE, and NSE) and over-the-counter (OTC) markets.
Features of Secondary Market
1. Price Discovery: This market helps determine the fair market value of security through the
forces of supply and demand. If a stock is in high demand, its price will go up; if not, it’ll go
down.
2. Transparency: Most secondary markets, especially stock exchanges, offer high
transparency, ensuring all market participants can access price information.
3. Accessibility: With online brokerages like Alice Blue, retail investors can easily
participate in the secondary market without hassle.
4. Market Orders: Various types of orders can be placed, like limit orders, stop orders, and
so on, giving investors flexibility in their trading strategy.
Benefits of Secondary Market
1. Liquidity: Secondary capital markets enable investors to quickly buy or sell securities,
enhancing the liquidity of financial assets.
2. Price Discovery: Secondary markets facilitate the determination of market prices for
securities, reflecting the supply and demand of the assets.
3. Risk Reduction: Secondary markets enable investors to diversify their portfolios and
hedge against risks, reducing the overall risk of their investments.
4. Capital Formation: Secondary markets enable companies to raise capital by issuing
securities to investors, funding their growth and expansion.
Disadvantages of Secondary Markets
1. Market Volatility: Secondary markets can be volatile, leading to fluctuations in the prices
of securities.
2. Insider Trading: Insider trading involves the use of non-public information to gain an
unfair advantage in the market.
3. Market Manipulation: Market manipulation involves the deliberate attempt to artificially
influence the price of securities.

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Examples of Secondary Market Transaction
Here are a few examples of secondary market transactions:
1. Stock trading: An investor buys shares of a publicly traded company, such as Apple or
Amazon, from another investor on the New York Stock Exchange (NYSE). The shares were
previously issued by the company in an Initial Public Offering (IPO) and are now being
traded on the secondary market.
2. Bond trading: An investor buys a bond issued by a corporation, such as Microsoft or
Coca-Cola, from another investor in the bond market. The bond was previously issued by the
company to raise funds and is now being traded on the secondary market.
3. Mutual fund investment: An investor purchases shares of a mutual fund, such as Fidelity
or Vanguard, from another investor in the secondary market. The mutual fund invests in a
diversified portfolio of securities, such as stocks and bonds, and is now being traded on the
secondary market.
4. Options trading: An investor buys a call option on a stock, such as Tesla or Facebook,
from another investor in the options market. The call option gives the investor the right, but
not the obligation, to buy the underlying stock at a specified price within a certain time
period.
5. Futures contract trading: An investor buys a futures contract on a commodity, such as
crude oil or gold, from another investor in the futures market. The futures contract obligates
the investor to buy or sell the underlying commodity at a specified price on a specified date in
the future.

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Distinguish between Primary Market and Secondary Market
Aspects of Primary Market Secondary Market
Comparison
Definition Companies issue and sell new Investors buy and sell existing securities.
securities.
Purpose Companies raise capital via Investors engage in trading pre-issued
new shares or bonds. securities.
Participants Issuers (companies) and Primarily investors (both retail and
investors (public, institutions)
institutional). Companies may repurchase
shares occasionally.
Trade Volume Limited Higher trading volume
Price Company sets issue price based Prices determined by supply and demand
Determination on valuation and market dynamics.
conditions.
Role of Investment banks and Stock exchanges and stockbroking
Intermediaries institutions underwrite and platforms facilitate all trading.
issue.
Capital Flow Flows from investors to the Moves between investors in trading
issuing company. transactions.
Present Position of Stock Market in India
The secondary market is also known as the stock market; Trading of securities in India dates
to the 18th century when the East India Company began trading in loan securities. 1830s:
During this decade, corporate shares started being traded in Mumbai. Most notably, stocks of
banks and cotton presses were traded during this time.

Here are some key recent developments in the Indian stock market:
1. Sensex and Nifty at record highs:
India's benchmark indices Sensex and Nifty have been hitting new all-time highs in
recent months, crossing psychological milestones like 60,000 and 18,000 respectively. This is
led by strong foreign inflows, recovery from COVID impact, and positive economic outlook.
2. IPO frenzy:
There has been a surge in IPO activity in India in 2021 and 2022. Major IPOs like
Zomato, Nykaa, PolicyBazaar have seen huge subscription and listing gains. This has been
driven by high liquidity, booming startup ecosystem, and attractive valuations.

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3. Retail investor participation:
The pandemic led to a significant increase in new demat account openings and
participation of retail investors, especially via online brokerages. Retail money in equities
reached record levels.
4. Indices inclusion:
MSCI has increased India's weightage in its global indices. S&P Dow Jones Indices
have added new Indian stocks to its indices. This led to huge foreign inflows into India.
5. Volatility due to global factors:
Rising inflation, monetary tightening by global central banks, Russia-Ukraine conflict
has led to bouts of high volatility in Indian markets impacting FIIs flows.
6. Focus on technology and startups:
Technology and startups are driving a lot of capital inflows into India. there is
increasing interest in companies like InfoEdge, Zomato, Nykaa among investors.
So in summary, while the long-term outlook remains positive, short-term challenges
persist driven by global macro environment. Regulators are also looking to curb excessive
speculation and risk.
Meaning - Money market
Money market is an important part of the economy which provides short-term fund.
The money market is the part of financial market which deals in the borrowing and lending of
short-term loans generally for a period of less than or equal to 365 days. Money market is
considered a safe place to invest due to the high liquidity of securities.
The money market is an unregulated and informal market and not structured like the
capital markets, where things are organized in a formal way. Money market gives lesser
return to investors who invest in it but provides a variety of products.
Structure of the Indian Money Market
The Indian money “Market” is divided into two distinct parts: I) organized sector, and
2) unorganized sector,

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1) Organized Sector:
 This sector consists of the
 Reserve Bank of India,
 State Bank of India and its subsidiaries,
 foreign exchange banks,
 Nationalized banks,
 all scheduled and lion-scheduled commercial banks and
 The regional rural banks.
 Besides, some nonbanking companies and
 financial institutions like
 the Life Insurance Corporation of India,
 the General insurance Company of India,
 The Unit Trust of India, etc., also operate in the organised money market. Chit funds
and post-office savings banks also play a significant tole specially in semi-urban
areas and small towns.
2) Unorganized Sector:
This part of the money market consists of indigenous bankers and the money-lenders
called mahajans, seths, shroffs, chettiars, etc., in different parts of the -country. Many of the
indigenous bankers combine banking business with trading and commission business,
whereas others deal primarily in banking activities. The indigenous bankers deal in 'hundis'
and 'promissory notes'. Nearly fifty per cent of the internal trade depends on finance from the
unorganized sector.

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Characteristics of the Indian Money Market
Some of the key characteristics or features of the Indian Money Market are as follows:
1. Segmented Structure:
The Indian money market can be categorized into organized and unorganized
sectors. The organized sector includes institutions like the Reserve Bank of India (RBI),
commercial banks, cooperative banks, and other financial institutions. However, the
unorganized sector comprises indigenous bankers and money lenders.
2. Regulatory Oversight by the RBI:
The Reserve Bank of India plays a pivotal role in regulating and supervising the
Indian money market. It controls the money supply in the economy, manages liquidity, and
ensures the stability of the financial system.
3. Focus on Short-Term Financing:
The Indian money market predominantly deals with short-term financial instruments
having maturities of up to one year. It enables participants to fulfill their short-term funding
requirements and efficiently manage liquidity.
4. Diverse Array of Instruments:
The Indian money market offers a wide range of instruments; including treasury
bills, certificates of deposit, and commercial papers, call money, etc. These instruments
serve as avenues for short-term borrowing, lending, and investment activities.
5. High Liquidity:
The Indian money market is known for its high liquidity due to the presence of
diverse participants and instruments. Market participants can readily buy or sell their
holdings without significant price fluctuations.
6. Low-risk Instruments:
Instruments in the Indian money market are generally considered low-risk because
of their short maturities and backing by credible issuers such as the government, banks, and
financial institutions. Consequently, they are attractive to risk-averse investors.
7. Significance in Monetary Policy Transmission:
The money market plays a critical role in transmitting monetary policy decisions.
The RBI employs various tools, such as open market operations, repo rate, and reverse repo
rate, to regulate liquidity in the money market and influence overall interest rates in the
economy.

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8. Dominance of Institutional Investors:
Institutional investors, including banks, financial institutions, and mutual funds,
primarily dominate the Indian money market. Individual retail investors have limited direct
participation, although they can indirectly access the money market through mutual funds
and other investment vehicles.
9. Interconnectedness with Other Financial Markets
The Indian money market exhibits interconnections with other segments of the
financial market, such as the capital market and foreign exchange market. Funds from the
money market can flow into long-term investments or be utilized for currency trading.
10. Ongoing Infrastructure Development:
The Indian money market has experienced significant growth and development in
recent years. Efforts have been made to enhance market infrastructure, improve
transparency, and introduce new instruments to cater to the evolving needs of participants.

Defects of the Indian Money Market (or) Problems faced by Indian Money Market

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 The Indian money market has been associated with several defects that hinder its
efficient functioning. Some of the defects of the Indian money market are as follows:
1. Existence of Unorganized Money Market:
The Indian money market consists of both organized and unorganized sectors. The
unorganized sector, which includes indigenous bankers and moneylenders, lacks proper
regulations and operates outside the purview of RBI. This leads to issues such as lack of
transparency, high-interest rates, and exploitation of borrowers. Borrowers may face
difficulties in accessing fair and transparent lending practices, affecting the overall
efficiency of the market.
2. Absence of Cooperation amongst the Members of the Money Market:
The lack of cooperation and coordination among the various participants in the
money market, including banks, financial institutions, and the government, hampers the
smooth functioning of the market. Without effective collaboration, the market may
experience inefficiencies, liquidity problems, and a fragmented structure. Cooperative
efforts are necessary to ensure the stability and optimal functioning of the money market.
3. Lack of Uniformity in Interest Rates in the Money Market:
In the Indian money market, interest rates are not uniform across different segments
and participants. This lack of uniformity creates disparities and uncertainties, making it
difficult for market participants to make informed decisions. It also affects the transmission
of monetary policy and the overall stability of the market. Transparent and consistent
interest rate mechanisms are essential for an efficient money market.
4. Absence of Organized Bill Market:
A well-developed bill market is crucial for the functioning of the money market.
However, in India, the bill market is not adequately organized. This absence of an
organized bill market limits the availability of short-term credit instruments, such as
treasury bills and commercial bills, which are essential for liquidity management and
financing trade transactions. A well-regulated bill market is necessary to facilitate efficient
short-term financing.
5. Seasonal Financial Stringency:
The Indian money market experiences seasonal fluctuations in liquidity and
financial stringency. This is primarily due to factors like agricultural cycles, festive
seasons, and government borrowing patterns. These fluctuations can lead to volatility in
interest rates and create uncertainties for market participants. Strategies to manage these
seasonal fluctuations are necessary for maintaining stability.
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6. Shortage of Capital in the Money Market:
The Indian money market faces a shortage of capital to meet trade and industry
requirements. The limited availability of capital hampers the development of various
sectors and restricts the growth potential of the overall economy. Adequate availability of
capital is crucial for sustaining economic growth and meeting the funding needs of
businesses and individuals.
7. Lack of Development of the Indian Money Market:
The Indian money market is not as developed as other major global money markets.
It lacks depth, breadth, and sophistication in terms of financial products and instruments.
This hinders the efficient allocation of funds and impedes the overall growth and stability
of the financial system. Developing a diverse range of financial products and instruments
can enhance the market’s efficiency.
8. Excessive Number of Indigenous Bankers in the Money Market:
The presence of a large number of indigenous bankers, such as moneylenders and
unregulated non-banking financial entities, creates issues of unfair practices, lack of
accountability, and high-interest rates. It also contributes to the unorganized nature of the
money market. Proper regulation and oversight are necessary to mitigate these issues and
ensure fair and transparent practices.
9. Absence of Specialized Institutions in the Money Market:
The Indian money market lacks specialized institutions that can cater to specific
financial needs and provide specialized financial services. This absence limits the options
available to market participants and hampers the overall efficiency of the money market.
The establishment and strengthening of specialized institutions can enhance the market’s
ability to meet diverse financial requirements.
10. Non-availability of Credit Instruments:
The Indian money market suffers from a lack of diverse and readily available credit
instruments. The absence of a wide range of credit instruments restricts the flexibility and
effectiveness of financing options for borrowers and lenders. Developing a comprehensive
range of credit instruments can provide market participants with more options for managing
their financing needs.

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Difference between Money Market and Capital Market

Basis Money Market Capital Market

A market for short-term funds that A marketer including all institutions,

is meant to use for a period of upto organizations’ and instruments
Meaning
one year is known as Money providing medium and long-term
Market. funds is known as a Capital Market.

The participants of money market

are banks, financial institutions, The participants of capital market
foreign investors, and public and are banks, financial institutions,
Participants private companies. However, foreign investors, ordinary retail
ordinary retail investors from investors from public, and public
public do not participate in this and private companies.
market.

The money market deals in

The capital market deals in securities
Duration securities of short-term with a
of medium and long term.
maximum tenure of one year.

Some of the common instruments Some of the common instruments of

of money market are Call Money, a capital market are debentures,
Instruments Commercial Bills, T. Bills, equity shares, bonds, preference
Commercial Paper, Certificate of shares, and other innovative
Deposits, etc. securities.

As the value of securities in the

The instruments of the money
capital market is generally low (of
Investment market are quite expensive;
about ₹10 to ₹100), the investment
Outlay therefore, the financial investment
in this market does not require a
requirement of this market is huge.
huge financial investment.

The securities that come under the

capital market are considered liquid.
Money market securities are highly It is because of the stock exchange.
Liquidity
liquid. However, these securities are less
liquid as compared to the
instruments of money market.

The instruments of a money market The instruments of a capital market

are less risky or safe as they are are riskier. The investors may face
Safety used for a short period of time and the risk in return as well as principal
also because of the soundness of repayment, as the companies issuing
the issuers. the securities may fail.

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Basis Money Market Capital Market

The expected return of a capital

The duration of the money market market is higher. It is because along
Expected
is short; therefore, the expected with regular interest or dividend, the
Return
return here is less. investors have chances of capital
gain.

Companies approach money

Type of Companies approach capital market
market when they need working
Capital when they need fixed capital.
capital.

Money Market Instruments:

1. T-Bills
Treasury Bills or T-Bills issued by the Reserve Bank of India on behalf of the Central
Government for the receipt of funds. They have a short-term maturity of up to one year.
Currently, T-Bills are issued for 3 maturity periods, which is 91 days T-Bills, 182 days T-
Bill, one year T-Bill. T-Bills are issued at a discount on face value. At maturity, the investor
receives a face value. The difference between the original value and the face value is the
return earned by the investor. It is a complete fixed income investment as supported by the
Government of India.
2. Trading Papers
Large corporations and businesses are issuing fundraising promises to meet short-term
business needs, known as Commercial Papers (CPs). These firms have a high credit rating,
due to the fact that the transaction documents are not secured, with the company’s credibility
acting as financial asset protection.
Companies, startups (PDs), and All-India Financial Institutions (FIs) can issue CPs.
CPs has a fixed maturation time ranging from 7 days to 270 days. However, investors can sell
this instrument in the secondary market. They offer higher profits compared to those from
financial buildings.

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3. Deposit Certificates
DCs are financial assets issued by banks and financial institutions. They offer fixed
interest on the investment. The main difference between a DC and a Fixed Deposit is that of
the principal amount that can be invested. The first is issued for large sums of money (1 lakh
or for 1 lakh multipliers thereafter).
Due to the limited investment limit, DCs are more popular with organizations than
people who want to pack their remaining money in the short term and earn interest as well.
The period of maturity of Deposit Certificates ranges from 7 days to 1 year if issued by
banks. Some financial institutions may issue a DC with maturity from one year to three years.
4. Purchase Agreements
Also known as repos or repurchase, Repurchase Agreements are the formal
agreements between two parties, where one party sells the security to the other, with the
promise of buying it again later from the buyer also called a Transaction-Buy transaction.
The seller buys the security for a specified period and time of money including the interest
rate at which the buyer agrees to purchase the security. The interest rate charged by a
consumer for agreeing to buy a mortgage is called the Repo rate. Repos come in handy when
a retailer needs temporary cash, they can simply sell the securities and get the disposal funds.
The buyer gets the chance to reap the benefits of the investment.
5. Bank Approval
A financial instrument produced by an individual or organization, in the name of the
bank, is known as Banker’s Acceptance. It requires the donor to pay the owner of the metal a
certain amount specified on the pre-determined day, which ranges from 30 to 180 days, from
the date of issue of the metal. It is a safe financial instrument as payment is guaranteed by a
commercial bank. Bank approval is issued at a discounted price, and the actual amount is
paid to its owner at maturity. The difference between the two is the investment made by the
investor.
Instruments of Capital Market
Capital markets teem with diverse financial instruments, each having its own role and
significance. When businesses and governments need to raise capital, they issue securities
that investors can purchase. There are three main instruments in the capital market:
1) equities (stocks, shares),
2) bonds, and
3) derivatives

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 What are the Financial Instruments traded in the Share Market?
There are four categories of financial instruments that are traded on the Share Market. These
include: -
1. Shares
A share or a stock of a company represents a unit of equity ownership in a company.
Shareholders are entitled to any profits in the form of Dividends that the company may
earn. They also enjoy the right to vote in any Annual General Meeting (AGM) of the
company.
2. Mutual Funds
Mutual Funds are investments that allow you to indirectly invest in share markets or
bonds. In simpler terms, the money pooled by a large number of people (or investors) is
what makes a Mutual Fund.
3. Bonds
To undertake long term and profitable projects, a company requires substantial amount of
capital. Bonds refer to high-security debt instruments that enable an organization to raise
funds and capital to fulfill their requirements.
4. Derivatives
The term Derivative refers to a type of financial contract whose value is dependent on an
underlying asset or a group of assets. This can have a wide variety such as shares, bonds,
currency, commodities and more. Contract value depends on changes in the price of the
underlying asset.
What is Repo rate? (OR) Re - Purchase Agreement
The introduction of Liquidity adjustment facility (LAF) in India was on the basis of
the recommendations of Narasimham Committee on Banking Sector Reforms (1998). In
April 1999, an interim LAF was introduced to provide a ceiling and the fixed rate repos were
continued to provide a floor for money market rates.
REPO is used with respect to banks; full form of REPO is repurchase agreement.
Under this system a bank can borrow money from RBI with the intention of paying back that
money at a future date with interest. REPO rate is fixed by reserve bank of India; current
REPO rate is 8 percent. This rate is quite important for maintaining growth and inflation of a
country as higher rate would imply that banks will have to borrow at higher rate of interest
and therefore they will give loans at even higher rates leading to fall in growth of a country.;

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What is a Non-Banking Financial Company (NBFC)?
A Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit
business but does not include any institution whose principal business is that of agriculture
activity, industrial activity, purchase or sale of any goods (other than securities) or providing
any services and sale/purchase/construction of immovable property. A non-banking
institution which is a company and has principal business of receiving deposits under any
scheme or arrangement in one lump sum or in installments by way of contributions or in any
other manner, is also a non-banking financial company (Residuary non-banking company).
Here are the 10 Top NBFCs in India in 2023
1) Aditya Birla Capital
2) Bajaj Finserv
3) L&T Finance Holdings Limited
4) Cholamandalam Investment and Finance Company Limited
5) Muthoot Fincorp
6) Reliance Capital
7) Shriram Finance Ltd
8) Poonawalla Fincorp
9) Edelweiss Financial Services

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