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MA0036 — Financial system and Commercial Banking

MA0036 — Financial system and Commercial Banking


Summer 2013

Master of Business Administration- MBA Semester 3

MA0036 — Financial system and Commercial Banking — 4 Credits

(Book ID: B1770)

Assignment- 60 marks

Note: Answer all questions. Kindly note that answers for 10 marks questions should be approximately of 400 words. Each question is followed by evaluation scheme.


Q1. The key functions of financial system are to provide a link between savers and investors. What are the key functions of financial market?

( explanation of functions of financial markets – 10 marks) 10 marks

Answer : Functions of financial markets :

A financial market is a market in which financial assets are traded. In addition to enabling exchange of previously issued financial assets, financial markets facilitate borrowing and lending by facilitating the sale by newly issued financial assets. Examples of financial markets include the New York Stock Exchange (resale of previously issued stock shares), the U.S. government bond market (resale of previously issued bonds), and the U.S. Treasury bills auction (sales of newly issued T-bills).

Intermediary Functions:

The intermediary functions of a financial markets include the following:


Q2. Explain the meaning and the purpose of financial instruments.

(meaning – 5 marks; functions of financial instruments – 5 marks) 10 marks

Answer :  Meaning of financial instrument :

A financial instrument is a trade able asset of any kind; either cash, evidence of an ownership interest in an entity, or a contractual right to receive or deliver cash or another financial instrument.

According to IAS 32 and 39, it is defined as “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity”.

Types of financial instruments :

Stocks and bonds are the most traditional types of financial instruments, although there are sophisticated ways to invest in these securities. When an investor purchases stock, he or she is obtaining an equity stake in that corporate entity that entitles him or her to share in profits and vote on some key events. Buying equity also exposes an investor to risk in that there is little recourse if a stock loses value.


Q3. Discuss the role played by brokers and primary dealers in the process of intermediation?

(brokers role-5 marks; primary dealers role – 5marks) 10 marks

Answer :  Broker’s role in the process of  intermediation :

1. A brokers typically work for the policyholder in the insurance process and act  independently in relation to insurers. Brokers assist clients in the choice of their insurance by presenting them with alternatives in terms of insurers and products. Acting as “agent”  for the buyer, brokers usually work with multiple companies to place coverage for their  clients. Brokers obtain quotes from various insurers and guide clients in determining the adequate policy from a range of products.

Primary dealer’s role in the process of intermediation :

A primary dealer is a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities. The government may regulate the behavior and numbers of its primary dealers and impose conditions of entry. Some governments sell their securities only to primary dealers; some sell them to others as well


Q4. The Bank for International Settlement (BIS) was established in 1930 with its headquarters inBasel, Switzerland. Explain Basel Concordant.

(Basel origin- 2marks; Basel Concordant- 8 marks) 10 marks

Answer :  Basel origin of BIS :

The Bank for International Settlements was established in 1930. It is the world’s oldest international financial institution and remains the principal centre for international central bank cooperation.

The BIS was established in the context of the Young Plan (1930), which dealt with the issue of the reparation payments imposed on Germany by the Treaty of Versailles following the First World War

Basel Concordant :

The Basel “Concordat”, produced by the Basel Committee on Banking Supervision, is a seminal work on international banking regulation (1983). Since 1975, the Basel Committee had been developing its “Principles for the supervision of banks’ foreign establishments” — originally known under the designation “Basel Concordat” — in an effort to close any regulatory gaps that existed.


Q5. The RBI, apart from the role of regulator and supervisor of payment systems, also plays the role of a settlement bank apart from being a catalyst, an operator and a user. Discuss the role played by RBI in technological up gradation?

(explain RBI- 4 marks; explain the role played by RBI in technological upgradation-6 marks) 10 marks


Answer : RBI :

The Reserve Bank of India (RBI) is India’s central banking institution, which formulates the monetary policy with regard to the Indian rupee. It was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of ₹100 each fully paid, which was entirely owned by private shareholders in the beginning.  Following India’s independence in 1947, the RBI was nationalized in the year 1949.


Role of RBI in technological up gradation :

As at the end of March 2008, there were 91 RRBs with a total of 14,816 branches. These included 46 amalgamated and 45 stand alone banks. These RRBs employed  68,069 staff.

In paragraph 148 of the Reserve Bank’s Mid-term Review of Annual Policy for 2007-08, it was stated that in order to prepare RRBs to adopt appropriate technology and migrate to Core Banking Solutions (CBS) for better customer services, it is proposed to constitute a Working Group with representatives from Reserve Bank, NABARD, sponsor banks and RRBs for preparing a road-map for migration to core banking solutions by RRBs.


Q6. Explain the challenges and issues regarding the perspective in banking industry.

(challenges-5 marks; issues-5 marks) 10 marks

Answer : Challenges regarding the perspective in banking industry :

1) Self-interest sometimes morphs into greed and selfishness, which is unchecked self-interest at the expense of someone else. This greed becomes a kind of accumulation fever. “If you accumulate for the sake of accumulation, accumulation becomes the end, and if accumulation is the end, there’s no place to stop,” he said. The focus shifts from the long-term to the short-term, with a big emphasis on profit maximization.


2) Some people suffer from stunted moral development: “I think this happens in three areas: the failure to be taught, the failure to look beyond one’s own perspective, and the lack of proper mentoring,” Duska said.

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