Financial Institutions and Markets - Study Guide
This domain tests the institutions that channel funds and the markets where instruments trade. Questions often ask you to classify an institution or instrument, identify the regulator, and explain the difference between money-market and capital-market products.
Core ideas
- Banking institutions include scheduled commercial banks, regional rural banks and cooperative banks; NBFCs lend but cannot accept demand deposits.
- Contractual savings institutions include life insurers and pension funds; mutual funds pool investor money and issue units.
- Money market: T-bills (government, discount, up to 1 year), commercial paper (unsecured corporate promissory note), certificates of deposit (bank), call money (very short interbank).
- Capital market: equity shares, preference shares, debentures and bonds; primary issues raise capital; secondary trading does not.
- Stock exchanges provide trading and price discovery; SEBI regulates securities markets; RBI regulates money market and banking.
Worked example
A company issues 91-day commercial paper with face value ₹100 at a discount. The market yield is 8% per annum. Discount = ₹100 × 8% × 91/365 = ₹1.9956, so issue price is about ₹98.00. The investor pays ₹98.00 and receives ₹100 at maturity; the ₹2.00 difference is the return. This is a money-market instrument because maturity is under one year, it is unsecured, and it is issued by a company rather than the government.
Traps
T-bills have no coupon; return comes from discount. Commercial paper is unsecured, while a certificate of deposit is a bank liability. A secondary-market purchase does not give the company new funds. NBFCs are not banks. Do not use SEBI for bank licensing or RBI for stock-exchange listing rules.