Financial Institutions: formula sheet

Key formulas

Four components of the financial system

Financial system = Institutions + Markets + Instruments + Services

Use this as the skeleton for any question asking for the structure or components.

Financial markets split

Financial markets = Money market (up to 1 year) + Capital market (long term: primary + secondary)

Money market deals in short-term funds; capital market in long-term funds. Do not mix up the two.

Capital formation chain

Savings → Financial intermediation → Investment → Capital formation → Growth

Use this to explain the role in economic development.

Core functions

Mobilise savings, allocate funds, provide liquidity, enable payments, manage risk, discover prices

List these six, then add one line of explanation for each.

Regulator-to-sector map

RBI → banks, NBFCs, money market, forex, payments | SEBI → securities market | IRDAI → insurance | PFRDA → pensions (NPS)

Use this one-line map to place any institution under the right regulator.

SEBI's three-part mandate

Protect investors + Develop the market + Regulate the market

Start any SEBI answer with this.

RBI quantitative monetary tools

Repo rate, reverse repo rate, CRR, SLR, open market operations, marginal standing facility, bank rate

CRR is a share of a bank's deposits kept with RBI as cash. SLR is a share kept in liquid assets such as cash, gold or approved securities. A higher CRR or SLR reduces the money banks can lend.

Direction of policy action

Tighten: raise repo, CRR, SLR or sell securities | Ease: lower them or buy securities

Raising rates or selling securities reduces liquidity and credit. The opposite adds liquidity.

Classification by ownership and purpose

Banks = Commercial (public, private, foreign) + Cooperative + Regional Rural Banks + Small Finance Banks + Payment Banks

Use this as the opening line of any 'types of banks' answer.

Classification by schedule

Scheduled = in Second Schedule of RBI Act, 1934 (meets Section 42(6) conditions); Non-scheduled = not in it

The distinction is about inclusion in the Schedule, not the size of the bank.

Primary functions of a commercial bank

Primary = Accepting deposits + Lending

Everything else (agency and utility services) is secondary.

Payment bank limit

Payment bank: deposits (up to RBI cap per customer) allowed; lending and credit cards not allowed

Learn the restriction, not a fixed rupee figure, because the RBI can revise the cap.

NABARD

NABARD = agriculture + rural development + refinance

Refinances banks for farm and non-farm rural activity, supports cooperative and regional rural banks, and promotes rural credit and development work.

SIDBI

SIDBI = MSME finance + refinance + promotion

Apex institution for MSME financing and development. Lends mainly through banks and other institutions, and also directly.

EXIM Bank

EXIM Bank = export and import finance + project exports

Offers credit to exporters and importers, and lines of credit to overseas entities to promote Indian exports.

NHB

NHB = housing finance regulation/promotion + refinance

Promotes housing finance institutions and refinances them. Check current ICMAI material for regulatory role details, as this has changed over time.

DFI vs bank

DFI: long-term, development aim | Bank: deposits, short to medium term

Use this one-line contrast in any compare question.

Money market vs capital market: maturity

Money market: up to 1 year | Capital market: more than 1 year

This is the base for every comparison question. Write it first.

Primary vs secondary market

Primary = new issue, funds reach the issuer | Secondary = trading of existing securities, funds go to selling investor

Secondary trading does not add capital to the company.

Depository structure

Investor → Depository Participant → Depository (NSDL / CDSL) → Issuer

Shares are held as electronic entries in a demat account.

Mutual fund unit value

NAV per unit = (Market value of assets − Liabilities) ÷ Number of units outstanding

Useful for numerical questions on mutual funds.

Factoring advance

Advance = Invoice value × Advance % ; Factoring commission = Invoice value × Commission %

Commission is usually charged on the full invoice value. Interest is charged only on the advance, for the period it is outstanding.

Net cost of factoring (per period)

Cost = Commission + Interest on advance − Savings (collection cost, bad debts avoided)

Compare the net cost with the interest saved or the benefit gained. Express as a percentage of the advance for annual cost.

Annualised cost

Annual cost % = (Charges ÷ Base amount) × (Days in year ÷ Days outstanding)

Use the day-count basis the question gives (360 or 365). Use the base the question specifies: the advance or the net cash received. If annual charges are given, divide them by the advance directly.

Lease rental (basic)

Annual lease rental = Cost of asset ÷ Present value annuity factor

Ignores residual value and tax. Add them only if the question gives them.

Key contrasts

Factoring: short-term domestic receivables. Forfaiting: medium-term export receivables, non-recourse.

Finance lease: lessee bears risks. Operating lease: lessor bears risks.

Quick revision

• The financial system has four parts: markets, instruments, institutions and services.
• Its main function is to channel savings into investment.
• RBI regulates banks and the money market and is the central bank.
• SEBI regulates the securities market and protects investors.
• IRDAI regulates insurance and PFRDA regulates pension schemes.
• Money market deals in short-term funds; capital market deals in long-term funds.
• Banks accept deposits repayable on demand or after a period; NBFCs generally cannot issue cheques drawn on themselves.
• NABARD supports agriculture and rural development; SIDBI supports small industries; EXIM Bank supports foreign trade.
• Development financial institutions provide long-term finance for sectors that need special support.
• Primary market raises new capital; secondary market trades existing securities.
• Insurance transfers risk; pension institutions build retirement savings.
• For comparison answers, always give points side by side on the same parameters.

Common mistakes

• Treating financial institutions, markets and instruments as the same thing. Fix: Remember: institutions are the players, markets are the places, instruments are the products traded.
• Placing long-term instruments in the money market or short-term ones in the capital market. Fix: Money market deals in funds up to one year, such as treasury bills and commercial paper. Capital market covers long-term instruments such as shares and debentures.
• Giving RBI the power to regulate stock exchanges or mutual funds. Fix: Link securities, exchanges and mutual funds to SEBI. RBI covers banks, NBFCs, money market and forex.
• Confusing CRR and SLR. Fix: CRR is held with RBI as cash. SLR is held by the bank itself in liquid assets such as cash, gold or approved securities.
• Saying payment banks can give loans. Fix: Remember payment banks accept limited deposits and offer payments, but do not lend or issue credit cards.
• Treating small finance banks and payment banks as the same. Fix: Link SFB with 'basic banking and lending to underserved' and payment bank with 'payments and deposits, no lending'.
• Treating IDBI and SIDBI as the same institution. Fix: Remember the S: SIDBI is Small Industries. IDBI is the older industrial development bank, now operating as a bank.
• Saying NABARD lends mostly directly to farmers. Fix: Write that NABARD mainly provides refinance to banks and cooperative institutions, who lend to farmers.
• Saying the company receives money when shares are traded on the stock exchange. Fix: Remember that the issuer receives funds only in the primary market. In the secondary market, money moves between investors.
• Treating NSDL and CDSL as stock exchanges. Fix: They are depositories that hold securities electronically. Trading happens on BSE or NSE.

Exam tips

• Always open with a definition and the four-component frame; it earns easy marks even if you forget details.
• Use Indian examples (RBI, SEBI, NABARD, treasury bills) rather than generic ones.
• In MCQs, test the maturity rule: up to one year is money market, longer is capital market.
• For 'discuss the role' questions, draw or write the savings-to-growth chain; it shows logic and fits a written format for step marks.
• Do not quote statistics such as savings rates unless the question gives them.
• Learn the one-line sector map first. Most MCQs test only who regulates what.
• For short notes, use objective, functions and powers as fixed headings of your answer.
• Revise direction of policy tools. Questions often ask what happens when a rate or ratio rises.