What Is a Financial Institution (FI)?

A financial institution (FI) is a company engaged in the business of dealing with

financial and monetary transactions such as deposits, loans, investments, and
currency exchange. Financial institutions encompass a broad range of business
operations within the financial services sector including banks, trust companies,
insurance companies, brokerage firms, and investment dealers. Virtually everyone
living in a developed economy has an ongoing or at least periodic need for the
services of financial institutions.

What is Non-Performing Asset (NPA)

A nonperforming asset (NPA) refers to a classification for loans or advances that

are in default or are in arrears on scheduled payments of principal or interest. In
most cases, debt is classified as nonperforming when loan payments have not
been made for a period of 90 days. While 90 days of nonpayment is the standard,
the amount of elapsed time may be shorter or longer depending on the terms and
conditions of each loan.

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Loan Syndication vs. Consortium: An Overview

A loan syndication usually occurs when multiple banks lend money to a borrower
all at the same time and for the same purpose. In a very general sense, a
consortium is any group of individuals or entities that decide to pool resources
toward a given objective. A consortium is usually governed by a legal contract
that delegates responsibilities among its members. In the financial world, a
consortium refers to several lending institutions that group together to jointly
finance a single borrower.

These multiple banking arrangements are very similar to a loan syndication,

although there are structural and operational differences between the two.

Loan Syndication

While a loan syndication also involves multiple lenders and a single borrower, the
term is generally reserved for loans involving international transactions, different
currencies, and a necessary banking cooperation to guarantee payments and
reduce exposure. A loan syndication is headed by a managing bank that is
approached by the borrower to arrange credit. The managing bank is generally
responsible for negotiating conditions and arranging the syndicate. In return, the
borrower generally pays the bank a fee.

Loan syndication is the most common way for European and American
corporations to seek financing from banks and other lenders. In Europe, loan
syndication is primarily driven by private equity sponsors, while in the U.S.,
corporate borrowers and private equity sponsors drive the loan syndication
market in equal measures.
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The managing bank in a loan syndication is not necessarily the majority lender, or
"lead" bank. Any of the participating banks may act as lead or assume the
responsibilities of the managing bank depending on how the credit agreement is
drawn up.

A loan syndication is similar to a consortium, although there are structural and

operational differences between the two.

Consortium

Like a loan syndication, consortium financing occurs for transactions that might
not take place with a single lender. Several banks agree to jointly supervise a
single borrower with a common appraisal, documentation, and follow-up and
own equal shares in the transaction. Unlike in a loan syndication, there is not one
lead bank that manages the financing project; all of the banks play an equal role
in managing the project.

Consortiums are not built to handle international transactions such as a

syndication loan; instead, a consortium may arise because the size of the project
at hand is simply too large or too risky for any single lender to assume. While loan
syndications typically work across borders and may handle financing in different
currencies, consortiums typically occur within the boundaries of a given nation.

Sometimes the participating banks form a new consortium bank that functions by
leveraging assets from each institution and disbands after the project is complete.
By allowing all of the members to pool their assets, consortiums allow smaller
banks to tackle larger projects.\

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Loan syndications are generally reserved for loans involving international
transactions, different currencies, and necessary banking cooperation.

A consortium is usually governed by a legal contract that delegates

responsibilities among its members.

Consortium financing occurs for transactions that might not take place with a
single lender.

Definition: Maximum Permissible Banking Finance(MPBF)

MPBF stands for Maximum Permissible Banking Finance in Indian Banking Sector.
MPBF is mainly a method of working capital assessment. As per the
recommendations of Tandon Committee, the corporate are discouraged from
accumulating too much of stocks of current assets and are recommended to
move towards very lean inventories and receivable levels. This is where MPBF
comes into picture. There are 2 methods for MPBF calculation.

WHAT ARE ASSETS IN ACCOUNTING?

An asset is a resource or property having a monetary/economic value possessed

by an individual or entity, which is capable to generate some future economic
benefit. Assets are generally brought in business to benefit from them and to
increase the value of a business. In simple language, it means anything that a
person “owns” say a house or equipment. In the accounting context, an asset is a
resource that can generate cash flows. The assets are recorded on the balance
sheet. They are found on the right-hand side of the balance sheet and can also be
referred to as “Application of Funds”. The assets include furniture, machinery,
accounts receivable, cash, investments, etc. We shall discuss various Types of
Assets in this article.
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Assets are classified into different types based on their convertibility to cash; use
in business or basis their physical existence. Assets are a part of the balance sheet
and are stated at historical cost less depreciation deducted so far or at cost or at
cost or market value, whichever is lower.

CLASSIFICATION OF ASSETS

Assets are generally classified in the following three ways depending upon nature
and type:

1. ON THE BASIS OF CONVERTIBILITY

One way of classification of assets is based on their easy convertibility into cash.
According to this classification, total assets are classified either into Current
Assets or Fixed Assets.

CURRENT ASSETS

ssets which are easily convertible into cash like stock, inventory, marketable
securities, short-term investments, fixed deposits, accrued incomes, bank
balances, debtors, bills receivable, prepaid expenses etc. are classified as current
assets. Current assets are generally of a shorter lifespan as compared to fixed
assets which last for a longer period. Current assets can also be termed as liquid
assets.

FIXED ASSETS

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Fixed assets are of a fixed nature in the context that they are not readily
convertible into cash. They require elaborate procedure and time for their sale
and converted into cash. Land, building, plant, machinery, equipment, and
furniture are some examples of fixed assets. Other names used for fixed assets
are non-current assets, long-term assets or hard assets. Generally, the value of
fixed assets generally reduces over a period of time (known as depreciation).

2. ON THE BASIS OF PHYSICAL EXISTENCE

Another classification of assets is based on their physical existence. According to

this classification, an asset is either a tangible asset or intangible asset.

TANGIBLE ASSETS

Tangible assets are those assets which we can touch, see and feel. All fixed assets
are tangible. Moreover, some current assets like inventory and cash fall under the
category of tangible assets too.

INTANGIBLE ASSETS

We can not see, feel or touch Intangible assets physically. Some examples of
intangible assets are goodwill, franchise agreements, patents, copyrights, brands,
trademarks etc.

These are also classified under assets because the business owners reap
monetary gains with the help of these intangible assets. A company’s trademark,
brand, and goodwill contribute to its marketing and sale of its products. Many
buyers purchase goods only by seeing its trademark and brand in the market.

3. ON THE BASIS OF USAGE

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According to a third way of classification, assets are either operating or non-
operating. This classification is based on usage of the asset for business operation.
Assets which are predominantly used for day-to-day business are classified as
operating assets and other assets which are not used in operation are classified as
non-operating.

OPERATING ASSETS

Operating assets are those assets which are required for the current day-to-day
transaction. In simple words, the assets that a company uses for producing a
product or service are operating assets. These include cash, bank balance,
inventory, plant, equipment etc.

HomeFinancial AccountingMeaning and Different Types of Assets

Table of Contents [show]

WHAT ARE ASSETS IN ACCOUNTING?

An asset is a resource or property having a monetary/economic value possessed

by an individual or entity, which is capable to generate some future economic
benefit. Assets are generally brought in business to benefit from them and to
increase the value of a business. In simple language, it means anything that a
person “owns” say a house or equipment. In the accounting context, an asset is a
resource that can generate cash flows. The assets are recorded on the balance
sheet. They are found on the right-hand side of the balance sheet and can also be
referred to as “Application of Funds”. The assets include furniture, machinery,
accounts receivable, cash, investments, etc. We shall discuss various Types of
Assets in this article.

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Assets are classified into different types based on their convertibility to cash; use
in business or basis their physical existence. Assets are a part of the balance sheet
and are stated at historical cost less depreciation deducted so far or at cost or at
cost or market value, whichever is lower.

CLASSIFICATION OF ASSETS

Assets are generally classified in the following three ways depending upon nature
and type:

1. ON THE BASIS OF CONVERTIBILITY

One way of classification of assets is based on their easy convertibility into cash.
According to this classification, total assets are classified either into Current
Assets or Fixed Assets.

CURRENT ASSETS

Assets which are easily convertible into cash like stock, inventory, marketable
securities, short-term investments, fixed deposits, accrued incomes, bank
balances, debtors, bills receivable, prepaid expenses etc. are classified as current
assets. Current assets are generally of a shorter lifespan as compared to fixed
assets which last for a longer period. Current assets can also be termed as liquid
assets.

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FIXED ASSETS

Fixed assets are of a fixed nature in the context that they are not readily
convertible into cash. They require elaborate procedure and time for their sale
and converted into cash. Land, building, plant, machinery, equipment, and
furniture are some examples of fixed assets. Other names used for fixed assets
are non-current assets, long-term assets or hard assets. Generally, the value of
fixed assets generally reduces over a period of time (known as depreciation).

2. ON THE BASIS OF PHYSICAL EXISTENCE

Another classification of assets is based on their physical existence. According to

this classification, an asset is either a tangible asset or intangible asset.

Meaning and Different Types of Assets

TANGIBLE ASSETS

Tangible assets are those assets which we can touch, see and feel. All fixed assets
are tangible. Moreover, some current assets like inventory and cash fall under the
category of tangible assets too.

INTANGIBLE ASSETS

We can not see, feel or touch Intangible assets physically. Some examples of
intangible assets are goodwill, franchise agreements, patents, copyrights, brands,
trademarks etc.

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These are also classified under assets because the business owners reap
monetary gains with the help of these intangible assets. A company’s trademark,
brand, and goodwill contribute to its marketing and sale of its products. Many
buyers purchase goods only by seeing its trademark and brand in the market.

3. ON THE BASIS OF USAGE

According to a third way of classification, assets are either operating or non-

operating. This classification is based on usage of the asset for business operation.
Assets which are predominantly used for day-to-day business are classified as
operating assets and other assets which are not used in operation are classified as
non-operating.

OPERATING ASSETS

Operating assets are those assets which are required for the current day-to-day
transaction. In simple words, the assets that a company uses for producing a
product or service are operating assets. These include cash, bank balance,
inventory, plant, equipment etc.

NON-OPERATING ASSETS

All assets which are of no use for daily business operations but are essential for
the establishment of business and for its future needs are termed as non-
operational. This could include some real estate purchased to earn from its
appreciation or excess cash in the business, which is not used in an operation.

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What is Disinvestment?

Disinvestment is the action of an organization or government selling or liquidating

an asset or subsidiary. Absent the sale of an asset, disinvestment also refers to
capital expenditure reductions, which can facilitate the re-allocation of resources
to more productive areas within an organization or government-funded project.
Disinvestment can be carried out for a variety of reasons, some of which are
outlined below. Whether a disinvestment action results in divestiture or the
reduction of funding, the primary objective is to maximize the return on
investment (ROI) on expenditures related to capital goods, labor and
infrastructure.

Definition of Disinvestment

At the very basic level, disinvestment can be explained as follows:

“Investment refers to the conversion of money or cash into securities,

debentures, bonds or any other claims on money. As follows, disinvestment
involves the conversion of money claims or securities into money or cash.”

Disinvestment can also be defined as the action of an organisation (or

government) selling or liquidating an asset or subsidiary. It is also referred to as
‘divestment’ or ‘divestiture.’

In most contexts, disinvestment typically refers to sale from the government,

partly or fully, of a government-owned enterprise.

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A company or a government organisation will typically disinvest an asset either as
a strategic move for the company, or for raising resources to meet
general/specific needs.

Objectives of Disinvestment

The new economic policy initiated in July 1991 clearly indicated that PSUs had
shown a very negative rate of return on capital employed. Inefficient PSUs had
become and were continuing to be a drag on the Government’s resources turning
to be more of liabilities to the Government than being assets. Many undertakings
traditionally established as pillars of growth had become a burden on the
economy. The national gross domestic product and gross national savings were
also getting adversely affected by low returns from PSUs. About 10 to 15 % of the
total gross domestic savings were getting reduced on account of low savings from
PSUs. In relation to the capital employed, the levels of profits were too low. Of
the various factors responsible for low profits in the PSUs, the following were
identified as particularly important:

Price policy of public sector undertakings

Under–utilisation of capacity

Problems related to planning and construction of projects

Problems of labour, personnel and management

Lack of autonomy

Hence, the need for the Government to get rid of these units and to concentrate
on core activities was identified. The Government also took a view that it should
move out of non-core businesses, especially the ones where the private sector
had now entered in a significant way. Finally, disinvestment was also seen by the
Government to raise funds for meeting general/specific needs.

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In this direction, the Government adopted the 'Disinvestment Policy'. This was
identified as an active tool to reduce the burden of financing the PSUs. The
following main objectives of disinvestment were outlined:

To reduce the financial burden on the Government

To improve public finances

To introduce, competition and market discipline

To fund growth

To encourage wider share of ownership

To depoliticise non-essential services

Importance of Disinvestment

Presently, the Government has about Rs. 2 lakh crore locked up in PSUs.
Disinvestment of the Government stake is, thus, far too significant. The
importance of disinvestment lies in utilisation of funds for:

Financing the increasing fiscal deficit

Financing large-scale infrastructure development

For investing in the economy to encourage spending

For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go
towards repaying public

debt/interest

For social programs like health and education

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Disinvestment also assumes significance due to the prevalence of an increasingly
competitive environment, which makes it difficult for many PSUs to operate
profitably. This leads to a rapid erosion of value of the public assets making it
critical to disinvest early to realize a high value.

What Is a Yield Curve?

A yield curve is a line that plots yields (interest rates) of bonds having equal credit
quality but differing maturity dates. The slope of the yield curve gives an idea of
future interest rate changes and economic activity. There are three main types of
yield curve shapes: normal (upward sloping curve), inverted (downward sloping
curve) and flat.

Types of Yield Curve

Normal Yield Curve

A normal or up-sloped yield curve indicates yields on longer-term bonds may

continue to rise, responding to periods of economic expansion. When investors
expect longer-maturity bond yields to become even higher in the future, many
would temporarily park their funds in shorter-term securities in hopes of
purchasing longer-term bonds later for higher yields.

In a rising interest rate environment, it is risky to have investments tied up in

longer-term bonds when their value has yet to decline as a result of higher yields
over time. The increasing temporary demand for shorter-term securities pushes
their yields even lower, setting in motion a steeper up-sloped normal yield curve.

Yield Curve

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Image by Julie Bang © Investopedia 2019

Inverted Yield Curve

An inverted or down-sloped yield curve suggests yields on longer-term bonds may

continue to fall, corresponding to periods of economic recession. When investors
expect longer-maturity bond yields to become even lower in the future, many
would purchase longer-maturity bonds to lock in yields before they decrease
further.

The increasing onset of demand for longer-maturity bonds and the lack of
demand for shorter-term securities lead to higher prices but lower yields on
longer-maturity bonds, and lower prices but higher yields on shorter-term
securities, further inverting a down-sloped yield curve.

Flat Yield Curve

A flat yield curve may arise from the normal or inverted yield curve, depending on
changing economic conditions. When the economy is transitioning from
expansion to slower development and even recession, yields on longer-maturity
bonds tend to fall and yields on shorter-term securities likely rise, inverting a
normal yield curve into a flat yield curve.

When the economy is transitioning from recession to recovery and potential

expansion, yields on longer-maturity bonds are set to rise and yields on shorter-
maturity securities are sure to fall, tilting an inverted yield curve toward a flat
yield curve.

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What Is a Mutual Fund?

A mutual fund is a type of financial vehicle made up of a pool of money collected

from many investors to invest in securities like stocks, bonds, money market
instruments, and other assets. Mutual funds are operated by professional money
managers, who allocate the fund's assets and attempt to produce capital gains or
income for the fund's investors. A mutual fund's portfolio is structured and
maintained to match the investment objectives stated in its prospectus.

Mutual funds give small or individual investors access to professionally managed

portfolios of equities, bonds and other securities. Each shareholder, therefore,
participates proportionally in the gains or losses of the fund. Mutual funds invest
in a vast number of securities, and performance is usually tracked as the change
in the total market cap of the fund—derived by the aggregating performance of
the underlying investments.

KEY TAKEAWAYS

A mutual fund is a type of investment vehicle consisting of a portfolio of stocks,

bonds, or other securities.

Mutual funds give small or individual investors access to diversified, professionally

managed portfolios at a low price.

Mutual funds are divided into several kinds of categories, representing the kinds
of securities they invest in, their investment objectives, and the type of returns
they seek.

Mutual funds charge annual fees (called expense ratios) and, in some cases,
commissions, which can affect their overall returns.

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The overwhelming majority of money in employer-sponsored retirement plans
goes into mutual funds

What Is a Credit Rating?

A credit rating is a quantified assessment of the creditworthiness of a borrower in

general terms or with respect to a particular debt or financial obligation. A credit
rating can be assigned to any entity that seeks to borrow money—an individual,
corporation, state or provincial authority, or sovereign government.

Individual credit is scored from by credit bureaus such as Experian and

TransUnion on a 3-digit numerical scale using a form of Fair Isaac (FICO) credit
scoring. Credit assessment and evaluation for companies and governments is
generally done by a credit rating agency such as Standard & Poor’s (S&P),
Moody’s, or Fitch. These rating agencies are paid by the entity that is seeking a
credit rating for itself or for one of its debt issues.

Non-Banking Financial Companies (NBFC

) are establishments that provide financial services and banking facilities without
meeting the legal definition of a Bank. They are covered under the Banking
regulations laid down by the Reserve Bank of India and provide banking services
like loans, credit facilities, TFCs, retirement planning, investing and stocking in
money market. However they are restricted from taking any form of deposits
from the general public. These organizations play a crucial role in the economy,
offering their services in urban as well as rural areas, mostly granting loans
allowing for growth of new ventures.https://efinancemanagement.com/wp-
content/uploads/2011/06/Lease-Financing-Vs-Hire-Purchase.png?ezimgfmt=ng:webp/ngcb1

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What Is a Factor?

A factor is an intermediary agent that finances receivables. A factor is essentially a

funding source that agrees to pay the company the value of an invoice less a
discount for commission and fees.

The factor advances most of the invoiced amount to the company immediately
and the balance upon receipt of funds from the invoiced party. There are three
parties directly involved in a transaction involving a factor: the factor, who
purchases the receivable; the seller of the receivable; and the debtor, who must
make a payment to the owner of the invoice.

What is Venture Capital?

Venture capital is financing that investors provide to startup companies and small
businesses that are believed to have long-term growth potential. Venture capital
generally comes from well-off investors, investment banks and any other financial
institutions. However, it does not always take a monetary form; it can also be
provided in the form of technical or managerial expertise.

Though it can be risky for investors who put up funds, the potential for above-
average returns is an attractive payoff. For new companies or ventures that have
a limited operating history (under two years), venture capital funding is
increasingly becoming a popular – even essential – source for raising capital,
especially if they lack access to capital markets, bank loans or other debt
instruments. The main downside is that the investors usually get equity in the
company, and, thus, a say in company decisions.

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What Is a Merchant Bank?

A merchant bank is a company that conducts underwriting, loan services, financial

advising, and fundraising services for large corporations and high net worth
individuals. Unlike retail or commercial banks, merchant banks do not provide
services to the general public. They do not provide regular banking services like
checking accounts and do not take deposits.

These banks are experts in international trade, which makes them specialists in
dealing with multinational corporations. Some of the largest merchant banks in
the world include J.P. Morgan, Goldman Sachs, and Citigroup.

Definition: Merchant banking can be defined as a skill-oriented professional

service provided by merchant banks to their clients, concerning their financial
needs, for adequate consideration, in the form of fee.

Merchant banks are a specialist in international trade and thus, excel in

transacting with large enterprises. It offers a range of financial and consultancy
services, to the customers, which are related to:

Marketing and underwriting of the new issue.

Merger and acquisition related services.

Advisory services, for raising funds.

Management of customer security.

Project promotion and project finance.

Investment banking

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Portfolio Services

Insurance Services.

Merchant banking helps in reinforcing the economic development of the country,

by acting as a source of funds and information to the business entities.

Merchant Banker

Any person, indulged in issue management business by making arrangements

with respect to trade and subscription of securities or by playing the role of
manager/consultant or by providing advisory services, is known as a merchant
banker. The activities carried out by merchant bankers are:

Private placement of securities.

Managing public issue of securities

Satellite dealership of government securities

Management of international offerings like Depository Receipts, bonds, etc.

Syndication of rupee term loans

Stock broking

International financial advisory services.

In India, the functions of the merchant bankers are governed by Securities and
Exchange Board of India (SEBI) Regulations, 1992.

Functions of Merchant Banking Organization

Portfolio Management: Merchant banks provides advisory services to the

institutional investors, on account of investment decisions. They trade in

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securities, on behalf of the clients, with the aim of providing them portfolio
management services.

Raising funds for clients: Merchant banking organisation assist the clients in
raising funds from the domestic and international market, by issuing securities
like shares, debentures, etc., which can be deployed for starting a new project or
business or expansion activities.

Promotional Activities: One of the most important activities of merchant banking

is the promotion of business enterprise, during its initial stage, right from
conceiving the idea to obtaining government approval. There is some
organisation, which even provide financial and technical assistance to the
business enterprise.

Loan Syndication: Loan Syndication means service provided by the merchant

bankers, in raising credit from banks and financial institutions, to finance the
project cost or working capital of the client’s project, also termed as project
finance service.

Leasing Services: Merchant Banking organisations renders leasing services to their

customers. There are some banks which maintain venture capital funds to help
entrepreneurs.

Merchant Banking helps in coordinating the operations of intermediaries, with

respect to the issue of shares like registrar, advertising agency, bankers,
underwriters, brokers, printers and so on. Further, it ensures compliance with the
rules and regulations, of the capital market.

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