TERM V

Financial Institutions Nature, Scope & Importance of Financial Services Financial system & market Overview of foreign exchange market Financial sector reforms in India Recent trends in Indian financial markets

Definition of 'Financial Institution - FI'

An establishment that focuses on dealing with financial transactions, such as investments, loans and deposits. Conventionally, financial institutions are composed of organizations such as banks, trust companies, insurance companies and investment dealers. Almost everyone has deal with a financial institution on a regular basis. Everything from depositing money to taking out loans and exchange currencies must be done through financial institutions.

Various types of financial institutions are as follows: Commercial Banks Credit Unions Stock Brokerage Firms Asset Management Firms Insurance Companies Finance Companies Building Societies Retailers

The various financial institutions generally act as an intermediary between the capital market and debt market. But the services provided by a particular institution depends on its type. The financial institutions are also responsible to transfer funds from investors to the companies. Typically, these are the key entities that control the flow of money in the economy.

Financial Institutions play very significant role in the form of catering to the need of credit for all the sections of society. The banks and the financial institutions also cater to another important need of the society i.e. mopping up small savings at reasonable rates with several options. The common man has the option to park his savings under a few alternatives, including the small savings schemes introduced by the government from time to time and in bank deposits in the form of savings accounts, recurring deposits and time deposits

Another option is to invest in the stocks or mutual funds The facility of internet banking enables a consumer to access and operate his bank account without actually visiting the bank premises. The facility of ATMs and the credit/debit cards has revolutionised the choices available with the customers

The banks also serve as alternative gateways for making payments on account of income tax and online payment of various bills like the telephone, electricity and tax. In the modern day economy, where people have no time to make these payments by standing in queue, the service provided by the banks is commendable. Regional Rural Banks (RRBs) have been sponsored by many commercial banks in several States. These banks, along with the cooperative banks, take care of the farmerspecific needs of credit and other banking facilities.

Services Offered by Various Financial Institutions

The services provided by the various types of financial institutions may vary from one institution to another. For example, The services offered by the commercial banks are

Insurance Services, Mortgages, Loans and Credit cards.

The services provided by the brokerage firms, on the other hand, are different and they are

Insurance, Securities, Mortgages, Loans, Credit Cards, Money Market And Check Writing.

The insurance companies offer

Insurance Services, Securities, Buying Or Selling Service Of The Real Estates, Mortgages, Loans, Credit Cards And Check Writing.

The CREDIT UNION is co-operative financial institution, which is usually controlled by the members of the union. The major difference between the credit unions and banks is that the credit unions are owned by the members having accounts in it.
The STOCK BROKERAGE firms are the other types of financial institutions that help both the corporations and individuals to invest in the stock market. Another type of financial institution is the ASSET MANAGEMENT FIRMS. The prime functionality of these firms is to manage various securities and assets to meet the financial goals of the investors. The firms also offer fund management advice and decisions to the corporations and individuals.

In general, all types of activities which are of a financial nature could be brought under the term financial services. The term Financial Services in a broad sense means mobilising and allocating savings. Thus, it includes all activities involved in the transformation of saving into investment.
.

Meaning of Financial Services

The financial service can also be called financial intermediation. Financial intermediation is a process by which funds are mobilised from a large number of savers and make them available to all those who are in need of it and particularly to corporate customers

Customer oriented Intangibility Simultaneous performance Dominance of human element Perishability

The importance of financial services can be realised from the following: Economic Growth Promotion of Savings Capital Formation Provision of Liquidity Financial Intermediation Contribution to GNP Creation Of Employment Opportunities

Financial Services covers wide range of activities. They can be broadly classified into two namely:

Traditional Activities Modern Activities

Traditionally the financial intermediaries have been rendering a wide range of services encompassing both capital and money market activities. They can be grouped under two heads:
1.

Fund based activities and Non fund based activities

2.

Underwriting of or investment n shares, debentures, bonds etc. of new issues( primary market activities). Dealing in secondary market activities. Participating in money market instruments like commercial papers, certificate of deposits, treasury bills, discounting of bills etc. Involving in equipment leasing, hire purchase, venture capital, seed capital etc. Dealing in foreign exchange market activities.

Today

whether individual or corporate are not satisfied with mere provision of finance, they expect more from financial service companies. This can also be called fee-based activity. Managing the capital issues, i.e., management of preissue and post issue activities relating to the capital issue in accordance with the SEBI guidelines and thus enabling the promoters to market their issues. Making arrangements for the placement of capital and debt instruments with investment institutions. Arrangement of funds from financial institutions for the clients project cost or his working capital requirements. Assisting in the process of getting all government and other clearances.

Rendering project advisory services right from the preparation of the project report till the raising of fund. Planning for M&A and assisting for their smooth carry out. Guiding corporate customers in capital restructuring. Acting as trustees to the debentures holders. Hedging of risks due to exchange risk, interest rate risk, economic risk and political risk by using swaps and other derivative products. Managing the portfolio of large public sector corporations. Undertaking the risk management services like insurance services, buy-back options etc. Guiding the clients in the minimization of the cost of debt and in the determination of the optimum debt equity mix.

There are three main constituents of the financial system: (a) the financial assets, (b) the financial market and (c) the financial institutions.
1. Financial Assets:

The financial assets or near-money assets are the claims to money and perform some functions of money. They have high degree of liquidity but are not as liquid as money is. Financial assets are of two types: (a) primary or direct assets, and (b) secondary or indirect assets. Primary assets are the financial claims against real-sector units created by realsector units as ultimate borrowers for raising funds to finance their deficit spending; they are the obligations of ultimate borrowers.

The examples of Primary assets are bills, bonds, equities, book debits, etc. Secondary assets are financial claims issued by financial institutions against themselves to raise funds from the public; these assets are the obligations of the financial institutions.
The examples of secondary assets are bank deposits, life insurance policies, Unit Trust of India units, etc.

2. Financial Markets:

The financial system of a country works through the financial markets and the financial institutions. The financial markets deal with the financial assets of different types, currency deposits, cheques, bills, bonds, etc. Financial markets perform the following functions: (a) They create and allocate credit, (b) They serve as intermediaries in the process of mobilisation of saving, (c) They provide convenience and benefits to the lender and borrowers, (d) They promote economic development through a balanced regional and sectoral allocation of investible funds. Financial markets are credit markets which cater the credit needs of individuals, firms and institutions. Since credit is required and supplied for short period and long period, the financial markets are broadly divided into two types: (a) money market and (b) capital market. Money market deals with the short-period borrowing and lending of funds; in the money market, the short term securities are exchanged. Capital market deals with the long period borrowing and lending of funds; in the capital market, long-term securities are exchanged. Financial market may also be categorized into: (a) primary market, and (b) secondary market. Primary market is a market in which newly issued credit instruments are sold and purchased. Secondary market, on the other hand, is market in which previously issued credit instruments are bought and sold.

3. Financial Institutions:

Financial institutions or financial inter-mediaries act as half- way houses between the primary lenders and the final borrowers. They borrow funds (or accept deposits) from those who are willing to give up their current purchasing power and lend to (or buy securities from) those who require the funds for meeting the current expenditures. Financial institutions are generally divided into two categories (a) banks, and (b) non-bank financial intermediaries. The main difference between banks and non bank financial intermediaries is that the former possess, while the latter do not possess the demand deposits or credit-creating power.

Provision of Liquidity Mobilisation of Savings Size transformation Function Maturity Transformation function Risk Transformation function

The market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The forex market is considered to be the largest financial market in the world

To make necessary arrangements to transfer purchasing power from one country to another. To provide adequate credit facilities for the promotion of foreign trade. To cover foreign exchange risks by providing hedging facilities.

In India, the foreign exchange business has a three tiered structure consisting of: Trading between banks and their commercial customers. Trading between banks through authorised brokers. Trading with banks abroad.

In Early 1990s Financial Repression Extensive regulation Administered Interest rate Direct Credit Programmes Weak Banking Structure Lack of Proper accounting & risk management system Lack of transparency in operations

Removal of existing financial repression Creation of an efficient, productive and profitable financial sector Enabling the process of price discovery by the market determination of interest rates that improves allocative efficiency of resources. Providing operational and functional autonomy in institutions Preparing the financial system for increasing international competition. Opening the external sector in a calibrated manner Promoting financial stability in the wake of domestic and external shocks

A bank is a financial Institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets.

Saving banks Commercial banks Industrial banks/ development banks Land mortgage/ land development banks Indigenous banks Central/ federal/ national banks Co-operative banks Exchange banks Consumer banks

The reserve bank of India performs all the functions, a typical central bank is expected to do. The Preamble of the RBI Act, 1934 defines the main functions of the Bank as to regulate the issue of bank note and the keeping of reserve with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.
The Functions of the RBI may be classified into: Monetary Functions Non-Monetary functions.

The monetary functions of RBI are related to control and regulation of money and credit. They are: 1. Note issue 2. Banker to the government 3. Bankers bank and lender of last resort 4. Custodian of foreign reserves 5. Controller of credit.

Supervision of Banks Promotion of sound banking

CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks dont hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivalent to holding cash with RBI. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. Thus, When a banks deposits increase by Rs100, and if the cash reserve ratio is 6%, the banks will have to hold additional Rs 6 with RBI and Bank will be able to use only Rs 94 for investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investment. This power of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.

SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved securities to liabilities (deposits) It regulates the credit growth in India. Some non bankers also wrongly use SLR ratio or SLR Rate instead of Statutory Liquidity Ratio.

It stands for Prime Lending rate . The interest rate that commercial banks charge their most creditworthy customers. Generally a bank's best customers consist of large corporations. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate which banks lend to one another. The prime rate is also important for retail customers, as the prime rate directly affects the lending rates which are available for mortgage, small business and personal loans.

Financial institutions establish commercial interest rates according to a number of varying market conditions. Following are the factors which are taken into consideration while determining the interest rates: Overall Health of the Business Prospects for future growth Opportunity cost Inflation Length of time Credit Rating(credit history) A business debt to income ratio. Government Intervention.

Capital Adequacy ratio: an amount of money which a bank has to hold in the form of stockholders' equity, shown as a proportion of its risk-weighted assets, agreed internationally not to fall below 8%. Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR).

Tier-I Capital -Capital which is first readily available to protect the unexpected losses is called as Tier-I Capital. It is also termed as Core Capital. Tier-I Capital consists of : Paid-Up Capital. Statutory Reserves. Other Disclosed Free Reserves : Reserves which are not kept side for meeting any specific liability. Capital Reserves : Surplus generated from sale of Capital Assets.

Tier-II Capital -Capital which is second readily available to protect the unexpected losses is called as Tier-II Capital.

Tier-II Capital consists of :Undisclosed Reserves and Paid-Up Capital Perpetual Preference Shares. Revaluation Reserves (at discount of 55%). Hybrid (Debt / Equity) Capital. Subordinated Debt. General Provisions and Loss Reserves. There is an important condition that Tier II Capital cannot exceed 50% of Tier-I Capital for arriving at the prescribed Capital Adequacy Ratio.

Risk Weighted Assets Capital Adequacy Ratio is calculated based on the assets of the bank. The values of bank's assets are not taken according to the book value but according to the risk factor involved. The value of each asset is assigned with a risk factor in percentage terms.

Suppose CRAR at 10% on Rs. 150 crores is to be maintained. This means the bank is expected to have a minimum capital of Rs. 15 crores which consists of Tier I and Tier II Capital items subject to a condition that Tier II value does not exceed 50% of Tier I Capital. Suppose the total value of items under Tier I Capital is Rs. 5 crores and total value of items under Tier II capital is Rs. 10 crores, the bank will not have requisite CRAR of Rs. 15 Crores. This is because a maximum of only Rs. 2.5 Crores under Tier II will be eligible for computation.

Subordinated Debt
These are bonds issued by banks for raising Tier II Capital. They are as follows :They should be fully paid up instruments. They should be unsecured debt. They should be subordinated to the claims of other creditors. This means that the bank's holder's claims for their money will be paid at last in order of preference as compared with the claims of other creditors of the bank. The bonds should not be redeemable at the option of the holders. This means the repayment of bond value will be decided only by the issuing bank.

India and Capital Adequacy Norms

The Government of India (GOI) appointed the Narasimham Committee in 1991 to suggest reforms in the financial sector. In the year 1992-93 the Narasimhan Committee submitted its first report and recommended that all the banks are required to have a minimum capital of 8% to the risk weighted assets of the banks. The ratio is known as Capital to Risk Assets Ratio (CRAR). All the 27 Public Sector Banks in India (except UCO and Indian Bank) had achieved the Capital Adequacy Norm of 8% by March 1997. The Second Report of Narasimham Committee was submitted in the year 1998-99. It recommended that the CRAR to be raised to 10% in a phased manner. It recommended an intermediate minimum target of 9% to be achieved by the year 2000 and 10% by 2002.

A classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset.
Also known as non-performing loan. Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in non-performing loans and often results in massive write-downs.

Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the reliability of the dues: 1 Sub-standard Assets 2 Doubtful Assets 3 Loss Assets sub standard asset is the asset in which bank have to maintain 10% of its reserves.

One time settlement/ compromise scheme Lok adalats Debt recovery tribunals(DTRs) Corporate debt restructuring(CDR) Willful Defaulters SARFAESI Act,2002 Asset restructuring companies

Retail banking is typical mass-market banking where individual customers use local branches of larger commercial banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so on.

Organizedbankingservicesstartedin15thand1 6centuryEurope,whenbanksbeganopeningbra nchesincommercialareasoflargecities Bythelas tquarterof19thcenturybankswereconsolidatin gtheirbranchnetworkssothattheycouldoperate inamoreintegratedmanner.

Todays retail banking sector is characterized as Multiple products Multiple channels of distribution Multiple customer groups

Indian retail banking has been showing phenomenal growth In2004-05,42%ofcreditgrowthcamefromretail Overthelast5yearsCAGRhasbeenover35% Rural areas offer tremendous potential too which needs to be exploited.

Your money is much more secure than in a box under your bed and you can buy goods, be paid, and sell things without cash changing hands The bank you are familiar with and which knows you can also offer you a wide range of other services, such as mortgages and insurance. Retail banks offer a variety of ways you can access your account and manage your money

Retail Banking focuses on individual and small units The risk is spread and the recovery is good Surplus deployable funds can be put into use by the banks Customize and wide ranging products are available

Banks are a business, and they need to make money from looking after yours. If the bank decides to apply charges to your account(within the terms of the account),you may only find out about it afterwards for example if you accidentally go overdrawn without permission. If you disagree with a charge, you will need to contest it to recover the money.

The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements

ATM Savings Accounts Current Accounts Trading accounts Fixed Deposits Internet Banking Mobile Banking

Home Loans Personal Loans Car Loans Commercial Vehicle Loans Loans against Securities Education loan

Housing Finance connotes finances(or Loans) for meeting the various needs relating to housing, namely: Purchase of a flat Acquisition of plot & construction of a house Construction of a house Extension of a house Repairs, renovation & up gradation of a house/flat. Taking over housing loans from other banks/ housing finance companies.

Engine of equitable economic growth. Reduce poverty Prevent slum proliferation Take part in financial sector liberalisation Create & meet a growing housing demand.

RBI NATIONAL HOUSING BANK Commerci al banks Housing Finance Companies Cooperativ e Institutes Insurance Companies Sponsored Private sector Companies State Cooperativ e Agri & Rural Banks

HUDCO

HDFC

Bank Sponsored

Apex Cooperative Housing Federation

State Cooperative Banks

Urban Cooperativ e Bank

195 1 Entry Stage

198 0 Growth Stage Substantial National Advertiseme nt Measureme nt of Sales success by key Figures Less examinatio n of customer satisfaction

200 3 Maturit y

201 5 Saturatio n

202 0

Simple Segmentatio n Small Produ ct Range Random Customer Segmentati on

Credit Process compatible to segmentatio Regular n Customer Calls Increasin g Defaults

Upto 1990s Specialised Lenders, Housing Finance Companies Bank/Insurance companies sponsored HFCs Builder promoted HFCs Company Promoted HFCs

1983-2003 Aggressive entry for banks- HFCs loose market value. Irrational Competition Rapid Disbursement Credit quality Issues

2003 Onwards Oligopolistic market share Top 3 key players have over 80% of incremental market share. More rational market Sustained mortgage growth at 25%

Influencing Factors Social Cultural Lifestyle Changes Regional shifts Impact of generation Y Family breakups Growing population Increase in working force

Fiscal concessions Interest rate Inflation Lower output volatility

Hardware improvements Econometric modeling Software improvements

Reserve Bank Of India requirements National housing board requirements

Public Deposits Term Deposits Institutional Borrowings(domestic & international) Capital Markets Foreign currency convertible bonds Refinance NHB Securitization

A mutual fund is a trust that pools the savings of a number of investors with common financial goals.

The collected money is invested in various instruments like debentures, shares, etc.
The income generated from these instruments and the capital appreciation is shared by the investors in proportion to the number of units

The concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry.
The mutual fund industry can be broadly put into four phases according to the development of the sector.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. The first scheme launched by UTI was Unit Scheme 1964.

In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI.
At the end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds)

SBI Mutual Fund was the first followed by Canara bank Mutual Fund (Dec 1987) Punjab National Bank Mutual Fund (Aug 1989), Indian Bank Mutual Fund (Nov1989). Bank of India (Jun 1990), LIC in 1989 and GIC in 1990. Bank of Baroda Mutual Fund (Oct 1992). The end of 1993 marked Rs.47,004 as assets under management.

Third Phase - 1993-2003 (Entry of Private Sector Funds) A new era started in the Indian mutual fund industry, With the entry of private sector funds in 1993 The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996 At the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crore. The Unit Trust of India with Rs.44,541 crore (Asset value)

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003).
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM and with the setting up of a UTI Mutual Fund,

By structure Open-ended funds Close-ended funds Interval

By Investment objective
Growth Schemes Income Schemes Equity-linked Schemes Money market Schemes

Other schemes

Tax saving schemes

Special schemes Index funds Sector specific schemes

ABN-AMRO Baroda Pioneer Mutual Fund Benchmark Birla Sunlife Canbank DBS Chola Deutsche DSP Merrill Lynch Escorts Fidelity Franklin Templeton HDFC HSBC ING Vysya

JM Kotak Mahindra LIC Morgan Stanley Principal Prudential ICICI Reliance Sahara SBI Standard Chartered Sundaram BNP Paribas Tata UTI

Diversification- Mutual funds hold a number of

stocks, which protects them from a sharp decline in any one holding. Growth- Rapid growth in the value of their funds.

Income- Receiving income from their investments. International Exposure- It's important to have
some exposure to overseas stocks. Low Fees- Many "no-load" mutual funds are available that don't charge investors anything.

Affordability Professional management Diversification Convenience Liquidity Tax breaks Transparency

A company that invests its clients' pooled fund into securities that match its declared financial objectives. Asset management companies provide investors with more diversification and investing options than they would have by themselves.
Mutual funds, hedge funds and pension plans are all run by asset management companies. These companies earn income by charging service fees to their clients. AMCs offer their clients more diversification because they have a larger pool of resources than the individual investor. Pooling assets together and paying out proportional returns allows investors to avoid minimum investment requirements often required when purchasing securities on their own, as well as the ability to invest in a larger set of securities with a smaller investment.

(NAV) represents a fund's per share market value. This is the price at which investors buy ("bid price") fund shares from a fund company and sell them ("redemption price") to a fund company. It is derived by dividing the total value of all the cash and securities in a fund's portfolio, less any liabilities, by the number of shares outstanding. An NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio's securities.

To calculate a Mutual Fund's Net Asset Value or NAV, the value of the total assets of the mutual fund is subtracted by its liabilities, and then this amount is divided by the total number of shares or units in the mutual fund. Mutual Fund NAV = Total Assets - Liabilities / Total number of shares or units The assets of a mutual fund would consist of its investments and cash. (For more info on mutual fund investments, read Getting to know Mutual Fund Basics). The liabilities of a mutual fund include operating expenses. For example, a mutual fund has assets in stocks and other investments to the value of $100, 000 and liabilities worth $20, 000. Assuming the mutual fund has issued 10, 000 shares, then its NAV would be:

NAV = (100, 000 - 20, 000)/ 10, 000

NAV = 80, 000 / 10, 000

NAV = $8
The NAV or price per share of this mutual fund would be $8.

What is insurance?
The definition of insurance can be made from two points: Functional definition. Contractual definition.

FUNCTIONAL DEFINITION
Insurance is a co-operative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to insure themselves against the risk.

In the words of justice Tindall, Insurance is a contract in which a sum of money is paid to the assured as consideration of insurers incurring the risk of paying a large sum upon a given contingency.

INSURANCE LIFE GENERAL INSURANCE INSURANCE

Life insurance is a written contract between the insured and the insurer, that provides for the payment of the insured sum on the date of the maturity of the contract or on the unfortunate death of the insured, whichever occurs earlier.

General insurance or non-life insurance policies, including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General insurance typically comprises any insurance that is not determined to be life insurance.

Health insurance Business insurance Automobile insurance Fire insurance etc.

Life Insurance Corporation of India (LIC) was formed in September 1956 by an Act of Parliament, LIC Act 1956 with a contribution of Rs. 50 million. The then Finance Minister Mr. C. D. Deshmukh while piloting the bill for nationalization outlined the objectives of LIC thus: To conduct the business with utmost economy with the spirit of trusteeship; to charge premium no higher than warranted by strict actuarial considerations; to invest the funds for obtaining maximum yield for the policy holders consistent with safety of capital; to render prompt and efficient service to policy holders thereby making Insurance widely popular.

Presently the LIC has a network of seven zones; 100 divisions and 2,048 branches, personnel exceed seven lakhs employees and over six lakhs agents. Vision: A trans-nationally competitive financial conglomerate of significance to societies and Pride of India. Mission: To explore and enhance the quality of the life of people through financial security by providing products and services of aspired attributes with competitive returns and by rendering resources for economic development. Values: Caring and Courtesy, Initiatives and Innovation, Integrity and Transparency, Quality and Returns, Participation and Relationship, and Trustworthiness and Reliability Culture: Agility (quickness), Adaptability, Collaboration, Commitment, Discipline, Empowerment, Sensitivity, and Excellence.

Objectives Spread Life Insurance widely and in particular to the rural areas. Maximise mobilization of peoples savings by making insurance-linked savings adequately attractive. Deployment of funds to the best of advantage of the investors as well as the community as whole, keeping in view national priorities and obligations of attractive return. Conduct of business at most economy and with the full realisation that the money belongs to the policyholders. Act as trustee of the insured public in their individual and collective capacities.

Prior nationalization there were 68 Indian insurers (including LIC) and 45 non-Indian insurers did the business. In Nov. 1972, the general insurance business was nationalized by the General Insurance Business (Nationalized), Act 1972 (GIBNA) and vested in the hand of the GIC and its four subsidiaries viz.
1. National Insurance Co. Ltd., 2. New India Assurance Co. Ltd., 3. Oriental Fire and General Insurance Co. Ltd., and 4. United India Insurance Co. Ltd.

GIC was incorporated as a holding company in 1992. General Insurance Business is completely owned by the government. The paid up capital of GIC was fully subscribed by the Government and of four subsidiaries. It was controlled by a single organization with four subsidiaries.

GICs four subsidiaries: 1. National Insurance Co. Ltd., 2. New India Assurance Co. Ltd., 3. Oriental Fire and General Insurance Co. Ltd., and 4. United India Insurance Co. Ltd.

The Govt of India took over Control, supervision, and policy making is with GIC.
The premium income for GIC comes mainly through the obligatory reinsurance premium on a quota share basis from subsidiaries on their direct business in India (almost 20% of subsidiaries business come to GIC).

TYPES AND STRUCTURE OF BUSINESS - General insurance policies are not financial claims. - There is no guarantee of renewal of policy on the same terms or on any terms. - The contract is short-term contract. - The general insurance companies do not collect savings. - Policy claims are unpredictable. - Assets are held in relatively liquid form. - GIC meets the requirements of industrial, manufacturing, commercial, services, household, and agricultural sectors through wide rage of 115 products, granting insurance coverage. - GIC has been promoting insurance cover in the field of livestock, poultry, sericulture, horticulture, pump sets, and personal accidents.

IRDAS MISSION

To protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto. Composition of Authority under IRDA Act, 1999 As per the section 4 of IRDA Act' 1999, Insurance Regulatory and Development Authority (IRDA, which was constituted by an act of parliament) specify the composition of Authority. The Authority is a ten member team consisting of a. a Chairman; b. five whole-time members; c. four part-time members, (all appointed by the Government of India)

Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA. 1. Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business. 2. Without prejudice to the generality of the provisions contained in sub-section (1), the powers and functions of the Authority shall include: a. issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration;

b. protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance;
c. specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents; d. specifying the code of conduct for surveyors and loss assessors;

e.

promoting efficiency in the conduct of insurance business;

f. Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries;

g. Regulating investment of funds by insurance companies;

h. Regulating maintenance of margin of solvency; i. Adjudication of disputes between insurers and intermediaries or insurance intermediaries; j. Supervising the functioning of the Tariff Advisory Committee;

LEASING Leasing as a financing concept, is an arrangement between two parties, the leasing company or lessor and the user or lessee, whereby the former arranges to buy capital equipment for the use of the latter for an agreed period of time in return for the payment of rent.

Lease is a form of contract transferring the use or occupancy of land, space, structure or equipment, in consideration of a payment, usually in the form of a rent.

Leasing companies finance for: 1. Modernisation of business 2. Balancing Equipment 3. Cars, scooters and other vehicles and durables. 4. Items entitled to 100% or 50% depreciation. 5. Assets which are not being financed by banks/ institutions.

The steps involved in a leasing transaction are summarised as follows:

1. First,

the lessee has to decide the asset required and select the supplier. He has to decide about the design specifications, the price, warranties, terms of delivery, servicing etc

2. The lessee, then enters into a lease agreement with the lessor. The lease agreement contains the terms and conditions of the lease such as,(a) The basic lease period during which the lease is irrecoverable.(b) The timing and amount of periodical rental payments during the lease period.(c) Details of any option to renew the lease or to purchase the asset at the end of the period.(d) Details regarding payment of cost of maintenance and repairs, taxes, insurance and other expenses
3. After the lease agreement is signed the lessor contacts the manufacturer and requests him to supply the asset to the lessee. The lessor makes payment to the manufacturer after the asset has been delivered and accepted by the lessee

Financial Lease Operating Lease Leverage Lease Sale and Back Lease Cross Border Lease Wet Lease And Dry Lease Vendor Leasing

Permit Alternative Use of Funds: Faster and Cheaper Credit Flexibility Facilitates Additional Borrowings Protection against obsolescence No Restrictive Covenants Hundred Percent Financing Boon to Small Firm

Lease is not suitable mode of project finance

Certain tax benefits/incentives such as subsidy may not be available on leased equipment. The value of real assets such as land and building may increase during lease period. In such a case the lessee loses the advantage of a potential capital gain. The cost of financing is generally higher than that of debt financing. A manufacturer who wants to discontinue a particular line of business will not in a position to terminate the contract except by paying heavy penalties. If it is a owned asset the manufacturer can sell the equipment at his will.

If the lessee is not able to pay rentals regularly, the lessor would suffer a loss particularly when the asset is a sophisticated one and less liquid. In case of lease agreement, it is lessor who has purchased the asset from the supplier and not the lessee. Hence, the lessee by himself is not entitled to any protection in case the supplier commits breach of warranties in respect of the leased assets. In the absence of exclusive laws dealing with the lease transaction, several problems crop up between lessor and lessee resulting in unnecessary complications and avoidable tension

Hire Purchase is a method of selling goods. In a hire purchase transaction the goods are let out on hire by finance company(creditor) to the hire purchase customer (hirer) . The buyer is required to pay an agreed amount in periodical installments during a given period. The ownership of the property remains with creditor and passes on to hirer on the payment of last installment.

1.Under hire purchase system, the buyer takes possession of goods immediately and agrees to pay the total hire purchase price installments. 2.Each installment is treated as hire charges. 3.The ownership of goods passes from the seller to the buyer on the payment of the installment. 4.Incase the buyer makes any default in the payment of any installment the seller has right to repossess the goods from the buyer and forfeited the amount already received treating it as hire charges.

s.nO
1 2 3

criteria
ownership relationship Buying

LOAN
Borrower Lenderborrower Borrower buys the equipment

Hire Purchase
Financier OwnerHirer Owner purchases and supplies to the hirer

Leasing
Lessor Lessorlessee Lessor purchases and supplies to lessee

4
5

Compensatio Interest n
Repayment Principal and interest paid in installments At borrowers cost

Hirer charges
Hire charges paid along with installments At owners cost

Lease rent
lease rent paid periodically At lessors cost

Insurance

FACTORING Definition: A financing method in which a business owner sells

accounts receivable at a discount to a third-party funding source to raise capital

In a typical factoring arrangement, the client (you) makes a sale, delivers the product or service and generates an invoice. The factor (the funding source) buys the right to collect on that invoice by agreeing to pay you the invoice's face value less a discount--typically 2 to 6 percent. The factor pays 75 percent to 80 percent of the face value immediately and forwards the remainder (less the discount) when your customer pays. Factoring is not a loan; it does not create a liability on the balance sheet or encumber assets. It is the sale of an asset--in this case, the invoice Factoring is a short-term solution; most companies factor for two years or less

Factoring contract is like any other sale purchase agreement regulated under the law of contract. The terms and conditions on which factor agrees to purchase the debts from seller are mutually settled keeping in view the business connections and customs. Nevertheless, some of the important aspects which are supposed to be born in mind and incorporated in factoring agreements are as follows

1) Offer to sell debts from time to time arising out of business transactions on such terms and conditions as are stipulated in the agreement. The offer shall specifically mention about the invoices relating to each debt as an evidence of he delivery of goods or rendering of services to the customer. 2) Acceptance of the offer shall be comprehensive, covering all interests in the purchased debts, with all remedies for enforcing the debts and rights of unpaid seller being vested in the factor. 3) Condition to have no recourse to the supplier by the factor in the case of non-recourse factoring contract on the failure of the customer to pay the dues. 4) Power of attorney from the firm to the factor so as to empower the factor to the factor.

5) Payment of purchase price of debts.

6) Notice of sale of assignment of debt be endorsed on invoices sent to customer to entitle the factor to recover their dues and issue discharge receipt of the customers. 7) Non-collection of dues by the firm : Firm (client) not to collect dues from customers assigned to the factors. 8) Notice of credit allowed to customer to be given to the factor. 9)Warranties and covenants.

10) Factoring commission, charge, fees and mode of payment.

11) Durations of agreement. 12) Notice of termination. 13) Jurisdiction of court to entertain dispute between the parties

Factoring services started in the United States of America in the 1920s and were introduced to the other parts of the world in the 1960s. Today there are more than900 companies offering factoring services in more than 50 countries. Factoring services have become quiet popular allover the world

Factoring is a financial service covering the financing and collection of accounts receivables in domestic as well as in international trade. Basically factoring is an arrangement in which receivables on account of sale of goods or services are sold to the factor at a certain discount. As the factor gets title to the receivables on account of the factoring contract , he becomes responsible for all credit control , sales ledger administration and debt collection from the customers

The various types of factoring arrangements can be classified into the following categories.

1)Full Servicing Factoring: This is also known as without recourse factoring service. It is the most comprehensive type of factoring arrangement offering all types of services, namely: (a) Finance, (b) Sales ledger administration, (c) Collection, (d) Debt protection, and (e) Advisory services. The most important characteristic of this type of factoring service is that it gives protection against bad debts to the client. In other words, in case the customer fails to pay, the factor will absorb the losses arising from insolvency or bankruptcy of the client is customers

2)Recourse Factoring:
In such a type of factoring arrangement, the factor provides all types of facilities except debt protection. That means, in other words, the client is responsible for any bad debts arising from insolvency of the client and customers. 3)Maturity Factoring: Under this type of factoring arrangement, except for providing finance, all other facilities are provided to the client. As far as finance is concerned, the client is paid at the end of a predetermined date or maturity date whether or not the customers have settled their dues in respect of credit sales

4) Invoice Discounting: In such type of arrangement, only finance is provided, and, hence, no other services are offered in respect of receivables. 5) Agency Discounting: Under this arrangement, the facilities of finance and protection against bad debt are provided by the factor. As against this, the sales ledger administration and collection of book debts are carried out by the client himself

1) Under the factoring arrangement the client receive prepayment upto 80-90 percent of the invoice value immediately and the balance amount after the maturity period. This helps the client to improve cash flow position which enables him to have better flexibility in managing working capital funds in an efficient and effective manner. Besides this, such arrangement also improves the ability of the client to develop sales to credit worthy customers

If the client avails the services of the factor in respect of sales ledge administration and collection of receivables, he need not have any administrative set up for this purpose. Naturally this will result into a substantial saving in time and cost of maintaining own sales ledger administration and collecting receivables from the customer. Thus, it will reduce administrative cost and time. As a result of this, the client can spare substantial time for improving the quality of production and tapping new business opportunities

When without recourse factoring arrangement is made, the client can eliminate the losses on account of bad debts. This will help him to concentrate more on maximizing production and sales. Thus, it will result in increase in sales, increase in business and increase in profit.

There are three parties involved generally in a factoring contract, viz.,

1)Buyer of goods (i.e. customer) who has purchased goods or services on credit and as such has to pay for the same once the credit period gets over. 2)Seller of goods (i.e. client)who has supplied goods or provided services to the customers on credit terms. 3)Factor who purchase the invoices(receivable) from seller of goods and collect the money from the customers of his clients.

The client can avail advisory services from the factor by virtue of his expertise and experience in the areas of finance and marketing. This will help the client to improve efficiency and productivity of his organization. Besides this , with the help of data base, the factor can readily provide information regarding product design/mix, prices, market conditions etc., to the client which could be useful to him for business decisions

1)Image of the client may suffer as engaging a factoring agency is not considered a good sign of efficient management. 2) Factoring may not be of much use where companies or agents have one time sales with the customers. 3) Factoring increases cost of finance and thus cost of running the business. 4) If the client has cheaper means of finance and credit (where goods are sold against advance payment), factoring may not be useful

Forfeiting is the purchase of receivables along with availed negotiable instruments like promissory note or bills of exchange(without recourse to any previous holder of the instruments) due on a specific date to be matured in future and arising from the exports of goods on credit. Thus, Forfeiting is a source of trade finance which enables exporters to get funds from the institution called forfeiter on transferring the right to recover the debts from the importer. The debt instrument is purchased by the forfeiter at an appropriate discount. This facility is always provided with non-recourse feature. Normally all exports of capital goods and other goods made on medium to long term credit are considered for providing finance through Forfeiting arrangement. Now-a-days, in many developed countries, a forfeiter provides a finance even in respect of commodity exports wherein the credit period is upto 180 to 360 days. (It is estimated that about 15 to 20 per cent of Forfeiting market worldwide is represented by transactions involving commodity exports upto 180 to 360 days

1)It is a specific form of export trade finance.

2) Export receivables are discounted at a specific but fixed discount rate. 3) Debt instruments most commonly used in Forfeiting arrangement are bill of exchange and a promissory note. 4) Payment in respect of export receivables which is further evidenced by bill of exchange or promissory notes, must be guaranteed by the importers bank. The most usual form of guarantee attached to a Forfeiting agreement is an avail. 5) It is always without recourse to the seller (viz. Exporter). 6) Full value of export receivables i.e. 100 per cent of the contract value is taken into account. 7) Normally the export receivables carrying medium to long term maturities are considered

The benefits accruing to the exporter are numerous. Few of these benefits are stated below: 1) Exporter can convert export transaction under deferred payment arrangement into a cash transaction. Thus he can improve his own liquidity position. 2) Since the forfeiter takes all risks, naturally exporter is relieved of the risks arising out of the default by the buyer (importer) as also the political and exchange risk. 3) Since the Forfeiting is a fixed rate contract, the exporter is hedged against interest rate risk and exchange rate risk.

4) Exporter gets finance upto 100 per cent of the contract value(which is to be reduced to the extent of Forfeiting cost).
5) Exporter is freed from credit administration and collection problems

1)Factoring services is mainly meant for financing and collecting of receivables arising from short term credit transactions say upto 180 days. As against this, Forfeiting is meant for financing credit transactions of having deferred credit period of more than 1 year.
2) Factoring arrangement can be with recourse or without recourse depending on the terms of factoring contract between a client and a factor. As against this ,Forfeiting transaction is always without recourse where forfeiter absorbs credit risk also. 3) Factoring services can be considered either for domestic transaction or for export transaction. As against this Forfeiting transaction is always considered for export transactions only

4)Factoring is done on the strength of sales invoices only. Whereas Forfeiting involves use of avulsed negotiable instruments like Bill of exchange or promissory note.
5) In a factoring arrangement, a margin of 5 to 20 per cent is kept. In other words, finance is provided immediate on the purchase of invoice to the extent 80 to 95 per cent of invoice value. As against this; a forfeiter discounts the entire sale value of the export transaction without keeping any margin. 6) Factoring services include sales ledger, administration, collection of receivables and other advisory services. On the other hand , Forfeiting is a pure financial arrangement. 7) Factoring is done on whole turnover basis, whereas, Forfeiting can be done on transaction basis

Bill financing is considered to be an appropriate form of financing trade and business. Under this form of financing, seller of the goods draw a Bill of exchange on the buyer(who accepts and returns the same to the drawer). Subsequently seller of the goods discounts the Bill of exchange with bank or finance company and avail the finance accordingly. Only those bills which arise out of genuine trade transactions are considered by the banks and finance companies for discounting purpose.

A)The drawer (seller of the goods)Who draws the bill Who ensures that the bill is accepted and paid according to its tenor . Who promises to compensate the holder or any endorser of the bill if it is dishonored. B) The drawee (buyer of the goods) The person on whom the bill is drawn. Who has shown assent by signing across the bill for payment at maturity (thus becoming the acceptor) The person who assumes legal obligation to pay the bill .

The Payee The person to whom or to whose order the bill is payable. The Endorser -The payee or any endorsee who signs the billon negotiation. If the bill is negotiated to several persons who signs it in turn becomes an Endorser . The endorser is liable as a party to the bill . If the bill of exchange is not endorsed then drawer and payee will be the same person

A debt that someone incurs for the purpose of purchasing a good or service. This includes purchases made on credit cards, lines of credit and some loans.
Also referred to as "consumer debt". Consumer credit is basically the amount of credit used by consumers to purchase non-investment goods or services that are consumed and whose value depreciates quickly. This includes automobiles, recreational vehicles (RVs), education, boat and trailer loans but excludes debts taken out to purchase real estate or margin on investment accounts

A credit card is part of a system of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user

Credit cards Charge cards In-Store cards Cheque cards Corporate Credit cards Business Cards Smart Cards Debit Cards

Premium Credit Cards Cash Back Credit Cards Gold Credit Cards Airline Credit Cards Silver Credit Cards Business Credit Cards Balance Transfer Credit Cards Co-branded Credit Cards Low Interest Credit Cards Lifetime Free Credit Cards Rewards There are some additional credit cards that are available in India as well. Rewards credit cards available in India can be subdivided into six categories Points, Hotels and Travels, Retail, Auto and Fuel.

Cardholder: The holder of the card used to make a purchase; the consumer.
Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder. Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant. Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.

Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with. Credit Card association: An association of card-issuing banks such as Visa, MasterCard, Discover, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks. Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks.

The main benefit to each customer is convenience.

Compared to debit cards and cheques, a credit card allows small shortterm loans to be quickly made to a customer who need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card. Credit cards also provide more fraud protection than debit cards. In the UK for example, the bank is jointly liable with the merchant for purchases of defective products over 100.

Many credit cards offer rewards and benefits packages, such as offering enhanced product warranties at no cost, free loss/damage coverage on new purchases, and points which may be redeemed for cash, products, or airline tickets. Additionally, carrying a credit card may be a convenience to some customers as it eliminates the need to carry any cash for most purposes.

Credit cards offer high profits for the banks It may help to get new customers It helps to control bank cost as it reduces the number of cheques issued by the customers

No Bad debt arises in credit cars transactions. A good cash flow is established because of the speedy settlement of bills by banks The acceptance of card in lieu of cash reduces security risk. Member establishments are able to offer credit facility to their customers without setting up their own credit arrangements. It helps in increasing the volume of business to member establishments.

To Cardholders They are burdened with service charges. Credit cards tempt the holders for more purchases beyond their income and repaying capacity.

To Issuers The cost involved in the credit card business is high The menace of frauds perpetuated by holders of bogus cards. The average utilization of credit card is only 20% to 30% in India.

To member Establishment The commission to be paid to the issuing/credit card organisation is heavy. Some banks make delay in payment due to the lack of adequate system and trained personnel.

MEANING
Venture capital means funds made available for start up firms and small businesses with exceptional growth potential. Venture capital is money provided by professionals who alongside management invest in young, rapidly growing companies that have the potential to develop into significant economic contributors

Venture capital (VC) is financial capital provided to early-stage, high-potential, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc.

Venture Capitalists generally:

1. 2. 3.

Finance new and rapidly growing companies

Purchase equity securities

Assist in the development of new products or services

4.

Add value to the company through active participation.

Characteristics of venture capital 1. Long time horizon

2.

High risk
Equity participation Participation in management

3.

4.

Types of venture capital

1.

Independent venture capital fund Captive venture capital funds

2.

3.

Government funds

Various stages of venture capital 1. Seed Money: Low level financing needed to prove a new idea. 2. Start-up : Early stage firms that need funding for expenses associated with marketing and product development. 3. First-Round : Early sales and manufacturing funds.

4.Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit . 5.ThirdRound: Also called Mezzanine financing, this is expansion money for a newly profitable company 6.FourthRound: Also called bridge financing, it is intended to finance the "going public process

Advantages of venture capital

It provides a strong capital base for future growth by injecting long term equity finance. The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gain. Provides practical advice and assistance to the company based on past experience with other companies.

Network of contacts
Provides additional source of funding

Venture capitalists are experienced in the process of preparing a company for an initial public offering(IPO) of its shares onto the stock exchanges or overseas stock exchange such as NASDAQ
Facilitates sale trade

Methods of venture capital

1. 2. 3. 4. 5.

Equity Conditional loan Income note Participating debentures

Quasi equity

Exit way of a venture capital firm

1.

2.
3. 4.

Initial public offer(IPOs) Trade sale Promoter buy back Acquisition by another company

Development of venture capital in India

The concept of venture capital was formally introduced in India in1987 by IDBI. ICICI started VC activity in the same year Later on ICICI floated a separate VC company -TDICI

Venture capital funding in India VCFs in India can be categorized into following five groups: 1)Those promoted by the Central Government controlled development finance institutions. For example:-ICICI Venture Funds Ltd. -IFCI Venture Capital Funds Ltd (IVCF) -SIDBI Venture Capital Ltd (SVCL)

2).Those promoted by State Government controlled development finance institutions. For example: Punjab InfoTech Venture Fund Gujarat Venture Finance Ltd (GVFL) Kerala Venture Capital Fund Put Ltd.
3) Those promoted by public banks. For example: Canara bank Venture Capital Fund SBI Capital Market Ltd

4)Those promoted by private sector companies. For example: L&FS Trust Company Ltd Infinity Venture India Fund
5)Those established as an overseas venture capital fund. For example: Walden International Investment Group HSBC Private Equity management Mauritius Ltd

Rules and regulation of venture capital in India

AS PER SEBI AS PER INCOME TAX ACT,1961

"Non-banking financial company" means-(i)a financial institution which is a company;(ii)a non banking institution and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;(iii)such other non-banking institution or class of such institutions, as the bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify . NBFCs as described by RBI in points are

EQUIPMENT-LEASING COMPANY; HIRE-PURCHASE COMPANY; LOAN COMPANY; INVESTMENT COMPANY

They are also categorized in a different format among 8 categories1.LOAN COMPANY 2.HIRE PURCHASE 3.COMPANY INVESTMENT COMPANY 4.MUTUALBENEFITCOMPANY 5.MISCELLANEOUS NON- BANKING FINANCIAL COMPANY 6.CHIT FUNDS RESIDUARY FINANCE 7. COMPANY HOUSING FINANCE 8. COMPANY EQUIPMENT LEASING COMPANY

Another and recent way of categorizing NBFCs is as under1. ASSET FINANCING COMPANY(AFC)
2.

INVESTMENT COMPANY(IC) LOAN COMPANY(LC)

3.

As recognized by RBI and expert committees

Development of sectors like Transport & Infrastructure Substantial employment generation Help & increase wealth creation Broad base economic development Irreplaceable supplement to bank credit in rural segments major thrust on semi-urban, rural areas & first time buyers / users To finance economically weaker sections Huge contribution to the State exchequer

 70-80%

driven

of Commercial Vehicles are finance

Indian economy is more dependent on roads Heavy Govt. outlay for mega road projects Heavy replacement demand anticipated 30 lacs commercial vehicles by the year 2007 Another Rs.6000 Crores required for phasing out old commercial vehicles CRISIL in its study has placed commercial vehicle financing under low risk category Each commercial vehicle manufactured, sold and financed gives employment to minimum 20 persons (direct and indirect)

In section 45- IA RBI Act, 1934 NBFC should be registered with RBI. But not for all category of NBFCs.
There are certain category of NBFC which are regulated by other regulators..

As.

Housing Finance companies are regulated by national Housing companies. Venture Capital Funds, stock broking companies are registered with SEBI. Insurance companies holding a valid certificate of registration issued by IRDA

A Non-Banking financial company should have minimum net owned fund 2 crore. The company is registered to submit its application for registration in the prescribed formal along with necessary documents for bank consideration.

Can all NBFC Accept Public Deposits?

No All NBFC are not accept public deposits So

What are the requirement for acceptability?

Let us Know.

Holding a valid certificate of registration with authorisation to accept it. Should have minimum stipulated net owned fund Comply with the directions issued by the bank.

An NBFC required NOF(Net owned Funds)/ CRAR complying with these norms.. Category of NBFC Ceiling on public deposits AFC maintaining CRAR of 15% without credit rating LC(Loan Companies)/IC(Investment Companies) with CRAR of 15% and having minimum investment grade credit 1.5 times of NOF.

Max rate of interest a NBFC can offer is 11%. The interest may be paid or compounded at rest not shorter than monthly rest. Minimum period of time 12 month Maximum period of time 60 month.

NBFC cannot offer gifts/incentives to the deposits The repayment of deposits by NBFC is not guaranteed by RBI The deposit with NBFC are not insured NBFC should have minimum investment grade credit rating.

CRISIL: FA-(FA MINUS) ICRA: MA- (MA MINUS) CARE: CARE BBB(FD) FITCH RATING INDIA Pvt Ltd.

The depositor can approach: Company law board Consumer forum File a civil suit

Owned Funds
& Net owned funds

Statutory annual return of deposits-NBSI Quarterly return on liquid assets Half yearly return on prudential norms A copy of the credit rating obtained Once a year along with one of the half yearly return prudential norms.

It stands for conversion of loans or loan recoveries into marketable paper or securities by SPV. By pooling assets, it diversifies and reduces risks of the portfolio and, with additional credit enhancement arrangement, can produce highly creditworthy instruments to market. Isolating and efficiently allocating the risk. It is selling the rights to cash flow from loans etc .

Selection of assets by the Originator Packaging of pool of loans and advances (assets) Underwriting by underwriters. Assigning or selling to of assets to SPV in return for cash Conversion of the assets into divisible securities SPV sells them to investors through private stock market in return for cash Investors receive income and return of capital from the assets over the life time of the securities The risk on the securities owned by investors is minimized as the securities are collateralized by assets The difference between the rate of the borrowers and the return promised to investors is the servicing fee for originator and the SPV . Assets to be securitized to be homogeneous in terms of underlying assets ,maturity period ,cash flow profile

1.

Originator: An entity making loans to borrowers or having receivables from customers Special Purpose Vehicle: The entity which buys assets from Originator and packages them into security for further sale Investment Bank : A body that is responsible for conducting the documentation work. Credit Rating Agency: To provide value addition to security

2.

3.

4.

4.

Insurance Company / Underwriters: To provide cover against redemption risk to investor and / or under-subscription Obligors: Company that gives debt to other company as a result of borrowing.( debtor)

5.

6.

Investor: The party to whom securities are sold .

It is a legal entity created to fulfill the narrow, specific or temporary objectives. i.e. funding the assets. SPV are typically used by companies to isolate the firm from financial risk and allow other investors to share the risk. Intermediary Helps in the pooling process Holding of pooled securities as a repository Bankruptcy remote transfer

ADVANTAGE Opportunity to potentially earn a higher rate of return. Opportunity to invest in a specific pool of high quality credit-enhanced assets . Portfolio diversification . DISADVANTAGE Prepayment by borrowers can lessen the earning through interest. Currency interest rate fluctuations which affect the floating rates on ABS. Maintenance obligations of the collateral are not met as given in the prospectus.

Assets backed securities :Those securities whose income is derived from pool of underlying assets. Example: payments from car loan, credit card. Mortgage backed securities: Mortgage loans are purchased from banks and assembled into pools which become securities. Credit debt obligation: CBO: Those backed b corporate bonds. CLO: Those backed by leveraged home loans.

First securitization deal in India between Citibank and GIC Mutual Fund in 1991 for Rs 160 million. L&T raised Rs 4,090 mln through the securitization of future lease rentals to raise capital for its power plant in 1999. Securitization of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 through offshore SPV. Indias largest securitization deal by ICICI bank of Rs 19,299 mn in 2007. The underlying asset pool was auto loan receivables

All sorts of assets are securitized: Auto loans Student loans Mortgages Credit card receivables Lease payments Accounts receivable.

This bring the financial market and capital market together and hence increase the power of capital market. The securitization reduces the risk for the creditor so it will lead the lower cost of funding. Agency and intermediation cost is reduced. The rate of assets turnover in market increases. HFCs do securitize due to this the volume of the resources increases. Component risk (credit ,liquidity, catastrophe) are segregated and distributed to the market intermediaries which absorb them and make market stable.

A DFI s defined as an institution promoted or assisted by government mainly to provide development finance to one or more sectors or sub-sectors of the economy.
The basic emphasis of a DFI is on long-term finance and on assistance for activities or sectors of the economy where the risks may be higher than that the ordinary financial system is willing to bear.

DFIs may also play a large role in stimulating equity and debt markets by 1. Selling their own stocks and bonds 2. Helping the assisted enterprises float or place their securities 3. Selling from their own portfolio of investments.

The first DFI established in India in 1948 was Industrial Finance Corporation Of India(IFCI) followed by setting up of State Financial Corporations(SFCs) at the State Level After passing of the SFCs Act,1951.

There is no specific use of the DFI in either the RBI Act,1934 or the Companies Act, 1956 or various statutes establishing DFIs. While the RBI Act defines the term Financial Institution(FI), the companies Act has categorised certain institutions as Public Financial Institution(PFIs). While the various FIs including PFIs vary from each other in terms of their business specifications, some of them perform the role of DFIs in the broadest sense of the term.

Term Lending Institutions Refinancing Institutions Investment Institutions Sector specific/ Specialized institutions

IDBI ICICI IFCI NABARD RRBs