• Indian Financial System
• Mcom 2 nd Semester
• Unit 4 th
• Sources – Various Books & Internet
Financial Services &
Regulations
Financial services
• It refer to services provided by the financial
institutions for the facilitation of various financial transactions and other related activities in the
world of finance like loans, insurance, credit cards, investment opportunities.
• Services that are financial in nature.
• The finance industry encompasses a broad range of organizations that deal with the management of
money.
TYPES OF FINANCIAL SERVICES
Banking services
Issuance of checkbooks
Provide personal loans, commercial
loans
ATMs
Foreign exchange
services Currency Exchange
Foreign Currency
Banking
Wire transfer
Investment services
Asset
Management
Hedge Fund Management
Insurance
Insurance Brokerage
Reinsurance
• A bank, financial institutions & NBFC offers two types of products namely – fund
based and fee based . The proportion
between the two impacts the amount of
capital required and income earned.
Fund Based
• Loans are fund based products. In
order to lend an amount as a loan to a borrower, the bank or NBFC has to
borrow money and ensure that the cost of borrowing is less than the cost of lending.
• Fund based products are also subject to capital adequacy norms and tighter regulation for non performing assets.
Fee Based
• When it sells a mutual fund or
insurance product, it earns a fee or commission for doing so. These are third party products which do not require the bank to fund them.
• The profit margins in the case of fee based products may be lower;
however, since they do not require high capital investment, they are
profitable. The existing infrastructure is usually extended to offer them.
Fund Based Services
• Fund based finance is a specialized method of providing structured working capital and term loans that are secured by account receivables,
inventory, machinery, equipment, and real estate.
• It is a financing method that is driven by the assets of companies. Assets include current assets such as account receivables, inventory and fixed assets
such as plant and machinery.
The firm raises funds through debt, equity, deposits and
than invests the funds in securities or lends to those who are in need of capital.
❑ Leasing and hire purchase
❑ Housing finance
❑ Credit cards
❑ Venture capital
❑ Factoring
❑ Bill discounting
❑ Insurance
Leasing
• A lease may be defined as “a contractual
agreement where by a party owning an asset provides the asset for use to another over a certain time for consideration in the form of periodic payments”.
• Leasing enables a firm to avail the services of plant or equipment without making the
investment.
Parties involved in Leasing
• Lessor – is the owner of the asset that is being leased.
• Lessee – is the receiver of the services of the asset
under a lease contract
Hire Purchase
• It means hiring of an asset for a period of time and at the end of the period, purchasing the same.
• This is the time sharing of the asset, the person hiring
the asset acquires is possession and the right to use it.
1.The possession of the goods is given to the buyer immediately 2.Payment will be made in instalments
3.The property in the goods remains with the vendor till the last instalment is paid
4.The seller can repossess the goods in case of default in payment of any instalment and
5.Each instalment is treated as hire charges till the last
instalment is paid
Parties Involved
Hire purchaser – he is the customer who obtains possession of the goods at the outset and can use it, while paying for it by
instalments over a agreed period of time.
Hire vendor – the time of ownership of the goods remains with
the seller called hire vendor until the hire purchaser has made
all the payments.
Consumer Credits
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.
For example, a mortgage for purchasing a house is not consumer credit.
However, the 52 inch television you put on your credit card is
consumer credit.
• In a consumer credit transaction the individual consumer buyer pays a fraction of the cash purchase price at the time of the delivery of the asset and pays the
balance with interest over a specified period of time.
• The term consumer credit refers to the activities involved in granting credit to consumers to enable them possess own goods means for everyday use.
• It is also known by several names such as credit merchandising, deferred payment, instalment buying, easy payment and instalment credit plan.
Types of Consumer Credit
• CLOSED-END CREDIT: this form of credit is used for a specific purpose, for a specific amount and for a specific period of time. Payments are usually of equal amounts.
• Ex: automobile loans, where a agreement lists the repayments terms
such as the number of payments, the payment amount and how much
the credit will cost.
• OPENED-END CREDIT: loans are made on a continuous basis as you purchase items, and you are billed periodically to make at least partial payment.
Ex: using a credit card issued by a store, a bank card such as visa or master card. There is a maximum amount of credit that you
can use called line of credit, you have to pay the debt in full each
month, you also have a finance charges for use of credit.
Factoring
• The word factoring has its origin from latin word ‘factor’ which means ‘doer'. The webster dictionary defines a factor as a “one that lends money to producers and dealers on the security of account receivables”
• It is a financial transaction whereby a business sells its accounts receivable (i.e., Invoices) to a third party (called a factor) at a
discount in exchange for immediate money with which to finance
continued business.
Features of Factoring
• Factoring is a contractual service arising out of the
agreement between the business firm and the factors.
• Factoring makes an advance payment generally arising
from 80% to 90% against the invoices factored by the client firm.
• Smoothens your cash flow.
Venture Capital Financing
• The term venture capital comprises of two words, namely venture and capital. The term venture literally means a course of proceeding the
outcome of which is uncertain but which is attended by; the risk of danger of loss. On the other hand , the term capital refers to the resources to start the enterprise.
• According to narrow sense, the capital which is available for financing the
new business ventures is called venture capital. It involves leading finance to
the growing companies.
Features
• Venture capital financing is generally made in new enterprises that use new technology to produce new products.
• Venture capitalists continuously involve themselves with the clients
investments either by providing loans or managerial sills or any other support.
• Venture capitalists usually finance small and medium sized firm during
the early stages of their development.
Bill Discounting
• According to the Indian negotiable instruments act, 1881
• The bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of that instrument.
• While discounting , banks buy the bill before it is due and credit the value of the bill after a discount charge to the customer's account.
Housing Finance
• Housing finance is what allows for the production and consumption of housing.
• It refers to the money we use to build and maintain the nation’s housing stock.
• But it also refers to the money we need to pay for it, in the form of rents, mortgage loans and repayments.”
• Purchase of a flat or a house, acquisition of a plot, construction or extension
of a house, repairs or renovation of a house.
Fee Based Services
The services wherein financial institutions operate in specialized fields to earn a substantial income in the form of fees or
dividends or brokerage on operations.
❑ Credit cards
❑ ATMs/Debit Cards
❑ Stock broking services
Stock Broking
• The process of investing in the share market, either individually or through a broker is known as stock broking.
• This is primarily done by opening a Demat account.
• If done through a broker, he opens an account, helping
to operate through online stock broking facility.
Stock Broker
• Licensed agent who has to pass certain qualifying
Tests to be certified to offer securities investment Advice to investors.
• He or she may
• Counsel what and when to buy
• Counsel whether to hold or sell securities,
• Execute buy-sell orders on behalf of the investors, and
• Charge a percentage of the transaction amount and brokerage fee for the services rendered.
Credit Cards
• A card issued by a financial company giving the holder an option to
borrow funds, usually at point of sale. Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a purchase is made and borrowing limits are pre-set
according to the individual's credit rating.
• Card holders normally must pay for credit card purchases within 30
days of purchase to avoid interests and/or penalties.
Debit Cards
An electronic card issued by a bank which allows bank clients access to their account to withdraw cash or pay for goods and services. This
removes the need for bank clients to go to the bank to remove cash from their account as they can now just go to an ATM or pay
electronically at merchant locations. This type of card, as a form of payment, also removes the need for checks as the debit card
immediately transfers money from the client's account to the business
account.
Automated Teller Machine (ATM)
Computerized machine that permits bank customers
to gain access to their accounts with a magnetically
encoded plastic card and a code number.
Importance of Financial Services
1. Promoting Investments 2. Promoting Savings
3. Minimizing The Risks 4. Maximizing The Returns 5. Ensures Greater Yield 6. Economic Growth
7. Economic Development 8. Benefit To Government
9. Promotion Of Domestic And Foreign Trade 10. Capital Market
Q & A
Insurance
• An arrangement by which a company or the state undertakes to provide a
guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.
• There are basically two types of insurance available today, they are Life Insurance and General Insurance.
Life Insurance In India
• Life Insurance services have been India since 1818
when first life insurance company namely, Oriental Life Insurance was established in Calcutta
• First General Insurance company , Tritan Insurance
Company established in 1850 in Calcutta
• Insurance Regulation formally began in India with the
passing of Life Insurance Companies Act of 1912 &
Provident Fund Act of 1912.
• By 1938 there were 176 insurance companies operating
in the country.
• First comprehensive legislation was introduced with the
insurance act of 1938.
Insurance Sector Reforms
• In 1993, Malhotra Committee headed by Former
Finance Secretary & RBI governor R. N. Malhotra,
formed to evaluate the Indian Insurance Industry
and recommend its future directions.
Kinds of Insurance
• Business Point of view:
• Life Insurance
• General Insurance
• Risk Point of view:
• Property Insurance – Fire & Marine
Role &Importance
• Provides security & safety
• Affords peace of mind
• Encourage Savings
• Uncertainty of Business losses is reduced
• Increase business efficiency
• Welfare of employees
Life Insurance Corporation
• In 1870 two British life insurance companies entered in India and
attempted to do life insurance business on Indian lives. After that many Indian & foreign companies started business in India and by the year
1955 there were 255 insurance companies operating in India and
transacting the business to the extent of Rs 200 crores. Due to the
following reasons the Government decided to nationalize the life
insurance industry w.e.f 1/7/1956.
1. No full guarantee to the Policyholders (who are insured).
2. The concept of trusteeship (confidence) was lacking.
3. Many insurance companies went into liquidation (bankrupt).
4. There was malpractice in the business.
5. Non-Spreading of life insurance.
6. No insurance in rural areas.
7. No group insurance
8. No social security.
• In 1956, the life insurance business of all the companies
was nationalised and a single monolithic organization, LIC was set up.
• The post & telegraph department conducts some
business in this area for its employees, but the volume of
that business in relation to LIC is negligible & declining.
• Features:-
1. The Central Govt. guaranteed the Policyholders through the LIC.
2. Being a Corporation formed under Special Act Passed by the Parliament therefore the public can trust.
3. The LIC cannot be liquidated without the order of the Central Govt.
4. Under the LIC Act, all day-to-day functions of the Corporation and the method of
Investment in Govt. Securities were defined. Therefore, the malpractices were eliminated.
After the nationalization the life insurance business has grown substantially in very first year i.e. from Rs 200 crore upto 1956 to Rs 328 crores in 1957 and till
privatization in 2000 the business was transacting worth Rs 73436 crores.
Objectives
• To spread life insurance and provide life insurance protection to the masses at reasonable cost.
• To mobilise people’s savings through insurance linked saving schemes.
• To invest the funds to serve the best interests of both the policy holders and nation
• To conduct business with maximum economy, remembering always that the money belongs to the policy holders.
• To act as trustees of the policy holders and protect their individual & collective interests.
• To innovate and adapt to meet the changing life insurance needs of the community.
Key Points: LIC – Life Insurance Corporation of India
• It is the largest insurance company in India.
• The Parliament of India passed the Life Insurance of India Act on 19 June 1956 creating the Life Insurance Corporation of India, which started operating in
September of that year.
• Life Insurance Corporation of India (LIC) is celebrating its Foundation Day 1st September
• The LIC gets a large amount of insurance premium and has been investing in almost all sectors of the economy, viz, public sector, the private sector, co- operative sector, Joint Sector and now it is one of the biggest term-lending institutions in the country. LIC was established to spread the message of Life Insurance in the country and mobilize people’s savings for nation-building activities.
Subsidiaries:
• LIC Nepal
• LIC Cards Services
• LIC International
• Life Insurance Corporation (Lanka) Ltd
• LIC Pension Fund Ltd
• LIC Singapore
• LIC Lanka
• Life Insurance Corporation of India, Asset Management Arm
• Life Insurance Corporation International B.S.C.
• The Life Insurance Corporation of India Provident Fund
• LIC Nomura Mutual Fund
• Life Insurance Corporation of India
Organisation and Management:
• LIC with its central office in Mumbai and seven Zonal offices at Mumbai, Kolkata, Delhi, Chennai Hyderabad, Kanpur and
Bhopal operates through 100 divisional offices in important cities and 2048 branch offices. As on March 31, 2003 LIC had 9.88 lakh agents spread over the country. LIC also entered the international insurance market and opened its offices in
England, Mauritius and Fiji.
Investment Policy
• Investment policy of LIC is subject to the regulation under the provisions content in Sec 6 (1) of LIC Act 1956.
• Enjoying on it the duty of carrying its business to the best advantage of the community, always bearing in mind the
primary obigations to the policy holders whose money they are
using it as a trustee.
• The pattern of investment of LIC was governed under the Sec 27A of Insurance Act 1938, 1956.
• As per provisions of Act at least 50% of its funds invested in Central &
State govt securities
• 35% in govt approved securities
• 15 % in unapproved securities
• But this section has been amended numerous times as the
requirement of economy & govt policies, approved by the board of LIC.
5 Recent Developments in the Life Insurance Industry
1. Growth in Premium
• Life Insurance industry has seen a significant jump in the amount of premium collected.
The premiums collected for the year 2017-18 stood at a behemoth amount of Rs. 4.58 Lakh Crore, a considerable jump from Rs. 4.18 Lakh Crore recorded in the previous year 2016-17. A commendable growth which shows the acceptance of life insurance by the people of the country.
• All 23 private life insurance companies and the public sector life insurance giant Life Insurance Corporation of India have introduced products that meet the varying
insurance needs of India’s versatile population.
2. Outstanding Claim Settlement Ratio
• Claim Settlement Ratio is an important factor that helps people in choosing their life insurance plans from the various players operating in the Indian life insurance market. An important landmark seen here is that this is the first time that a
private life insurance company Max Life Insurance has overtaken the market giant Life Insurance Corporation of India by settling 98.26% of the claims. It is not just that, out of the 23 private life insurance companies, 12 companies have a claim settlement ratio of above 95%, 7 life insurers have a claim settlement ratio between 91% - 95%. There are only 3 life insurers who have a claim settlement ration between 80% to 90%.
3. Better Fraud Management Practices
• A good claim settlement ratio is a result of a robust underwriting
practice and better fraud management practices implemented by the insurer right at the proposal and policy issuance stage. These vigorous checks, use of data analytics and technology-enabled KYC verification process has enabled the insurers to detect fraudulent attempts and practices even before a policy is issued. Stringent practices have
allowed insurers to reign in and reduce the fraudulent practices which
are causing life insurance companies to bleed on the financial front.
4. Digital Push
• Life insurance companies have already started implementing technology on a larger scale in all stages of a life insurance contract. Starting from pre-policy issuance i.e.
verification of an applicant’s proposal to paying out the claim. The digital push by the government along with a strong push towards a cashless economy also has provided considerable help in implementing digitization that has touched every aspect in the life insurance industry.
• Data analytics, Block Chain, Internet of Things (IOT), Artificial Intelligence, Machine
Learning and other technological advancements have helped insurers to work efficiently and smartly. Insurers with the help of digitization have created a beautiful harmony
between the services offered on the online and offline front to its customers.
5. Better Reach
• Life insurers have also started employing various ways by which they
can reach people across the length and grid of the nation. Innovative ways like life insurers’ mobile apps, websites, integration with the
platform of online brokers and POS(point of sales) agents has enabled people to secure their lives with life insurance. The digital push has
also helped the insurer in providing life insurance policies with a
reduced policy issuance time and other customer-related services
through their online platform.
General Insurance Corporation
• The General Insurance Corporation (GIC) was formed by Central Government in 1972. With effect from January 1, 1973 the erstwhile 107 Indian and foreign
insurance companies who were operating in the country prior to nationalization, were grouped into four operating companies, namely: -
• National Insurance Company Limited.
• New India Assurance Company Limited.
• Oriental Insurance Company Limited.
• United Insurance Company Limited
• With head offices at Kolkata, Mumbai, New Delhi and Chennai, respectively GIC which was the holding company of the four
public sector general insurance companies has since been
delinked from the later and has been approved as the ‘Indian Reinsurer’ since 3 November 2000. All the four entities are
Government companies registered under Companies Act.
• The General Insurance business has grown in spread and
volume after nationalization. The tour companies have 2, 699
branch offices, 1,360 divisional offices and 92 regional offices
spread all-over the country.
Role and Functions of GIC
• Carrying on of any part of the general insurance, if it thinks it is desirable to do so.
• Aiding, assisting and advising the acquiring companies in the matter of setting up of standards of conduct and sound practice in general insurance business.
• Rendering efficient services to policy holders of general insurance.
• Advising the acquiring companies in the matter of controlling their expenses including the payment of commission and other expenses.
• Advising the acquiring companies in the matter of investing their fund.
• Issuing directives to the acquiring companies in relation to the conduct of general insurance business.
• Issuing directions and encouraging competition among the acquiring companies in order to render their services more efficiently.
Activities of GIC
• Some of the schemes in operation of the benefit of poor are the personal account insurance, social security scheme, hut insurance scheme for poor families in rural areas and crop insurance scheme.
• Besides the domestic market, the GIC is presently operating in 16 countries directly through branches or agencies and in 14 countries through subsidiary and associate companies. The
wholly owned subsidiary of GIC known as Indian International Insurance Private Limited, set up in 1988 in Singapore, has
grown into a leading company in the Singapore market.
Performance of GIC
• The gross premium income of the nationalised general insurance industry in India during 1999- 2000 was Rs.
9,523 crore as against Rs. 8,759 crore during 1998-99, representing a growth of 8.72% over the premium
income of 1998-99.
• The net premium income of the nationalised general insurance industry in India during the year 1999-2000
was Rs. 8,649 crore as against Rs. 7,732 crore in 1998-99,
representing a growth of 11.86% over the net premium
income of 1998-99.
• The gross profit of the industry during 1999-2000 was Rs.
1,152 crore as against Rs. 1,467 crore in 1998-99.
Similarly, the net profit of the industry during the year
1999-2000 was Rs. 1,077 crore as against Rs. 874 crore in 1998-99.
• According to the latest report the net profit of the
Industry during 2001-02 amounted to Rs. 12,229 crore, as against Rs. 10,772 crore during 2000-01 representing a growth of 13.52% over the premium income of last
year.
• General Insurance Corporation of India (GIC RE) reported
a consolidated net loss of Rs 1035.54 crore in Q3
December 2019 (Q3 FY20) compared with net profit of Rs 377.34 crore in Q3 December 2018 (Q3 FY19).
• Shares of GIC RE slumped 9.20% to Rs 240.20. It traded
in the range of Rs 239.35 and Rs 255.50 so far during the
day.
• Total income of the general insurer rose 20.3% to Rs 10091.16 crore in Q3 FY20 over Q3 FY19. The company reported a pre-tax loss of Rs 950.50 crore in the third quarter of FY20 as against pre-tax profit of Rs 1021.38 crore in the same period last year.
• GIC RE said that against the backdrop of severe claims worldwide during the year 2019-20, higher agriculture claims and flood claims in various parts of India, in the quarter ended 31 December 2019 underwriting performance resulted in underwriting loss to the
corporation.
Q & A
Mutual Funds
• A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.
• The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.
• The income earned through these investments and the capital appreciation released are shared by its unit holders in
proportion to the number of units owned by them.
Mutual Fund Operation Flow Chart
HISTORY OF MUTUAL FUND
• 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. 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 non- UTI Mutual Fund established in June 1987 followed by Canbank
Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92)
• Third Phase – 1993-2003 (Entry of Private Sector Funds) Kothari
Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores.
• Fourth Phase – since February 2003 -In February 2003, following the
repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two
separate entities.
• One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund Regulations
• 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
On the basis of Structure
OPEN ENDED SCHEMES:
• Open ended Schemes are schemes which offers unit for sale without specifying any duration for redemption.
• They sell and repurchase schemes on a continuous basis.
• The main feature of such kind of scheme is liquidity
CLOSED ENDED SCHEMES:
• These are the schemes in which redemption period is specified.
• Once the units are sold by mutual funds, then any transaction takes place in secondary market only i.e stock exchange.
• Price is determined by forces of market.
On the basis of investment objectives
Growth Fund:
• The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks.
INCOME FUNDS:
• Funds that invest in medium to long-term debt instruments issued by private
companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds
BALANCED FUND
• These funds provide both growth and regular income as these schemes invest in debt and equity.
• The NAV of these schemes is less volatile as compared pure equity funds.
MONEY MARKET FUNDS
• Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest
investment option when compared with other mutual fund types.
On the basis of Special Schemes
INDUSTRY SPECIFIC SCHEMES:
• Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like Infotech, FMCG, Pharmaceuticals etc
INDEX SCHEMES:
• In this schemes, the funds collected by mutual funds are invested in shares forming the Stock Exchange Index.
• Example- Nifty Index Scheme of UTI Mutual Fund and Sensex Index Scheme of Tata Mutual Fund
SECTORAL SCHEMES
• Sectoral funds are those mutual funds which invest in a particular sector of the market, e.g. banking, information
technology etc. Sector funds are riskier than equity diversified
funds since they invest in shares belonging to a particular sector
which gives them fewer diversification opportunities
Advantages of Mutual Funds
• Diversification
• Professional management
• Convenience and Flexibility
• Affordability
• Liquidity
• Transparency
• Tax Benefit
Disadvantages of Mutual Funds
• No control over costs
• The investor cannot choose the securities they want to
invest in or the securities they want to sell
• The investors face the risk of fund manager not
performing well.
Q & A
Lease finance
• Leasing is a method of financing in which the lessor retains the
ownership of an asset whereas the lessee gets its possession
with right to use the same against payment of a specific
amount of rental over a period of time.
Lease finance
A finance lease or capital lease is a type of lease. It is a commercial arrangement where:
• the lessee (customer or borrower) will select an asset (equipment, vehicle, software)
• the lessor (finance company) will purchase that asset
• the lessee will have use of that asset during the lease
• the lessee will pay a series of rentals or installments for the use of that asset
• the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee
• the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price)
Features of lease
• A contract between the lessor (owner) and the lessee(user).
• Payment of periodical rental to the lessor for using the asset by the lessee.
• Return the asset upon expiry of the lease term or its disposal in a
manner agreed upon between the owner and the lessee.
Functions of lease
• In addition to lease these companies also render some other services to raise their
• funds:
• They allowed to accept term deposits with duration of one year and above,
• Mobilize term deposits by launching special schemes like monthly income deposit, double deposit scheme, and triple deposit scheme etc.
• Issuing credit cards and undertake merchant banking activities with permission from Bangladesh bank.
• Issuing debentures/bonds to raise funds.
• Term loans from commercial banks and other financial institutions.
Types of leasing
The re are two main types of lease :
• Equipment Leasing
• Real Estate Leasing Equipment Leasing :
• The rentals cover some costs of equipment such as depreciation, interest cost, maintenance cost, interest and a profit margin for the leasing company.
It is two types-
• Finance Lease
• Operating Lease
Finance leasing :
• Under a finance lease, the finance company owns the asset throughout and the agreement covers a set period (considered to be the full economic life of the asset). Often, there is an option to continue leasing at a reduced, rate, at the end of the contracted period.
Operating leasing :
• An operating lease runs for less than the full economic life of the asset, and the lessee is not liable for the financing of its full value.
Real estate:
• A rental agreement is often called a lease, especially when real estate is rented. Real estate rentals are initiated by a rental application which is used to build the terms of the lease.
Advantages of Lease Financing
• Financing of the full value
• Flexibility payment
• Piecemeal medium term financing
• Tax concession
• Procedural convenience
• Softening of inflationary impact
• Budget planning is convenient
• Preservation of credit capacity
• Elimination of some other risk
Disadvantages of Lease Financing
Inadequate Protection Against Loss :
• Lessee is not the owner of the assets that’s why the lessee remains at a disadvantage in case of loss.
Loss of Terminal Value :
• In case of some assets like land , there may be some increase in the value but the lessee is not entitled to it because he is not the owner.
High Interest Cost :
• The cost of leasing is generally higher than other modes of financing due to higher interest rate as well as some other cost involved in it.
Disposal of Repossessed Assets :
• From the lessor’s perspective the default of the lessee may force it to repossess the assets which he cannot dispose of readily.
Consequence of Default :
• In case of non-compliance of any terms and conditions the
lessor may terminate the lease and takeover the assets at its
will leaving the lessee in the lurch (Danger).
Q & A
Merchant Banking ?
• Merchant Banking may be defined as an institution which covers a
wide range of activities such as underwriting of shares, portfolio
management, Project counseling, insurance etc. They all render these service for a fee. Both commercial and investment banks may engage in merchant banking activities.
• The original purpose of merchant banks was to facilitate and/or finance
production and trade of commodities and hence the name "merchant“.
Merchant Banker?
• A merchant banker is one who is a critical link between a company raising fund and the investors.
• Merchant banker is one who underwrites corporate securities and advices on issues like corporate mergers.
• The merchant banker may be in the form of a bank, a company, firm or even proprietary concern.
• Merchant Banker understands the requirements of the business concern and arranges finance with the help of financial institutions, banks, stock exchanges and money
market.
Functions Of Merchant Banks
• Promotional Activities – Merchant Banks helps the entrepreneur in conceiving an idea, identification of projects, preparing feasibility reports, obtaining Government approvals and incentives etc.
• Issue Management - Management of issues refers to effective
marketing of corporate securities viz., equity shares, preference shares
and debentures or bonds by offering them to public. Merchant banks
act as intermediary whose main job is to transfer capital from those
who own it to those who need it.
• Credit Syndication - Credit Syndication refers to obtaining of loans from single development finance institution or a syndicate or
consortium. Merchant Banks help corporate clients to raise syndicated loans from commercials bank.
• Project Counseling- It includes preparation of projects reports,
deciding upon the financing pattern, appraising the project relating
to its technical, commercial and financial viability. It includes filling
up of application forms for obtaining funds from financial institution.
• Portfolio Management - It refers to the effective management of Securities i.e., the merchant banker helps the investor in matters pertaining to investment decisions. Taxation and inflation are taken into account while advising on investment in different securities. The merchant
banker also undertakes the function of buying and selling of securities on behalf of their client companies. Investments are done in such a way that it ensures maximum returns and
minimum risk.
• Working capital Finance: Merchant bankers provide the following services as a part of working capital finance
• Assessment of working capital requirement
• Preparing the application for the sanction of appropriate credit facilities
• Providing assistance in negotiations with the banks.
• Advising on issue of debenture for augmenting long term requirement of working capital.
• Leasing and Finance – Many merchant bankers provide leasing and
finance facilities. Some of them even maintain venture capital funds to assist the entrepreneurs. They also help companies in raising finance by way of public deposits.
• Servicing Issues – Merchant Bankers helps in servicing the
shareholders and debenture holders in distributing dividends, debenture interest.
• Other Specialized Services – Merchant Banks also provide corporate advisory services on issues like mergers and amalgamations, tax
matters, recruitment of executives and cost and management audit
etc.
Merchant Banking In India
• Need for merchant banking was felt with rapid growth in number and size of issues made in primary issue.
• Merchant Banking services started by foreign banks, namely National Grindlays in 1967 followed by Citi Bank in 1970.
• Merchant Banking services was offered along with other traditional banking services.
• SBI was first Indian bank to set up merchant banking division in 1972.
• Later, the ICICI set up its merchant banking division in 1973.
• It was followed by other commercial banks like Canara Bank, Bank of Baroda, Bank Of India, Syndicate Bank, Central Bank Of India, PNB, UCO Bank etc.
Classification Of Merchant Banker
• Category I – to carry on the activity of issue management i.e., the preparation of prospectus, determining the financial structure, tie-up of financiers ,financial
allotment of securities and so on. To act as adviser, consultant, manager, underwriter, portfolio manager.
• Category II - to act as adviser, consultant, comanager, underwriter, and portfolio manager.
• Category III - to act as underwriter, adviser and consultant to an issue.
• Category IV – to act only as adviser or consultant to an issue of capital
Obligations And Responsibilities
• Merchant banker not to associate with any business other than that of the securities market.
• Maintenance of book of accounts, records, etc. Every merchant banker shall keep and maintain the following books of accounts, records and documents namely:
a)A copy of balance sheet at the end of each accounting period b)A copy of profit and loss account for that period
c)A copy of auditor’s report on the accounts of that period d)A statement of financial position
• Submission of half-yearly results.
• Report on steps taken on auditor’s report.
• Acquisition of shares prohibited.
• Information to the Board.
• Disclosure to the Board
Q & A
SELF HELP GROUPS
• Self Help Groups (SHGs) are small groups of poor people. The members of an SHG face similar problems. They help each other, to solve their problems. SHGs promote small savings among their members. The savings are kept with the bank. This is the common fund in the name of the SHG. The SHG gives small loans to its members from its common fund.
• SHG is an informal group and registration under any Societies
Act, State cooperative Act or a partnership firm is not
mandatory vide Circular RPCD.No. Plan BC.13/PL -09.22/90- 91
dated July 24th, 1991.
WHO HELPS TO FORM SHGs?
A reasonably educated and helpful local person has to initially help the poor people to form groups. He or She tells them about the benefits of thrift and the advantages of forming groups. This person is called an ‘animator’ or ‘facilitator’ . Usually, the animator is a person who is already known to the community.
• Any of the following persons can be a successful animator:
➢Retired school teacher or a retired government servant, who is well known locally.
➢A health worker/a field officer/staff of a development agency or department of the State Government.
➢Field officer or a staff member of a commercial bank/regional rural bank or a field staff from the local co-operative bank or society.
➢A field level functionary of an NGO.
➢An unemployed educated local person, having an inclination to help others.
➢A member/participant in the Vikas Volunteer Vahini (VVV) Programme of NABARD.
Woman animators can play more effective role in organizing women SHGs. The animator cannot organize the groups all alone. He or she will need guidance, training, reading material, etc. Usually, one of the following agencies help:
➢ A voluntary agency or Non Governmental Organization (NGO).
➢ The development department of the State Government. The local branch of a bank.
What does the animator do?
• The animator talks to people in the village or at their homes. He or
she explains the benefits of thrift and group formation. No promise
of bank loan is given to anyone. He or she helps the group members
to hold one or two initial meetings. The group and a group leader, for
holding meetings, keeping books, etc. The animator guides and
encourages the leader and the group members.
SHGs (Self Help Groups) JLGs (Joint Liability Groups) 1. Minimum 15 members and maximum
20
1. Minimum 3 members and maximum 5
2. Meeting is compulsory 2. No necessary of compulsory meeting 3. Bank loan is available 3. They get loans only from MFIs
4. Gets the benefit of government scheme
4. There is no benefits
5. Individual responsibility 5. They share responsibility and stand as guarantee for each other.
FUNCTIONING OF SHGs
• Size of the SHG
➢ The ideal size of an SHG is 10 to 20 members. (Advantage: In a bigger group, members cannot actively participate. Also, legally it is required that an informal group should not be of more than 20 people.).
➢ The group need not be registered.
• Membership
➢From one family, only one person can become a member of an SHG. (More families can join SHGs this way.)
➢The group normally consists of either only men or of only women. Mixed groups are generally not preferred. Women’s groups are generally found to perform better.
(They are better in savings and they usually ensure proper use of loans.)
➢Members should have the same social and financial background. (Advantage: This makes it easier for the members to interact freely with each other. If members are both from rich as well as poor class, the poor may hardly get an opportunity to express themselves.)
➢Some Common factors for Membership in an SHG
❑Women/men from very poor households.
❑Those who depend on moneylenders even for daily necessities.
❑Those with a per capita income not exceeding Rs. 250 per month.
❑Those having dry land holding not exceeding 2.5 acres.
❑Common living conditions for the Group Members eg. Living in kutcha houses, Having no access to safe drinking water, Presence of illiterate adults in the family etc.
➢Compulsory attendance: Full attendance in all the group meetings will make it easy for the SHG to stabilize and start working to the satisfaction of all.
➢Membership register, minutes register etc., are to be kept up to date by the group by making the entries regularly. (Advantage: This helps you to know about the SHG easily. It also helps to build trust among the SHG members.)
• Keeping of Accounts by the SHG
➢Simple and clear books for all transactions to be maintained.
➢If no member is able to maintain the books, the SHG may take outside help. (It has been seen that a boy or a girl from the village with some educational qualification does this job enthusiastically. After some months, the group can even consider giving him or her a small reward for this job.). Animator can also help.
➢All registers and account books should be written during the course of the meeting.
(Advantage: This creates confidence in the minds of members who are unable to read and write.)
➢Books to be kept by an SHG
❑Minutes Book: The proceedings of meetings, the rules of the group, names of the members etc. are recorded in this book.
❑Savings and Loan Register: Shows the savings of members separately and of the group as a whole.
Details of individual loans, repayments, interest collected, balance, etc. are entered here.
❑Weekly/Fortnightly/Monthly Register: Summary of receipts and payments, updated in every meeting.
Members’ Passbooks: Individual members’ pass books in which individual’s savings and loan balance outstanding is regularly entered. (Advantage: this encourages regular savings.)
MAJOR FUNCTIONS OF SHGs
• Savings and Thrift:
➢All SHG members regularly save a small amount. The amount may be small, but savings have to be a regular and continuous habit with all the members.
➢“Savings first — Credit later” should be the motto of every SHG member.
➢SHG members take a step towards self-dependence when they start small savings. They learn financial discipline through savings and internal lending. (Advantage: This is useful when they use bank loans.)
• Internal lending:
➢The SHG should use the savings amount for giving loans to members.
➢The purpose, amount, rate of interest, schedule of repayment etc., are to be decided by the group itself.
➢Proper accounts to be kept by the SHG.
• Discussing problems:
In every meeting, the SHG should be encouraged to discuss and try to find solutions to the problems faced by the members of the group. Individually, the poor people are weak and lack resources to solve their problems.
When the group tries to help its members, it becomes easier for them to face the difficulties and come up with solutions.
• Taking bank loan:
The SHG takes loan from the bank and gives it as loan to its members.
MICRO FINANCE
SCENARIO OF MICRO FINANCE IN INDIA
• India‘s population is more than 1000 million, around 350 million, are living below the poverty.
• Only 20% access loan from the formal sources and 80% from the informal sources.
• Out of that 20% only 10% have access to Micro finance.
• Annual credit demand by the poor is estimated to be about Rs 60,000 crores. And only 12,000 crores are disbursed. (April 09)
• Customers of Micro Finance are ―Small and marginal farmers", " rural artisans" and
"economically weaker sections”
MICRO-CREDITS MODEL
• Focus on, providing the capital for poor women to use their innate "survival skills" to pull themselves out of poverty.
• Lend mostly to women in small groups (credit circles), say of five or seven.
• Draw up a weekly or bi-weekly repayment schedule.
• In case any member defaults the entire circle is denied
access to credit.
BUSINESS MODEL OF GRAMEEN BANK
• Introduction
➢The Grameen Bank started in 1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh .
➢Grameen today has some 2,468 branches in Bangladesh, with a staff of 24,703 people serving 7.34 million borrowers from 80,257 villages.
➢Grameen’s methods are applied in 58 countries — including the United States.
➢Grameen Bank borrowers own 94% of the Bank. The remaining 6% are owned by the government. (January 09)
• Working model of Grameen bank:
➢Manager first makes a round to the appointed area to introduce Grameen policies and programs.
➢Try to make the group of 5 people.
➢ Only two members can obtain loan at first. After 6 weeks of successful repayment another two can apply for loan. The leader can only receive loan at last.
➢Repayment responsibility solely rests on the individual borrower.
➢However if one member of a group defaults, that group will never receive a loan from Grameen
• Two popular scheme by Grameen is:
➢Loan Insurance
➢Beggars Loan
• The Repayment Mechanism:
➢One year loan
➢Equal weekly installments
➢Repayment starts one week after the loan
➢Repayment amounts to 2% per week for fifty weeks .
• Criticism of Grameen Bank:
➢There are rumors that there repayment rate are fake
➢Grameen Bank clients used their loans for many different purpose .e.g..Dowry, gambling etc.
NABARD INITIATIVES IN MICRO FINANCE
• National Bank for Agriculture and Rural Development (NABARD) was established as an apex rural development bank in the year 1982, through an Act of Parliament.
• Role and Function of NABARD:
➢ Providing Refinance to lending institutions in rural areas.
➢ Evaluating, monitoring and inspecting the client banks.
➢ Providing support to NGOs through a variety of schemes.
➢ Making model projects / development schemes for banks and farmers
➢ It prepares, on annual basis, rural credit plans for all districts in the
country.
• Financial Santa Clause (NABARD)
➢(NABARD) was established in 1982,with an initial capital of 1400 crores.
➢And till March 30, 09 it reached to Rs 1,00,000 crores with the surplus of Rs 1400 crores.
➢Its Reserve and Surplus increased by 10.26% from 07 to 08, and its Cash and Bank balance and Investment increased by 40.16% and 15.5%. (sources :nabard.org)
• How NABARD gives loan to the Institutions?
➢NABARD follows the very strange way of providing the loans.
➢They give loans to the every ODD number institution i.e.3, 5, 7, 9….
ORGANIZATIONAL STRUCTURE of NABARD
Board of directors
Chairman
Managing director
Executive director (4)
Regional offices (28)
Sub Office(Andaman &
Nicobar) & Special cell (Srinagar)
District development offices (391)
Head office dept. (24)
Training establishme
nt (6)
HOW NABARD MANAGE THEIR REPAYMENT STRUCTURE
• Their Repayment ratio is more than 95%.
• NABARD see the credit rating of that institute given by the rating agency.
• NABARD analyze the balance sheet and profit and loss statement of the borrowing institutes.
• NABARD sees the past record of the borrowing institutes, their repayment
ratio and the executives who are working in that institutes.
MFI’s being criticized because of high interest rates
• Most MFI‘s financially sustainable by charging interest rates that are high enough to cover all their costs.
• Four key factors determine these rates:
➢The cost of funds.
➢The MFI's operating expenses.
➢Loan losses.
➢And profits needed to expand their capital base and fund expected future growth.
• There are three kinds of costs the MFI has to cover when it makes microloans:
➢The cost of the money that it lends.
➢The cost of loan defaults.
➢Transaction and Operating cost.
• For instance, MFI lends is 10 percent, and it experiences defaults of 1 percent of the amount lent, then total Rs 11 for a loan of Rs 100, and Rs 55 for a loan of Rs 500. And the third cost i.e. transaction cost. :Example
• Suppose that the transaction cost is Rs 15 per loan and that the loans are
for one year. To break even on the Rs 500 loan, the MFI would need to
collect interest of Rs 50 + Rs 5 + Rs 15 = Rs 70, which represents an annual
interest rate of 13 percent. To break even on the Rs 100 loan, the MFI would
need to collect interest of Rs 10 +Rs 1 + Rs 15 = Rs 26, which is an interest
rate of 26 percent.
SWOT analysis of MICRO FINANCE
• Strength
➢Helped in reducing the poverty.
➢Huge networking available.
• Weakness
➢Not properly regulated.
➢High number of people access to informal sources of finance.
➢Concentrating on few people only and mainly in urban areas.
• Opportunity
➢Huge demand and supply gap.
➢Employment Opportunity.
➢Huge Untapped Market.
➢Opportunity for Pvt. Banks, NBFCs, Foreign Banks to enter this business segment.
• Threat
➢High Competition.
➢Neophyte Industry.
➢Over involvement of Govt.
