banking bu material.docx

8/13/2019 banking bu material.docx

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S.R.S FIRST GRADE COLLEGE. Manjunatha A S

8095506917 ([email protected])

INDIAN FINANCIAL SERVICES 1

MODULE -1

Finance is a branch of economics concerned with resource allocation as well as resource

management, acquisition and investment. Simply, finance deals with matters related to money.

It consist of 3 decisions viz :

1. Financing decisions

2. Investment decision

3. Dividend decision

INDIAN FINANCIAL SYSTEM

The economic development of the country is reflected by the various sectors of the economy. Slowlysome of the sectors will be placed in surplus or deficit during the course of time. A financial system or

financial sector functions as an intermediary and facilitates the flow of funds from the areas of

surplus to the areas of deficit.

A Financial System is a composition of various institutions, markets, regulations and laws,

practices, money, analysts, transactions, claims and liabilities.

Financial System;

Indian financial system consists of financial market, financial instruments and financial

intermediation and financial services.


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\STRUCTURE OF FINANCIAL SYSTEM:

Financial

Instrument

Short term, medium term, long

Eg: Securities, debentures,

warrants, bonds, treasury bills,

CDs, CPs, Call/Notice Money

Financial

Services

Custodian, merchant banking,

depository, investment banking,

Underwriting and financial

Financial

Intermediaries

Banking

Non BankingLIC, GIC, NABARD,

Venture capital

Financial

Markets

Primary Market

Secondary Market

Capital market

Money market

Fee Based

Fund based

Underwriting, leasing, factoring,

forfeiting, venture capitalist,

housing finance, bills discounting


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RBI

RBI (Reserve Bank of India) is the central Bank of the country. It is the centre of Indian financial

and monetary system. As the Apex institution, it is guiding, monitoring, regulating, controlling

and promoting the Indian financial system.

RBI started functioning from 1stApril 1935 on the terms of the RBI ACT; 1934.It was a private

shareholders institution till January 1949, after which it became a State-owned institution Under

the Reserve Bank (Transfer to Public Ownership) of India Act, 1948.

Organization and Management:

The Bank is managed by

a. Central Board of directors (The governor, 4 Deputy governors and 15 Directorsnominated by central Govt.)

b. Four local board of directorsc. Committee of Central board of directors

The functions of the Local Board of directors is to advice the Central Board ofdirectors

The local board of directors are also required to perform the required duties The final control vests in the Central Board.

In order to perform various functions, the bank has been divided and sub-divided into a large

number of departments. Apart from banking and issue departments, there are 20 departments and

three training establishments at the central office of the bank.

Functions of RBI:

1. To maintain monetary stability (Controlling of liquidity and inflation)2. To maintain financial stability (Controlling the variation of rupee)3. To maintain Balance of payment4. To promote the financial infrastructure of the market and financial system5. To ensure the proper credit allocation throughout the system6. To regulate the overall volume of money and credit in the economy

Roles of RBI:

1. Note Issuing Authority:RBI is the sole authority for issuing of currency except for minting of coins. The bank

can issue notes against the security of gold coins and gold bullion, foreign securities,

government securities.


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2. Banker to the Government:The RBI is the banker to the Central and state Governments. It provides to the

Government all banking services such as acceptance of deposits, withdrawal of funds by

cheques, making payment as well as collections on behalf of government, transfer of

funds and management of public debts.

3. Bankers Bank:RBI is considered as the Bankers bank. It has the authority to regulate all the

commercial, co-operative banks and financial institutions. RBI lends funds to the Banks

in times of shortage and the banks can park their excess funds with RBI. RBI is also

called as the lender of last resort.

4. Supervising Authority:The RBI has the powers to control the Commercial and Co-operative banks with a view

to develop adequate and sound banking system. Hence,

a. It issues licenses for the establishment of new banksb.

It issues licenses for setting up of new branches

c. It prescribes minimum requirement for paid up capital, reserves, maintenance of cashreserves etc.

d. It inspect and investigate working of banks5. Exchange control authority:

RBI to maintain the stability of the external value of the rupee acts as an exchange

control authority. Its functions wit reference to exchange control is:

a. To administer the foreign exchange controlb. To manage and fix the exchange rate between Rupee and other currenciesc. To manage exchange reservesd. To interact and negotiate with monetary authorities.

Monetary policy of RBI:

1. To accelerate economic development2. To develop appropriate institutional set up3. Control of bank credit and money supply4. To stabilize the Inflationary pressures5. To maintain price stability.

The RBI uses following techniques to control the monetary pressures and policies

a. Bank rateb. Statutory liquidity ratio (SLR)c. Cash reserve ratio (CRR)d. Open market operationse. Credit planningf. Liquidity Adjustment facility (LAF)


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Banking Operations/Special roles of the Commercial Banks

1. Balancing Profitability with Liquidity Management:The maintenance of liquidity is very important because of the nature of liabilities. Banks

deal with otherpeoplesmoney, a substantial part of which is repayable on demand.

2. Management of reserves:The banks are expected to hold voluntarily a part of their deposits in the form of cash

reserves; and the ratio of cash reserves to deposits is known as the cash reserve ratio.

Central bank in every country is empowered to prescribe their reserve ratio that all banks

must maintain with the central bank.

3. Creation of credit:Banks can create transfer money. Banks create deposits or credit or loan. The bank

creates money by earning money on the existing deposits and loans. This has given rise to

the important concept of Deposit multiplier or money multiplier, which adds money

supply in the economy.

4. Basis and process of credit creation:The public has accepted the deposits in the banks as the most liquid form of money.


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SEBI

SEBI (Securities and Exchange board of India) is a regulatory authority established on April 12,

1988, later became a statutory and powerful body on 21stFebruary 1992.

Constitution and Organization:

The SEBI is a body of 6 members comprising of:

a. The Chairmanb. 2 members from among the officials of the ministries of Central Government dealing

with finance and Law

c. 2 members who are professionals and have experience or special knowledge relating tosecurities market

d. One member from RBIAll members except RBI member is appointed by the government

The work of SEBI has been organized into 5 operational departments each of which is headed by

an executive director who reports to the chairman:

a. Primary Market Operations and regulatory Departmentb. Secondary market operations and insider trading departmentc. Issue management and intermediaries departmentd. Secondary market exchange administration, inspection and non member intermediaries

department

e. Institutional investment departmentOther than these departments, there are Legal and Investigation department also.

Objectives:

The objectives of SEBI are:

a. To protect the interest of the Investorsb. To promote and develop the securities market in Indiac. To regulate the securities market and the matters concerned withd. To prevent trading malpracticese. To facilitate the efficient mobilization and allocation of resources throughout the

securities market.f. To maintain transparency and to provide information to investors


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Powers:

SEBI has the powers to regulate

a. Depository participantsb. Custodiansc. Debenture trustees and trust deedsd. FIIse. Insider Tradingf. Merchant Bankersg. Mutual Fundsh. Portfolio Managers and Investment Advisorsi. Registrars to the issue and share transfer agentsj. Stock brokers and sub-brokersk. Underwritersl. Venture capital fundsm. Banker to the issue

Guidelines:

SEBI can issue guidelines in respect of

a. Information disclosureb. Operational transparency and investor protectionc. Development of financial institutionsd. Pricing of issuese. Bonus issuef. Preferential issuesg. Financial instrumentsh. Firm allotment and transfer of shares among promoters

Terminologies:

1.Insider Trading:It refers to the trading of a corporations stock or other securities byindividuals with potential access to non-public information about the company.

It is legal if the corporate insiders do the trade after the information becomes public. Illegal

insider trading refers to buying or selling a security by making use of non-public information on

the security..


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2. Issue management:It is an activity where SEBI deals with various rules and regulationsregarding an issue such as

a. Filing of offer documentb. Deciding on issue pricec. Promoters contributiond.

Issue Advertisemente. Issue of debentures

f. Bonus Issueg. Right Issue etc.

3. Appointment and Duties of Debenture Trustees:It is mandatory for every company to appoint debenture trustees before issuing the

prospectus or letter of offer.

This section also lists the functions that shall be performed by the Trustees. These include:

a. Protecting the interests of the debenture holdersb. Addressing the grievances of debenture trusteesc. To ensure that the assets of the company issuing debentures are sufficient to

discharge the principal amount of the debenture holders.

d. To ensure that the company does not commit any breach of the provisions of theTrust Deed.

e. To arrange a meeting of the debenture holders as and when required.If the debenture trustees find that the companys assets are insufficient to discharge the principal

amount, they can file a petition before the Central Government. A debenture trustee can be a

scheduled bank, an insurance company, a body corporate or a public financial institution.

4. Debenture Trust Deed:A Debenture Trust Deed shall, include the following:

a. An undertaking by the company to pay the Debenture holdersprincipaland interest

b. The details of legal mortgages over the Companys freehold and leasehold property.

c. The clause which gives the trustees the power to take possession of theproperty charged when security becomes enforceable.

d. To maintain the register of debenture holders, convening meeting ofdebenture holders and other administrative matters related to the deed.

In addition, the SEBI regulations have laid format of the Trust Deed. Some of the

important provisions would include

Time limit of creation of security for issue of debentures. Obligations of the organization towards the debenture holders. Procedure for the inspection of charged assets by the Trustees.


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5. Registrar to an Issue:

Registrar to an issue means any person carrying on the activities in relation to an issue such as

collecting application forms from investors, keeping a record of applications and money received

from investors or paid to the seller of securities, assisting in determining the basis of allotment ofsecurities, finalizing the list of persons entitled to allotment of securities and processing and

dispatching allotment letters, refund orders or certificates and other related documents


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MODULE2

NBFCs

EXIMThe EXIM bank was set up in January 1982 as a statutory corporation wholly owned by the

central government. It grants direct loans in India and outside for the purpose of exports and

imports, refinances loans of banks and other notified financial institutions for purposes of

international trade, rediscounts usance export bills for banks, provides overseas investment

finance for Indian companies towards their equity participations in joint ventures abroad

The products and services of EXIM banks include:

a. Post shipment term financeb. Pre shipment creditc. Term loans for export oriented unitsd. Overseas investment financee. Finance for export marketingf. Relending facilities to banks abroadg. Rediscounting of export billsh. Refinance of export crediti. Bulk import financej. Research, analysis, advisory and informational services


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National Bank for Agriculture and Rural Development

(NABARD):

The NABARD was set up on July 12, 1982 under an act of parliament as a central or apex

institution for financing agricultural and rural sectors. Its paid up capital of Rs 100 croresubscribed by government and RBI in equal amounts.

Nabard provides:

a. Long term refinance for minor irrigation, plantation, horticulture, land development, farmmechanization, animal husbandry, fisheries etc.

b. Short-term loan assistance for financing of seasonal agricultural operations, marketing ofcrops, purchase/procurement/distribution of agricultural inputs etc.

c. Medium-term loan facilities for approved agricultural purposesd.

Working capital refinance for handloom weaverse. Refinance for financing government-sponsored programmes such as IRDP, Rozgar yogna

Small Industries Development Bank of India (SIDBI):

The SIDBI was set up in October 1989 under the Act of Parliament as a wholly owned

subsidiary of the IDBI. The authorized capital is 250 Crore with an enabling provision to

increase it to Rs. 1000 crore.

The Objectives are:

a. To initiate steps for technological up gradation and modernization of existing unitsb. To expand channels for marketing of SSI sector products in India and abroadc. To promote employment-oriented industries in semi urban areas and to check migration

of population to big cities.

The functions are:

a. SIDBI refinances the SFCs and commercial banks for modernization of projectsb. SIDBI refinances ceiling of Rs.50 lakhs for single window scheme of SFCs etcc. It participates in venture capital funds set up by public as well as public limited

companies.d. It provides refinance to lending institutions which are now permitted to lend SSI units


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Industrial Financial Corporation of India(IFCI)

This is the first term financing institution set up in july, 1948 by Government of India under IFCI

Act, 1948.

It provides direct rupee and foreign currency loans for setting up new industrial projectsand for expansion, diversification, renovation and modernization of existing units.

It also underwrites and directly subscribes to industrial securities, provides financialguarantees, merchant banking services and lease finance.

Its resources are in the form of:

a. Loan from RBIb. Share capitalc. Retained earningsd. Repayment of loanse. Issue of bondsf. Loans from the governmentg. Lines of credit from foreign lending agenciesh. Commercial borrowings in international capital markets.

Co-operative Bank:

Co-operative banks are organized and managed on the principals of Co-operation, self help

and mutual help. They function with the principle of one member one vote. Well being of

all the members is their motto and not profit.

The perform all the activities of banks such as deposit mobilization, supply of credit and

provision of remittance facilities.

The sources of funds for co-operative:

a. Central and state governmentsb. The RBI and NABARDc. Co-operative institutionsd. Ownership fundse. Deposits


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SMALL SAVINGS

Small Savings are mainly of two types:

Post office deposits

Saving certificates and bonds

These also consist of small savings bank account with co-operative banks, Recurring Deposits

(RD), Cumulative Term Deposits (CTD) etc.

The main Characteristics of these are:

1. These assets represent medium and long term investment opportunities.2. They are the good substitute for liquidity, maturity and safety.3. They also represent reinvestment plan..4. POSB (Post office savings bank) are highly liquid like bank deposits and constitute the

money supply in the economy5. Tax benefits can be availed through some of the investmentsTypes of instruments in small savings:

Post Office Savings Bank Deposits Post office Cumulative Time Deposits(POCTD) Post Office Time Deposits (POTD) Post Office Recurring Deposits (PORD) National Savings Certificate(NSC)

Indira Vikas Patra(IVP) Kisan Vikas Patra (KVP) National Savings Scheme (NSC) Post Office Monthly Income Scheme (POMIS)


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PROVIDENT FUNDS

This is the way of savings mostly by people who earn their income in salaries. However, with the

starting of the Public Provident Fund Schemes, it is possible even for non salaried earners also to

save in this form.

Savings in the form of Provident Fund is a contractual obligation and the main motto is to

provide for old age and for the family after ones death. Profit making or capital appreciation on

investment is not of much important aspect in these funds.

The various PF schemes operating in India are:

a. Provident funds for Exempted Industrial Establishmentsb. Central and State Government Employee Provident Fundc. Coal Mines Provident Fundd. Assam Tea Plantations Provident Funde.

Public Provident Fund

Advantages:

1. It is an incentive for savings.2. It increases the feeling of security among the investors who are salaried employees.3. It provides tax benefits.4. Provides good returns on investment.5. The investors can get loan facilities on provident funds.6. The provident funds invest in markets and companies and contribute for development of

country.


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Pension Funds:

Pension Plans (PP) is an arrangement to provide income to participants in the plan when they

retire. PPs are generally sponsored by private employers, government as an employer and labour

unions.

Classification of Pension Funds:

a. Defined Benefits pension Plan (DBPP)b. Defined Contribution Pension Plan (DCPP) or Money Purchase Pension Plan (MPPP)c. Payas-you-go Pension plan (PAYGPP)

Defined Benefits pension Plan (DBPP): under DBPP, the final pension is pre-defined based on

the final salary and the period of service. Most of the pension plans offered by public sector

enterprises and the government as employer in India are of DBPP variety. This type ensures a

predictable amount of pension to the employees for all the years after their retirement and it is

guaranteed by the state.

Defined Contribution Pension Plan (DCPP): DCPPs popular in US, do not guarantee the

amount of final benefit which the employees would get after they retire. In DCPP, The employee

and employer make a predetermined contribution each year, and these funds are invested over

the period of time till the retirement of employee. What ever the value of these investments at the

time of retirement, the employee will get the certain amount which he would use to purchase an

annuity.

Payas-you-go Pension plan (PAYGPP): In most of the European Countries, Pensions arepaid through PAYGPP, under which the current employees pay a percentage of their income to

provide for the old, and this, along with the contribution of the state, goes as a pension that

sustains the older generation.

Some of the Pension schemes available in India are:

1. Government Employees pension scheme2. Bank Employees Pension Scheme and Insurance Employees Pension Scheme

(BEPS/IEPS)

3. Privately Administered Superannuation fund


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INSURANCE

Insurance is a protection against the financial loss arising against the unforeseen contingences or

unexpected happenings. It gives the reimbursement or financial protection against the possible

future contingent losses or damages.

Definition:

Insurance is a contract between two parties whereby one party agrees to undertake the risk of

another in exchange for consideration known as premium and promises to pay a fixed sum of

money to the other party on happening of an uncertain event(death) or after the expiry of certain

period in case of life insurance or to indemnify the other party on happening of an uncertain

event in case of general insurance.

The benefits of insurance are:

It safeguard oneself and ones family for future requirements

It provides peace of mind in case of financial loss It is an alternative for saving and encourages savings Tax benefits can be availed on the savings It provides security against the various assets

Life insurance is a contract between the insurer and the insured where the insurer agrees to pay acertain sum of money upon the occurrence of an event (death) or after the expiry of a certain

period. The insured, also known as the policy holder is obligated to pay premium amount against

which the insurer agrees to indemnify against the risk.

Types of Life Insurance Policies:

1. Whole Life Assurance: In this policy, the insurance company collects premiumfrom the insured for whole life or till the time of his retirement and pays claim to

the family of the insured only after his death.

2. Endowment Assurance: In case of endowment assurance, the term of policy isdefined for a specified period say 15, 20, 25 or 30 years etc. The insurance

company pays the claim to the family of assured in an event of his death within

the policy's term or to the insured if the insured person survives throughout theterm of the policy.

3. Term Assurance:This is the policy which covers the death risk. It is offered fora limited time and the claim is paid to the family of the insured only after his

death. In case the assured survives the term of policy, no claim is paid to the

assured.


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4. Annuities: In case of annuity policy, the insured agrees to pay a specified sum ofcapital (lump sum or by installments) to the insurer. The insurer in return

promises to pay the insured a series of payments until insured's death. Generally,life annuity is opted by a person having surplus wealth and wants to use this

money after his retirement.

There are two types of annuities:

Immediate Annuity: In an immediate annuity, the insured pays a lump sum

amount (known as purchase price) and in return the insurer promises to pay himin installments a specified sum on a monthly/quarterly/half-yearly/yearly basis.

Deferred Annuity: A deferred annuity can be purchased by paying a single

premium or by way of installments. The insured starts receiving annuity payment

after a lapse of a selected period (also known as Deferment period).

5.

Money Back Policy: A money back policy is issued for a particular period, andthe sum assured is paid through periodical payments to the insured. In case of

death of the insured within the term of the policy, full sum assured along withbonus on it is payable by the insurance company to the nominee of the deceased.

General Insurance:

Insurance other than Life Insurance falls under the category of General Insurance. General

Insurance comprises of insurance of property against fire, burglary etc, personal insurance such

as Accident and Health Insurance, and liability insurance which covers legal liabilities. General

Insurance is normally meant for a short term period of twelve months or less.

General insurance can be classified as follows:

1. Fire Insurance:It provides protection against damage to property caused by accidentsdue to fire, lightening or explosion.

2. Marine Insurance:It basically covers three risk areas, namely, hull, cargo and freight.The risks which these areas are exposed to are collectively known as "Perils of the Sea".

These perils include theft, fire, collision etc.

3. Miscellaneous:As per the Insurance Act, all types of general insurance other than fireand marine insurance are covered under miscellaneous insurance. Some of the examples

of general insurance are motor insurance, theft insurance, health insurance, personalaccident insurance, money insurance, engineering insurance etc.

ULIPs


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ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurancepolicy which provides a combination of risk cover and investment. In unit linkedpolicies, the investment risk is generally borne by the investor.

Essentials of a valid Insurance Contract:

1. Offer and Acceptance:Offer and acceptance are the essentials of a contract. Asinsurance is also a contract, there should be minimum of two parties along with the offer

by one party to provide insurance and acceptance of the offer by the other.

2. Consideration:In case of insurance contracts, the premium is paid as the considerationto the insurer against the insurance provided.

3. Legal Capacity:The parties entering into the contract should be sound. A minor or ainsane person cannot enter into a insurance contract.

4. Legal Purpose:The purpose of the contract should be legal.

Advanced technologies in banking:


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E-banking (Electronic Banking)Banking services are also made available through computer. In modern banking system,

banks record banking transactions. Information about the balance in the deposit account

can be

known through computers. Banking activity carried on through computers and other

electronic means of communication is called electronic banking or e-banking.

Automated Teller MachineBanks have installed their own Automated Teller Machine (ATM) throughout the country at

Convenient locations. By using this, customers can deposit or withdraw money from their

own account any time round the clock.

Debit CardBanks are now providing Debit Cards to their customers having saving or current account

in the

banks. The customers can use this card for purchasing goods and services at different

places inlieu of cash. The amount paid through debit card is automatically debited (deducted) from

the

customers account.

Credit CardCredit cards are issued by the bank to persons who may or may not have an account in the

bank.

Just like debit cards, credit cards are used to make payments for purchase, so that the

individual

does not have to carry cash. Banks allow certain credit period to the credit cardholder to

make

payment of the credit amount. Interest is charged if a cardholder is not able to pay back the

credit extended to him within a stipulated period. This interest rate is generally quite high.

Net BankingWith the extensive use of computer and Internet, banks have now started transactions over

Internet. The customer having an account in the bank can log into the banks website andaccess

his bank account. He can make payments for bills, give instructions for money transfers,

fixed

deposits and collection of bill, etc.

Phone BankingIn case of phone banking, a customer of the bank having an account can get information of

his

account, make banking transactions like, fixed deposits, money transfers, demand draft,

collection and payment of bills, etc. by using telephone . As more and more people are now

using mobile phones, phone banking is possible through mobile phones. In mobile phone a


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customer can receive and send messages (SMS) from and to the bank in addition to all the

functions possible through phone banking.

RTGS

The abbreviation RTGS stands for Real Time Gross Settlement. RTGS system is a funds

transfer mechanism where transfer of money takes place from one bank to another on a real

time and on gross basis. This is the fastest possible money transfer system through the

banking channel.

Settlement in real time meanspayment transaction is not subjected to any waiting period. The

transactions are settled as soon as they are processed.

Gross settlement means the transaction is settled on one to one basis without bunching with

any other transaction. Considering that money transfer takes place in the books of the Reserve

Bank of India, the payment is taken as final and irrevocable.

The RTGS system is primarily for large value transactions. The minimum amount to be

remitted through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS transactions.

The remitting customer has to furnish the following information to a bank for effecting a RTGS

remittance:

1. Amount to be remitted2. His account number which is to be debited3. Name of the beneficiary bank4. Name of the beneficiary customer5. Account number of the beneficiary customer6. Sender to receiver information7. The IFSC code of the receiving branch

Before the innovation of RTGS system, EFT and NEFT were used by banks for Fund

transfer:

EFT (Electronic Fund Transfer) and NEFT (National Electronic Fund Transfer) are electronic

fund transfer modes that operate on a Deferred Net Settlement (DNS) basis which settles

transactions in batches. In DNS, the settlement takes place at a particular point of time. All

transactions are held up till that time. For example, NEFT settlement takes place 6 times a day

during the week days (9.30 am, 10.30 am, 12.00 noon. 1.00 pm, 3.00 pm and 4.00 pm) and 3


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times during Saturdays (9.30 am, 10.30 am and 12.00 noon). Any transaction initiated after a

designated settlement time would have to wait till the next designated settlement time. Contrary

to this, in RTGS, transactions are processed continuously throughout the RTGS business hours.

ECS (Electronic Clearing System)

It is a mode of electronic funds transfer from one bank account to another bank account using the

services of a Clearing House. This is normally for bulk transfers from one account to many

accounts or vice-versa. This can be used both for making payments like distribution of dividend,

interest, salary, pension, etc. by institutions or for collection of amounts for purposes such as

payments to utility companies like telephone, electricity, or charges such as house tax, water tax,

etc or for loan installments of financial institutions/banks or regular investments of persons.

SECURITIZATION


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INDIAN FINANCIAL SERVICES 22SPV (Special

Purpose Vehicle)

It is the process of taking an illiquid asset, or group of assets, and through financial engineering,

transforming them into a security.

Debt Securitization

It is nothing but the packaging of a pool of financial assets into marketable securities. It involvesissue of securities against illiquid assets of financial institutions and such securities are

structured, whereby the originator transfer or sells some of the assets to a SPV (Special Purpose

Vehicle) which breaks these assets into tradable securities of smaller value then sold to the

investing public. The general principle is that the maturities of these securities must

coincide with the maturity of the securitized loan.

This makes the bank independent in the field of raising funds other than the money market, loan

market etc.

EG: A financing company that has issued a large number of auto loans and wants to raise cashso it can issue more loans. One solution would be to sell off its existing loans, but there isn't a

liquid secondary market for individual auto loans. Instead, the firm pools a large number of its

loans and sells interests in the pool to investors. For the financing company, this raises capital

and gets the loans off its balance sheet, so it can issue new loans. For investors, it creates a liquid

investment in adiversifiedpool of auto loans, which may be an attractive alternative to a

corporate bond or other fixed income investment. The ultimate debtorsthe car ownersneed

not be aware of the transaction. They continue making payments on their loans, but now those

payments flow to the new investors as opposed to the financing company.

The Following Diagram shows the process of Debt Securitization:

Sells the

Financial Assets

Originator (Eg.

Banks, Lic, Co.

etc)
http://www.riskglossary.com/articles/liquidity.htmhttp://www.riskglossary.com/articles/hedging_and_diversification.htmhttp://www.riskglossary.com/articles/corporate_bond.htmhttp://www.riskglossary.com/articles/corporate_bond.htmhttp://www.riskglossary.com/articles/hedging_and_diversification.htmhttp://www.riskglossary.com/articles/liquidity.htm


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Security 1

Parties to the Securitization:

1. The Originator or the Selleris the entity whose receivables form the basis for AssetBacked Securities (ABS) issuance.

2. Special Purpose Vehicle (SPV)- The entity which is as the issuer of the ABS ensuresadequate cash flow to the investors.

3. The Servicer- who bears all administrative responsibilities relating to the securitizationtransaction.

4. The Trustee or the Investor Representative: Group of people or trust or organizationto safeguard the interests of investors in the ABS.

5. The Credit Rating Agency: which provides an objective estimate of the credit risk inthe securitization transaction by assigning a credit rating.

6. Investors:Investors are the ultimate judges of any securitization effort. Originatorsshould therefore interact actively with the investor community to get to know investor

preferences and concerns for effective structuring and distribution of ABS. Such

knowledge would also make the origination process more efficient.

Process of Securitization:

1. Creation of asset pool and its sale:The originator/seller (of assets) creates a pool of assets and executes a legal true sale of

Securi

ty 2

Security

4

Securit

y 5

Securit

y 6

Security

7

Securit

y 8

Securi

ty 1

Breaks into small

securities


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the same to a special purpose vehicle (SPV). A SPV is either a trust or a company, setup

to carry out a restricted set of activities, management of which would usually rest with an

independent board of directors.

2. Designing the securities: The SPV will break the financial asset purchased from theoriginator in securities of smaller value so as to make it convenient and affordable for the

public/investors. Design of the instrument however would be based on the nature of

interest that investors would have on the asset pool. These securities will be designed in

such a manner that the maturity of the ABS (Asset Backed Securities) will have to match

with that of the underlying financial asset.

3. Credit rating:Once the securities have been designed, it should get approval and ratedfrom one of the recognized credit rating agency.

4. Issuance of the securitized paper: This activity is usually performed by the SPV.

5.

Credit Risk:It must be made clear that the interest, amortization, redemption andpayments are entirely dependent on the performance of the pooled assets, and will have

nothing to do with the credit of the originator.

6. Administration:Performance of various duties and responsibilities relating to administration of

securitized assets, including payment servicing and managing relationship etc.

Advantages to issuer/Originator:

1. Reduces funding costs:Through securitization, a company rated BB but with AAAworthy cash flow would be able to borrow at possibly AAA rates. This is the number one

reason to securitize a cash flow and can have tremendous impacts on borrowing costs.

2. Reduces asset liability mismatch: Securitization allows such banks and financecompanies to create a self-funded asset book.

3. Lower capital requirements:Some firms, due to legal, regulatory or other reasons, havea limit on their. By securitizing some of their assets, which qualifies as a sale for

accounting purposes, these firms will be able to lessen the equity on their balance sheets

while maintaining the "earning power" of the asset.

4. Locking in profits:Once the block has been securitized, the level of profits has nowbeen locked in for that company, thus the risk of profit not emerging, or the benefit of

super-profits, has now been passed on.

5. Transfer risks (Credit, liquidity, repayment, reinvestment, asset concentration):Securitization makes it possible to transfer risks from an entity that does not want to bear

it, to one that does.

6. Increases Earnings:Securitization makes it possible to record an earnings bouncewithout any real addition to the firm.


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7. Liquidity: Future cash flows may simply be balance sheet items which currently are notavailable for spending, whereas once it has been securitized, the cash would be available

for immediate spending or investment and there by creates liquidity. This also creates a

reinvestment opportunity.

Disadvantages to issuer/originator:

1. Costs:Securitizations are expensive due to management and system costs, Legal feesunderwriting fees, rating fees and ongoing administration.

2. Size limitations:Securitizations often require large scale structuring, and thus may notbe cost-efficient for small and medium transactions.

3. Risks:Since securitization is a structured transaction and a difficult process to be carried.Advantages to investors:

1. Opportunity to potentially earn a higher rate of return: Higher risk and higher return2. Enables portfolio diversification3. Isolation of credit risk from the parent entity

Risks to investors

1. Liquidity risk2. Credit/default:Default risk is theborrowers inability to meet interest payment

obligations on time.

3.

Prepayment/reinvestment/early amortization: The majority of ABS are subject tosome degree of early amortization risk. The risk stems from early payments or premature

payments.

4. Currency interest rate fluctuations: Like all fixed income securities, the prices of fixedrate ABS move in response to changes in interest rates.

5. Servicer risk:The transfer or collection of payments may be delayed or reduced if theservicer becomes insolvent. Having a backup servicer involved in the transaction

mitigates this risk.

Reasons of its unpopularity in India:

1. Lack of awareness in the market2. Heavy stamp duty and registration fees3. Complicated procedure4. Lack of standardized procedure.


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5. Absence of proper guidelines by the regulatory authorities.

Pass through Certificate:

A pool of fixed-income securities backed by a package of assets. A servicing intermediarycollects the monthly payments from issuers, and, after deducting a fee, remits or passes them

through to the holders of the pass-through security. It is also known as a "pass-through

certificate" or "pay-through security."

The most common type of pass-through is a mortgage-backed certificate (MBS) and not Assetbacked securities (ABS), where homeowners' payments pass from the original bank through a

government agency or investment bank to investors.

Risk involved in pass through certificate:

1. Pass-Through Certificates May Not be Suitable Investments for You: IFd definitepayment stream, or a single payment on a specific date is expected, Pass-Through

Certificates are not suitable investments

2. Principal Payment Rates are Uncertain:Principal payment rates on the Pass-ThroughCertificates will depend on the rates of principal payments on the underlying Mortgages.

In general, prepayments tend to increase when current interest rates decline, as more

borrowers choose to take out their existing Mortgages. As current interest rates increase,

prepayments generally decline.

3. Prepayments Can Reduce the Yield:The yield on a Pass-Through Certificates willdepend on its price, the rate of prepayments on its underlying Mortgages and the actual

characteristics of those Mortgages. The Mortgages may be prepaid at any time, in most

cases without penalty.

4. Pass-Through Certificates are Subject to Market Risks:The market values of Pass-Through Certificates will vary over time, primarily in response to changes in prevailing

interest rates.

Special Purpose Vehicle (SPV) or Special Purpose Entity (SPE):

A special purpose entity (SPE) is a body corporate created to fulfill narrow, specific or

temporary objectives, primarily to isolate financial risk, usually bankruptcy, specific taxation or

regulatory risk.


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It is also referred to as a bankruptcy remote entity whose operations are limited to acquisition

and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability

structure and legal status that makes its obligations secure even if the parent company goes

bankrupt.

Features of SPV:

1. It must be capable of acquiring, holding and disposing of assets.2. It should be a bankruptcy remote entity3. It should have separate and distinguished identity from that of its originator.4. It should have the capability of housing multiple securitizations.

MODULE3

LEASING:

Meaning of Leasing:

Leasing is an agreement, which consists of two parties, viz., Lessor and Lessee


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Lease is defined as An agreement whereby the lessee uses the asset owned by the lessor by paying some

consideration.

Lessor is a person who owns the asset.

Lesseeis a person who uses the asset.

Lease Rentalsrefers to the consideration paid to the lessor in lump sum or in fixed installments by the

lessee for using the asset.

The various factors to be considered in leasing of an asset are:

1. Insufficient Funds: When there are insufficient in the business and if the businesses want toallocate its funds in a more rational manner instead of investing in an asset, then the business unit

can go for leasing of an asset.

2. Lease Rentals:Lease rentals are cash outflows and are an expense, which is deductible for tax.Hence the benefit of tax savings can be taken in case of payment of lease rentals.

3. Duration: If the lifetime of the project is long, leasing is preferred.4. No Obsolescence risk:As the asset is not owned, there is no risk of obsolescence as the leasecontract can be terminated for the obsolete one and new contract can be entered into. There are

also no replacement expenses for the obsolete asset in case of leasing.

5. Depreciation: There will not be any depreciation expenses as the business unit does not own theasset and hence tax savings on depreciation cannot be claimed.

6. Interest: As the fund in not borrowed, there is no interest expense and thereby, tax savings oninterest cannot be claimed.

7. No loss:There is no risk of Short or Long Term Capital Loss as the asset is not sold at the end ofthe project, but transferred back to lessor. As there is no ownership, sale does not occur in this

case.

8. Salvage value: There is no salvage value because asset is not sold as it is not owned buttransferred to the lessor at the end of the project.

HIRE PURCHASE:

Hire purchase is a system in which a buyer takes possession of an asset on payment of a deposit andcompletes the purchase by paying a series of installments while the seller retains ownership until the final

installment is paid.

The various factors to be considered in purchase of an asset through hire purchase are:


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1. Insufficient Funds: The business unit can go for this option in case of in sufficient funds aspurchase down payment will usually be 10 to 20% of the value of the asset. The remaining

amount can be paid in small installments annually.

2. Interest: Installments payment includes interest factor in it. And interest is an expensedeductible for tax, the benefit of tax savings arises.

3. Ownership:The business unit after the payment of entire series of installment claims theownership of the asset.

4. Depreciation:As the business unit owns the asset, it can claim depreciation which is an expensedeductible for tax and hence the benefit of tax savings also arises.

5. Salvage Value:At the end of the lifetime of the asset, the asset can be sold and the scrap valuerealized will be considered as a cash inflow.

6. Profit or loss on sale of asset: Short or Long Term Profit or Loss on sale of asset has to beconsidered. If it is a profit, well and good. If it is loss, tax savings can be claimed on the loss.

Difference between hire purchase and installment purchase:

In case of hire purchase, ownership is transferred at the end once all the installments are paid; in case of

installment purchase, ownership is transferred at the beginning as soon as the initial deposit is made.

However, this does not impact on any entries in the books of accounts.

HIRING:

Hiring is similar to that of leasing. In case of hiring, the hiree uses the asset of the owner by paying him a

consideration (rent).

The various factors to be considered in hiring an asset are:


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1. No investment:As the business unit is not going for the purchase of the asset, no huge initialinvestment is required.

2. Rent:The rent paid for hiring an asset is considered for the purpose for tax calculation.Therefore, the tax benefit can be availed on rental expenses.

3. No Obsolescence risk:As the asset is not owned, there is no risk of obsolescence as the asset ishired for some particular point of time, especially for a short period.

4. Depreciation: There will not be any depreciation expenses as the business unit does not own theasset and hence tax savings on depreciation cannot be claimed.

5. Interest: As the fund in not borrowed, there is no interest expense and thereby, tax savings oninterest cannot be claimed.

6. No loss:There is no risk of Short or Long Term Capital Loss as the asset is not sold at the end ofthe project, but transferred back to owner of the asset. As there is no ownership, sale does not

occur in this case.

7. Salvage value: There is no salvage value because asset is not sold as it is not owned buttransferred to the owner of the asset at the end of the project.

CREDIT RATING AND ITS PROCESS

Meaning:


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Credit rating refers to the assessment of the credit worthiness of individuals and corporations. It

is based upon the history of borrowing and repayment, as well as the availability of assets and

extent of liabilities.

The rating is based on the opinion of the banks and financial institutions and financial analysis

to investigate stability and credit history and they consistently provide ratings which areindependent, objective and of the highest possible quality.

Credit rating agencies in India:CRISILCredit Rating and Investment Services of India Ltd.

ICRAInformation and Credit Rating Agency of India (ICRA)

CARECredit Analysis and ResearchDuff and Phelps credit rating India Pvt. Ltd.

ONICRA Credit Rating Agency of India Ltd.

CRISIL RATING:

Long-term instruments:

AAA-highest SafetyAA-high safety

AAdequate Safety

BBBModerate SafetyBB- Sub Moderate safety

BInadequate Safety

CSubstantial Risk

DDefault

Short-term instruments:P1P2

P3

P4

ICRA Rating:

Long Term instruments:LAAA

LAEtc

Short-term instruments:A1

A2


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ISSUER

CARE RatingCare AAA

Care A

Rating Process:

The rating process begins with an application to the rating agencies by the company inwriting along with the submission of the following documents and rating fees.

The preliminary official statement; Latest audited and unaudited financial statements; The latest budget information, including economic assumptions and trends; Capital outlay plans; All legal documents relating to the security for the bonds Any other documents that may pertain to the issuance of any security as

Requested by the rating agencies.

The rating agency assigns a rating team, which will conduct the preliminary analysis.

The team also conducts the meetings with the management and will do the site visit. After collecting all the required data, the team will make the suitable analysis and

presents it to the rating committee.

Then the top officials considering the analysis and reports, decides the rating and therating is communicated to the company.

If the company accepts the rating, it is officially published by the rating agency Rating agency keeps such rating under continuous surveillance.

A detailed flow chart of rating process is as under:

Rating


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The elements involved in determining a credit rating are:

1. Economic Factors : The various economic factors such as economic diversity,response of the organization to business cycles, economic restructuring are considered.

Request for a

rating

Signs rating agreement,

provides information

and rating fees

Rating team assigned. Team

collects information, Conducts

preliminary analysis

Management meetings

with the rating team

Team conducts site visits and

performs analysis

Analysis presented to rating

committee

Rating assigned and

communicated to the issuer

Accepts the rating or

appeal

Rating published officially

All ratings kept under

continuous surveillance

throughout validity


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2. Financial Factors : Liquidity position of the company, Investment outlay and futureoutlay, ongoing operations and profitable position of the organization etc. are the

various financial factors considered for rating.3. Management/Structural Factors: The internal factors such as organization structure,

government intervention, tax policy, financial and budgetary responsibilities etc. are

considered for rating.4. Investment Policies and Practices: Leverage position, market risk, liquidity

management capacity, infrastructure facility etc. are some of the factors which areconsidered by the credit rating agencies for rating.

Depository and Depository participant:

Depository: A depository is an organisation which holds securities of investors in electronic

form at the request of the investors through a registered Depository Participant. It also

provides services related to transactions in securities. At present two Depositories areregistered with SEBI.viz.

National Securities Depository Limited (NSDL) Central Securities Depository Limited (CSDL)

The minimum net worth stipulated by SEBI for a depository is Rs.100 crore.

It can be compared with a bank, which holds the funds for depositors.

BANK DEPOSITORY

Holds funds in an account Hold securities in an account

Transfers funds between

accounts on the instruction of

the account holder

Transfers securities between

accounts on the instruction of the

account holder

Facilitates transfer without

having to handle money

Facilitates transfer of ownership

without having to handle securities

Facilitates safekeeping ofmoney

Facilitates safekeeping of securities

Role of Depositories:

Dematerialisation i.e., converting physical certificates to electronic form; Rematerialisation i.e., conversion of securities in demat form into physical certificates;


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Facilitating repurchase / redemption of units of mutual funds; Electronic settlement of trades in stock exchanges connected to NSDL; Pledging/hypothecation of dematerialised securities against loan; Electronic credit of securities allotted in public issues, rights issue; Receipt of non-cash corporate benefits such as bonus, in electronic form;

Nomination facility for demat accounts; Services related to change of address; Effecting transmission of securities; Account monitoring facility over Internet for clearing members through SPEED facility; Other facilities viz. holding debt instruments in the same account, availing stock

lending/borrowing facility, etc.

NSDL:

The Depositories Act of 1996 paved way for establishment of NSDL(National Securities

Depositories Ltd).

Using innovative and flexible technology systems, NSDL works to support the investors and

brokers in the capital market of the country.

Objectives of NSDL:

1. Ensure Safety2. Increase efficiency of markets3. Minimise risk4. Provide settlement solution5. Providing service at lesser cost.6. Nurturing the growth of financial services industry.Milestones of NSDL:

Commencement of Demat trading at NSE in Dec, 1996. Commencement of Demat trading at BSE in Dec, 1997. Compulsory demat trading for Institutional investors in Jan, 1998. Introduction of Demat of Government Securities Dec, 1998. Launch of PAN card services in June, 2004.

Launch of SMS alert facility for investors in Sept, 2007.

CSDL:

CDSL was set up with the objective of providing convenient, dependable and secure depositoryservices at affordable cost to all market participants.


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Objectives of CSDL:

1. Ensure Safety2. Increase efficiency of markets3. Minimise risk4. Provide settlement solution5. Providing service at lesser cost.

Nurturing the growth of financial services industry

Some of the important milestones of CDSL system are:

CDSL received the certificate of commencement of business from SEBI in February,1999.

Started to operate from July 15, 1999. Settlement of trades in the demat mode started in July 1999. All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange,

Delhi Stock Exchange, The Stock Exchange, Ahmedabad, etc established connectivity

with CDSL.

As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities,bonds, debentures, commercial papers), units of mutual funds, certificate of deposits etc.into the CDSL system.

Depository participant:

A Depository Participant (DP) is an agent or an intermediary between the investor and

exchange and depositories.


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A DP can offer depository services only after it gets proper registration from SEBI. Banking

services can be availed through a branch whereas depository services can be availed through

a DP.

The benefits of availing of depository services are:

A safe and convenient way to hold securities; Immediate transfer of securities; No stamp duty on transfer of securities; Elimination of risks associated with physical certificates such as bad delivery, fake

securities, delays, thefts etc.;

Reduction in paperwork involved in transfer of securities; Reduction in transaction cost; No odd lot problem, Nomination facility; Change in address recorded with DP gets registered with all companies in which investor

holds securities electronically eliminating the need to correspond with each of them

separately;

Transmission of securities is done by DP eliminating correspondence with companies; Automatic credit into demat account of shares, arising out of

bonus/split/consolidation/merger etc.

Holding investments in equity and debt instruments in a single account.Dematerialisation:

Dematerialisation is the process by which physical certificates of an investor are converted to

an equivalent number of securities in electronic form and credited into the investor's account

with his/her DP.

Process of dematerilization:

In order to dematerialise physical securities one has to fill in a DRF (Demat Request Form)

which is available with the DP and submit the same along with physical certificates one


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wishes to dematerialise. Separate DRF has to be filled for each ISIN Number. The complete

process of dematerialisation is outlined below:

Surrender certificates for dematerialisation to your depository participant. Depository participant intimates Depository of the request through the system. Depository participant submits the certificates to the registrar of the Issuer Company.Registrar confirms the dematerialisation request from depository.

After dematerialising the certificates, Registrar updates accounts and informs depositoryof the completion of dematerialisation.

Depository updates its accounts and informs the depository participant. Depository participant updates the demat account of the investor.

ISIN:

ISIN (International Securities Identification Number) is a unique identification number for asecurity.

Rematerialization:

It refers to the conversion of securities from electronic form to physical form

If the investor wishes to get the securities in the physical form, he ahs to fill the Remat

Request Form (RRF). The process of rematerialisation is as follows:

Request for rematerialisation Depository Participant intimates to the depository Depository confirms rematerialisation request to the registrar Registrar updates accounts and prints certificates Depository update the accounts and informs the same to the DP Registrar dispatches certificates to the investor.

MODULE4

Custodian Bank:


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It is an organization responsible for safeguarding a firm's or individual's financial assets.

The functions of a custodian are as follows:

1. Safe keeping of assets2.

Collection of information and also in income on the assets in the form ofdividend, interest etc.

3. Provide information about various companies and their details to the client4. Perform foreign exchange transactions5. Reporting regularly to the clients.

Merchant Banking

A merchant bankis a financial institution primarily engaged in international finance and long-

term loans for multinational corporations and governments.

They are known as accepting and issuing houses in UK and as Investment banks in US.

Investment banking is the traditional aspect of investment banks which involves helping

customers raise funds in the capital markets and advising on mergers and acquisitions.

The functions of Merchant Banker are:

1. Underwriting:Underwriting is an agreement whereby the underwriter promises to subscribe to a specified

number of shares or debentures or a specified amount of stock in the event of public notsubscribing to the issue

Methods of Underwriting:

Standing behind the issue: Under this method, the underwriter guarantees thesale of a specified number of shares within a specified period. If the public do not

subscribe to the specified amount of issue, the underwriter buys the balance in the

issue.

Outright purchase:The underwriter, in this method, makes outright purchase ofshares and resells them to the investors.

Consortium method:Underwriting is jointly done by a group of underwriters inthis method. The underwriters from a syndicate for this purpose. This method is

adopted for large issues.

Advantages of Underwriting:


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1. The issuer is assured for minimum subscription2. The risk of finding the buyers is reduced3. Underwriters also provide other services such as timing of security issue, pricing of

the issue etc. which is very helpful for the investor.

2. Project promotion and Project finance:This service refers to the encouragement of new

projects to establish new business and industries by providing required funds and also

enabling the new set up to raise fund from various other sources.

3. Syndication of credit: When two or more financial institutions join hands and lend credit to a

big corporation/company/multinational, such a set up is known as loan syndication or credit

syndication.

4. Leasing:

Leasing is an agreement which consists of two parties, viz., Lessor and Lessee

Lease is defined as An agreement whereby the lessee uses the asset owned by the lessor by paying some

consideration.

Lessor is a person who owns the asset.

Lesseeis a person who uses the asset.

Lease Rentalsrefers to the consideration paid to the lessor in lump sum or in fixed installments by the

lessee for using the asset.

5. Venture Capital:

A venture capital company is defined as a financing institution which joins an entrepreneur as aco-promoter in a project and shares the risks and rewards of the enterprise.

Features:

i. They usually participate in the form of equity participation.ii. Investment is made in highly risky and growth potential products.

iii. It enables commercialization of new ideasiv. It provides technical as well as managerial assistancev. They exit once the firm is established very well in the market.

6. Assistance regarding Mutual and Offshore funds: This service consists of information

regarding the provision of information to various clients about the performance of various

mutual funds and industries along with the information of offshore funds.


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7. Corporate and investment advisory services:this service consists of advising the corporate

on the matters such as acquisition, mergers and demergers, amalgamations, diversification,

joint ventures etc.

Structure of Merchant Banker:

The set up of the entire merchant banking system in India can be studied under the following

four heads:

1. Commercial Banks:The commercial banks own wholly owned subsidiaries to carry outthe merchant banking services. Eg; SBI, Canara Bank, Bank of Baroda etc.

2. All India Financial Institutions:The Authorized financial institutions from SEBI canalso provide merchant banking services. Eg: ICICI, IFC, IDBI.

3. Private Consultancy Firms: Various private consultancy firms with the permission ofRBI and SEBI also provide merchant banking services. They usually venture into small

funding business. Eg: DSP Financial Consultants, JM Financial and Investment Servicesetc.

4. Technical Consultancy Organization:These organizations provide merchant bankingservice to medium and small sized units.

8. Investment Banking:

Investment banking is the traditional aspect of investment banks which involves helping

customers to raisefunds in thecapital markets and advising onmergers andacquisitions.

Functions:

Security issuance Underwriting Coordinating with bidders Negotiation regarding merger and acquisition Advising on mergers, amalgamations, leveraging etc.

9. Depository Services:

Depository services refer to those services offered by the Depository participants such as:
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a. Purchasing and selling of shares on behalf of clientb. Informing the client about the fundamentals and technicals of the various assets and

markets

c. Helping the client to keep the track record of various financial assets in his accountd. Providing investor informatione. Helps in conversion of shares and debentures into dematerialized and rematerialized

format through the help of Depositories.

10. Financial Consultancy:

Providing consultancy services regarding investments, tax policies and savings, mergers, joint

ventures etc.

11. Leasing:is an arrangement, similar torent agreements, for the use of property (buildings,

cars,office equipment and other items) inreturn for payments to the owner. Thelessee

(person taking out alease)agrees to pay a number of fixed or flexible installments over an

agreed period to thelessor,who remains the owner of theasset (item) throughout the period of

the lease. Lease provides tax advantages to the lessee because lease payments are usually tax-

deductible.

12. Factoring:Factoring is a method of financing whereby a company sells its trade debts at a

discount to a financial institution.

Functions of a factors:

a. Purchase and collection of debts.b. Sales ledger managementc. Credit investigation and undertaking of credit riskd. Provision of finance against debtse. Rendering consultancy services

Types of Factoring:

a. Full service factoring or without recourse factoring: It provides all kinds ofservice as mentioned above in functions of the factor.
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b. With Recourse Factoring: Under this method, the factor does not assume thecredit risk. If the payment is not made, the credit risk is reversed back to the seller

c. Maturity Factoring:Under this type, the factor pays to the seller of debts as andwhen the payment is collected from the debtors. One time payment will not be

done.

d. Invoice factoring: Under this type, the factor simply provides finance againstinvoices without undertaking any other functions.

e. Agency Factoring:Under this method, the factor and the client/seller share thefunctions between themselves.

f. International Factoring: If the factoring service is provided beyond theboundaries of the domestic country, it is called as international factoring.

g. Limited Factoring:Under this type, the factor discounts selected invoices on thebasis of the credit worthiness of clients customer.

13. Hire Purchase is a system in which a buyer takes possession of an asset on payment of adeposit and completes the purchase by paying a series of installments while the seller retains

ownership until the final installment is paid.

14. Forfaiting: This kind of service is usually used in international trade. Usually Banks and

financial institutions offer the services of Forfaiting.

It refers to the discounting of approved international bill of exchange by bank or

financial institution.

Whenever exporter sends the goods as specified and agreed by the importer, exporter receivesthe Bill of payment from the importer approved by the Importers Bank. The Banks then come

into picture i.e they purchase the approved Bills of exchange from the Exporter by providing

him the discounted value and on the maturity date of the bill, the banker collects the actual

value from the importer or importers bank. Thus its a win win situation where the exporters

working capital gets released early and banker also makes the profit (Actual value of the bill

discounted value paid).

15. Bills Discounting: It refers to the act of discounting the bills of exchange by the bank or

financial institution.

In case of trade, the seller draws the bill on the buyer who signs it and agrees to pay the bill

amount on a certain future date. The buyer to get the liquidity, discounts the bill with the bank.

MODULE5

MUTUAL FUNDS


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A Mutual fund is an intermediary which performs the function of buying and selling of securities

on behalf of its unit holders. The investors in the MF are given the share in its total funds which

is proportionate to their investments, and which is evidenced by the unit certificates.

Advantages:

1. Spread of Risk2. Expert and professional management3. Diversification of Portfolio4. Low brokerage and transaction cost5. High return potential6. Convenient administration7. Liquidity8. Flexibility9. Tax benefits10.Investment Opportunity11.Alternative for savings

Organisation:

The Organisation of Mutual fund consists of 5 Bodies

a. Sponsorsb. Board of Trustc. Asset Management Companyd. Custodiane. Unit Holders

Types of Schemes:

1. Open Ended Funds:These are the funds which are sold and redeemed everyday or continuously. The unit

holders can enter into and exit from these funds any time. These units are perpetuities

without and redemption date or lock in period. Open ended funds have to invest major

part in highly liquid assets in order to be ready to repurchase the units as and when the

unit holders sell it. Open ended funds are assured with dividends, capital appreciation,

safety and liquidity.

2. Closed Ended Funds:The closed ended funds have a fixed time duration for their operation. Their corpus or

capitalization remains fixed or intact till their redemption. They have a long term lock in

period such as 3 yrs or 5 yrs. Closed ended funds can be traded in the stock market also.


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3. Fund of funds:In this scheme, instead of investing in equities or debt instruments, the investment is

made on mutual funds. It enables double diversification.

4. Exchange Traded Funds:These are the investment in funds which represent the securities which are traded on an

exchange. Unlike open ended funds, ETFs can be bought and sold like any other stock.

5. Index Funds:In this scheme, the investment in funds represents the securities which are included in the

index such as Sensex of BSE or Nifty of NSE. The performance of these funds replicates

the performance of the market represented by the index.

6. Money market Mutual Funds:These are short term investment pooling arrangements. They perform well when the

interest rate in the market is very high. These are the parking place for cash reserves.

Valuation of Funds:

In case of mutual funds, the value of each unit should be ascertained to track the performance of

the fund. The NAV (net asset value) of the unit is an important concept. The NAV of the unit is

arrived at by calculating the total market value of investments or assets of the mutual funds,

subtracting liabilities and dividing by the number of outstanding units.

NAV=Total market value of assets or securities in the portfolio of the fund - Liabilities

No of outstanding units

In case of open ended funds, NAV is calculated daily and the sales and repurchases on

each day are made at the most recently calculated NAV.

In case of Closed ended funds, daily prices are determined on the stock market by the

forces of supply and demand.

Regulatory Frame Work for mutual funds:

1. AMCs should have a minimum net worth of 10 crores2. AMCs can under take other fund based business such as providing investment

management services


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3. The consent of the investors should be taken by the investors before making any changein the fundamental attributes of the scheme

4. All the CEFs should be listed from the closure of the issue.5. MFs have to identify and provide for non performing asset as per SEBI guidelines6. MFs are required to display half yearly financial results.

MODULE6


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1. Financial Assets or Financial Instrumentsrepresents a claim to the payment of a sumof money sometime in the future and /or periodic payment in the form of interest or

dividend.

2. A Financial Marketcan be defined as the market in which financial assets are created ortransferred. As against a real transaction that involves exchange of money for real goodsor services, a financial transaction involves creation or transfer of a financial asset.

Money Market is a wholesale debt market for low-risk, highly-liquid, short-terminstrument. Funds are available in this market for periods ranging from a single day up to a

year. This market is dominated mostly by government, banks and financial institutions. Eg:

Call money, Treasury Bills, Commercial papers, Certificate of Deposits.

a. Call/Notice money is the money borrowed or lent on demand for a very short period.When money is borrowed or lent for a day, it is known as Call (Overnight) Money.

Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed

on a day and repaid on the next working day, (irrespective of the number of interveningholidays) is "Call Money". When money is borrowed or lent for more than a day and up

to 14 days, it is "Notice Money". No collateral security is required to cover these

transactions.

The participants in the call money markets are Commercial banks, stock brokers, Bill

market, Discount and Finance House of India LIC, UTI, GIC, IDBI, NABARS etc.

Some of the participants can act as both borrowers and lenders in this market. But some

participants such as : LIC, UTI, GIC, IDBI, NABARD etc are permitted to act as lenders

only.

The features are:

1. High Liquidity2. High Profitability3. Helps in Maintaining Statutory Liquidity Ratio4. Safe5. High volatility and lack of integration

b. Treasury Bills are short term (up to one year) borrowing instruments of the union

government.It is a promissory note issued by the Government under discount for a specified

period stated therein to the bearer of the instrument. Treasury bills are issued only by RBI


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on behalf of the government. The treasury bill is a tool used by the government to meet the

temporary government deficits.

It is a promise by the Government to pay a stated sum after expiry of the stated period from

the date of issue (91/182/364 days i.e. less than one year). They are issued at a discount to the

face value, and on maturity the face value is paid to the holder. The rate of discount and thecorresponding issue price are determined at each auction.

Types to treasury bills:

1. Treasury bills can be classified as Ordinary Treasury billsand Ad hoc Treasury bills. Ordinary treasury bills are issued to the public and other financial institutions for

meeting the short term financial institutions for meeting the short term financial

requirements of the Central Government and are freely marketable and they can

be bought and sold at any time and they have secondary market also

Ad hoc treasury bills are always issued in favour of RBI only. They are not soldthrough tender or auction. The RBI is authorized to issue currency notes against

them

2. On the basis of periodicity, treasury bills may be classified into:i. 91 days treasury bills

ii. 182 days treasury billsiii. 364 days treasury bills

91 days treasury bills are issued by RBI and carry fixed rate.364 days treasury bills are sold

through auction which is conducted once in fortnight. The bidders has to submit the bids and the

accepted bids with prices are displayed. The successful bidders have to collect letters of

acceptance from the RBI and deposit the amount. Some of the commercial banks and institutions

such as DFHI, STCI maintain a Subsidiary General Ledger (SGL) account with the RBI in which

the purchase and sales of Treasury bills are automatically recorded. Investors who do not have

SGL account can purchase the treasury bills through DFHI. DFHI activily participates in the

primary market by participating in auctions and also in secondary market by quoting dailybuying and selling rates

The features of these instruments are:


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Safety Liquidity Ideal short term investment Helps in maintaining SLR and CRR Provides for hedging facility Low yield Absence of competitive bids and active tradingc. Commercial Bills: It is an instrument used in credit trade transactions for a short

period of 3 months to 6 months. It is a negotiable instrument.

Section 5 of the Negotiable Instruments Act, defines a bill of exchange as 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 certain person or

to the bearer of the instrument

Types of Bills:

Demand and usance bills:Demand bills are also called as sight bills and are immediately paid on demand.No time is specified

Usance bills are called time bills and are payable on the expiry of a specific time

period

Clean Bills and Documentary Bills:Clean bills are those bills which are not accompanied with any documents

Documentary bills are those bills which are accompanied by documents.

Documentary bills can be further classified as


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Documentary Acceptance (D/A) Bills where the documents are issued to the

drawee as soon as he accepts the bill

Documentary Payment (D/P) Bills where the documents are issued to the drawee

only on making the payment on the bill. This is applicable in case of non credit

worthy customers

Inland and Foreign Bills:Inland bills are the bills drawn on the person residing in India and are payable in

India

Foreign bills are drawn on a person residing outside India payable either in India

or Outside India.

Export and Import Bills:

Export bills are those drawn by Indian exporters on importers outside India

Import bills are drawn on Indian Importers in India by exporters outside India

Accommodation Bills and Supply Bills:Accommodation bills: If bills do not arise out of genuine trade transactions, they

are called accommodation bills. They are known as kite bills or wind bills also.

Two parties draw bills on each other purely for the purpose of mutual financial

accommodation. These bills are discounted with bankers and the proceeds areshared among themselves and are paid back on the due dates.

Supply bills are those drawn by suppliers and contractors on the government

departments for the goods supplied to them.

Indigenous Bills: These are the bills drawn and accepted according to nativecustom and usage of trade. These bills are

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