CHALLENGES BEFORE FINANCIAL SERVICES INDUSTRY Most financial services companies continue to face significant pressure from a number

of directions. 1. Market issues In an increasingly competitive marketplace successful players are focused on customer retention. Improvements in retention levels can often be achieved by improving the approach to customer management and customer segmentation. There is also a need to address increasing customer expectations for price and service. 2. Regulatory issues Regulation has increased manifold and many organizations are focused significantly on meeting regulatory requirements. This is time and money consuming and other initiatives required to maintain a competitive position in the market do suffer 3. Operational issues Globalization, consolidation, convergence and the increasing focus of competitiveness are all driving the need to improve the efficiency and effectiveness of operations. Cost control remains a management imperative. Operational risk systems and controls are necessities not options. 4. Technology issues All of this change- in the marketplace , in the regulatory environment and in operations- means that there is very often a need to replace and upgrade infrastructure, hardware and software. 5. Manpower issues Meeting such a complex, interwoven set of challenges calls for pure been there, done that experience- the kind of hands-on, practical know-how. It is difficult to get manpower of such kind very easily, even after offering a fat pay-package.

SUPRANATIONAL INSTITUTIONS IMF The international monetary fund (IMF) is an international organization that oversees the global financial system by following the macro-economic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments. It is an organization formed with a stated objective of stabilizing international exchange rates and facilitating development. its headquarters are located in Washington , D.C., united states. WORLD BANK The world bank is a vital source of financial and technical assistance to developing countries around the world. World bank was originally created as IBRD (international bank for reconstruction and development). today IBRD and IDA, as arms of the world bank group, focus on development activities by providing funds to the governments. The other two wings of the world bank group viz., IFC and MIGA empower private sector to foster growth of less developed regions and countries. Broad motive of the world bank group is to work free of poverty

WTO World trade organization (WTO) deals with rules of trade between nations at a global or nearglobal level. WTO is a place where member governments go, to try to sort out the trade problems they face with each other. The first step is to talk. The WTO was born out of negotiations, and everything the WTO does is the result of negotiations. BIS The bank of international settlements (BIS) is an international organization which fosters international monetary and financial cooperation and serves as a bank for central banks. The head office is in basel, Switzerland and there are two representative offices in the hongkong special administrative region of the peoples republic of china and mexico city. Established on 17th may 1930, the BIS is the worlds oldest international financial organization. UNCTAD The united nations conference on trade and development (UNCTAD) was established in 1964 as a permanent intergovernmental body. It is the principal organ of the united nations general assembly dealing with trade, investment and development issues. CREDIT RATING AGENCIES (CRA) A credit rating agency is a company that assigns credit ratings for issuers of certain types of debt and other obligations. In most cases, these issuers are companies, cities, non-profit organizations, or national governments issuing debt-like or other securities that can be mostly traded on a secondary market. A credit rating measures credit worthiness, the ability to pay back a loan, and affects the interest rate applied to loans. A company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency. Functions of credit rating agency (CRA) 1. CRAs reduce the informative asymmetry between lenders and investors, on one side, and issuers on the other side, about the credit worthiness of companies or countries. 2. Credit ratings determine the eligibility of debt and other financial instruments for the portfolios of certain institutional investors due to national regulations that restrict investment in speculative grade bonds. 3. CRAs assess creditworthiness of the issuer of bonds and certain other financial instruments. 4. In a way, regulators have outsourced to CRAs much of the responsibility for assessing debt risk. 5. CRAs role has expanded with financial globalization and has received an additional boost from basel II, which incorporates the ratings of CRAs into the rules for setting weights for credit risk.

CREDIT RATING PROCESS

in general the rating process has seven steps. The agency whose instrument is to be rated is referred to as the client and credit rating agency ad agency 1. Collection of information The client should provide all the necessary information to the agency. This should mainly contain financial reports, audited balance sheets, copy of all agreements and contracts of relevance. It should disclose all the ownership documents of proposed collateral or security. 2. Management meeting Agency would collate and analyze all the information provided and prepare its preliminary findings report. At this stage there is a meeting of the rating agency executives with the key personnel of the client. Client takes this opportunity to justify his unsubstantiated information. More than one meetings are possible if CRA is convinced that such further meetings are necessary and would provide better insight. 3. Assignment of ratings Rating team of the agency examines all the data, information and documents. It also considers all the points presented by the client. The team then recommends the rating. 4. Advice to the client The client is informed about the rating proposed by the rating agency. 5. Appeal If the client feels that the rating can be improved and has adequate reason for it, it can appeal so to the agency. Such appeal should be substantiated with proper reasoning and justification. On appeal the agency may or may not revise the rating. 6. Publication On finalization of rating, it is normally communicated to the client, to regulator and after their acceptance it is released for general public. 7. Surveillance and review Rating is a dynamic activity. So rating has to be monitored continuously. Also it is mandatory. TREASURY BILLS Treasury bills (t-bills) are the most marketable money market security. Their popularity is mainly due to their simplicity. T-bills are short-term securities that mature in one year or less from their issue date. Features of treasury bills: 1. Treasury bills are short-term borrowing instruments of the government of india which enable investors to park their short-term surplus funds while reducing their market risk 2. They are auctioned by reserve bank of india at regular intervals and issued at a discount to face value. T-bills are purchased by the investor for a price that is less than their par value; when they mature, the government pays the holder the full par value.

3. The rate of discount is market driven and the corresponding issue prices are determined at each auction. When liquidity is tight in the economy, returns on treasury bills sometimes become even higher than returns on bank deposits of similar maturity. 4. Any person in india including individuals, firms, companies, corporate bodies, trusts and institutions can purchase treasury bills. 5. Treasury bills are eligible securities of SLR purposes. 6. Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples of Rs. 25,000 thereafter. They are available in both primary and secondary market. 7. Recently treasury bills are also being issued frequently under the market stabilization scheme (MSS).

CERTIFICATE OF DEPOSIT (CD) CDs are negotiable money market instrument issued in demat form or as a usance promissory notes. CDs issued by banks should not have the maturity less than seven days and not more than one year. Financial institutions are allowed to issue CDs for a period between 1 year and upto 3years. CDs are like bank term deposits but unlike traditional time deposits these are freely negotiable and are often referred to as negotiable certificates of deposit. CDs normally give a higher return than bank term deposit. CDs are rated by approved rating agencies which considerably enhance their tradability in the secondary market, depending upon demand. Features of CD 1. All scheduled banks are eligible to issue CDs 2. They can be issued to individuals, corporations, trusts, funds and associations. 3. NRIs can also subscribe to CDs, but on non-repatriable basis only. In secondary market such CDs cannot be endorsed to another NRI 4. They are issued at a discount rate freely determined by the issuer and the market/investors. 5. CDs issued in physical form are freely transferable by endorsement and delivery. Procedure of transfer of dematted CDs is similar to that of any other demat securities. 6. For CDs there is no lock-in period. 7. CDs are issued in denominations of Rs. 1 lac and in the multiples of Rs. 1 lac thereafter. 8. Discount/ coupon rate of CD is determined by the issuing bank/FI 9. Loans cannot be granted against CDs 10. Banks/FIs cannot buy back their own CDs before maturity.

COMMERCIAL PAPER (CP) Commercial paper (CD) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in india in 1990 with a view to enabling highly rated corporate borrowers/ to diversify their sources of short-term borrowings and to provide an additional instrument to investors.

Subsequently, primary dealers and satellite dealers were also permitted to issue CP to enable them to meet their short- term funding requirements for their operations. FEATURES OF CP 1. They are unsecured debts of corporate and are issued in the form of promissory notes, redeemable at par to the holder at maturity. 2. Only corporate who get an investment grade rating can issue CPs, as per RBI rules. 3. It is issued at a discount to face value 4. Attracts issuance stamp duty in primary issue 5. Has to be mandatorily rated by one of the credit rating agencies. 6. It is issued as per RBI guidelines 7. Its held in demat form 8. CP can be issued in denominations of Rs. 5 lakh or multiples thereof. Amount invested by a single investor should not be less than Rs 5 lakh 9. Bank and FIs are prohibited from issuance and underwriting of CPs 10. Can be issued for a maturity for a minimum of 15days and a maximum upto one year from the date of issue.

STOCK EXCHANGES Stock exchange is an organized security market provides marketability and price continuity for shares and helps in a fair evaluation of securities in terms of their intrinsic worth. Thus it helps orderly flow and distribution of savings between different types of investments. This institution performs an important part in the economic life of a country, acting as a free market for securities where prices are determined by the forces of supply and demand. Apart from the above basic function it also assists in mobilizing funds for the government and the industry and to supply a channel for the investment of savings in the performance of its functions. The stock exchanges in india as elsewhere have a vital role to play in the development of the country in general and industrial growth of companies in the private sector in particular and helps the government to raise internal resources for the implementation of various development programmes in the public sector. As a segment of the capital market it performs an important function in mobilizing and channelizing resources which remain otherwise scattered. Thus the stock exchanges tap the new resources and stimulate a broad based investment in the capital structure of industries. A well developed and healthy stock exchange can be and should be an important institution in building up a property base along with a socialist in india with broader distribution of wealth and income. Thus stock exchange is a vital organ in a modern society. Without a stock exchange a modern democratic economy cannot exist.

Finance from external sources mainly from the investing public can become possible only when an institute like stock exchange provides opportunities for the conversion of scattered savings into profitable investments with the promises of a reasonable yield and minimum element of risk.

DEMAT ACCOUNT Till year 2000, Indian stock investors used paper-printed share certificates. The certificates were endorsed on the back side for each sale transaction, with the name of new holder. The problems were Long time for transfer of share in the new name Duplicate and fake share certificates Damaged and multilated share certificates. Fraudulent creation of excess share certificates by the issuing company itself as the number of shares in the market were difficult to trace.

The physical share certificates were dematerialized and now the shares are in the electronic form; popularly known as demat form. As per SEBI, it is compulsory to have a demat account if anyone has to transact in secondary market. Advantages of demat account 1. 2. 3. 4. 5. 6. 7. 8. Shares are held in electronic form No need to safe keep share certificates No need to remember record dates of various companies Immediate transfer of securities No stamp duty on transfer of securities Risk on bad delivery, fake securities eliminated Reduced paperwork for transfer of securities Reduced transaction cost