UNIT - I

Decision Support System : Overview, components and classification, steps in constructing a dss, role in business, group decision support system.

UNIT - II

Information system for strategic advantage, strategic role for information system, breaking business barriers, reengineering business process, improving business qualities.

UNIT - III

Information system analysis and design, information SDLC, hardware and software acquisition, system testing, documentation and its tools, conversion methods.

UNIT - IV
Marketing IS, Manufacturing IS, Accounting IS, Financial IS.

MBArd SEMESTER, M.D.U., ROHTAK

SYLLABUS
External Marks : 70 Time : 3 hrs. Internal Marks : 30 67

M ANAGEM ENT OF FINANCIAL SERVICES

UNIT I
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M ANAGEM ENT OF FINANCIAL SERVICES

FINANCE : SPECIALIZATION PAPERS
Q. Define Financial Services. Explain its nature and scope. Ans. Introduction :Financial services are an important component of the financial system. There are four components of financial system. Diagram : Financial System Meaning of Financial Services : The term financial services is broadly understood to include banking, insurance, housing finance, stock broking and investment services. The services include fund-based as well as fee-based services. Financial services cater to the needs of financial institutions, financial markets and financial instruments geared to serve individual and institutional investors. Financial institutions and financial markets facilitate functioning of the financial system through financial instruments. In order to fulfil the tasks assigned, they required a number of services of financial nature. Financial services are, therefore regarded as the fourth element of the financial system. An orderly functioning of the financial system depends to a great deal on the range of financial services extended by the provider, and their efficiency and effectiveness. Financial services not only to help to raise the required funds but also ensure their efficient deployment. They assist in deciding the financial mix and extend their services up to the stage of servicing of lenders. In order to ensure an efficient management of funds, services such as: Financial Services Financial Institutions Financial System Financial Market Financial Instruments

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MANAGEMENT OF FINANCIAL SERVICES Bill Discounting Factoring of Debtors Parking of short term funds in the money market Securitisation of debts Sources of Financial Services : (i) Stock Exchanges (ii) Specialised and General Institutions (iii) Non-Banking Finance Companies (iv) Subsidiaries of financial Institutions (v) Bank Insurance Companies. Nature of Financial Services : Financial services differ in nature from other services. Some of the salient features of financial services are discussed as follows: (1) Customer-Oriented : Financial services are customer-oriented. The providers of such services study the needs on the customers in detail to suggest financial strategies which give due regard to costs, liquidity and maturity considerations. The providers of financial services remain in constant touch with the market. They design both universal and firm-specific projects. This is due to the fact that the present day firms happen to be different in terms of: Size Level of Output Profits and Labour force. (2) Intangibility : Financial services are intangible in nature. Unless the institutions supplying them have a good image and confidence of the clients, they may not succeed. Thus, they have to focus on quality and innovativeness of their services to build their credibility and gain the trust of clients. (3) Inseparability :the functions of producing and supplying financial services have to be performed simultaneously. This needs a perfect understanding between the financial services firms and their clients. (4) Perishability : Financial services like any other services cannot be stored. They have to be supplied as required by customers. The providers of financial services have to ensure a match between demand and supply. (5) People Based Service : Marketing of financial services is people-intensive and therefore subject to variability of performance or quality of service. The personnel in financial services organizations need to be selected on the basis of their suitability.

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(6) Dynamism : Financial services have to be constantly redefined on the basis of socioeconomic changes such as disposable income, standard of living and educational changes related to the various classes of customers. Financial services institutions while evolving new services could be proactive in visualizing in advance what the markets want, or reactive to the needs and wants of customers. Scope or Constituents of Financial Services : Financial services comprise four major constituents: (1) Instruments :These includes: (i) Equity Instruments (ii) Debt Instruments (iii) Hybrid Instruments (iv) Exotic Instruments. (2) Market Players :These includes: (i) Banks (ii) Financing Institutions (iii) Mutual Funds (iv) Merchant Bankers (v) Stock Brokers (vi) Consultants (vii) Underwriters (viii) Market Makers etc. (3) Specialised Institutions :These include: (i) Discount Houses (ii) Credit Rating Agencies (iii) Venture Capital Institutions etc. (4) Regulatory Bodies :These includes (i) Department of Banking and Insurance of the Central Government. (ii) Reserve Bank of India (iii) Securities and the Exchange Board of India (SEBI) (iv) Board for Industrial and Financial Reconstruction (BIFR) Q. Explain the Regulatory Framework for Financial Services. Ans. Meaning of Financial Services : Financial services cater to the needs of financial institutions, financial markets and financial instruments geared to serve individual and institutional investors.

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MANAGEMENT OF FINANCIAL SERVICES Financial institutions and financial markets facilitate functioning of the financial system through financial instruments. In order to fulfil the tasks assigned, they required a number of services of financial nature. Financial services are, therefore regarded as the fourth element of the financial system. An orderly functioning of the financial system depends to a great deal on the range of financial services extended by the provider, and their efficiency and effectiveness. Different Level of Regulation on Financial Services : Level I Government of India Appellate Authority and Regulator in Certain Cases Level II Legislation Passed in the Parliament Banking Regulation Act, Insurance Act, Indian Trust Act, etc. Level III Institutions Under an Act of Parliament UTI Act, LIC Act, GIC Act, etc. Level IV Regulators RBI SEBI IRA Level V Regulations Given by the Regulators RBI Directions to Commercial Banks NBFC's Directions issued by the RBI SEBI Regulations, Guidelines, Notifications, etc. Level VI Self - Regulation By-laws, Rules and Regulation and Code of Conduct Issued by the various Financial Service Industry Associations. Regulatory Framework : For the purpose of studying regulatory framework which govern the financial services, we can divide the financial services in four different categories: (A) Banking and Financing Services (B) Insurance Services (C) Investment Services (D) Merchant Banking and other services

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Regulations on all these services are : (A) Regulations on Banking And Financing Services : (1) Banking Institutions : In order to develop a sound banking system in the country, the RBI regulates the commercial banking institutions in the following ways: (i) It is the licensing authority to sanction the establishment of new bank or new branch. (ii) It prescribe the Minimum capital, Reserves and use of profits and reserves Distribution of dividends Maintenance of minimum cash reserve Other liquid assets (iii) It has the authority to inspect or conduct investigation on the working of the banks; and (iv) It has the power to control the appointment of Chairman and Chief Executive Officer of the private Banks and nominate members in the Board of Directors. (2) Non-Banking Financial Companies (NBFCs) : The Banking Laws Act, 1963 was introduced to regulate the NBFCs. The RBI which derives powers under this Act regulates the NBFCs as follows: (i) It requires the NBFCs of certain categories to register with it and provide periodical statements on their working. (ii) It prescribes the types of companies which are eligible to raise funds from public and its members. (iii) It also prescribes the extent to which the funds could be raised and the terms and condition thereof. (iv) NBFCs are also required to invest certain percentage of the deposits in the approved securities and maintain reserve fund. (v) It also collects periodic reports and has the powers to collect information on any aspect relating to the functioning of the NBFCs , conduct inspection of the books of NBFCs and investigate on any aspects relating to the activities of the NBFCs. (vi) Finally, it has the powers to imposing penalties or suspending or canceling the license or registration.

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MANAGEMENT OF FINANCIAL SERVICES Major Directions: The RBI has issued three major directions to regulate different forms of Non-Banking Financial Companies and other financial institutions. They are: (i) Non-Banking Financial Companies Directions, 1977 (ii) Miscellaneous Non-Banking Financial Companies Directions, 1977 (iii) Residuary Non-Banking Financial Companies Directions, 1977 (B) Regulations on Insurance Services : With an objective of reforming the insurance sector and allowing private entrants, the Government of India had set up an interim Insurance Regulation Authority (IRA) in January, 1996 and introduced the Insurance Regulatory Authority Bill, 1996 in December, 1996 to give statutory status. The duties, powers and functions of the IRAas per the Act are: (i) To regulate, promote and ensure orderly growth of the insurance business. (ii) To protect the interest of the policyholders in matter concerning assigning of policy nomination by policyholders, insurance interest, settlement of insurance claims, surrender value of the policy and other terms and conditions of contract insurance. (iii) To promote efficiency in the conduct of insurance business (iv) To call for information from, undertake inspection and conduct enquires and investigation including audit of the insurers, insurance intermediaries and other organization connected with the insurance business. (v) To regulate investment of funds by insurance companies. (vi) To adjudicate disputes between insurers and intermediaries. (C) Regulations on Investment Services :Investment services are primarily fund based activities. The mutual funds and venture capital funds are directly fall under the investment services. SEBI is emerging as a powerful regulator of various financial services. Securities and Exchange Board of India (SEBI) : The SEBI Act, 1992 entrusts the responsibility of protecting the interest of investors in securities. They are: (i) Regulating the business of stock exchange and any other securities markets. (ii) Registering and regulating the working of stock brokers. (iii) Registering and regulating the working of collective investment schemes including mutual funds. (iv) Promoting investors education and training of intermediaries of securities markets.

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(v) Calling for information from, undertaking inspection, conducting inquires and audit of stock exchanges. (vi) Conducting research for the above purpose (vii) Performing some other functions as may be required. (D) Merchant Banking and Other Services : There are several intermediaries associated with management of public and rights issue of capital. While the merchant bankers is the main intermediary others associated with the issue management are Underwriters, Brokers, Advisors and Credit Rating Agencies. The SEBI has issued a detailed guideline/regulation on many of these intermediaries. They are: (i) SEBI ( Merchant Banker) Regulation, 1992 (ii) SEBI Rules for Underwriters (iii) SEBI ( Brokers and Sub-brokers) Regulation 1992 (iv) SEBI Rules for Registrar to an Issue and Share Transfer Agents, 1993 (v) SEBI (Debentures Trustees ) Regulations, 1993 Graphic Presentation of Regulation on Financial Services : Regulation on Financial Services Financial Services Banking and Insurance Investment and Merchant Bankers Financing Services Fee-based Services and Other Services Services Banking Insurance Securities Contracts SEBI Regulations, Regulation Act, 1938 Act, 1956 1992 Act, 1949 Companies Act, 1956 Indian Trust Act, 1882 Reserve Bank Insurance SEBI SEBI Rules for of India Regulatory Registrar Authority And Share Transfer Agents Notification, Regulations, SEBI Regulations, Rules, Guildelines etc. 1994 Directions, etc.

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MANAGEMENT OF FINANCIAL SERVICES Q. Explain the risk involved in Financial Services. Ans. Meaning of Financial Services :The term financial services is broadly understood to include banking, insurance, housing finance, stock broking and investment services. Classification of Financial Services:- Financial services include fund-based as well as feebased services. (i) Fund-based Services: In fund based services, the firm raises equity, debt and deposits and invests in securities or lends to those who are in need of capital. (ii) Fee-based Services: In fee-based services, the financial service firms enable other to raise capital from the market. The financial sector is also known for its dynamic character and within a short period, it has introduced several new products and services. Though the sector is growing rapidly all over the world, the financial markets have seen a number of bank and insurance companies failure and market crashes. The industry is operating in an environment where the risk is very high. Trading in Risk :There are two types of risk involved in financial services: (1) External Risk (2) Internal Risk. (1) External Risk : It could be due to changes in interest rate in the market that reduces the value of existing financial claims. As these are events arising outside the company, they can be grouped under external sources. The following are few external sources of risk: (i) Institutions Providing Direct Finance :There are different types of institutions available in the financial market providing finance for various requirements. There are many examples: Commercial Banks normally provide finance for short term needs of the firms. Term-lending institutions meet the long term funding needs of industries which are commonly known as project financing. Housing finance companies provide funds to individuals and some times house-construction companies for acquisition of house property. Venture capital provides funds in the form of equity to new projects which involve some innovative ideas. External Risk : A bank may fail to honour the deposit claims of the deposit holders if the non-performing assets of the bank are above its net worth.

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Another important external reason for the failure of these institutions in the business of lending is the quality of other assets in their total assets. If the investment is made in high-risk debt or equity securities, any adverse development in the capital market or the issuing company or agency will reduce the value of the investments and in this process it may affect the bank's ability to meet the liability. (ii) Insurance Services : Insurance services take the risk associated with the assets of their clients. The premium collected for this service in turn is either invested in securities or led to outsiders who are in need of money. External Risk : An insurance company may fail to honour its obligation if the investments they have been made poor. Similarly, the quality of assets they have insured may also turn bad. There are two common problems in insurance services namely : (a) Moral Hazard : Moral hazard is the tendency of an insured to take greater risk because she/he is insured. For example, a machine owner may run the machine continuously ignoring the normal shut-down requirement to complete an order in less time. Without insurance, the owner may not turn the unit ignoring the normal shut-down requirement. (b) Adverse Selection : The adverse selection is the tendency of insuring the low quality asset and not insuring high quality assets. (iii) Stock Broking Services : Stock Brokers but and sell on behalf of their clients. They collect the securities from the sellers and collect money from the buyer and hand over the funds to seller after deducting the brokerage for the service rendered. External Risk :Though the activity looks relatively simple, the risk from external sources are very high: First, in situation where the trades are not guaranteed by the stock exchanges. There is always a possibility that the client may fail to honour the commitment but the broker has to make good the loss. (iv) Leasing and Hire Purchase : Leasing and Hire Purchase service is very close to the banking service. These companies also raise money from the market through deposits and other means and lend to industries. Of course, the lending is done not in the form of term loan or working capital loan, but in the form of assets.

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MANAGEMENT OF FINANCIAL SERVICES External Risk : Leasing and hire purchase companies are also affected by the frequent changes in the regulations. The recent Reserve Bank of India regulation is expected to wipe out many of these companies from the market as RBI has put rigid norms in raising deposits from the public. (v) Institutions Offering Fee Based Services : Merchant Banking, Mutual Funds, Credit Rating , Merger and Acquisition are few examples of fee based services offered by the financial services companies. External Risk : There are major changes in the regulation of merchant banking and mutual funds which will effectively reduce the number of players in their respective industry. (2) Internal Risk : Financial Services Company often fails due to their own mistakes. There are several internal factors that contribute to the failure of the firms in the financial services industry. Some of these internal sources of risk for different financial services companies are discussed below: (i) Institutions Providing Direct Finance : Banks, term lending institutions and other companies providing direct finance are exposed to several internal source of risk. Internal Risks : First and foremost among them is the quality of evaluation of the loan proposals. Often, the appraising officers fail to consider vital issues that affect the outcome of the project. They are also affected by the asset-liability mismatch and excessive dealing in the security market. Another important source of internal risk is the policy of the institution in using derivatives in managing their risk. If the bank fails to use the derivatives products in hedging the risk, its performance may be affected if the market moves against the position the bank is holding. (ii) Insurance Services : As in case of financial services companies which are in the business of direct lending, insurance companies are also affected by the efficiency in assessing the insurance proposal. Internal Risk : Unless, the internal system of evaluating the insurance proposal is efficient, the company will end up in insuring bad assets. (iii) Stock Broking Service :Though the stock broking is a fee based service, there are many sources of risk attributable to internal factors. Stock broking activity typically involves Receipt of the order from the clients Execution of the order in the exchange

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Receipt of documents or cash from the clients and delivery of cash or documents to the clients. Internal Risk : There are many fake documents in the market Even if the stocks delivered are good and genuine, there is no guarantee that they are good for delivery. Many Indian stock brokers have also trade on their account and their proximity with the trading system does not guarantee profit. On several occasions, many big brokers have incurred huge losses on their trading. (iv) Leasing and Hire Purchase : The business of leasing and hire purchase is highly competitive with too many players in the market. Internal Risk : First the credit rating information in India is relatively weak and published accounts are not reliable to assess the credit worthiness of the borrowers. Secondly, the competition in the industry allows very little time to take decision on sanctioning the proposals, otherwise, the competitors will take away your clients. Another internal problem is on the asset-liability mismatch. (v) Institutions Offering Fee Based Services : Institutions offering specialized services are exposed to several internal risks. Internal Risk : The performance of mutual funds directly depends on the ability of the fund managers in reading the market and making investments accordingly. On the other hands, if they freely use the information to their own benefit, it hurts the performance of the funds. Types of Risk : In the previous section, the different source of risk for various financial services firms have discussed. They could now broadly be classified under the following six heads: 1. Credit Risk : Many of the financial services firms like banking, credit cards, lease and hire purchase are also involved in fund based business. The credit risk affects the fund based activities of the financial services. The risk arises in evaluating the proposals for lending. While credit rating, either by credit rating institutions or internally helps to quantify the risk, the percentage of non-performing assets measurers the impact of credit risks in the firms. 2. Asset-Liability Gap Risk : This risk also applies to firms doing fund based services. Since funds raised from external sources play a major role in the fund based activities,

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MANAGEMENT OF FINANCIAL SERVICES the duration of the liability is an important variable which needs to be considered while lending. For example, if a firm gives a five year loan against a deposit for two years, there is a mismatch between the liability and asset. 3. Due-Diligence Risk :Merchant banking companies and other financial services firms which are offering fee based services like merger and acquisition have to exercise due diligence in their operations. This due diligence may have to be provided to the regulatory agencies or to their clients. For example, the SEBI regulation on Merchant Banking requires the lead manager to provide a due diligence certificate in the prescribed form before the public or rights issue opens for subscriptions. In the event of any lapse or mistake noticed in the due diligence subsequently, it will affect the financial services firm which has provided the due-diligence certificate in different ways. 4. Interest Rate Risk : This risk affects the firms which are in fund based activities. The interest rate risk arises when there are frequent changes in the interest rates in the market. 5. Market Risk : Financial services firms which are in the investment business or investing a part of the funds in securities are exposed to the market risk. This risk arises on account of changes in the economy and all securities are affected. 6. Currency Risk : Firms which are dealing in foreign exchange currencies are exposed to this source of risk. Bank, financial institutions and money changers are few financial services firms which are normally affected by this source of risk. This risk arises because of changes in the currency values which in turn was determined by the fundamental economic strength of the two countries and short run demand and supply gap. These firms are affected by currency risk when they hold currencies or liabilities in the form of either forward contract or interest/principal payment. (i) When the Rupee depreciates, it affects those who are holding foreign currency liabilities. (ii) When the Rupee appreciates, if affects those who are holding foreign currency. Q. Explain how you can manage the risk involved in Financial Services. Ans. Introduction : It may not be feasible to start any venture without taking risk. Risk is an integral part of any business and the reward or profit is directly proportional to the risk undertaken. In the case of financial services industry, the firms deals with financial claims which are by nature risk products. We will now discuss different strategies available to manage these risks: Management of Risk : (1) Managing Credit Risk : The first step in the process of managing the credit risk is the quantification of credit risk the firm is exposed. The quantification is done through credit rating. The firm can adopt the following strategy in managing the credit risk. The steps involved in this strategy are:

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(i) Desirable Loan Portfolio : The starting point could be to develop a desirable loan mix which consists of different categories of the borrowers. (ii) Continuous Monitoring : This is more important in managing the credit risk. This continuous monitoring requires flow of information from the borrowers and also from the market and the firm has to develop necessary mechanism to collect such information from the borrowers and the market intelligence system. Since the performance of the borrowers deteriorate over a period, the monitoring system in force should give early warning and thus assumes a crucial role in the credit risk management. (iii) Action on Doubtful and Bad Debts : The moment the monitoring system raises some doubts about the loan account, action need to be initiated to recover the loans. The steps are: First things that need to be done is to check the assets, movable or immovable, that are given as a security to avail the loan. If the asset value is found is to be inadequate, then demand is to be made for additional security. Along with this process, it is also useful to offer a good discount to motivate the borrowers to prepay the loan. (2) Managing Asset-Liability Gap Risk :This risk also applies to firms doing fund based services. Since funds raised from external sources play a major role in the fund based activities, the duration of the liability is an important variable which needs to be considered while lending. For example, if a firm gives a five year loan against a deposit for two years, there is a mismatch between the liability and asset. The techniques of management are: Gap Management: The first job in the ALM is to measure gap. There are two ways in which the gap can be measured. If the gap is measured at a macro level, it has limited use. It given an idea about the level of risk involved in the firm. The second method which is useful in ALM is to get a detailed break up of 'Gap'. The gap has to be necessarily closed or managed. (3) Managing Due-Diligence Risk : The professional efficiency and ethics followed by the firm determine this source of risk. Since the financial services firm is giving a certification to either the regulating agencies or its client on the completion of required formalities, they are expected to perform efficiently with thigh ethical standards. This risk could be managed by bringing in more professional an creating right environment within the organization. (4) Managing Interest Rate Risk : Interest rates in the economy play a major role in the financial markets. For managing interest rate risk interest rate swap is adopted. Interest Rate Swap : Interest rate swap involves the exchange of interest payments. It usually occurs when a person or a firm needs fixed rate funds but is only able to get

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MANAGEMENT OF FINANCIAL SERVICES floating rate funds. It finds another party who needs any floating rate loan but is able to get fixed rate funds. The two, known as counter parties, exchange the interest payments and the loans according to their own choice. It is the swap dealer, usually a bank, that brings together the two counter-parties for the swap. (5) Managing Market Risk : This is the minimum risk that investors in the market are exposed. Firms which are investing in the securities have to manage the market risk. There are several ways through which the market risk is managed. Some firms take a view on the market and switch over the funds from one market to another in order to minimize the risk. (6) Managing Currency Risk : Firms dealing in foreign exchange are exposed to currency risk. Non-banking entities, such as traders, that use the foreign exchange market for the purpose of hedging their foreign exchange exposure on account of changes in the exchange rate. They are known as hedgers.

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UNIT II M ANAGEM ENT OF FINANCIAL SERVICES

FINANCE : SPECIALIZATION PAPERS
Q. Explain the Operations of Indian Stock Market. Ans. Meaning of Stock Exchange : Stock exchange means an organized market where securities issued by companies, government organizations and semi-organizations are sold and purchased. Securities include: (i) Shares (ii) Debentures (iii) Bonds etc. Definition of Stock Exchange : According to Pyle : Stock Exchange are market places where securities that have been listed thereon, may be bought and sold for either investment or speculation. Features of Stock Exchange :The main features of stock exchange are as follows: (1) Organised Market : Stock Exchange is an organized market. Every stock exchange has a management committee, which has all the rights related to management and control of exchange. All the transactions taking place in the stock exchange are done as per the prescribed procedure under the guidance of management committee. (2) Dealing in Securities issued by various concerns : Only those securities are traded in the stock exchanges which are listed there. After fulfilling certain terms and conditions, a company gets it security listed on stock exchange. (3) Dealing only through Authorized Members : Investors can sale and purchase securities in stock exchange only through authorized members. Stock exchange is a specified market place where only the authorized members can go. Investor has to take their help to sale and purchase. (4) Necessary to obey the Rules and Bye-Laws : While transacting in stock exchange, it is necessary to obey the rules and bye-laws determined by stock exchange. Functions of Stock Exchange : The main functions performed b stock exchange are as follows:

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MANAGEMENT OF FINANCIAL SERVICES (1) Providing Liquidity and Marketability to existing securities : Stock exchange is a market place where previously issued securities are traded. Various types of securities are traded here on regular basis. Whenever required, investor can invest his money through this market into securities and can reconvert this investment into cash. (2) Pricing of Securities :Astock exchange provides platform to deal in securities. The forces of demand and supply work freely in the stock exchange. In this way, prices of securities are determined. (3) Safety of Transactions : Stock exchanges are organized markets. The fully protect the interest of investors. Each stock exchange has its own laws and be-laws. Each member of stock exchange has to follow them and any member found violating them, his membership is cancelled. (4) Contributes to Economic Growth : Stock exchange provides liquidity to securities. This gives the investor a double benefit-first, the benefit of the change in the market price of securities and secondly, n case of need for money they can be sold at the existing market price at any time. (5) Spreading Equity Cult : Share market collects every types of information in respect of the listed companies. Generally this information is published or otherwise n case of need anybody can get it from the stock exchange free of any cost. In this way, the stock exchange guides the investors by providing various types of information.] (6) Providing Scope for Speculation : When securities are purchased with a view to getting profit as a result of change in their market price, it s called speculation. It is allowed or permitted under the provisions of the relevant Act. It is accepted that in order to provide liquidity to securities, some scope for speculation must be allowed. The share market provides this facility. Stock Exchange in India :There are 24 stock exchanges functioning currently in India. The names are given below: 1. Mumbai Stock Exchange OR 12. Bhubaneswar Stock Exchange Bombay Stock Exchange-BSE 13. Cochin Stock Exchange 2 National Stock Exchange (NSE) 14. Coimbatore Stock Exchange 3. Over the Counter Exchange o 15. Guwahati Stock Exchange India (OTCEI) 16. Jaipur Stock Exchange 4. Calcutta Stock Exchange(CSE) 17. Kanpur Stock Exchange 5. Delhi Stock Exchange (DSE) 18. Ludhiana Stock Exchange 6. Chennai Stock Exchange 19. Mangalore Stock Exchange 7. Ahmedabad Stock Exchange 20. Meerut Stock Exchange 8. Hyderabad Stock Exchange 21. Patna Stock Exchange 9. Bangalore Stock Exchange 22. Pune Stock Exchange

10. Indore Stock Exchange 23. Rajkot Stock Exchange 1 1. Baroda Stock Exchange 24. Capital Stock Exchange Kerala Ltd.

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Q. What are the main features of NSEI? Explain the trading process of NSEI Ans. National Stock Exchange of India (NSEI) : The NSEI has been established in the form of a traditional competitor stock exchange. It is an exchange where business is carried on in the securities of the medium & large-sized companies & the government securities. This stock exchange is fully computerized. The NSEI was established in the form of a public limited company in Nov., 1992. Its promoters are like this: (i) The Industrial Development Bank of India (IDBI). (ii) The Industrial Finance Corporation of India (IFCI). (iii) The Industrial Credit & Investment Corporation of India (ICICI). (iv) The Life Insurance Corporation of India (LIC). (v) The General Insurance Corporation of India (GIC). (vi) The SBI Capital Market Limited. (vii) The Stock Holding Corporation of India Ltd. (viii) The Infrastructure Leasing & Financial Services Ltd. Features or Nature of NSEI : The Chief features of the NSEI are following: 1) Model Exchange : The NSEI is the first stock exchange of its kind. The system of transaction of securities is very efficient and transparent. It is, therefore called a model exchange. 2) Floorless : In the NSEI there is no special importance of trading. The terminals of the NSEI have been established almost throughout the country. 3) Two Segments : On the basis of the transactions of securities done on the NSEI, it can be divided into two parts: (i) Wholesale Debt Market (WDM): This can be called money market segment. It mai9nly concerns the government securities, bonds of public sector undertakings, treasury bills, commercial papers, certificates of deposits, etc. (ii) Capital Market Segment: Its concern is with the shares and debentures of companies. 4) Easy Access : It being a special floorless stock exchange, every big and small investor can easily approach it. 5) Transparency in Transactions : Anybody can visit the local terminal of the NSEI and have a look at various transactions of the securities. Therefore is no possibility of any fraud in transactions. 6) Competition : The NSEI has removed the shortcomings of the traditional share markets and it has attempted to provide better facilities to the investors. Thats why the remaining share markets are nervous at its success. Now, they are also trying to provide good facilitate to the investors. In this way, there is a competition between two kinds of share markets. The investors are getting the benefits of this competition.

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MANAGEMENT OF FINANCIAL SERVICES 7) Same Price : Under the traditional system, the shares of a company could have different rates in different share markets but at the NSEI all the shares have the same value in all the towns. 8) Listing of other Stock Exchange :The securities of those companies which have not been listed on other share markets can be traded on the NSEI. 9) Undisclosed Identity of Participants : Information about any individual trading on any terminal of the NSEI cannot be passed on to any other person. In this way, the secrecy about the identity of the investors is maintained. 10) Order Driven System : The NSEI is a stock exchange based on the order driven system. It means that the sellers and buyers first place the order about the type of security, its number, rate and time when they are ready to buy or sell them. On the receipt of this order on the computer, the process of order matching starts. The moment a good matching takes place, its information appears on the computer screen. Purposes of NSEI : The chief aims of the establishment of the NSEI are the following: 1) Single Stock Exchange at National Level : It was decided by a Shri M.J. Pherwani that there should be a single stock exchange at the National level so that the confidence of the investors in the capital market increases. 2) Increasing Numbers of Transactions : For the last few decades, there has been an increase in the numbers of investors while the stock exchange system continues to be old. In such a situation the transactions cannot be settled easily. The purpose of the establishment of the NSEI is to solve this problem. 3) Increasing Transaction Costs : The transaction costs increase because of the distance between the stock exchange and the investors. Through the medium of NSEI, an effort bas been made to reduce these costs. 4) Decreasing Liquidity : There is a decline in the liquidity of the securities under the system of local stock exchange because the people doing transaction on a single stock exchange are limited in number. On the contrary, through the medium of NSEI the investors from the entire country can trade simultaneously at a single stock exchange. This increase the liquidity of securities. Therefore, the purpose of the NSEI is to check the decreasing liquidity of securities. 5) Developing a Debt Market : The purpose of the NSEI is to develop a debt Market. In the traditional share market, transactions are mostly in shares and no attention is paid to Debentures. Now the NSEI has divided the market in two parts-Debt market and capital Market. Therefore, this division is helpful in the development of debt market.

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6) Conforming to International Standard : Many modern share markets are being established at the International Level. In India also, there is a dire need of establishing a stock exchange of international level. The NSEI is a modern stock exchange based on the international standards. 7) Outdated Settlement System : In the traditional share markets, the system of settlement of transactions had become old. It was getting difficult to control the ever increasing number of transactions under this system. Under the NSEI, provision has been made to settle the transaction very quickly. Trading Process on NSEI : The selling and buying process of securities on the NSEI is as under: 1) Placing the Order : First of all the person buying or selling securities places an order. In this order, he tells the name of the company whose security he is ready to buy or sell at what price, in what quantity and for what period of time. 2) Conveying the Message to Computer : The moment the terminal operator receives the order from the customer, he feeds it in the computer. 3) Starting of Matching Process : The moment the computer receives orders, it starts the process of matching. During the process of matching orders, the best matching of the selling or buying order is sought to be found out. 4) Accepting the Order :As soon as the best matching of the buying and selling orders is established during the process of matching orders, its list is immediately obtained on the computer screen. This information tells us at what rate, time. All the terminals of the NSEI established throughout the country go on feeding their computers continent with what party your order has been transacted. 5) Delivery and Payment : After the transaction has been settled, the delivery and payment are made according to the rules of the NSEI. Q. What are the main features of OTCEI? Explain the trading process of OTCEI. Ans. Over the Counter Exchange of India (OTCEI) : The OTCEI is a completely computerized and special ringless stock exchange which is different from the traditional stock exchange and on which the buying and selling of securities is absolutely transparent and moves at a great speed. Its counters are spread all over the country where transactions are made with the help of telephone. The OTCEI was established under section 25 of the Companies Act, 1956 in October, 1990. The promoters of the OTCEI are the following financial and other institutions: (i) The Unit Trust of India (ii) The Industrial Credit and Investment Corporation of India. (iii) The Industrial Development Bank of India

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MANAGEMENT OF FINANCIAL SERVICES (iv) The Industrial Finance Corporation of India (v) The Life Insurance Corporation of India (vi) The General Insurance Corporation of India (vii) The SBI Capital Market Limited (viii) The Canbank Financial Services Limited. Features or Nature of OTCEI :The main features of the OTCEI are the following: (1) Ringless Trading : There s no particular place for transacting business in securities under the OTCEI. This exchange has its counters/offices throughout the country. Any buyer or seller of securities can go the counter/officer and have transaction through the medium of the operator. (2) Nation Network : The OTCEI has its network all over the country. All the counters are linked with the central terminal through the medium of computers. Therefore, the facility of nationwide listing is available here. In other words by listing on one exchange, one can have transactions with all the counters in the whole country. (3) Exclusive List of Companies :On the OTCEI only those companies are listed whose issued capital is 30 lakhs or more. In the old share markets this amount used to be ten crores on the BSE and three crores on the other exchanges and hence, listing was not possible in case the issued capital was less than three crores. Those companies which have been listed on the old share markets cannot be listed on the OTCEI. (4) Fully Computerized : This exchange is fully computerized. It means that all the transactions done on this exchange are done through the medium of computers. (5) Sponsorship : In order to get listed on the OTCEI, a company has to find a member to sponsor it. The main job of a sponsor is market making. T means a sponsor has to be read to buy or sell the shares of that company at least for a period of 18 months. In this way, a sponsor creates liquidity in securities. (6) Investors Registration :All the investors doing transactions on the OTCEI have got to register themselves compulsorily. Registration can be got done b giving an application at an counter. The registration is called the INVESTOTC CARD. On the basis of this card, one can do transactions of securities at any counter throughout the country. (7) Greater Liquidity :There is greater liquidity in securities because of the sponsors job of market making. (8) Transparency in Transactions :All the transactions are done in the presence of the investor. The rates of buying and selling can be seen on the computer screen. The operator cannot do any fraud or mischief with the transactions. (9) Faster Delivery and Payment : On the OTCEI, delivery in case of buying and payment in case of selling are both very fast. The work of delivery and payment in case of listed securities and permitted securities is completed within seven days and 15 days respectively.

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(10) Two ways of Public Offer :Acompany listed on the OTCEI can issue security in two ways. Firstly, the company can go directly to the public. This is called Direct Offer System. Secondly, the company sells its securities to the sponsor at a particular price. Then the sponsor sells them to the public. This is called Indirect Offer System. (11) Easy Access : In the big cities the counters of the OTCEI can be seen like ordinary shops. Any body can go the counter and do buying and selling of securities. Trading Process : One can trade in securities b going to any counter of the OTCEI. All the counters are linked with the central computer at the OTCEI headquarter. This office is in Mumbai. There can be three types of trading on the OTCEI: (1) Initial Allotment : When an investor is allotted shares through the medium of OTCEI, he is given a receipt which is called counter receipt-CR. This receipt is just like the share certificate. Selling and buying can be done through the medium of this receipt. (2) Buying in the Secondary Market : For the purpose of buying shares listed on the OTCEI, a person has to get himself registered (if he is not already registered). After this, he informs the counter operator about the number of the shares to be purchased. The counter operator displays the rates on the screen. After getting himself satisfied with the rate, the investor hands over the cheque to the operator. On the encashment of the cheque, the CR is handed over to the investor. This procedure takes about a week. (3) Selling in the Secondary Market : An investor who has purchased shares from the OTCEI can sell his shares at any counter of the OTCEI. After getting himself satisfied with the rate displayed on the screen, the investor hands over the Counter Receipt and the Transfer Deed to the Operator. The operator prepares the Sales Confirmation Slip (SCS) and a copy of it is handed over to the seller. The operator sends the CR, TD and SCS to the Registrar for confirmation. After confirming every detail the Registrar sends them back to the counter operator. In the end the operator issues a cheque to the seller and receives back the SCS from the seller. Purposes of OTCEI : The objects of the establishment of the OTCEI may be described as under: (1) Liquidity : The first object for the establishment of the OTCEI is o maintain liquidity in the securities of the small companies. The sponsor has got to do the job of market making. (2) Transparency : The second aim of this share market is to maintain transparency of transactions. Here all the transactions are made on the computer screen. This eliminates any chance of fraud. (3) Investors Grievances : An important aim of the establishment of the OTCEI is the speed solution of the problems of the investors.

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MANAGEMENT OF FINANCIAL SERVICES (4) Quick Settlement : In the traditional share markets both the delivery and payment take time. This problem has been overcome with the help of the OTCEI. (5) Listing of Small Companies : Small companies remain deprived of being listed because they are unable to fulfil the conditions laid down by the old share markets. (6) Access :This stock exchange is of the ringless type and therefore, has its counters all over the country. Q. Write brief notes on the concept of mutual funds. Also explain the organizational functions of mutual funds. Ans. Meaning of Mutual Fund : A mutual fund is essentially a mechanism of pooling together the savings of a large number of small investors for collective investment, with an avowed objective of attractive yields and capital appreciation, holding the safety and liquidity as prime parameters. Amutual 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 realized are share by its unit holders in proportion to the number of units owned by them. Working of a Mutual Fund : The flow chart below describes broadly the working of a mutual fund : Returns Passed back to Generates Investors Pool their money with Fund Manager Invest in Securities

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Mutual Fund Organisation : There are many entities involved and the diagram below illustrates the organization set up of a mutual fund: Organisation of a Mutual Fund Amutual fund can be constituted either as a corporate entity or as a trust. In India, UTI was set up as a corporation under an Act of parliament in 1964. Indian banks when permitted to operate mutual funds, were asked to create trusts to run these funds. Atrust has to work on behalf of its trustees. Indian banks operating mutual funds had made a convincing plea before the government to allow their mutual funds to constitute them as Asset Management Companies. The department of Company Affairs, Ministry of Law, Justice and Company Affairs has issued guidelines in respect of registration of Assets Management Companies (AMCs) in consultation with SEBI, as follows: (1) Approval of AMC by SEBI :As per guidelines, AMC shall be authorized for business by SEBI on the basis of certain criteria and the Memorandum and Articles of Association of the AMC would have to be approved by SEBI. (2) Authorised Capital of AMC : The primary objective of setting up of an AMC is to manage the assets of the mutual funds and other activities, which it can carry out, such as, financial services consultancy, which do not conflict with the fund management activity and are only secondary and incidental. Many players who help in running a mutual fund are as follows: SEBI Unit Holders Sponsors Trustees The Mutual Fund Custodian AMC Transer Agent

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MANAGEMENT OF FINANCIAL SERVICES (i) Registers and Transfer Agents :The major responsibilities are: Receiving and processing the application form of a mutual fund Issuing of unit/share certificate on behalf of mutual fund Maintain detailed records of unit holders transactions Purchasing, selling, transferring and redeeming the Unit/Share certificate Issuing of income /dividend, broker cheques etc. (ii) Advertiser : Major responsibilities of an adviser include: Helping mutual funds organizers to prepare a media plan for marketing the fund. Issuing/buying the space in newspapers and other electronic media for advertising the various features of a fund. Arranging or hoardings at public places. (iii) Advisor/ Manager : It is generally a corporate entity that does the following jobs: Professional advice on the funds investments Advice on asset management services. (iv) Trustees : Trustees provide the overall management services and charge management fee. (v) Custodian :Acustodian is again a corporate body that carries out the following functions: Holds Securities Receives and delivers securities Collects income/interest/dividends on the securities Holds and processes cash (vi) Other Players :Besides the above, other players are as under: Fund Administrator Fund Accounting Services Legal Advisors. Fund Officers Underwriters/Distributors Q. What are the advantages of investing in mutual funds? Also explain the drawbacks of mutual funds. Ans. Meaning of Mutual Fund : A mutual fund is essentially a mechanism of pooling together the savings of a large number of small investors for collective investment, with an avowed objective of attractive yields and capital appreciation, holding the safety and liquidity as prime parameters.

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Advantages of Investing in Mutual Funds : The advantages of investing in mutual funds are: (1) Professional Management : Most mutual funds pay top-flight professionals to manage their investments. These managers decide what securities the fund will buy and sell. (2) Regulatory Oversight : Mutual funds are subject to many government regulations that protect investors from fraud. (3) Liquidity : Its easy to get your money out of a mutual fund. Write a cheques, make a call and youve got the cash. (4) Convenience : You can usually buy mutual fund shares by mail, phone or over the Internet. (5) Low Cost :Mutual fund expenses are often no more 1.5 % of your investment. (6) Investment variety and spread in different industries. (7) Capital Appreciation (8) No impulsive decision-making regarding purchase or sale of share/securities, since the funds are managed by expert, professional fund managers who have access to the latest detailed information regarding the stock market. (9) Even the smallest dividend or capital gain gets reinvested, thus enhancing the effective return. (10) Freedom from paperwork. (11) Transparency (12) Flexibility (13) Choice of Schemes (14) Tax benefits on invested amounts/returns/capital gains (15) Well regulated Drawbacks of Mutual Fund :Mutual funds have their drawbacks: (1) No Guarantees : No investment is risk-free. If the entire stock market declines in value, the value of mutual fund shares will go down as well. (2) Fees and Commissions : All funds charge administrative fees to cover their day-today expenses. Some funds also charge sales commissions or loads to compensate brokers, financial consultants, or financial planners. (3) Taxes :During a typical year, most actively managed mutual funds sell anywhere from 20 to 70% of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.

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MANAGEMENT OF FINANCIAL SERVICES (4) Management Risk : When you invest in a mutual fund, you depend on the funds manager to make the right decisions regarding the funds portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Q. What are the different types of mutual funds schemes? Also explain the types of mutual fund schemes in India. Ans. Meaning of Mutual Fund : A mutual fund is essentially a mechanism of pooling together the savings of a large number of small investors for collective investment, with an avowed objective of attractive yields and capital appreciation, holding the safety and liquidity as prime parameters. Types of Mutual Fund Schemes :Awide variety of mutual fund schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. Types of Mutual Fund Schemes By Structure By Investment Other Schemes Objectives Open-ended Funds Growth Funds Tax Saving Funds Close-ended Funds Income Funds Special Funds Balanced Funds Area Funds (A) By Structure :On the basis of structure, there are two types of mutual fund schemes: (1) Open-ended Funds :In open-ended funds, there is not limit to the size of funds. Investors can invest as and when they like. (2) Close-ended funds : These funds are fixed in size as regards the corpus of the fund and the number of shares. In close-ended funds, no fresh units are created after the original officer of the scheme expires. (B) By Investment Objectives : On the basis of investment objectives there are four types of mutual funds schemes: (1) Growth Funds : These funds do not offer fixed regular returns but provide substantial capital appreciation in the long run. The pattern of investment in general is oriented towards shares of high growth companies.

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(2) Income Funds : These funds offer a return much higher than the bank deposits but with less capital appreciation. The emphasis being on regular returns, the pattern of investment in general is oriented towards fixed income-yielding securities like non-convertible debentures of consistently good dividend paying companies etc. (3) Balance Schemes or Income and Growth-Oriented Funds : These offer a blend of immediate average returns and reasonable capital appreciation in the long run. (4) Area Funds : These are funds that are raised on other countries for providing access to foreign investors. The India Growth Fund and the India Fund raised in the US and UK respectively are examples of area funds. (C) Other Schemes : (1) Tax Saving Funds : These funds are raised for providing tax relief to those investors whose income comes under taxable limits. (2) Special Funds : These funds are invested in a particular industry like cement, steel, jute, power or textile etc. These funds carry high risks with them as the entire fund is exposed to a particular industry. Types of Mutual Fund Schemes in India : (1) Growth Funds :There are the following features: (i) Objective : Generating substantial capital appreciation (ii) Investment Pattern :Nearly all in equity shares (iii) Duration :Seven Years (iv) Investment Risk :High risk in reinvestment schemes (v) Returns :No assured return but high returns are expected (vi) Liquidity : No repurchase facility except at the end of the scheme (vii) Transfer of units is allowed Some Examples of Growth Schemes :Schemes issued by (a) Master Share, Master share plus, Master Gain, UGS-200 Unit Trust of India (b) Magnum Express, Magnum Multiplier SBI Mutual Fund (C) Canshare, Canstar Cap, Cangrowth, Canbonus Canbank Mutual Fund (d) Ind Ratna, Ind Sagar, Ind Moti Indbank Mutual Fund (2) Income Funds :The Income funds are the following features: (i) Objective :Assured minimum income and safety of capital (ii) Duration :5-7 years (iii) Investment Pattern : Bulk of funds invested in fixed income securities like government bonds, company debentures, etc. and rest in equity shares.

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MANAGEMENT OF FINANCIAL SERVICES (iv) Investment Risk :Absolute Safety (v) Return : 14.75% p.a. upwards-payable monthly or quarterly plus mid scheme bonus and end of the scheme appreciation. (vi) Liquidity :No listing on stock exchange and units are not transferable. Some examples of Income Funds: (a) Units Scheme of 1964, Growing Income Unit Scheme of 1987 Unit trust of India (b) Magnum Monthly Income Schemes SBI Mutual Fund (c) Rising Monthly Income Schemes BOI Mutual Fund (3) Balance Funds :The main features are: (i) Objective :Income and growth with reasonable safety (ii) Duration :Seven Years (iii) Investment pattern :About 50% in equity and the rest in debenture etc. (iv) Returns : No assured returns, but steady income due to annual contribution of minimum of 80% of the Trustincome by way of dividends, interest etc. (v) Liquidity : Repurchase facility after initial lock-in period of three years (vi) No listing of stock exchange (vii) Transfer of units permitted (viii) Units can be pledged to banks for loans (4) Tax Planning Schemes : The investment made under these schemes are deductible from the taxable income up to certain limits, thus providing substantial tax relief to the investors. Examples of tax planning schemes: (a) Can 80CC and Canstar 80Lof Canbank Mutual Fund (b) Ind 88Aof Indbank Mutual Fund (5) Other Schemes : These include schemes of 10-15 years duration, which offer multiple benefits. For example: Sr. No. Scheme Benefits 1. Unit Linked Insurance (i) Contribution eligible for tax deduction of Plan of UTI ITAct (ii) Insurance cover up to target amount (iii) Reasonable income by way of dividend (iv) Liquidity (v)

Safety Of Capital 2. Dhanaraksha, These offer some or all of the following Dhansahyog, benefits :

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Dhanavridhi (i) Life Insurance cover (ii) Accident Insurance Cover Schemes of LIC (iii) Reinvestment of annual dividends of Mutual Fund reasonable dividend (iv) Safety of capital (v) Reasonable capital appreciation (vi) Liquidity (vii) Units are not transferable, but bank loan facility is available (viii) Tax exemption on dividend Q. Explain the Merchant Banking Services. Ans. Merchant Bankers : Amerchant banker is any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager/consultant/advisors or rendering corporate advisory service in relation to such issue management. Issues mean an offer for sale/purchase of securities by any body corporate/other person or group of persons through a merchant banker. The importance of merchant bankers as sponsors of capital issues is reflected in their major services such as, determining the composition of capital structure, draft of prospects and application forms, listing of securities and so on. In view of the importance of merchant bankers in the process of capital issues, it is now mandatory that all public issues should be managed by merchant bankers functioning as the lead managers. In the case of right issues not exceeding Rs. 50 lakh, such as appointments may not be necessary. Services provided by the Merchant Bankers : (1) Project Management : Right from planning to commissioning of project, project counseling and preparation of project reports, feasibility reports, preparation of loan application form, government clearances for the project from various agencies, foreign collaboration, etc. (2) Issue Management : (i) The evaluation of the clients fund requirements and evolution of a suitable finance package. (ii) The design of instrument such as equity, convertible debentures, nonconvertible debentures etc. (iii) Applications covering consents from institutions/banks and audited certificates, etc. (iv) Appointment of agencies such as printers, advertising agencies, registrars, underwriters, and brokers to the issue. (v) Preparation of prospectus

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MANAGEMENT OF FINANCIAL SERVICES (3) Portfolio Management Services : Portfolio management schemes are promoted by merchant bankers and other finance companies to handle funds of investors at a fee. (4) Counselling : Corporate counseling basically means the advice a merchant banker gives to a corporate unit to ensure better performance in terms of growth and survival. (5) Loan Syndication : Loan syndication refers to the services rendered by merchant banker in arranging and procuring credit from financial institutions, banks and other lending institutions. Q. What is Issue Management. Explain various types of issues. Ans. Issue Management : Issue management refers to management of securities offerings of the corporate sector to public and existing shareholders on rights basis. Issue managers in capital market are known as Merchant Banker or Lead Managers. Although the term merchant banking, in generic terms, covers a wide range of services, but issue management constitutes perhaps the most important function within it. Under SEBI Guidelines, each public issue and rights issue of more than Rs. 50 lacs is required to be managed by merchant banker, registered with SEBI. Types of Issues : Existing as well as new companies raise funds through various sources for implementing projects: (1) Public Issue : The most common method of raising funds through issues is through prospectus. Public issue is made by a company through prospectus for a fixed number of shares at a stated price which may be at par or premium and any person can apply for the shares of the company. (2) Rights Issue : Right issues are issues of new shares in which existing shareholders are given preemptive rights to subscribe to new issue of shares. Such further shares are offered in proportion to the capital paid-up on the shares help by them at the date of such offer. The shareholders to whom the offer is made are not under any legal obligation to accept the offer. (3) Private Placement : The direct sale of securities by a company to investors is called private placement. In private placement, no prospectus is issued. Private placement covers shares, preference, shares and debentures. Q. Discuss briefly the pre-issue and post-issue obligations of merchant bankers. Ans. Introduction :raising money from the capital market needs planning the activities and chalking out a marketing strategy. It is, therefore, essential to make an nalaytical study of various sources, the quantum, the appropriate time, the cost of raising capital and the possible impact of such resources on the overall capital structure besides the low governing the issue. There are various activities required for raising funds from the capital markets. These can be broadly divided into pre-issue and post-issue activities.

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(A) Pre-issue Activities : (1) Signing of MoU : Issue management activities begin with the signing of Memorandum of Understanding between the client company and the Merchant banker. The MoU clearly specifies the role and responsibility of the Merchant banker, vis--vis, that of the Issuing Company. (2) Obtaining Appraisal Note : After the contract is awarded, an appraisal note is prepared either-in-house or is obtained from outside appraising agencies viz., financial institutions/banks etc. The appraisal not thus prepared throws light on the proposed capital outlay on the project and the sources of funding it. (3) Determination of Optimum Capital Structure : Optimum capital structure is determined considering the nature and size of the project. If the project is capital intensive, funding is generally biased in favour of equity funding. (4) Appointment of Underwriters, Registrars etc. : For ensuring subscription to the offer, underwriting arrangement are also made with various functionaries. This is followed by appointment of registrars to an issue for handling share allotment related work, appointment of Bankers to an issue for handling collection of application at various centres, printers for bulk printing of issue related stationery, legal advisors and advertising agency. (5) Preparation of Documents : Thereafter, initial application are submitted to those stock exchange where the listing company intends to get its securities listed. Lead managers also prepares the list of material documents viz., MoU with Registrar, with bankers to an issue, with advisor to the issue, co-managers to issue, agreement for purchase of properties, etc., to be sent for inclusion of prospectus. (6) Due Diligence : The lead manager while preparing the offer document is required to exercise utmost due diligence and to ensure that the disclosures made in the draft offer document are true, fair and adequate. (7) Submission of Offer Document to SEBI : The draft document thus prepared is filed with SEBI along with a due diligence certificate to obtain their observations. SEBI is required to give its observations on the offer document within 21 days from the receipt of the offer document. (8) Finalisation of Collection Centres : Lead Manager finalises collection centres at various places for collection of issue application from the prospective investors. (9) Filing with RoC : After incorporating SEBI observations in the offer document, the complete document is filed with Registrar of Companies to obtain their acknowledgment. (10) Launching of a Public Issue : The observation letter issued by SEBI is valid for a period of 365 days from the date of its issuance within which the issue can open for

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MANAGEMENT OF FINANCIAL SERVICES subscription. Once the legal formalities and statutory permission for issue of capital are complete, the process of marketing the issue starts. Lead manager has to arrange for distribution of public issue stationery to various collecting banks, brokers, investor , etc. The announcement regarding opening of issue in the newspapers is alos required to be made by advertising in newspapers 10 days before of the issue opens. (11) Promoters Contribution : Acertificate to this effect that the required contribution of the promoters has been raised before opening of the issue obtained from a chartered accountant is also required to be filed with SEBI. (12) Closing of the Issue : During the currency of the issue, collection figures are also obtained on daily basis from Bankers to the issue. These figures are to be filed in a 3 days report with SEBI. Another announcement through the newspapers is also made regarding the closure of the issue. (B) Post-Issue Activities : After the closures of the issue, lead manager has to manage the post-issue activities pertaining to the issue. Certificate of 90% subscription from Registrar as well as final collection certificate from Bankers are obtained. (1) Finalisation of Basis of Allotment : In case of a public offering, if the issue is subscribed more than five times, association of SEBI nominated public representative is required to participate in the finalization of Basis of allotment (BoA). (2) Despatch of Share Certificate : Then follows dispatch of share certificates to the successful allotees and refund order to unsuccessful applicants. (3) Issue of Advertisement in Newspapers : An announcement in the newspaper is also made regarding BoA, no. of applications received and the date of despatch of share certificates and refund orders etc.

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UNIT III M ANAGEM ENT OF FINANCIAL SERVICES

FINANCE : SPECIALIZATION PAPERS
Q. Define Leasing. What are its essential elements? Discuss briefly the significance and limitations of leasing. Ans. Meaning of Leasing : Conceptually, a lease may be defined as a contractual arrangement in which a party owing an asset (lessor) provides the asset for use to another (lessee) over a certain/for an agreed period of time for consideration in form of periodic payment. At the end of the period of contract, the asset reverts back to the lessor unless there is a provision for the renewal of the contract. Leasing is a process by which a firm obtain the use of a certain fixed asset for which it must make a series of contractual periodic tax-deductible payments (lease rentals). Essential Elements :The essential elements of leasing are: (1) Parties to the Contract : There are essentially two parties to a contract of lease financing, namely: (i) The Owner called the lessor (ii) The User called the lessee Lessors as well as lessees may be individuals, partnerships, joint stock companies, corporations or financial institutions. Sometime there may be jointly lessors or joint lessees. Besides, there may be a lease-broker who acts as an intermediary in arranging lease deals. They charge certain percentage of fees for their services, ranging between 0.5 to 1 percent. (2) Asset : The asset, property or equipment to be leased is the subject matter of a contract of lease financing. The asset may be an automobile, plant & machinery equipment, land & building and so on. The asset must, however, be of the lessee's choice suitable for his business needs. (3) Ownership separated from User : The essence of a lease financing contract is that during the lease-tenure, ownership of the asset vests with the lessor and its use is allowed to the lessee. On the expiry of the lease tenure, the asset reverts to the lessor. (4) Term of Lease : the term of lease is the period for which the agreement of lease remains in operation. Each lease should have a definite period otherwise it will be legally inoperative.

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MANAGEMENT OF FINANCIAL SERVICES (5) Lease Rentals : The consideration which the lessee pays to the lessor for the lease transaction is the lease rental. (6) Modes of Terminating Lease : The lease is terminated at the end of the lease period and various courses are possible, namely, (i) The lease is renewed on a perpetual basis for a definite period, or (ii) The asset reverts to the lessor, or (iii) The asset reverts to the lessor and the lessor sells it to a third party, or (iv) The lessor sells the asset to the lessee. Advantage/Significance of Leasing :The advantages are: (A) Advantage to the Lessee :Lease financing has following advantage to the lessee: (1) Financing of Capital Goods : Lease financing enables the lessee to have finance for huge investments in land, building, plant, machinery, heavy equipments and so on, upto 100 percent, without requiring any immediate down payment. (2) Additional Source of Finance : leasing facilitates the acquisition of equipment, plant & machinery without necessary capital outlay, and thus, has a competitive advantage of mobilizing the scare financial resources of the business enterprise. (3) Less Costly : Leasing, as a method of financing, is less costly than other alternatives available. (4) Ownership Preserved : Leasing provides finance without diluting the ownership or control of the promoters. (5) Flexibility in Structuring of Rentals : The lease rentals can be structured to accommodate the cash flow position of the lessee, making the payment of rentals convenient to him. (6) Simplicity : A lease finance arrangement is simple to negotiate and free from cumbersome procedure with faster and simple documentation. (7) Tax Benefits : By suitable structuring of lease rentals, a lot of tax advantage can be derived. If the lessee is in a tax paying position, the rental may be increased to lower his taxable income. If the lessor is in tax paying position, the rentals may be lowered to pass on a part of the tax benefit to the lessee. Thus, the rentals can be adjusted suitably for postponement of taxes. (8) Obsolescence Risk is averted : In a lease arrangement, the lessor being the owner bears the risk of obsolescence and the lessee is always free to replace the asset with latest technology. (B) Advantage to the Lessor :Alessor has the following advantage: (1) Full Security :The lessor's interest is fully secured since he is always the owner of the leased asset and can take repossession of the asset if the lessee defaults.

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(2) Tax Benefit : The greatest advantage for the lessor is the tax relief by way of depreciation. If the lessor is in high tax bracket, he can assets high depreciation rates and , thus reduce his tax liability substantially. (3) High Profitability : The leasing business is highly profitable since the rate of return is more than what the lessor pays on his borrowings. (4) High Growth Potential : The leasing industry has a high growth potential. Lease financing enables the lessees to acquire equipment and machinery even during a period of depression, since they do not have to invest any capital. Leasing, thus, maintains the economic growth even during recessionary period. Limitations of Leasing :Lease financing suffers from certain limitations too: (1) Restrictions on Use of Equipment : A lease arrangement may impose certain restrictions on use of the equipment, or require compulsory insurance, and so on. Besides, the lessee is not free to make additions or alterations t the leased asset to suit his requirement. (2) Loss of Residual Value : The lessee never becomes the owner of the leased asset. Thus, he is deprived of the residual value of the asset and is not even entitled to any improvement done by the lessee or caused by inflation or otherwise, such as appreciation in value of leasehold land. (3) Consequences of Default : If the lessee defaults are complying with any terms and conditions of the lease contract, the lessor may terminate the lease and take over the possession of the leased asset. (4) Understatement of Lessee's Asset : Since the leased assets do not form part of lessee's assets, there is an effective understatement of his assets. (5) Double Sales-tax : With the amendment of sale-tax law of various states, a lease financing transaction may be charged to sales-tax twice- once when the lessor purchases the equipment and again when it is leaded to the lessee. Q. Define Lease. Give the Classification of Lease. Ans : Meaning of Leasing : Conceptually, a lease may be defined as a contractual arrangement in which a party owing an asset (lessor) provides the asset for use to another (lessee) over a certain/for an agreed period of time for consideration in form of periodic payment. At the end of the period of contract, the asset reverts back to the lessor unless there is a provision for the renewal of the contract. Leasing is a process by which a firm obtain the use of a certain fixed asset for which it must make a series of contractual periodic tax-deductible payments (lease rentals). Classification of Lease :Leasing can be classified into the following types:

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MANAGEMENT OF FINANCIAL SERVICES (A) Finance Lease and Operating Lease : (1) Finance Lease :According to International Accounting Standards (IAS-17), in finance lease the lessor transfers to the lessee, substantially all the risks and rewards incidental to the ownership of the asset. It involves payment of rentals over an obligatory non-cancellable lease period, sufficient in total to amortise the capital outlay of the lessor and leave some profit. In such leases, the lessor is only a financier and is usually not interested in the assets. Types of assets included, under such lease, are ships, lands, buildings, heavy machinery diesel generating sets and so on. (2) Operating Lease : According to the IAS-17, an operating lease is one which is not a finance lease. In an operating lease, the lessor does not transfer all the risks and rewards incidental to the ownership of the asset and the cost of the asset is not fully amortised during primary lease period. The lessor provides services attached to the leased asset, such as maintenance, repair and technical advice. Operating lease is generally used for computers, office equipments, automobiles, trucks, some other equipments, and so on. (B) Sale and Lease Back and Direct Lease : (1) Sale and Lease Back :In a way, it is an indirect form of leasing. The owner of an asset sells it to a leasing company (lessor) which leases it back to the owner (lessee). (2) Direct Lease : In direct lease, the lessee, and the owner of the asset are two different entities. Adirect lease can be of two types: Bipartite Lease :There are two parties in the lease transaction, namely (i) Asset Supplier-cum-lessor and (ii) Lessee Tripartite Lease :Such type of lease involves three different parties in the lease agreement: supplier, lessor and lessee. (C) Single Investor Lease and Leveraged Lease : (1) Single Investor Lease :There are only two parties to the lease transaction- the lessor and the lessee. The leasing company (lessor) funds the entire investment by an appropriate mix of debt and equity funds. (2) Leveraged Lease : There are three parties to the transaction- (i) Lessor, (ii) Lender (iii) Lessee. In such type of lease, the leasing company buys the asset through substantial borrowing. (D) Domestic Lease and International Lease : (1) Domestic Lease : A lease transaction is classified as domestic if all parties to the agreement, namely, equipment supplier, lessor and the lessee, are domiciled in the same country.

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(2) International Lease : If the parties to the lease transaction are domiciled in different countries, it is known as international lease. This type of lease if further sub-classified into Import Lease : In an import lease, the lessor and the lessee are domiciled in the same country but the equipment supplier is located in a different country. The lessor imports the asset and leases it to the lessee. Cross-border Lease :When the lessor and the lessee are domiciled in different countries, the lease is classified as cross-border lease. The domicile of the supplier is immaterial. Q. What are the regulations and directions for lease? Ans. RBI NBFCs Directions : With a view to coordinate, regulate and control the functioning of all non-banking financial companies, the RBI issues directions from time to time under the RBI Act. They apply to leasing and hire-purchase companies as well. (1) Other Acts /Laws :The other acts/laws applicable to the NBFCs are: (i) Motor Vehicles Act : the lessor is regarded as a dealer and although the legal ownership vests in the lessor, the lessee is regarded as the owner for purposes of registration of the vehicle under the Act and so on. In case of vehicle financed under lease, the lessor is treated as a financier. (ii) Indian Stamp Act : The Act requires payment of stamp duty on all instruments/documents creating a right/liability in monetary terms. The contracts for equipment leasing are subject to stamp duty which varies from state to state. (2) Lease Documentation and Agreement : Lease transactions involve a number of formalities and various documents. The lease agreements have to be properly documented to formalize the deal between the parties concerned and to bind them. The purposes and essential requirements of lease documentations are: (i) The documentation of lease agreements is significant as it provides evidence availability and enforceability of security, brings to sharp focus the terms and conditions agreed between the borrower and the lenders and enables the leasing company to take appropriate legal action in case of default. (ii) The essential requirements of documentation of lease agreements are that the persons: Executing the document should have the legal capacity to do The documents should be in the prescribed format, should be properly stamped, witnessed, and the duly executed and stamped documents should be registered where necessary, with appropriate authorities. (iii) Clauses in Lease Agreement :There is no standardized lease agreement. The contents differ from case to case. A typical lease agreement has the following clauses:

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MANAGEMENT OF FINANCIAL SERVICES Nature of the Lease : This clause specifies whether the lease is an operating lease, a financing lease or a leveraged lease. Description : The clause specifies the detailed description of equipment, its actual condition, size, components, estimated useful life, and so on. Delivery and Re-Delivery : The clause specifies when and how the equipment would be delivered to the lessee and re-delivered to the lessor or expiry of the lease contract. Period : This clause specifies that the lessee has to take the equipment for his use on lease on the terms specified in the schedule to the agreement. It also includes an option clause to the lessee to renew the lease of the equipment. Lease Rentals : This clause specifies the procedure for paying lease rentals by the lessee to the lessor at the rates specified in the schedule to the agreement. Use :This clause enjoins upon the lessee the responsibility for proper and lawful usage. Title :identification and ownership of equipment. Repairs and Maintenance: This clause specifies the responsibility for repairs and maintenance, insurance and so on. Alteration : It specifies that no alteration to the leased equipment may be made without the written consent of the lessor. Charges : This clause specifies clearly which party to the agreement would bear the delivery, re-delivery, customs, income tax, sales tax and clearance charges. Inspection : It gives the lessor or his representative a right to enter the lessee's premises for the purpose of confirming the existence, condition and proper maintenance of the equipment. Prohibition of Sub-leasing : This clause prohibits the lessee from the sub-leasing or selling the equipment to third parties. Events of default and remedies : This clause specifies the consequences of defaults by the lessee and recourse available to the lessor. This clause may also specify other remedies, if any. Applicable Law : This clause specifies the country whose laws would prevail in case of a dispute. Q. Explain the accounting treatment for finance and operating leases by a lessor and by a lessee and their disclosures in financial statements. Ans. Accounting Treatment for Leasing :Accounting treatment for leasing is divided into two parts:

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(A) Accounting for Leases by a Lessee (B) Accounting for Leases by a Lessor (A) Accounting for Leases by a Lessee : Accounting for finance and operating leases by a lessee and disclosures in their financial statements are given below: (1) Finance Lease :Afinance lease should be reflected in the balance sheet of a lessee by recording an asset and a liability at amount equal at the inception of the lease to the fair value of the leased assets net of grants and tax credits receivable by the lessor; if lower, at the present value of the minimum lease payments. In calculating the present value of the minimum lease payments the lease factor is the interest implicit in the lease, if this is practicable to determine. A finance lease gives rise to a depreciation charge for the asset as well as finance charge for each accounting period. The depreciation policy for leased assets should be consistent with that for depreciable assets which are owned and the depreciation charge should be calculated on the basis set out in the 'IAS-4:Depreciation Accounting'. (2) Operating Lease : The charge to income under an operating lease should be the rental expenses for the accounting period, recognized on a systematic basis that is representative of the time pattern of the user's benefit. Disclosure in Financial Statements of Lessees: Disclosure should be made of the amount of the assets that are subject to finance lease at each balance sheet date. Liabilities related to these leased assets should be shown separately from other liabilities, differentiating between the current and the long-term portions. (B) Accounting for Leases by Lessors : Accounting for finance, and operating leases by lessors and disclosure in their financial statements are given below: (1) Finance Lease : An asset held under a finance lease should be recorded in the balance sheet not as property, plant & equipment but as a receivable, at an anount equal to the net investment in the lease. (2) Operating Lease : Assets held for operating leases should be recorded as property, plant & equipment in the balance sheet of the lessor. The depreciation of leased assets should be on a basis consistent with the lessor's normal depreciation policy for similar assets and the depreciation charge should be calculated on the basis set out in IAS-4: Depreciation Accounting. Disclosure in the Financial Statements of Lessors: Disclosures should be made at each balance sheet date of the gross investment in leases reported as finance leases, and the related unearned finance income and unguaranteed residual values of the leased assets.

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MANAGEMENT OF FINANCIAL SERVICES Q. Explain the Tax aspects of Leasing. Ans. Tax Aspects of Leasing : The tax aspects of leasing pertain to both income-tax and sales tax. (A) Income Tax Aspects (B) Sales Tax Aspects (A) Income Tax Aspects : Leasing , as a finance device, has tax implications for, and offers tax benefits both to, the lessor and the lessee. (1) For Lessor : The main attraction of leasing device to the lessor is the deduction of depreciation from his taxable income. The relevant provisions applicable to the computation of the lessor's income, the tax rates and so on are summarized as follows: (i) Taxability of Lease Rentals : the computation of taxable income of an assessee under the provisions of the Income Tax Act, 1961 involves computation under various heads of income which are aggregated and then reduced by certain deductions. Calculation of Computation of Income are: Computation of Total Income : Income from Salary --------- Income from House Property --------- Income from Business or Profession --------- Income from Capital Gain --------- Income from Other Sources ---------____________ Gross Total Income ----------Less: Deductions ---------_____________ Taxable Income -----------Where leasing constitutes the business/main activity of the assessee (lessor), income from lease rental is taxable under the head Income from Business or Profession. In other cases, the income from lease is taxed as Income from Other Sources. (ii) Deductibility of Expenses : While computing the income of lessor from leasing, certain expenses are allowed as a deduction to determine the taxable income. These include: Depreciation Rent, taxes, repairs and insurance of the leased asset where such expenditure is borne by the lessor.

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Amortisation of certain preliminary expenses, such as expenditure for preparation of project report, market survey and so on. Interest on borrowed Capital Bad Debts Entertainment expenses subject to prescribed limits. Travel Expenses as per approved norms. Among the allowable deductions, depreciation and interest are the most important expenses for the lessor in the computation of his taxable income. (2) For Lessee :The income tax considerations for the lessee are: (i) Allowability of Lease Rentals : Lease rentals are allowed by the Income Tax Act as a normal business expenditure of the lessee for assessment purpose provided the expense is not Of Capital Nature APersonal Expense. (ii) Deductibility of Incidental Expenses :The lessee is normally required to bear expenses associated with the leased asset such as repairs and maintenance, finance charge and so on. These incidental expenses to the lease are allowed as a deduction by the Income Tax Act from taxable income of the lessee. (B) Sales Tax Aspects :The legislative framework governing levy of sales tax consists of the : Central Sales Tax Act, 1957(CST): The CSTdeals with the levy and collection of sales tax on the inter-state sale of goods only. Sales Tax Acts: The tax on sale of goods within a state (Intra-state sale) is governed by the provisions of the respective STAs. Alease normally has three important elements from the viewpoint of sales tax: (i) Purchase of Equipment : When purchase of an equipment by a lesser involves interstate sale, the transactions attracts the provisions of the CST according to which the normal rate of sales tax (10 per cent) or the appropriate rate applicable to intra-state purchase/sale of goods in the respective state, whichever is higher, is imposed. (ii) Lease Rentals : Before 1982, there was no sales tax on lease rentals. The incidence of sales tax on them was introduced by the Constitution Act, 1982. The provisions are: Sales tax is payable on the annual taxable turnover (aggregate lease rentals) of the lessor. The rates of tax vary between a minimum and maximum; they also vary from state to state. In addition, in several states, surcharge, additional surcharge, additional sales tax on turnover exceeding a specified limit/turnover tax are also levied on the lease rentals.

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MANAGEMENT OF FINANCIAL SERVICES (iii) Sale of Asset : Second sale exemptions available for the normal second sale transaction within the state are usually not available for lease transaction. For example, a leasing company buys and equipment from a supplier and lease it to a lessee, both within the same state. The transaction between the leasing company and the equipment supplier is called the first sale; it will attract local sales tax. The transaction between the lessor and the lessee being a deemed sale is called second sale. Normally second sale of some specified goods is exempted from levy of sales tax. But thie exemption is usually not available in lease transactions. Q. Define Debt Securitization. Explain its process. Ans. Meaning of Debt Securitization : Securitization is the process of pooling and repackaging of homogeneous illiquid financial assets into marketable securities that can be sold to investors. In other words, securitization is the process of transforming assets into securities. The process leads to the creation of financial instruments that represent ownership interest in, or are secured by a segregated income producing asset or pool, of assets. The pool of assets collateralizes securities. These assets are generally secured by personal or real property such as automobiles, real estate, or equipment loans but in some case are unsecured for example, credit card debt and consumer loans. Securitization Process :The securitization process is listed below: (1) Asset are originated through receivables, leases, housing loans or any other form of debt by a company and funded on its balance sheet. The company is normally referred to as the "originator". (2) Once a suitably large portfolio of assets has been originated, the assets are analysed as a portfolio and then sold or assigned to a third party, which is normally a special purpose vehicle company ("SPV") formed for the specific purpose of funding the assets. It issues debt and purchases receivables from the originator. (3) The administration of the asset is then subcontracted back to the originator by the SPV. It is responsible for collecting interest and principal payments on the loans in the underlying poolt of assets and transfer to the SPV. (4) The SPV issues tradable securities to fund the purchase of assets. The performance of these securities is directly linked to the performance of the assets and there is no resource back to the originator. (5) The investors purchase the securities because they are satisfied that the securities would be paid in full and on time from the cash flows available in the asset pool. The proceeds from the sale of securities are used to pay the originator. (6) The SPV agrees to pay any surpluses which, may arise during its funding of the assets, back to the originator. Thus, the originator, for all practical purposes, retains its existing relationship with the borrowers and all of the economies of funding the assets. (7) As cash flow arise on the assets, these are used by the SPV to repay funds to the investors in the securities.

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Graphic Presentation of Securitization Process : Parties to a Securitization Transaction : (1) Originator :This is the entity on whose books the assets to be securitized exist. It sells the assets on its books and receives the funds generated from such sale. (2) SPV : An issuer, also known as the SPV, is the entity, which would typically buy the assets to be securitized from the originator. (3) Investors : The investors may be in the form of individuals or institutional investors, and so on. They buy a participating interest in the total pool of receivables and receive their payment in the form of interest and principal as per agreed pattern. (4) Obligors : the obligors are the original debtors. The amount outstanding from an obligor is the asset that is transferred to an SPV. (5) Rating Agency : Since the investors take on the risk of the asset pool rather than the originator, an external credit rating plays an important role. The rating process would assess the strength of the cash flow and the mechanism designed to ensure full and timely payment by the process of selection of loans of appropriate credit quality, the extent of credit and liquidity support provided and the strength of the legal framework. (6) Administrator or Servicer : It collects the payment due from the obligors and passes it to the SPV, follows up with delinquent borrowers and pursues legal remedies available against the defaulting borrowers. Since it receives the installment and pays it to the SPV, it is also called the Receiving and Paying Agent. (7) Structure : Normally, an investment banker is responsible as structure for bringing together the originator, the credit enhancers, the investors and other partners to a securitization deal. It also works with the originator and helps in structuring deals. Interest and Principal Ancillary Service Provider Special Vehicle Creit Rating of Securities Rating Agency Structure Issue of Securities Investors Subscription of Securities Obligor Originator

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MANAGEMENT OF FINANCIAL SERVICES Q. Explain the System and Organisation of Housing Finance in India. Ans. Introduction : Housing is one of the basic human need of the society. It is closely linked with the process of overall socio-economic development of a country. India, being a highly populated country there is a great need and scope for the development of Housing Sector. Unfortunately, for some reasons or the other, the housing sector in India has remained underdeveloped in the past, however, it is hoped that there would be improvement in the near future. Organisation or Structure of Housing Finance in India : The setting up of the National Housing Bank marked the new era in housing finance as a new fund-based financial service in the country. A large number of financial institutions/companies in the public, private and joint sector entered in this field. For example, Life Insurance Corporation of India and General Insurance Corporation came with various schemes for finance the housing units. In 1970, Housing and Urban Development Corporation (HUDCO) a wholly government owned enterprise, was set up with the objective of housing and urban development as well as infrastructure development. The structure of housing finance industry is presented in the following figure: STRUCTURE OF HOUSE FINANCING INDUSTRY Formal Sector Informal Sector Household Savings Disposal of Existing Properties Borrowings from friends, relatives and money lenders, Etc. Government Central Govt. State Govt. Public Authorities Banking Commercial Banks Cooperative Banks Other Banks Non-Banking Non-Banking Finance Companies (NBFCs) Housing Finance Companies (HFCs) Non-Banking Housing Finance Companies (NBHFCs) Insurance LIC/GIC Specialised Institutions HDFC

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Q. Explain the Housing Finance Schemes in India. Ans. Housing Finance Schemes : Various institutions provide financial assistance to the needy persons. For this, they have come out with various financing schemes with different features for meeting the diversified needs of this sector. The various housing finance schemes are : (A) Home Loan Account Scheme of NHB : Home Loan Account Scheme initiated by National Housing Bank (NHB) with an objective of encouraging individual to save specifically for housing. The basic features of this scheme are: (i) Eligibility :Any Indian citizen who is not owing exclusively in his or her name, a house/flat/apartment any where in India may open an account under this scheme. (ii) Contribution :The individual under this scheme is required to start a saving of a minimum of Rs. 30 per month. The minimum period for which the savings must be accumulated is five years to become eligible for loan under this scheme. There is no upper limit on the amount to be saved under the scheme. (iii) Interest on Deposit : The contribution under this scheme is entitled for interest at the rate of 10 per cent per annum. (iv) Default : If the contributor fails to deposit for a continuous period for 12 calendar months, the original date of opening the home loan account is shifted forward by the period of default. (v) Withdrawals : Under this scheme the amount can be withdrawn only for construction/buying a house or a flat only after the expiry of 5 years. The amount can be withdrawn even if he/she does not avail of loan facility. (vi) Eligibility of Loan : An account holder is eligible for housing loan on the completion of the saving period. The quantum of the loan is based upon the builtup area which is as under: Built-up Area Quantum of loan in multiples of accumulated savings Upto 430 square feet 4 times Upto 860 square feet 3 times Above 860 square feet 2 times (vii) Interest on Loan Loan Amount Interest per annum (%) Up to 50,000 10.5 50,001-1,00,000 12.0 1,00,001-2,00,000 13.5 Above 2,00,000 14.5

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MANAGEMENT OF FINANCIAL SERVICES (B) HDFC Schemes for Individual Finance : Housing Development Finance Corporation Ltd. is a leading private sector housing finance company in India. The HDFC was set up in 1977 by the ICICI. Two important schemes offered by the HDFC are: (i) Home Saving Plan : This scheme is designed on the pattern of HLAS of NHB. The basic objective of this scheme is to provide housing loan on the basis of savings of the borrower. The scheme is open to individual as well as to individual jointly with a child or spouse. In this scheme, the minimum savings period is 25 months, but a participant can save up to a period of 7 years. The amount of loan granted would be equal to 70% of the cost of the property and the balance 30% would be financed from the borrower's savings. The maximum period of re-payment is normally 15 years. The basic feature of this scheme is that whole amount collected through savings contributed by the participant borrowers is kept separate and is not mixed with other funds raised by the HDFC. (ii) Home Loans (Individual) : Another important scheme of HDFC for providing housing loans to individual in the country is Home Loan (Individual). The amount of loan and rate of interest charged on some of the schemes offered by the HDFC have been shown in the following table: Sr. Scheme Amount of Loan Interest Rate in (%) No. (Maximum) in Rs. Min. Max. 1. Home Saving Plan --------------------------------------2. Home Loans (Individual) 5,00,000 10.5 16.5 3. Home Improvement Loan 5,00,000 or 70% of the 15.5 16.5 cost of Improvement 4. Home Extensions 5,00,000 or 85% 16.5 -------5 NRI Schemes 5,00,000 or 75% of cost 16.0 18.5 of property (C) Schemes of LIC Housing Finance Ltd. : Various housing finance schemes of LIC Housing Finance Ltd. are: Sr. Scheme

Amount of Loan Interest Rate in (%) No. (Maximum) Min. Max. 1. Griha Prakash 5,00,000 or 75% 12.5 16.5 2. GrIha Shubh 10,00,000 or 75% of the cost 12.5 19.0 of property

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3. Griha Dhara 5,00,000 12.5 15.0 4. Griha Lakshmi 10,00,000 17.0 19.0 5. Griha Jyoti 10,00,000 or 85% of cost 12.5 15.0 of property 6. Jeewan Niwas 5,00,000 12.5 17.0 7. Jeewan Kutir 2,00,000 12.0 15.5 (D) GIC Housing Finance :The GIC Housing Finance Ltd. was set up in December 1989 by the General Insurance Corporation as its subsidiary company. The various schemes are: Sr. Scheme Amount of Loan Interest Rate No. (Maximum) in (%) Min. Max. 1. Apna Ghar Yojna 5,00,000 12.0 18.5 2. Repairs/Renovation 10,00,000 or 75% of 14.0 19.0 the cost of property 3. Line of Credit to Company As per Company 13.0 16.5 4. Line of Credit through Company As per Company 13.0 16.5 5. Employees Housing Scheme 3,60,000 or 70% of cost 17.5

18.5 6. Construction Finance Scheme 50% of cost of property 21.0 19.0 (E) SBI Home Finance : The SBI Home Finance was established in 1988, as subsidiary of the State Bank of India, to provide financial assistance for housing specifically in the Eastern and North Eastern Regions of the country. Basic features are: (i) The SBI HF grants the house loans to individuals for construction of houses, purchase of house/flat, repairs renovation, extension, alteration of the existing houses. (ii) The quantum of loan is maximum 10 lakh (iii) The re-payment period ranges 5-20 years. (iv) The rates of interest are subject to changes from time to time. It varies with the size of loan, term of loan and purpose of the loan. Rate of Interest for a loan Sr. No. Loan Amount Rate of Interest (%) 1. Up to 25,000 12.0 2. 25,001-1,00000 15.5 3. 1,00,001-5,00,000 16.0 4. 5,00,001 and above 16.5 5. Repairs loan upto 30,000 16.0

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MANAGEMENT OF FINANCIAL SERVICES (vii) House loans are secured by equitable mortgage of property to be financed on the basis of first charge Q. Explain the concept of Credit Rating. What are its functions and significance? Also explain the process of Credit Rating. Ans. Credit Rating : Credit rating is a grading service to investors which helps them in reducing their risk. It provides a bird's eye-view on the credit quality or the instrument quality of a particular credit instrument issued by a business house. It is a technique in which relative ranking is provided to different instruments of a company on the basis of systematic analysis of the strengths and weaknesses of them. This credit ranking is done on the basis of: (i) Analysis of Financial Statements (ii) Project Analysis (iii) Credit Worthiness factors (iv) Future prospects of the concern project. Definitions : According to L.M. Bhole "It can be defined as an act of assigning values to credit instruments by estimating or assessing the solvency, i.e. the ability of the borrower to repay debt, and expressing them through pre-determined symbols". Significance of Credit Rating : (i) It imposes a healthy discipline on borrowers. (ii) It encourages greater information disclosures, better accounting standards and improved financial information, which ultimately helps in investor protection. (iii) It helps merchant bankers, brokers, regulatory authorities, etc. in discharging their functions related to debt issues. (iv) Ratings are very useful to investors especially when the regulatory authority takes no responsibility for those who raise funds. (v) The leading rating agencies play a vital role in evaluating sovereign ratings. Functions of Credit Rating :The major functions of credit rating are as follows: (i) To impose a healthy discipline on borrowers. (ii) To facilitate formulation of public guidelines on institutional investment. (iii) To help merchant banker, broker, regulatory authorities, etc. discharging their functions related to debt issues.

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Types of Credit Rating :Credit rating are of different types: (i) Bond Rating: Rating the bond or debt securities issued by a company, Governmental or quasi-Governmental body is called bond. This type of rating occupies the major share in the business of credit rating agencies. (ii) Equity Rating: The rating of equity shares in the capital market is called equity rating and it occupies the minimum share in the business of credit rating agencies. (iii) Commercial Paper Rating: It is mandatory on the part of a corporate body to obtain the rating from credit rating agency before issuing commercial paper in the market. This is known as commercial paper rating (iv) Borrowers Rating: This includes rating a borrower to whom a loan facility may be sanctioned. (v) Sovereign Rating: This includes rating a country as to its credit worthiness, probability to risk etc. Credit Rating Process :The steps involved in the credit rating process are as follows: 1. The rating process begins at the request of the company 2. A team is formed with professionally qualified analysts who are well-versed with the working of the particular industry in which the requesting company operates. The team visits the company and make inspections of the operations first hand. 3. The team conduct meetings with different levels of management including the chief executive officer 4. The team consults with a back-up team which has collected company's information from other sources and prepares the report. 5. The team forwards its reports to the internal committee consisting of senior executives of credit rating agency. 6. An open discussion between the team members and the internal committee takes place to arrive at a rating. 7. Then the ratings are placed before an external committee consisting of respected and eminent people unconnected with credit rating agency to avoid any sort of biasness. 8. The decision of the external committee is communicated to the company as a final decision. 9. The company may volunteer any further information at this point which could affect the rating. This information is passed on to the external committee again for change or affirmation of the previous ratings. 10. The company may request the agency for review of the rating.

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MANAGEMENT OF FINANCIAL SERVICES This process can also be presented through the following flow chart : Request by the Company for Rating Assigning the Work to a Team by Credit Rating Agency Visit and Inspection of company by the Team Receive Intial Information and Conducts Managerial Meetings Interaction with Back-up Team and Preparation of Report Forwading of Report to Senior Exective of Rating Agency Arriving at a Rating after Discussins Forwarding Rating to External Committee for Final Decision Communicationg Rating to Company Acceptance Drawbacks of Credit Rating Process : Rating Process has certain advantage but simultaneously suffers from drawbacks also. These are: 1. It does not take into account the factors, like market prices, personal risk or reward preferences that might influence investment decisions. 2. It is based on certain primitives. The analysis is based on information provided by the issuer and the rating agency does not take audit of that information. Consequently the rating process is compromised on the information provided, whether it is accurate pr inaccurate.

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3. Most of the rating agencies do not give rating to equity are supposed to take risk 4. The ratings are only the matters of opinion and not a recommendation to purchase or sell or hold security. 5. Credit ratings depend on both expertise and honesty of credit rating agencies. Therefore, credit ratings may also serve to misguide the investors. Q. Explain briefly the credit rating methodology used by the rating agencies for manufacturing and financial services companies. Ans. Rating Methodology : The rating methodology involves an analysis of the industry risk, issuer's business and financial risks. Arating is assigned after assessing all the factors that could affect the credit worthiness of the entity. The rating methodology is illustrated below with reference to (1) For Manufacturing Companies : The main elements of the rating methodology for manufacturing companies are given below: (i) Business Risk Analysis :The rating analysis begins with an assessment of the company's environment, focusing on the strength of the industry prospects, pattern of business cycles as well as the competitive factors affecting the industry. Business analysis is basically undertaken to analyse the risks involved in the operations of the company. It includes: Industry Risk : It includes competitions from others, market factors, demand and supply position and government policies, etc. Marketing Risk : It covers competitive advantages or disadvantages, market share, sales network, etc. Operating Efficiency : It involves locational advantages, labour cooperation, cost efficiency and operating margins, etc., Legal Position : Terms of the issue document/prospectus, trustees and their responsibilities, systems for timely payment and for protection against fraud and so on. (ii) Financial Risk Analysis : After evaluating the issuer's competitive positions and operating environment, the analysts proceed to analyse the financial strength of the issuer. This analysis includes the examination of : Accounting Quality : Overstatement/Understatement of profits, auditors qualifications, method of income recognition, inventory valuation and depreciation policies, contingent liabilities etc. are examined by the credit rating agency. Earning Prospects :The projection of future earnings, profitability ratios, earning per share proportion of interest to gross profit and net profit, etc. are analysed to check the truthfulness of the given data.

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MANAGEMENT OF FINANCIAL SERVICES Adequacy of Cash Flows : Cash flow adequacy as reflected in working capital management, current ratio, quick ratio, etc. are examined by the rating agencies. Financial Flexibility : Financial flexibility of the firm in terms of capital financing plans, ability to raise funds and so on. Interest and Tax Sensitivity : Exposure to interest rate changes, tax law changes, hedging against interest rates and so on. (iii) Management Risk :Aproper assessment of debt protection levels requires an evaluation of the management philosophies and its strategies. The analyst compares the company's business strategies and financial plans to provide insights into a management's abilities, with respect to forecasting and implementing of plans. Specific areas reviewed include: Track record of management: planning and control system, depth of managerial talent, succession plan. Evaluation of capacity to overcome adverse situations Goals, philosophy and strategies. (2) For Financial Services Companies : When rating debt instruments of financial institutions, banks and non-banking finance companies, in addition to the financial analysis and management evaluation explained above, the assessment also lays emphasis on the following factors: (i) Regulatory and Competitive Environment :This includes: Structure and regulatory framework of the financial system Trends in regulation/deregulation and their impact on the company/institution (ii) Fundamental Analysis :Fundamental analysis should include: Capital Adequacy :Assessment of the true net worth of the issuer, its adequacy to the volume of business and the risk profile of the assets. Resources : Overview of funding sources, funding profile, cost and tenor of various sources of funds. Liquidity Management : Capital structure, term matching of assets and liabilities, policy on liquid assets in relation to financing commitments and maturing deposits are also analysed by credit rating agencies. Profitability and Financial Position : Credit rating agency also analyses the profitability and financial position of the company. For this, the rating agency analyses the past profit, revenues on non fund based services, accretion to reserve and so on. Interest and Tax Sensitivity : Exposure to interest rate changes, tax law changes, hedging against interest rates and so on.

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Q. Explain the Credit Rating Agencies in India. Also explain the rating symbols used by credit rating agencies. Ans. Credit Rating Agencies in India : There are four credit rating agencies in India. These are as follows: 1. CRISILLtd. 2. ICRALtd. 3. CARE Ltd. 4. FITCH Ltd. 1. Credit Rating Information Services of India Ltd. (CRISIL Ltd.) : As the first credit rating agency in India, the CRISILwas promoted in 1987 jointly by the ICICIALtd. and the Unit Trust of India. Other shareholders include: (i) Asian Development Bank. (ii) Life Insurance Corporation (iii) HDFC Ltd (iv) General Insurance Corporation (v) Several Foreign and Indian Banks. It commenced operation on January 1, 1988. It offered its share capital to the public in 1993. Its objective is to rate the debentures, fixed deposits, short term borrowing instruments and preference shares of the companies on request from them. The CRISIL ratings are now required by the authorities, banks, UTI, merchant bankers, etc. in the due course of assisting companies. CRISIL is also publishing the corporate news regularly, containing information on their financial, business and technical aspects. Objectives of CRISIL: (i) To assist both individual and institutional investors in making investment decisions in fixed interest securities. (ii) To enable companies to mobilize funds in large amounts from a wide investor base, at a fair cost. (iii) To enable intermediaries to place debt instruments with investors by providing them with an effective marketing tool. (iv) To provide regulators with a market-driven system for bringing about discipline and a healthy growth of capital markets. To achieve these objectives, the functions performed by the CRISILcurrently fall under four broad categories: (i) Credit Rating Services (ii) Advisory Services (iii) Credibility first rating and evaluation services (iv) Training Services

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MANAGEMENT OF FINANCIAL SERVICES Rating Symbols and Investor Protection : Investors should also be familiar with the ratings given by the CRISIL for protecting their interests. The CRISIL ratings are given only for debt instruments of companies, commercial papers, debentures, bonds and fixed deposits. The symbols and their implication used for ratings are as follows: Debenture Ratings : Debenture Ratings Implications Triple A- AAA Highest Security Double A-AA High Safety Single A- (A) Adequate Safety Triple B- BBB Moderate Safety Double B - BB Inadequate Safety B High Risk C Substantial Risk D Default Fixed Deposit Ratings : Fixed Deposit Ratings Implications F -Triple A- (FAAA) Highest Safety F -Double A-(FAA) High Safety F -Single A- (FA) Adequate Safety FSingle B ( FB) Inadequate Safety FSingle C (FC) High Risk F-Single D (FD) Default Short-Term Instruments : P-1 Highest Safety P-2 High Safety P-3 Adequate Safety P-4 Inadequate Safety P-5 Default 2. Investment Information and Credit Rating Agency of India Ltd. (ICRALtd.) :ICRA was incorporated on January 16, 1991 and launched its service on August 31, 1991. It was formerly known as Investment Information and Credit Rating Agency of India Ltd. The ICRA Ltd. Has been promoted by the IFCI Ltd as the main promoter to meet the

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requirements of the companies based in the northern parts of the country. Apart from the main promoter, which holds 26 percent of the share capital, the other shareholders are: (i) Unit Trust of India (ii) Banks (iii) Life Insurance Corporation (iv) General Insurance Corporation (v) Exim Bank (vi) HDFC Ltd. (vii) ILFS Ltd. Objectives of ICRA: (i) To assist investor, both individual and institution, in making well informed decisions. (ii) To assist issuers in raising funds, from a wider investor base, in large amounts and at a lower cost for highly rated entities (iii) To enable banks, investment bankers, brokers in placing debt with investors by providing them with a marketing tool. (iv) To provide regulators with market driven systems to encourage the healthy growth of the capital markets in a disciplined manner, without additional burden on the Government. Services provided by ICRA:It presently offers its services under three banners: (i) Rating Services (ii) Information Services (iii) Advisory Service ICRAoffers its rating services to a wide range of issuers including : (i) Manufacturing Companies (ii) Banks and Financial Institutions (iii) Power Companies (iv) Service Companies (v) Construction Companies (vi) Insurance Companies (vii) Municipal and other local bodies (viii) Non-banking financial service companies (ix) Telecom Companies (x) Infrastructure Companies, such as dams, roads and highways.

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MANAGEMENT OF FINANCIAL SERVICES Rating Symbols : Long-Term Instruments Including Debentures, Bonds and Preference Shares : LAAA Highest Safety LAA+, LAA High Safety LA+, LA Adequate Safety LBBB Moderate Safety LBB+, LBB Inadequate Safety LB+, LB Risk Prone LC+, LC Substantial Risk LD Default Extremely Speculative Medium Term Instruments, Including Fixed Deposit and Certificate of Deposits : MAAA Highest Safety MAA+, MAA High Safety MA+, MA Adequate Safety MB+, MB Inadequate Safety MC+, MC Risk Prone MD Default Short-term Instruments, including Commercial Papers : A1+, A1 Highest Safety A2+, A2 High Safety A3+, A3 Adequate Safety A4+, A4 Risk Prone A5 Default 3. Credit Analysis and Research Care (CARE Ltd.) : The CARE Ltd is a credit rating and information services company promoted by the Industrial Development Bank of India jointly with financial institutions, public/private sector banks and private finance companies. It commenced its credit rating operations in October 1993 and offers a wide range of products and services in the field of credit information and equity research. Currently, it offers the following services: (i) Credit Rating : The CARE undertakes credit rating of all types of debt instruments, both short term and long term.

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(ii) Advisory Services :The CARE provides advisory services in the areas of: Securitisation Transactions Structuring Financial Instruments Financing of Infrastructure projects Municipal Finances (iii) Information Services : The broad objective of the information services is to make available information on any company, industry or sector required by a business enterprise. (iv) Equity Research : Equity research involves an extensive study of the shares listed/ to be listed in the major stock exchanges, and identification of the potential winners and lowers among them, on the basis of the fundamentals affecting the industry, market shares, management capabilities, international competitiveness and other relevant factors. (v) Publications :The CARE's publications include: Rating Reckoner- an update on its accepted ratings and CAREVIEW- a quarterly bulletin providing information on its ratings. (vi) Other Services : The CARE loan rating Credit Analysis Rating Rating Symbols :The CARE's ratings are as follows: CAR -1 Excellent debt management capability CAR-2 Very good management capability CAR -3 Good Capability in debt management CAR -4 Barely satisfactory capability for debt management CAR -5 Poor capability for debt management 4. FITCH Ratings India Ltd. : FITCH ratings are an international rating agency that provides global capital market investors with the highest quality ratings and research. FITCH rates entities in 75 countries and has some 1100 employees in more than 40 local offices worldwide. FITCH ratings provides ratings for financial institutions, insurance corporates, sovereigns and Public finance markets worldwide. FITCH India is a 100% subsidiary of FITCH group. It is the only international rating agency with a presence on the ground in India. Benefits of a Rating from FITCH : (i) It is the only rating agency in India with the ability to issue ratings on both domestic and international debt issuances.

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MANAGEMENT OF FINANCIAL SERVICES (ii) FITCH ratings are quoted daily on the financial magazines in the public press and in research publications. Rating Symbols : 1. Long Term Investment ( 12 months and above) : AAA (ind) Highest Credit Quality AA (ind) High Credit Quality A (ind) Adequate Credit Quality BBB (ind) Moderate Credit Quality BB (ind) Speculative B ( ind) Highly speculative C (ind) High Default Risk D (ind) Default 2. Time Deposits ( Bank Deposits and Fixed Deposits) : tAAA(ind) Highest Credit Quality tAA+(ind) High Credit Quality tA+(ind) Adequate Credit Quality tB+(ind) Speculative t C(ind) High Default Risk t D(ind) Default 3. Short-Term ( Less than 1 Year) : F 1+( Ind) Highest Credit Quality F 2+( Ind) Good Credit Quality F 3 ( Ind) Fair Credit Quality F 4 ( Ind) Speculative F 5 ( Ind) Default Key Indian Clients :The key Indian Clients of FICTH rating are as follows: 1. Ashok Leyland Ltd. 2. Ambuja Cement Ltd. 3. Britannia Ltd. 4. Indo Gulf Fertilizers Ltd. 5. Ford Motor Company Ltd. 6. Reliance Industries Ltd. 7. Reliance Petroleum Ltd.

8. WIPRO Ltd. 9. State Bank of India 10. Kotak Mahindra. 1 1. ICICI Bank 12. IDBI.

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UNIT IV M ANAGEM ENT OF FINANCIAL SERVICES

FINANCE : SPECIALIZATION PAPERS
Q. Define Venture Capital. What are the regulations of venture capital funds by the SEBI Ans. Introduction : Venture capital implies long term investment generally in high risk industrial projects with high reward possibilities. This investment may be at any stage of implementation of the project between start-up and commencement production. Expectation of higher gain motivates the investor to invest the funds in the risky venture which generally utilize new technology with higher probability of failure than success. The investor makes higher capital gains through appreciation in the value of such investment if the new technology proves successful, leading the enterprise to grow. Meaning of Venture Capital : Venture capital is equity, equity featured capital seeking investment in new ideas, new companies, new products, new process or new services that offer the potential of high returns on investment. It may also include investment in turnaround situations. Venture capital means start up and first stage financing and funding the expansion of companies that have already demonstrated their business potential but do not have access to the public securities markets or to credit oriented institutional funding sources. Features of Venture Capital : (i) Investments are made in equity or equity featured instruments of investment in high tech industry and wait for 5-7 years to reap the benefit of capital gains. (ii) Young companies that do not have access to public sources of equity or other forms of capital can collect venture capital. (iii) Investment are made in innovative projects with new technology with a view to commercialize the know how through new products/services. (iv) Industry, products or services that hold potential of better than normal. (v) Add value to the company through active participation and take higher risks with the expectation of higher rewards. (vi) It is a long term investment in growth-oriented small/medium firms. (vii) Turnaround Companies- When sick industries are revised by purchasing by any other, then the face of this industry has turnaround.

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MANAGEMENT OF FINANCIAL SERVICES (viii) Venture capital investors are not directly involved in the management of the enterprise but manage their own portfolio of investments. (ix) Venture capital investor does not interfere in the day-to-day business affairs but closely watches the performance of the business unit and keeps in close contact with the entrepreneur to protect and enhance his investment. (x) Venture capital funds need not be repaid in the course of business units, but it is realized through the exit route. SEBI Venture Capital Funds Regulations : According to these regulations, a VCF means a fund setup as a trust/company which has dedicated pool of capital raised in the specified manner and invests it in the specified manner. The main elements of the SEBI regulations are discussed below: (1) All VCFs must be registered with SEBI and pay Rs. 1,00,000 as application fee and Rs. 10,00,000 as registration fee for grant of certificate. (2) An applicant, whose application has been rejected by SEBI, would not carry on any activity as a VCF. (3) In the interest of investors, SEBI can issue directions with regard to transfer of records/documents/securities/disposal of investment relating to is activities as a VCF. (4) In order to protect the interest of the investors, it can also appoint any person to take charge of the records/documents/securities including the terms and conditions of such appointment. (5) The VCF are authorized to raise funds/money from: (i) Indian Investors (ii) Foreign Investors (iii) Non-Resident Indian Investors (6) Venture capital funds must disclose the investment strategy at the time of their registration. (7) They cannot invest more than 25 per cent corpus of the fund in one venture capital undertaking. (8) AVCF is not permitted to issue any document/advertisement inviting offers from public for subscription/ purchase of any of its units. (9) The VCFs must maintain for a period of eight years, books of accounts which give a true and fair picture of the state of their affairs. (10) AVCF established as a company can be wound up in accordance with the provision of the Companies Act. Q. Discuss the Process of Venture Capital Investment. Ans. Venture Capital Investment Process : Financing of a high tech project under venture capital has following steps. They can be presented in the form of following diagram:

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Graphic Presentation of Venture Capital Investment Process : Preparing a Project Report Preliminary Evaluation Detailed Approval Sensitivity Analysis Investment in the Project Monitoring the project and post investment support (1) Preparing a Project Report : The prospective entrepreneur, with his know-ho, prepares a project report establishing therein the possibility of marketing a commercial product. This can be done with the help of an auditor, professional or a merchant banker. The business consists of five important feasibility reports namely: (i) Technical Feasibility (ii) Financial Feasibility (iii) Managerial Feasibility (iv) Marketing Feasibility (v) Socio-economic Feasibility (2) Preliminary Evaluation : After the first stage is completed, the venture capital investor normally discusses the investment plan for the project with banker. (3) Detailed Approval : In addition to the close discussion with the management team, a detailed appraisal of project is undertaken. If required, they may even consult experts in the similar field to take a decision. (4) Sensitivity Analysis : The forecasted results of both sales and profits are tested and analyzed. The risks and threats are evaluated by using sensitivity analysis, which helps evaluate to predict the probable risks and returns associated wit the project.

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MANAGEMENT OF FINANCIAL SERVICES (5) Investment in the Project : The terms and conditions of venture capital assistance are finalized according to the requirement of the project. The amount of funds required, profit of the business, technology and the possible competition in the business will also be looked into. (6) Monitoring the project and post investment support : The venture capitalist role begins with financing the project. It is a general practice of investor to appoint and executive director to have closer look into the project. He assists the project in developing strategies, decision making and planning. Q. What are the stages of Venture Capital Financing. Ans. Venture Capital Financing : The selection of investment is closely related to the stages and type of investment. The stages of financing as differentiated in the venture capital industry broadly fall into two categories : Stages of Venture Capital Financing Early Stage Financing Later Stage Financing Seed Capital Expansion Finance Start up stage Financing Turnarounds Second Round Financing Management BuyOuts (A) Early Stage Financing : This stage of financing is done to initiate the new project or help the new technocrat who wishes to commercialize his research talents. The main instruments used for such financial assistance would be in the form of equity contribution, unsecured loans and optionally convertible securities. This stage of venture capital financing consists of: (i) Seed Capital : Relatively small amount of capital is provided to an entrepreneur to prove his concept. Seed capital financing includes implementation of research project, starting from the all initial conceptual stage. This stage requires more time to complete the process because the entrepreneur has madder an effort to the maximum to meet the market potentially. They key factors that influence equity financing at this stage are: The technology used in the project and possible threats of new technology in the near future. Different aspect of product life cycle. The total investment required to commercialize the product and the time required to get suitable returns etc.

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(ii) Start Up Stage Financing : This is the stage when commercial manufacturing has to commence. Venture capital financing here is provided for product development and initial marketing. It includes several types of new projects such as: Greenfield based on a relatively new or high technology New business in which the entrepreneur has good knowledge and working experience. New projects by established companies (iii) Second Round Financing : Start up stage is the stage of implementation of a project The enterprise may need funds for further investment before completion of the project. Such financing is called second round financing. This represents the stage at which the product has already been launched in the market but the business has not, yet, become profitable enough for public offering to attract new investors. This type of financing is required when the project incurs loss or shows inability to yield sufficient profits. The reason could be due to internal or external factors. (B) Later Stage Financing : This stage of venture capital financing involves established business which required additional financial support but cannot take recourse to public issues of capital. It includes: (i) Expansion Finance : Expansion finance may be needed by the enterprise for adding production capacity once it has successfully gained market share and faces excess demand for the product. It is strategically executed to: Expand the Market Expand the Production To establish warehouse. Export activities may also be considered for financing the proposed project. (ii) Turnaround :Venture capitalists make available finance for an enterprise which has gone unprofitable after crossing the early stage and entering into commercial production. Two kinds of inputs are required in a turnaroundnamely, money and management. The VCIs have to identify good management and operations leadership. Such form of venture capital financing involves medium to high risk and a time-frame to three to five years. (iii) Management BuyOuts : VCIs provide funds to enable the current operating management to acquire an existing product line. Q. Explain the Financial Instruments of Venture Capital Financing. Ans. Structuring the Deal/Financial Instruments : The structuring of the deal refers to the financial instruments through which venture capital investment is made. There are many instruments:

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MANAGEMENT OF FINANCIAL SERVICES (1) Equity Instruments :The following types of equity instruments are: (i) Ordinary Equity Shares (ii) Non-Voting Equity Shares (iii) Preference Ordinary Shares (iv) Cumulative Convertible Preference shares. (v) Participating Preference Shares (vi) Convertible cumulative redeemable preference shares (2) Debt Instruments : To ensure that the entrepreneur retains managerial control, debt instruments are issued. They Includes: (i) Convertible Debt: This debt can be converted in to equity shares of the company. (ii) Non-Convertible Debt: This debt cannot be converted into equity shares of the company. (iii) Conditional Loan: This is a form of loan finance without any pre-determined repayment schedule or interest rate. The suppliers of such loans recover a specified percentage of sales towards the recovery of the principal as well as revenue in a pre-determined ratio, usually 50:50. The charges on sales is known as royalty. (iv) Conventional Loans: These are modified to the requirements of venture capital financing. They carry lower interest initially which increases after commercial production commence. A small royalty is additionally charged to cover the interest foregone during the initial years. (v) Income Notes: These fall between the conventional and the conditional loans and carry a uniform low rate of interest plus royalty on sales. Q. What are the important channels for exit of investment in venture capital financing? Ans. Exit Routes : The main aim of the venture capitalist is to realize the investments with huge profit after the completion of successful efforts with the promoter in launching or commercializing the product. The exit route will be well thought by the investor at the stage of making investments. There are four alternatives: (1) Initial Public Offer : Most of the venture capital assisted firms prefer to go in for public issues to recover their investments with profits. The public issues provide another opportunity for the company to list its shares in the stock market. Once the shares are listed, the image of the company increases and attracts efficient persons to work in the organizations, In addition to this, commercial banks and financial institutors strategically come forward to offer different types of loans. If the firm wishes to raise additional capital for expansion and growth, it could be done easily through the public issue.

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(2) Buy Back of Share by the Promoters : Sometimes, the promoter may prefer to have exit route though Over The Counter Exchange Of India by entering into bought out deals with the member of O.T.C. He may purchase the shares with a view to entering into the primary market later. (3) Sale of Enterprise to Another Company : Venture capitalist can recover its investments by selling the holdings to outsider or some other company who is interested in purchasing the entire enterprise from the entrepreneur. (4) Liquidation : This is a lender of last resort, when a firm performs very badly, on other words if it incurs continuous cash loss over the years, the venture capitalist and the entrepreneur decides, to close down the operations. Hence, it takes the firm to liquidation. The reason for such a excise would be many: (i) Stiff Competition (ii) Technological Failure (iii) Poor management by the entrepreneur etc. Q. Define Factoring. Explain briefly the Mechanism of Factoring Ans. Factoring : Factoring is a financial service which is rendered by the specilaised persons known as 'Factors" who deal in realizing the book debts, bills receivable, managing sundry debtors and sales registers of the commercial and trading firms in the capacity of agent for a commission. Such commission is known as 'commercial charge'. Factoring helps in realization of credit sales of trading firms. Definition of Factoring : "Factoring means an arrangement between a factor and his client which includes at least two of the following services to be provided by the factors: (i) Finance (ii) Maintenance of accounts (iii) Collection of debts (iv) Protection against credit risk". Parties to Factoring Contract : 1. Buyer of goods who has to pay for goods bought in a factoring contract. 2. Seller of goods who has to realize credit sales from buyer 3. Factor who acts as agent in realizing credit sales from buyer and passes on the realized sum to seller after deducting his commission. Process OR Mechanism of Factoring : Credit sales generate the factoring business in ordinary course of business dealings. Realisation of credit sales is the main function of factoring services. Once sale transaction is completed, the factor steps in to realize the sales. Thus, factor works between the seller and the buyer and sometimes with seller's banks together. Mechanism of Factoring is:

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MANAGEMENT OF FINANCIAL SERVICES Mechanism of Factoring Various activities undertaken by the three parties in a factoring transaction are listed here under: (1) Buyer : (i) Buyer negotiates terms of purchasing the material with the seller. (ii) Buyer receives delivery of goods with invoice and instructions by the seller to make payment to the factor on due date. (iii) Buyer makes payment to factor in time or gets extension of time or in the case of default is subject to legal process at the hands of factor. (2) Seller : (i) Memorandum of Understanding(MOU) with the buyer in the form of letter exchanged between them or agreement entered into between them. (ii) Sells goods to the buyer as MOU. (iii) Delivers copies of invoice, delivery challan, MOU, instruction to make payment to factor given to buyer. (iv) Seller receives 80 per cent or more payment in advance from factor on selling the receivable from the buyer to him. (v) Seller receives balance payment from factor after deduction of factor's service charges etc. (3) Factor : (i) The factor enters into agreement with seller for rendering factor services to it. (ii) On receipt of copies of sale documents as referred to above makes payment to the seller of the 80 per cent of the price of the debt. (iii) The factor receives payment from the buyer on due dates and remits the money to seller after usual deductions. (iv) The factor also ensures that the following conditions should be met to give full effect to the factoring arrangements: SELLER Places Order Delivery of Goods & Invoice With Notice to pay Factor BUYER FACTOR

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The invoice, bills or other documents drawn by the seller should contain a clause that these payments arising out of the transaction as referred to or mentioned in might be factored. The seller should confirm in writing to the factor that all the payments arising out of these bills are free from any charge, pledge, or mortgage etc. The seller should execute a deed of assignment in favour of the factor to enable hime to recover the payment at the time or after default. The seller should confirm that all conditions to sell-buy contract between him and the buyer have been complied with and the transactions complete. Q. Discuss briefly the various forms of factoring. Also explain the advantage and disadvantage of Factoring. Ans. Factoring : Factoring is a financial service which is rendered by the specilaised persons known as 'Factors" who deal in realizing the book debts, bills receivable, managing sundry debtors and sales registers of the commercial and trading firms in the capacity of agent for a commission. Such commission is known as 'commercial charge'. Factoring helps in realization of credit sales of trading firms. Types /Forms of Factoring: Depending upon the features built into the factoring arrangement to cater to the varying needs of trade/clients, there can be different types of factoring. The important forms of factoring arrangements are briefly discussed below: (1) Recourse Factoring : Under a recourse factoring arrangement, the factor has recourse to the client (firm) if the debt purchased factored turns out to be irrecoverable. In other words, the factor does assume credit risks associated with the receivables. If the customer defaults in payment, the client has to make good the loss incurred by the factor. The factor is entitled to recover from the client the amount paid in advance in case the customer does not pay on maturity. The factor charges the client for maintaining the sales ledger and debt collection services and also for the interest for the period on the amount drawn by the client. (2) Non-recourse Factoring : The factor does not have the right of recourse in case of non-recourse factoring. The loss arising out of irrecoverable receivables is borne by him, as a compensation for which he charges a higher commission. The additional fess charged by him as a premium for risk-bearing is referred to as a del-credere commission. (3) Advance Factoring : The factor pays a pre-specified portion of the factored receivables in advance, the balance being paid upon collection. (4) Maturity Factoring : The maturity factoring is also known as collection factoring. Under such arrangements, the factor does not make a pre-payment to the client. The payment is made on the date of collection.

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MANAGEMENT OF FINANCIAL SERVICES (5) Disclosed Factoring :In disclosed factoring, the name of the factor is disclosed in the invoice by the supplier or manufacturer of the goods asking the buyer to make payment to the factor. The supplier may continue to bear the risk of non-payment by the buyer without passing it on to the factor. (6) Undisclosed Factoring : The name of the factor is not disclosed in the invoice although factor maintains the sales ledger of the supplier or manufacturer. The entire realization of the business transaction is done in the name of the supplier company abut all control remains with the factor. (7) Domestic Factoring : In the domestic factoring, the three parties involved, namely, buyer, seller and factor are domiciled in the same country. (8) Export Factoring : The process of export factoring is almost similar to domestic factoring except in respect of the parties involved. While in domestic factoring three parties are involved, there are usually four parties to a cross-border factoring transaction. They are: (i) exporter (Seller) (ii) Importer ( Buyer) (iii) Export Factor (iv) Import Factor Since two factors are involved in the deal, international factoring is also called TwoFactor System of Factoring. Advantages of Factoring :Following are the advantage resulting from the factoring: (1) Elimination of trade discounts. (2) Prompt payments and credits (3) Reduction in administrative cost and burden. (4) Increase in return to the client (5) Improvement in liquidity (6) Provides insurance against bad debts (7) It is not bank loan nor a deposit but facilitates liquidity (8) It avoids increased debts (9) Better credit discipline amongst customers by regular realization of dues, effective control of sales journal, reduced credit risk, better working capital requirement etc. Disadvantages of Factoring : (1) Image of the client may suffer as engaging a factoring agency is not considered a good sign of efficient management. (2) Factoring may not be of much use where companies have nation-wide network of branches. (3) Where goods are sold against advance payment, factoring may not be useful.

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Q. Write a note on Factoring in India. Ans. Factoring in India :Some of the major factoring firms in India are: (1) SBI Factors & Commercial Services Ltd. : SBI gas floated its subsidiary in March, 1991 as SBI Factors and Commercial Services Ltd. which commenced operations in April, 1991 starting with bill-discounting and other services. SBI FACS contemplated to undertake collection and credit services designed to improve cash flow of business concerns, by timely realization of debt or receivables. A seller can have his invoice converted into instant cash upto 80% without having to wait for 30, 60 or 90 days. SBI FACS takes the responsibility of collection of debts due from customers of the clients. It will also undertake the maintenance of client's sales ledger by using the computerised system. SBI FACS has paid up capital of Rs. 25 crores and had factored debt of Rs. 30 crores with gross profit of Rs. 2 crores during the year. (2) Canara Banks Factors Ltd. : Canara Bank Factor Ltd, got approval and was simultaneously incorporated as subsidiary of Canara Bank in August 1991 and has been operating in south zone. It has paid up capital of Rs. 10 crores contributed by Canara Bank, Andhra Bank and Small Industrial Development Bank of India in the proportion of 60:20:20 and rendering same services as SBI FACS. (3) Fairgrowth Factors Ltd. : It is the first company in private sector aloe\wed to operate as factors. It has started its functions in April, 1992 and has paid up capital of Rs.5 crores. Q. Define Forfaiting. Explain briefly the Mechanism of Forfaiting. Ans. Forfaiting : Forfaiting denotes the purchase of trade bills or promissory notes by a bank or financial institution without recourse to seller. This purchase is in the form of discounting the bills or notes covering the entire risk of non-payments in collection. Thus, all risks and collection problems are fully the forfaiter's responsibility who pays cash to seller after discounting the notes or bills. Forfaiting has been permitted to exporters in India since 1992.Forfaiting is a without recourse finance which converts a credit sale into a cash sale. Mechanism of Forfaiting : The communication channels and module of transactions in forfeiting are shown in the following figure: Diagram : Mechanism of Forfaiting Exporter Agreement Delivery of goods - export Delivery of Bills of Exchange With bank/acceptance guarantor Importer Forfaiter Presentation of bills on maturity Payment on Maturity Bank

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MANAGEMENT OF FINANCIAL SERVICES Explanation : (1) Commercial contract between the exporter and importer (2) Delivery of goods from exporter to importer (3) Acceptance and delivery of bills of exchange drawn on importer by exporter back to exporter (4) Forfaiting contract between the forfeiter and the exporter (5) Delivery of bills of exchange by exporter to importer (6) Cash payment by forfeiter to exporter of the face value of bill less discount. (7) Presentation of bills of exchange on maturity for payment by forfeiter to importer bank. (8) Payment of bills by importers bank to forfeiter. Advantage of Forfaiting : (i) Forfaiting enable a broad range of instrument in use like promissory notes, bills of exchange etc. (ii) It does not involve any risk on account of foreign exchange fluctuations to exporter between the insurance date and maturity of paper. (iii) Exporter faces no administration and collection problems (iv) It provides finance for counter trade, etc. Q. Distinguish between Factoring and Forfaiting. Ans. Meaning of Factoring : Factoring is a financial service which is rendered by the specilaised persons known as 'Factors" who deal in realizing the book debts, bills receivable, managing sundry debtors and sales registers of the commercial and trading firms in the capacity of agent for a commission. Such commission is known as 'commercial charge'. Factoring helps in realization of credit sales of trading firms. Forfaiting : Forfaiting denotes the purchase of trade bills or promissory notes by a bank or financial institution without recourse to seller. This purchase is in the form of discounting the bills or notes covering the entire risk of non-payments in collection. Thus, all risks and collection problems are fully the forfaiter's responsibility who pays cash to seller after discounting the notes or bills. Distinguish Between Factoring and Forfaiting : Sr. Basis Factoring Forfaiting No. of Difference 1. Time Factoring is usually for trade Forfaiting is usually for credit transactions of short credit transactions of long term maturities not exceeding term maturity periods. six months

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2. Recourse or Factoring can be with Forfaiting is without without recourse recourse or without recourse recourse to the exporter. depending upon the terms All risks are taken over of transactions between the by the forfeiter seller and factor. 3. Cost Cost of factoring is usually Cost of forfeiting is borne borne by the seller. by the importer Q. Briefly explain the features of a bill of exchange, its types and advantages. Ans. Introduction : Bill discounting, as a fund based activity, emerged as a profitable business in the early nineties for finance companies. Bill discounting is a source of shortterm trade finance. It is also known as acceptance credit where one party accepts the liability of trade towards third party. Bill discounting is used as a medium of financing the current trade and is not used for financing capital purposes. The concept of bills discounting based upon the operation of bills of exchange. Definition of Bill of Exchange (B/E) : 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". Creation of a B/E : Suppose a seller sells goods to a buyer. In most cases, the seller would like to be paid immediately but the buyer would like to pay only after some time, that is, the buyer would wish to purchase on credit. To solve this problem, the seller draws a B/E of a given maturity on the buyer. The seller has now assumed the role of a creditor and is called the drawer of the bill. The buyer, who is the debtor, is called the drawee. The seller then sends the bill to the buyer who acknowledges his responsibility for the payment of the amount on the terms mentioned on the bill by writing his acceptance on the bill. The acceptor could be the buyer himself or any third party willing to take on the credit risk of the buyer. Normally there are two parties involved in bill of exchange: Drawer Drawee Discounting of a B/E :The seller, who is the holder of an accepted B/E has two options: 1. Hold on to the B/E till maturity and then take the payment from the buyer. 2. Discount the B/E with a discounting agency. This second options is by far more attractive to the seller. The seller can take over the accepted B/E to a discounting agency and obtain ready cash. The discounting agency may be a bank, NBFC or a company. The act of handing over an endorsed B/E for ready money is called discounting the B/E.

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MANAGEMENT OF FINANCIAL SERVICES Discount : The margin between the ready money paid and the face value of the bill is called the discount and is calculated at a rate percentage per annum on the maturity value. Maturity : The maturity a B/E is defined as the date in which payment will fall due. Normal maturity periods are 30, 60, 90 or 120 days but bills maturing within 90 days seem to be the most popular. Types of Bill :There are various types of bills. (1) Demand Bill : This is payable immediately "at sight" or "on presentment" to the drawee. Abill on which no time of payment is specified is also termed as demand bill. (2) Usance Bill : This is also called time bill. Usance bill refers to the time period for payment of bill. (3) Documentary Bills : These are the B/Es that are accompanied by documents that confirm that a trade has taken place between the buyer and the seller of goods. These documents include the invoice and other documents. (4) Clean Bills : These bills are not accompanied by any documents that show that a trade has taken place between the buyer and the seller. Because of this, the interest rate charged on such bill is higher than the rate charged on documentary bills. Advantages of Bill Discounting : The advantages of bill discounting to investors and banks and finance companies are as follows: (A) To Investors : (i) Short term sources of finance. (ii) Flexibility, not only in the quantum of investment but also in the duration of investments. (B) To Banks : (i) Safety of Funds :The greatest security for a banker is that a B/E is a negotiable instrument bearing signatures of two parties considered good for the amount of bill; so he can enforce his claim easily. (ii) Certainty of Payment : A B/E is a self-liquidating assets with the banker knowing in advance the date of its maturity (iii) Profitability :Since the discount on a bill is front-ended, the yield is much higher than on other loans and advances, where interest is paid quarterly or half yearly. Q. What is Hire-purchase System? Also explain the Legal Provisions of HirePurchase System. Ans. Hire-Purchase System : Hire purchase means a transaction where goods are delivered to the purchase immediately on signing the agreement and he is called upon to the purchase price in periodic installments. These installments may be monthly, quarterly, half-

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yearly or yearly depending upon the terms of the agreement. Each instilment is treated as a hire charge till the payment of the last installment when ownership or property in the goods passes from seller to the buyer. In case the default is made in the payment of even the last installment, the seller will be entitled to repossess the goods and forfeit the amount already received treating it as a hire charge. As such, under this system, the purchaser is called 'Hire Purchaser' and the seller is called 'Hire Vendor'. Definitions : According to J. R. Batliboi : "Under the Hire Purchase System, goods are delivered to a person who agrees to pa the owners by equal periodical installments, such installments are to be treated as hire of these goods, until a certain fixed amount has been paid, when these goods become the property of the hirer". Characteristics of Legal Provisions of Hire-Purchase System : (1) Right to use the goods : Possession of goods is delivered to the hire-purchaser immediately on signing the agreement and he becomes entitled to use the goods. (2) Payment in Installment : Under section 3 of the Act, it is compulsory that hirepurchase agreement should be in writing and signed b the parties concerned. It must state the following : Hire-purchase price of the goods, Cash price of the goods, Date of commencement of the hire-purchase agreement, Number of installments and Amount of each installment. (3) Ownership of Goods : Although the possession of goods is delivered to the hire purchaser immediately on signing the agreement, the ownership or property in the goods does not pass to the purchaser or hirer till the final installment is paid. (4) Right of the hirer to purchase with rebate : The Act confers on the hire purchaser the right ot purchase the goods b giving 14 day's notice to the owner. In such a case the hirer is entitled to a rebate calculated in the following formula: 2 Total Hire Purchase Charges x No. of installments not yet due Rebate = ----- X -------------------------------------------------------------------------------3 Total No. of Installment The hirer has to pa the balance of the installment amount less rebate calculated as above. Example :From the following information, calculate the amount to be paid to the owner if the hire purchaser intends to complete the purchase of goods:

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MANAGEMENT OF FINANCIAL SERVICES Hire Purchase Price Rs. 72,000 Cash Price Rs. 54,000 No. of Installments 12 Installments paid by the hire purchaser 8 Solution : Hire purchase Charges = Hire purchase price - Cash price = 72,000-54000 = 18000 Amount of each installment = 72000 /12 = 6000 Balance of Hire Purchase Price = 4 X 6000 = 24000 2 18000 x 4 Rebate = ----- X ------------------- = 4,000 3 12 The hire purchaser may, therefore, complete the purchase of goods by paying a lump sum of Rs. 20,000 (24,000-4,000). (5) When default is made in the payment of any installment: (i) Right of repossession of goods by the seller : IF default is made in the payment of even the last installment, the seller will be entitled to take away the goods because the ownership in the property remains with the seller till the payment of final installment. However, Section 20 of the Act provides that in the following cases, the hire vendor cannot exercise his right of repossession of goods unless it is sanctioned by the court: Where the hire-purchase price is less than Rs. 15000, one half of the price has been paid; Where the hire-purchase price is higher, three fourth of the hire-purchase price has been paid. (ii) Refund to the hire-purchaser: In case the hire vendor repossesses the goods, he is not bound to return the amounts already received as they represent hire charges but he will be required, under the Act, to refund to the hire-purchaser the amount by which the total amount received from the hire-purchaser plus the value of the goods on the date of repossession exceeds the hire purchase price. (iii) Right to recover the arrears : In addition to the right to repossess the goods and the right to retain the installments already paid as hire charges, the hire vendor also has the right to recover the arrears of installments due on the date of default.

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(6) Liability of hire-purchaser to keep the goods in good condition : The hirepurchaser, during that period when he is in possession of goods, is supposed to take all such care of goods a prudent person does in case of his own goods. (7) Loss occurring to goods has to be borne by the seller : So long as the hirepurchaser has taken reasonable care of the goods expected from a prudent person, any loss occurring to goods has to be borne by the seller as the risk lies with the ownership. (8) No right to sell or pledge the goods :As the hire-purchaser is in the legal position of bailee, he has no right to sell or pledge the goods till he becomes the owner. Q. Discuss the main features of Consumer Credit Ans. Consumer Credit : Consumer credit includes all asset-based financing plans offered to primarily individuals to acquire consumer goods. Typically in a consumer credit transaction the individual-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 main suppliers of consumer credit are : (i) Foreign/Multinational Banks (ii) Commercial Banks (iii) Finance Companies And cover items such as cars, scooters, VCRs, TVs, refrigerators, washing machines, home appliances and so on. Salient Features :The salient features of consumer credit are: (1) Parties to the Transaction : The parties to a consumer credit transaction depend upon the nature of the transaction. (i) Abipartite Arrangement :There are tow parties: Borrower Financier (ii) Atripartite Arrangement :There are three parties: Borrower Dealer Financier (2) Structure of the Transaction : A consumer credit arrangement can be structured in three ways: (i) Hire-Purchase : The customer has the option to purchase the assets. But he may not exercise the option and return the goods according to the terms of the agreement.

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MANAGEMENT OF FINANCIAL SERVICES (ii) Conditional Sale : The ownership is not transferred to the customer until the total purchase price including the credit charge is paid. The customer cannot terminate the agreement before the payment of the full price. (iii) Credit Sale : The ownership is transferred to the customer on payment of the first installment. He cannot cancel the agreement. (3) Mode of Payment : From the point of view of payment, the consumer credit arrangement fall into two groups: (i) Down Payment Scheme : The down payment may range between 20-25 per cent of the cost of asset. (ii) Deposit-linked Scheme :The payment may vary between 15-25 per cent of the amount financed. (4) Payment Period and Rate of Interest : A wide range of options are available. Typically, the repayment period ranges between 12-60 monthly installments. The rate of interest is normally expressed at a flat rate. (5) Security : Security is generally in the form of a first charge in the asset. The consumer cannot sell the pledge asset.

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