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Loan Company(LC)

The Loan Company is a financial

institution principally engaged in
the business of providing finance
to the public, whether by making
loans or advances or otherwise, for
any activity other than its own
(Excludes equipment leasing and
hire-purchase activities)
The loan is a kind of an agreement wherein the
lender temporarily lends property, usually cash
to the borrower with a promise that the
borrower will return it along with the interest as
per the terms and conditions as agreed upon.

Few types of loans offered:

Demand loan, term loan, secured loan,
unsecured loan, industrial loan, commercial loan

Ex: Aditya Birla Finance Limited, HDB financial

IFC is a non-banking finance company which
provides finance and advisory services for
infrastructure projects.
Includes following infrastructure sectors:
Transport, Energy, Water and Sanitation,
Communication, and Social and Commercial

According to RBI a company can be listed as an

IFC if:-
a)It deploys at least 75 per cent of its total
assets in infrastructure loans.
b)It has a minimum Net Owned Funds(NOF) of
IFC can lend 25 % of owned funds to a
single borrower in infrastructure sector
compared to 20% of other NBFCs.

It can raise capital through issuance of

infrastructure bonds at comparatively lower
yield as the holders of such bonds are
entitled to tax benefits.

Ex: L&T Infra Finance

Infrastructure debt funds:
IDFs are investment vehicles which can be
sponsored by commercial banks and NBFCs in
India in which domestic/offshore institutional
investors, specially insurance and pension funds
can invest through units and bonds issued by
the IDFs.
IDFs would essentially act as vehicles for
refinancing existing debt of infrastructure
companies, thereby creating fresh headroom for
banks to lend to fresh infrastructure projects.
Mechanism of Infrastructure Debt Fund

Infrastructure Debt Fund (IDF) essentially means that

1. You invest money in an IDF company.
2. IDF company lends your money in some
Infrastructure project company (as Debt).
3. That infrastructure project company pays interest
rate to IDF Company.
4. IDF company gives that interest money to you.
(after cutting its commission).
Thus you make profit on your investment.
Tax Policy for Attracting investors
By merely allowing creation Infra Debt Funds, Government
cannot bring in the investment in infrastructure projects.
Government also needed to give some benefit (carrots) to
lure the investors.
Finance Minister has given two carrots
1.Withholding Tax reduced from 20% to 5% (for foreign
2.Money earned from IDF is exempt from income tax. (for
desi investors)

Ex: L&T Infra Debt Fund Ltd

As per RBI, the company shall be recognized as an IDF only if it
satisfies the following conditions:
A company must be a non-deposit accepting firm with a net owned
fund of Rs 300 crore and more.
It must invest only in the PPP (public-private partnerships)
and infrastructure projects with post-commencement operations
date (COD) which have satisfactorily completed a minimum
one year of commercial operations and becomes the party to the
tripartite agreement.
The IDF-NBFC must have a minimum credit rating of A of
Crisil or equivalent to any other accredited rating agencies.
The company should have a minimum CRAR (Capital risk
weighted asset ratio) at 15%, and Tier-II Capital should not
exceed the Tier-I capital.
The Non-Banking Financial Company-Factors
(NBFC-Factors) is yet another financial
company that deals in the principal business of
The Factoring is a financial transaction wherein
the company sells its bills receivables i.e. invoices
to a third party called as factor at a discount
The factoring is done so that business can receive
cash quickly against the invoices rather than
waiting for the time period (usually, 30 to 60 days)
the customer makes the payment.
According to RBI the company can be
registered as an NBFC factor if:-

It has a minimum net owned fund(NOF) of

5 crores.
The financial assets in the factoring
business should constitute at least 50
percent of its total assets and its income
derived from factoring business should not
be less than 50 percent of its gross
Gold Loan NBFCs

The eligibility criteria and the due diligence for personal

loans are much stricter because they are unsecured. In
case of default, the lender does not have the option of
selling the borrower's assets.
The loan amount depends on income. The limit is Rs
15-20 lakh depending on income and credit history.
There are pre-payment charges that could be as high as
5 per cent of the outstanding loan amount. Unlike in
gold loans, both interest and principal have to be paid
in monthly instalments.
Over the years, gold loan NBFCs witnessed an upsurge
in Indian financial market, owing mainly to the recent
period of appreciation in gold price and consequent
increase in the demand for gold loan by all sections of
society, especially the poor and middle class to make
the both ends meet.
Aggressive structuring of gold loans resulting from the
uncomplicated, undemanding and fast process of
documentation along with the higher Loan to Value
(LTV) ratio include some of the major factors that
augment the growth of Gold loan NBFCs.
NBFCs vs Banks

The RBI decides how much loan can be given as a proportion

of the gold's value. At present, NBFCs cannot offer more than
60 per cent.
NBFCs charge very high rates.Muthoot Finance has a wide
range, 12-24 per cent. It offers a maximum loan of Rs 50,000
at 12 per cent and a maximum loan of Rs 25,000 at 27 per
cent for a tenure of three months .
Banks, on the other hand, are offering gold loans at 14-16
per cent a year excluding the 1-2 per cent processing fee.
Banks have access to low-cost deposits in savings and
current accounts. NBFCs are not allowed to collect low-cost
short-term deposits.
Why NBFCs for Gold loans?
Gold loans offered by NBFCs are hassle-free, easy to take and
require little documentation. If you need instant money for very
short duration then NBFC is best option
They have easier repayment options and no processing fee, though
the rates are higher than bank gold loans or personal loans.
Those who cannot fulfil the strict eligibility and documentation
criteria of banks can tap this avenue.
There is always a scope of negotiation with NBFC.
NBFCs allow borrowers to repay just the interest regularly during
the tenure of the loan and pay the principal at the end of the
tenure. Gold loans by most banks, especially public sector banks,
are term loans, which means both interest and principal have to be
paid regularly. Most NBFCs like Muthoot Finance allow
prepayment without penalty. Banks do not offer this facility.
Residuary Non-Banking
Residuary Non-Banking Company is a class of NBFC
which is a company and has as its principal business the
receiving of deposits, under any scheme or
arrangement or in any other manner and not being
investment, asset financing, loan company.
The functioning of these companies is different from
those of NBFCs in terms of method of mobilisation of
deposits and requirement of deployment of depositors'
They offer a rate of interest of not less than 5% per
annum on term deposits and 3.5% on daily deposits
both compounded annually.
They cant accept deposits for a period less than 12
months and not more than 84 months.
They cant offer any gifts or incentives to solicit
deposits from public.
They can't accept deposits repayable on demand, i.e.,
they cant open saving or current accounts.
There is no ceiling on raising of deposits by RNBCs but
every RNBC has to ensure that the amounts deposited
and investments made by the company are not less
that the aggregate amount of liabilities to the
To secure the interest of depositor, such companies are
required to invest in a portfolio comprising of highly
liquid and secured instruments viz. Central/State
Government securities, fixed deposit of scheduled
commercial banks (SCB), Certificate of deposits of
SCB/FIs, units of Mutual Funds, etc.
No Residuary Non-Banking Company shall forfeit any
amount deposited by depositor, or any interest,
premium, bonus or other advantage accrued thereon.
It succeeded in inculcating the savings habit amongst
the common man-middle/lower middle/lower class of
the society with even a minimum daily deposit of Re.1.
Mutual Funds

Its an Investment vehicle made up of a pool of funds

collected from many investors for the purpose of
investing in securities such as stocks, bonds, money
market instruments and similar assets.
Operated by Money Managers.
Working of a mutual fund.
Why are mutual funds subject to market risk?
Which government body regulates the mutual funds in
Small savings

Small savings can be divided into two groups

Post office deposits
Savings certificates and bonds
These assets represent medium to long term
investment opportunities
These assets are as liquid as bank demand deposits
Some of the schemes also provide insurance cover to
the investor
Small savings also carry excellent tax-benefits
Small savings schemes

Post Office Savings Bank Deposit (1896) 3.5% p.a

[Rs.20 to Rs. 1 lakh] no tax benefits on investment
Post Office Cumulative Time Deposits (1959) 6.25%
p.a. matures in 5, 10 or 15 years tax benefits
Post Office Time Deposits (1970) 6.25 to 7.50% p.a
maturity less than 5 years no tax benefits on
investment no limits on investment amount
Post Office Recurring Deposits (1970) 12.5% p.a - no
tax benefits on investment matures in five years
Small savings schemes

National Savings Certificates (1970) 8% p.a - tax

benefits applicable - no limits on investment amount
Indira Vikas Patra (1986) principle doubled every 5
and half years (? p.a) transferable and no investment
limits no tax benefits - discontinued in 1999
Kisan Vikas Patra (1988) 10% p.a 7years 8 months
maturity period no investment limits no tax benefits
National Savings Scheme (1987) 11% p.a max.
investment Rs.40000 tax benefits applicable
Post Office Monthly Income Scheme (1987) 8%p.a
matures in 6 years range (6000 to 3 lakh)
Provident Funds

This is a way of saving mostly be people who earn their

income in salaries
However, non-salaried earners can also save in the Public
Provident Fund Scheme
The motive is individual and family welfare and not profits or
capital growth
Employees Provident Fund Scheme covering non-exempted (industrial)
Provident Funds of exempted industrial establishments
Central and State Government Employees (non-industrial) Provident Fund
Coal Mines Provident Fund
Assam Tea Plantations Provident Fund
Public Provident Fund

PPF was introduced in 1968 (operated through SBI and

subsidiaries) and from 1979 also at head post offices
Self-employed persons, general public and salaried
persons can take advantage of it
Maturity period of PPF is 15 years but in case of EPF it
depends on age of the employee
Employer makes specific contribution in EPF but
nothing like that in PPF
Both schemes enjoy tax benefits
In PPF contributions could be varied from year to year
however in EPF it is more restricted
Rules regarding investment of PFs

Funds mobilised through small savings and PF should

be invested wholly or substantially in the Central and
State government securities or securities guaranteed
by these governments

1995-96 1996 onwards

Investments in
Central government securities 25% 25%

State government securities (securities 15% 15%

backed by govt)
Special deposit schemes 30% 20%

Bond/other securities of public sector 30% 40%

financial institutions/companies/banks
Factors promoting growth of PF

Statutory measures to make PF compulsory for industrial

and other establishments
Increase in the number of establishments under statutory
Expansion of industrial and service sector and number of
salary earners
Introduction of PPF
Provision of tax benefits under PF schemes
Increase in minimum rates of contributions by the
employees and employers
Changes in the pay structure and basic pay
Increase in level of money income in the economy
Pension Funds

Powerful financial intermediary in developed countries

but not in India
In India, first investment-based pension fund was
proposed by UTI and approved by government in 1994
This was meant for self-employed people in order to
provide security in their old age
Anyone between age 18-52 can contribute and receive
regular monthly income from 58 years onwards
Pension plans

A pension plan is an arrangement to provide income to

participants in the plan when they retire
PPs are generally sponsored by private employers,
government as an employer and labour unions
Funded Pension Plans
If benefits are secured by assets specifically dedicated for the
Unfunded Pension Plans
IF benefits depend on general credit and not by any specific
The financial intermediary, or an organisation, or an
institution, or a trust that manages the assets and pays the
benefits to the old and retirees is called a Pension Fund
Classification of pension plans

Defined Benefits Pension Plan (For eg. India)

The final pension is pre-defined based on the final salary and
the period of service. For eg. Govt. jobs in India
Defined Contribution Pension Plan (For eg. US)
The employee and the employer make a pre-determined
contribution each year, and these funds are invested till the
The employee gets a certain amount of the value of these
investments and can purchase an annuity
Pay-As-You-Go Pension Plan (for eg. France, Germany)
Current employees pay a percentage of their income to
provide for the old, and this along with states contribution
goes to the older generation
Reforming the pension system

In developed countries the focus is to

Privatise pension systems and to replace pay-as-you-go pension
plans with privately managed defined contribution pension plan
Greater involvement of private sector in managing investments
and in administration relating to pensions
Improve regulation and bring business transparency including
capital market reforms
In India, the pension market covers hardly 3% of the total
EPF and PPF are the two major schemes
Govt employees benefit from defined benefit pension plan
Highly unorganised sectors in India makes pension funds
Current pension schemes in india

Government employees pension scheme

Superannuation/retirement pension
Permanent total disability pension
Widow or widowers pension
Orphan pension
Bank employees pension scheme
Insurance employees pension scheme
Privately administered superannuation fund
Varishta pension bima yojana
New jeevan akshay
New jeevan dhara
New jeevan suraksha
Pension reforms

Old Age Social Income Security (OASIS, Dave

committee 1999)
Private pension funds should be set up
Pension fund should be invested in secondary
markets for securities
Safe income, balance income and growth; three
types of pension schemes should be floated
Taxation should be avoided and funds should be
encouraged to earn higher real rate of return
Individuals can change fund managers if
The state government can choose to join the
pension scheme
Funds can be invested in international markets
Insurance companies

Actual premium = pure premium + (administrative and

marketing cost)
Pure premium is the present value of the expected cost
of an insurance claim
Collection of premium builds the insurance reserves
which is further invested in various activities and
Insurance companies (corporations or mutual
associations) offer protection to the investors, provide
means for savings and investment to the government
Examples, life insurance, health insurance, general
insurance (property insurance, fire insurance, vehicle)
Phases of development

Life insurance
Phase I: 1818-1956, competitive market with 245 private
sector companies
Oriental life insurance company 1818, calcutta
Phase II: 1956-2000, nationalised and state monopoly with
only one company
Life insurance corporation (LIC) 1956
Phase III: 2000 - , 12 major companies, mixed ownership,
public-private sectors, monopoly or oligopoly of public sector
Phases of development

General insurance
Phase I: 1850-1972, competitive market with 107
private sector companies
Tritan insurance company1850, calcutta
Phase II: 1972-2000, state monopoly/oligopoly; 5
National insurance company
New India assurance company
Oriental insurance company
United India insurance company
General insurance corporation
Phase III: 2000 - , 12 major companies, mixed
ownership, public-private sectors, monopoly or
oligopoly of public sector
Insurance sector reforms

Insurance Regulatory and Development Authority

IRDA became a statutory body in April 2000
August 2000, India opens for private insurance players
February 2011, 23 LI companies, 24 GI companies
In the last 200 years, insurance market has gone through
a privatised era to nationalisation and to liberalisation
However, in recent times, liberalisation is not comparable
with competitive market as very few players dominate
Heavy concentration of business (one or two companies)
In 2001-02, of all investment by life and general insurance
companies, the share of LIC was 99% and GIC 97%, respectively
Most investments are in govt securities, easing monetary policy

Health insurance, travel insurance, professional

indemnity insurance and crop insurance are
underdeveloped in India
Health insurance does not cover disability arising out of
illness, accidents
How far MNCs be allowed to do insurance business in
Is the low insurance coverage a reflection of social or
community assurance or low purchasing power and
knowledge or behaviour
Life Insurance Corporation

LIC was set up in 1956

Key Objectives
To spread and provide life insurance protection to masses at a
reasonable cost
To mobilize savings through insurance linked savings schemes
To invest the funds to serve the best interests of policyholders
and nation
To conduct business with maximum economy
To act as trustees of the policy holders and protect their
To ensure efficient and courteous service
To innovate and adapt to meet the changing needs of the
Portfolio restrictions on life
insurance, 2001-02

Type of investment Life insurance

1. Government securities 25%

2. Government securities or other approved securities Not less than 50%

Including 1
3. Approved investments as specified in schedule 1 Not less than 15%
Infrastructure and social sector
4. Others to be governed by Exposure Norms Not exceeding 35%
Portfolio restrictions on General insurance,

Type of investment General insurance

1. Central Government securities being not less than 20%

2. State govt. securities and other guaranteed securities 30%

3. Housing and loans to state government 5%

4. Investments in approved investments

A) Infrastructure and social sector Not less than 10%
B) Others to be governed by Exposure Norms Not exceeding 55%
Investment Trusts and Unit Trusts

Investment Trust is an investment-holding company

incorporated under Companies Act as any other
industrial or commercial company
Unit Trust is a trust at law
UT is obliged to buy back investments whenever an
investor wants to sell them, an IT cannot buy back its
shares which has to traded in the stock market
IT can raise long-term debt and retain a part of its
income; UT cannot
In case of UT the value of the fund and the value of
the assets are linked but this can differ in case of IT
Mutual savings banks are different from UT in terms
of purpose and loans, chequable services, retained
Mutual Funds

Mutual Fund is pure intermediary which buys and sells

securities on behalf of its unit-holders
Easily, conveniently, economically and profitable
The investors earn in proportion to their investments
Unlike shareholders in a company, shareholders in a MF
do not have any voting rights
It helps small investors to hold a share in large and
diversified portfolio of assets which reduces risks
With better professional management, investors can
earn relatively higher rate of return than they otherwise
would have earned
High return Low risk
Advantages of Mutual Funds

Economies of scale of operations

Spread of risk
Expert and professional management
Diversification of portfolio
Low brokerage and transactions costs
Good portfolio performances
High return potential
Convenient administration
Wide choice of schemes
Tax benefits
Mutual Funds

The sponsor(s), Board of Trustees or Trust Company
The Asset Management Company
The Custodian
The Unit holders
Type of Schemes
Open-ended funds units are sold continuously
Closed-ended funds fixed units are sold
Aggressive or pure or normal growth schemes, pure or regular or monthly
or cumulative income schemes, growth and income, or balanced
schemes, special purpose schemes, sectoral schemes, tax saving plans
They are also named as per investment asset
Equity funds, bond funds, real estate funds, money market funds
Fund of Funds
Exchange traded funds
Index Funds