Innovation in Banking and insurance Presented by : Saurabh Shah TAAZA KHABAR Updates on RATES

Particulars

As on 4th Dec ,2009

Bank Rate Repo Rate Reverse Repo Rate CRR SLR INR/ 1USD PLR Call Rates SENSEX NIFTY

6% 4.75% 3.25% 5.00% 25% 46.72 11% - 12% 2.10% - 3.30% 17,189.31(+64.09) 5134.65(+0.44%)

Contents

 Sector wise Distribution of GDP

Definition - Banking Section 5 (1) (b) of Banking Regulation Act defines banking as the accepting, for the purpose of lending or investment, of deposits of money from public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. Indian Banking System Early phase from 1786 to 1949 of Indian Banks : Phase 1 The General Bank of India was set up in the year 1786 The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks Imperial Bank acted as banker to government until the establishment of RBI in 1935

Contd: Phase 1 The Reserve Bank of India began operations as private shareholders' entity on April 1, 1935, which makes it 74 years old. It was nationalized on January 1, 1949. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act, 1949 Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority.

Nationalization of Indian Banks and up to 1991 prior : Phase 2

 Imperial Bank was nationalized in under State Bank of India Act 1955 which led to the emergence of State Bank of India and marked the beginning of first phase of nationalization Seven banks forming subsidiary of State Bank of India was nationalized in 1960 To extend banking facilities on a large scale specially in rural and semiurban areas. To act as the principal agent of RBI To handle banking transactions of the Union and State Governments all over the country and to help to pursue broad economic objectives

Contd..Phase2 SBI along with its associate banks account for 20% of total branches of all commercial banks in India In1969, major process of nationalization was carried out. 14 major commercial banks in the country were nationalized. Second phase of nationalization was carried out in 1980 with six more banks. This step brought 80% of the banking segment in India under Government ownership.

Nationalization of Commercial Banks On July 19, 1969, 14 commercial banks got nationalized Objectives Removal of control by a few Provision of adequate credit for agriculture and small industry and export Giving a professional bent to management Encouragement of a new class of entrepreneurs

 The provision of adequate training as well as terms of service for bank staff 14 banks that were Nationalized Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank Indian Bank Indian Overseas Bank Bank of Baroda Union Bank Allahabad Bank United Bank of India UCO Bank Bank of India Major Milestones in Banking History 1949 : Enactment of Banking Regulation Act 1955 : Nationalization of State Bank of India

1960 : Nationalization of SBI subsidiaries.

1969 : Nationalization of 14 major banks

 1971 : Creation of credit guarantee corporation 1975 : Creation of regional rural banks.

1980 : Nationalization of six banks with deposits over 200 crore. New phase of Indian Banking System Reforms after 1991-Phase3 This phase has introduced many more products and facilities in the banking sector in its reforms measure In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers

Phone banking and net banking is introduced. The entire system became more convenient and swift. Banking Sector Reforms Measures for liberalization, like dismantling the complex system of interest rate controls, eliminating prior approval of the Reserve Bank of India for large loans, and reducing the statutory requirements to invest in government securities Measures designed to increase financial soundness, like introducing capital adequacy requirements and other prudential norms for banks and strengthening banking supervision Measures for increasing competition like more liberal licensing of private banks and freer expansion by foreign banks. types of banks Commercial Banks Commercial banks operating in India may be categorised into public sector, private sector and Indian or foreign banks depending upon the ownership, management and control.

 They may also be differentiated as scheduled or non-scheduled, licensed or unlicensed. A commercial bank is run on commercial line that is to earn profits unlike a cooperative bank which is run for the benefit of a group of members of cooperative body e.g. a housing co-operative society. The commercial banks are spread across the length and breadth of the country ad cater to the short term needs of industry, trade and commerce and agriculture unlike the developmental banks which focus on long term needs.

 Functions of commercial banks

Types of Lending

Secondary functions Agency Functions Collection of Cheques Periodic Payment

Remittances Other Collections

Utility Functions Issue of Letter of Credit Issue of Travellers Cheque Cash Credit

Debit Card ATM E-Banking Safe Deposit Vault Credit Information Bank Guarantee

Scheduled Banks Scheduled Banks are those which are included in second scheduled of Banking Regulation Act 1965, other are non scheduled banks. To be included in scheduled category a bank lakhs

(i) must have paid up capital and reserves of not less than Rs 5

(ii) must also satisfy the RBI that its affairs are not conducted in a manner detrimental to the interests of its depositors. Scheduled banks are required to maintain a certain amount of reserves with the RBI, the in return enjoy the facility of financial accommodation and remittance facilities at concessional rates from the RBI Foreign banks Foreign Commercial Banks are the branches in India of the joint stock banks incorporated abroad. Besides financing the foreign trade, they undertake banking business within the country as well.

 There are around 40 foreign banks in India. Standard Chartered Grind lays is the bank with the largest branches in India. Foreign banks have brought latest technology and latest banking practices in India. They have helped made Indian Banking system more competitive and efficient. private banks Private Bank is a bank registered as a public limited company under the Companies Act 1956. The RBI may on merit grant a license under the Banking regulation Act 1949 for such a bank. The banks may also be included in Schedule II of the RBI at the appropriate time. While granting a license, preference may be given to those banks the headquarters of which are proposed to be located in a centre which does not have the headquarters of any other bank. Non-Scheduled Banks Those banks which are not included in the second schedule of the Banking Regulation Act 1965 are termed as non scheduled banks. Usually they are small sized institutions which restrict their activities to local areas. Their paid up capital and reserves do not aggregate up to more than Rs 5 lakhs. Their banking activities are also limited e.g. they cannot deal in foreign exchange. The classification of Indian commercial banks into scheduled and non scheduled banks had significance prior to nationalisation but now almost all commercial unscheduled banks have been weeded out. Regional Rural Banks(RRBs) RRBs are established under the Regional Rural Bank Act 1976 having a minimum capital of Rs 5 crore in business of

(1)granting loans and advances, particularly to small and marginal farmers and agricultural labourers, whether individually or in groups, and to co-operative societies etc (2)granting of loans and advances particularly to artisans, small entrepreneurs and persons of small means engaged in trade commerce or industry or other productive activities Of the issued capital 50% is subscribed by the central government, 15% by the State Government and 35% by the sponsor bank. Apart from subscribing to the share capital, sponsor banks also provide managerial assistance, help in recruitment and training of personnel etc Co-operative Bank Co-operative Bank are only partial financial intermediaries which are engaged in financing rural and agriculture development. Co-operative banking is small scale banking carried on a no profit, no loss basis for mutual cooperation and help. They were conceived to supplant money lenders and indigenous bankers by providing adequate short term and long term institutional credit at reasonable rates of interest. Reserve Bank of India The Reserve Bank of India began operations as private shareholders' entity on April 1, 1935, which makes it 76 years old. It was nationalized on January 1, 1949. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949. Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. Functions of RBI Monetary Authority : Formulation and Implementation of monetary policies. Objective-Maintaining price stability and ensuring adequate flow of credit to the productive sectors.

 Regulator and supervisor of the financial system Issuer of Currency : Issues and exchanges or destroys currency and coins not fit for circulation.

Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality. Developmental role Performs a wide range of promotional functions to support national objectives.

Regulator and supervisor of the financial system: Prescribes broad parameters of banking operations within which the country's banking and financial system functions

Objective - maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. Manager of Foreign Exchange Manages the Foreign Exchange Management Act, 1999.

Objective - to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. Due to free mobility of capital, there is inter linkage between domestic and international financial markets. Banker to the government : RBI performs merchant-banking function for the central and the state governments, also acts as their banker. It accepts money in deposit, permits withdrawal of cash by cheque, receives/collects payments to the Governments and transfers funds to various places in the country for the use of the Govt. Borrows on behalf of the Governments. Banker to banks : RBI maintains banking accounts of all scheduled banks.

 The Reserve Bank of India acts as the bankers' bank. All the SCBs have to necessarily maintain their Current Accounts with the RBI for maintaining CRR as well as for smooth functioning of Clearing House functions. RBI also lends to the banks through Repos transactions with them. Deposit Account This is a core activity of the bank. Public deposits comprise the major proportion of a bank working funds which are used primarily to make loans and advances and to purchase securities. The size of deposit is a fair reflection of the confidence, reposed by the public in that bank. The growth and propensity of a bank depends on how they are managed to maximize profits. Banks accept various types of deposits, which are generally categorized as demand or time deposits Saving Account Such accounts are usually maintained by people who wish to save a part of the current income to meet the future needs and also to earn some interest thereon. The banker pays interest against these accounts to the customers though at a lower rate than in case of fixed deposits. Normally, the minimum amount to open an account in a nationalized bank is Rs 100. If cheque books are also issued, the minimum balance of Rs 500 has to be maintained. However in some private or foreign bank the min.bal.is Rs 500 or more and can be up Rs. 10,000. A Savings account can be opened either individually or jointly with another individual. There are restrictions on the number of withdrawals to be made out. Current Account

 Such accounts are opened by business man/ corporate who do not want any restriction on the operation of their account and also wants to enjoy the available overdraft facility. It is running and active account and the banker is under obligation to repay these deposits only when the customer demands payment through a cheque, card, otherwise. As this accounts is a running account, this account does not provide any interest and provides no limit on the number of withdrawals from this account. A min. of Rs. 5000 has to be maintained in this account. Axis Bank Normal Current Account ( as on Aug 2008) At a Monthly Average balance of Rs 10,000 this account takes you into the all new world of banking. At-Par Cheque Facility Enjoy the benefits of payable 'At-Par' cheque book at very nominal charges. Issue cheques payable at par at any of our branches / outlets, presently 575 across the country. Inter Branch Cash Deposit Facility Deposit cash upto Rs. 50,000 per day at a remote branch for instant credit into your account. Home Branch Cash Withdrawal Free upto 50 transactions for unlimited amount per month. Axis Bank Normal Current Account (as on Aug 2008) Demand Drafts Avail Demand Drafts at very nominal charges. You can issue demand drafts at any of our branches / outlets, presently 575 and a wide network of correspondent bank locations. Outstation Cheque Collection Avail outstation cheques. Local Cheque Deposit Facility

 Deposit cheques at any Axis Bank branch and get the credit into your account. Recurring deposit account In this account a certain fixed amount is to be deposited by the account holder every month for a specified period of time.

This account inculcates the habit of regular savings among people. The interest allowed on this account is more than savings account but less than Fixed deposit account. No withdrawals are allowed from this account till maturity.

Fixed deposit account In this account a fixed amount is deposited in a bank for a specified period. The objective of this account is to encourage people to deposit surplus funds and earn higher rate of interest. Banks pay maximum rate of interest on fixed deposit since these amount can be reinvested by the banks at much higher rate. Banks provide loan facility to FD account holders to a maximum limit of 90% of the FD amount @ 2% interest.

Demat Account Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investors account with his Depository Participant (DP). It is introduced by the commercial banks to keep the record of the shareholdings of the customer regarding the opening stock and the closing stock of the shares. Foreign Deposit Account A bank normally offers the following foreign accounts 1. NRO Account (Non Resident Ordinary) 2. NRE Account (Non Resident External) 3. NRNR Account (Non-Resident Non Repartriable)

4. FCNR Account (Foreign Currency Non Resident) NRO Account (Non Resident Ordinary) Indian national residing outside India (Other than Nepal & Bhutan) for employment etc Intention to stay outside for a indefinite period Maintained in Savings, Current and Fixed Deposits Account in India. Funds in these accounts are non repatriable, cannot be remitted abroad or transfer to NRE account Interest on such deposits are taxable NRE Account (Non Resident External) Indian national residing outside India (Other than Nepal & Bhutan) for employment etc Deposits designated in rupees Maintained in Savings, Current and Fixed Deposits account in India Intention to stay outside for a indefinite period Funds in these accounts are repatriable Interest on these account is tax free

NRNR Account (Non-Resident Non Repatriable) In this scheme accounts are to be opened in Indian Rupees with the authorized dealers. Authorized dealers are free to fix the maturity period of the deposits between 6 months and 3 years. Individual can withdraw their money at a premature stage. On maturity the principal amount of deposit will not qualify for repatriation outside at any time. Interest accrued is allowed for repatriation.

 FCNR Account (Foreign Currency Non Resident) Account in foreign currencies Can be maintained by NRIs Permitted to be maintained in Pound Sterling, USD, Deutshe Mark and Japanese Yen Fixed Deposits of 6 months and above and up to 3 years Freely Repatriable Liabilities of Bank Share Capital Reserve Funds Deposits: Constitute 92% of total liabilities of all scheduled commercial banks Demand Deposits Term Deposits Other Liabilities of Banks Among other liabilities demand and time deposits from banks amount to three to four percent of total liabilities and Borrowing from other Banks amount to another one or Two percent Borrowings from RBI since 1960s till 1990 have varied between 2.49 and 5.69 percent. However at present they are negligible Apart from RBI, Banks also use non-deposit resources such as borrowings from NABARD, EXIM Bank and bill rediscounted with Financial Institutions Assets

Cash in Hand and Balances with RBI Investments In government and other approved securities (SLR Securities)

 Non- SLR Securities( CP, Units of Mutual funds, shares and debentures of PSUs) Private corporate sector. Bank credit : Types of advances provided are loans, cash credit, overdrafts, demand loans, purchase and discounting of commercial bills and installment or hire-purchase credit. Off balance sheet activities Transactions not appearing on balance sheet are called off balance sheet items. In India the off balance sheet activities of commercial banks include forward exchange contracts, loan commitments guarantees such as Letter of credit whereby bank agrees to pay a specified amount on presentation of evidence of default. Banks interest in saving capital and avoiding reserve requirements is one of the reason for the proliferation of these activities. Charge In lay mans term charge simply means individual legal claim. Creditors have first charge, second charge ,pari-passu charge depending upon encumbrance.

This refers to create a charge over immovable property like Land & Building as a collateral(security). As per sec 58 of the transfer property act 1882 defines mortgage as transfer of an interest in specific immovable property for the purpose of securing money.

 The transferor is called mortgagor the transferee is called mortgagee. Mortgage deed is the written legal document signed between both parties by which transfer is affected. Hypothecation Hypothecation is another method of creating charge over movable assets like current assets(e.g. book debts, raw material ) This method of lending is used by the banks for the purpose of working capital requirement. Neither possession nor ownership of the goods is transferred to the creditor but equitable charge is created at later stage. The goods remains in the possession of the borrower. The charge of hypothecation is converted into pledge and the banker or hypothecator enjoys the power and the rights of the pledge Lien Lien means to keep or retain the goods belonging to others as a security for the recovery of the reward. There are 2 types of Lien Particular Lien available against specific goods and not all goods. General Lien available against all the goods whether present or past.

As per sec 171,Indian contract bankers are given right of the general lien on the banker. The ownership of the goods is with customer and not with the banker. Pledge Goods delivered to another as a security for money borrowed is called Pledge It is one type of Bailment. Bailor in this case called the and the Bailee is called Pledgee Pledgor

Illustration A borrows Rs. 4000 against security of his jewellery. The bailment of jewellery is a pledge.

 Pledge can be affected only of movable property and there is only transfer of possession and not that of ownership. Evolution of bancassurance Insurance Regulatory and Development Authority (IRDA) Act,1999 permitted commercial banks to enter into Insurance business. RBI has issued certain guidelines in this context such as : Min net worth of Rs 500 crores Satisfy the criteria for capital adequacy, profitability, NPA level Maximum equity holding by banks normally 50% in Joint venture with risk participation

Banks not eligible for JV can participate without risk participation up to 10% of net worth or Rs 50 crore whichever is lower. In India Banking and Insurance sector are regulated by 2 different entities RBI and IRDA. IRDA has also issued certain guidelines : Each bank that sells insurance must have chief insurance executive to handle all the insurance activities. All the people involved in selling should undergo mandatory training and institute accredited by IRDA. Commercial banks, including cooperative banks and RRBs may become corporate agents for one insurance company. Banks cannot become insurance brokers.

Meaning Tie-ups in bancassurance INSURANCE HDFC Standard Life Insurance Co. Birla Sun Life Insurance ICICI Prudential Life Insurance Co. BANKS UNION Bank of India. HDFC Bank, Deutsche Bank etc. ICICI Bank, Citibank, etc

Life Insurance Corporation (LIC) SBI Insurance Co

Centurion Bank, Oriental Bank of Commerce, etc State Bank of India, Associate Bank

Advantages to Banks Increased income to banks in form of revenue.

Infrastructure Costs. a) Distribution cost b) Operation Cost Creating a Universal Banking platform with wider Financial Services. Advantages to Insurance Companies Advantages to Customers Currently India contributes 10% of the total premium collected across the whole Asias Life and Non-Life Insurance sector. At it is expected to contribute around 18% by 2010.

QUIZ !!!!!

 Facts of banks in India 1) The first bank in India to be given an ISO Certification Canara Bank 2) The first bank in Northern India to get ISO 9002 branches Punjab and Sind Bank 3) The first Indian bank to have been started solely with Indian capital Punjab National Bank 4) India's oldest, largest and most successful commercial bank, offering the widest possible range of domestic, international and NRI products and services, through its vast network in India and overseas. State Bank of India 5) India's second largest private sector bank and is now the largest scheduled commercial bank in India The Federal Bank Limited 6) Bank which started as private shareholders banks, mostly Europeans shareholders. Imperial Bank of India Derivatives In recent years, financial markets have developed many new products whose popularity has become phenomenal. Derivative products initially emerged, as hedging devices against fluctuations in commodity prices. A derivative is an instrument whose value depends on the values of one or more basic underlying variables called bases. The underlying variables are forex, equity, commodity, bonds, debentures etc. Illustration : Wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. The price of this derivative is driven by the spot price of wheat which is the underlying. Derivatives certification for their selected

 In derivative market when enter into a contract to buy or sell particular underlying: Long position means to have a buy position for particular stock Short position means to have a sell position for particular stock Bid price (buyers price) is the rate/price at which there is a ready buyer for the stock. Ask price (sellers price) is the rate/ price at which there is seller ready to sell his stock. Terminologies related to futures. Spot price: the price at which an asset trades in the spot market. Futures price: the price at which the futures contract trades in the futures market. Initial margin: the amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. Marked-to-market (M to M): in the futures market, at the end of each trading day, the margin account is adjusted to reflect the investors gain or loss depending upon the futures closing price. This is called marked-tomarket. Options terminology Option price/premium: Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium. Strike price: The price specified in the options contract is known as the strike price or the exercise price. Options terminology In-the-money option: Spot price > Strike Price in case of call option. Spot price < Strike Price in case of put option.

 If exercised immediately it would lead to positive cash flow. E.g.: Spot value of Nifty is 2157. An investor buys a one-month nifty 2140 call option for a premium of Rs.7. the option is? Out-of-the-money option: Spot price < Strike price in case of call option. Spot price > Strike price in case of put option. If exercised immediately it would lead to negative cash flow. E.g.: Spot value of Nifty is 2140. An investor buys a one-month nifty 2157 call option for a premium of Rs.7. the option is? Forward Contract A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. No cash is exchanged when the contract is entered into.

Illustration Shyam wants to buy a TV, which costs Rs 10,000 but he has no cash to buy it outright. He can only buy it 3 months hence. He, however, fears that prices of televisions will rise 3 months from now. So in order to protect himself from the rise in prices Shyam enters into a contract with the TV dealer that 3 months from now he will buy the TV for Rs 10,000. What Shyam is doing is that he is locking the current price of a TV for a forward contract. The forward contract is settled at maturity. The dealer will deliver the asset to Shyam at the end of three months and Shyam in turn will pay cash equivalent to the TV price on delivery. Features of Forward Contract They are bilateral contracts and hence exposed to counterparty risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality.

 The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counter-party, which often results in high prices being charged. Futures Contract A future contract is similar to Forward account. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Index futures are all futures contracts where the underlying is the stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole. Features of Futures Contract The standardized items in a futures contract are: Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change Location of settlement Forwards v/s Futures Forwards OTC in nature Contract terms are customized Requires no margin payment Settlement happens at end of period Futures Traded on organized stock exchange Contract terms are standardized Requires margin payment Follows daily settlement

One delivery date which is specified Some credit risk Counterparties have to take exposure

Range of delivery dates No credit risk Clearing house takes the exposure on both the parties

Types of Futures The different types of Futures are but different facets of the same Futures. Currencies Commodities. Interest Rates Stocks Index Options Option, as the word suggests, is a choice given to the investor to either honor the contract; or if he chooses not to walk away from the contract. An option gives its owner the right but not the obligation to purchase or sell an asset on or before some date in future. The date when option expires is known as the exercise date, the expiration date or the maturity date. The price at which asset can be purchased or sold is known as strike price. Call Option is the right, but not the obligation, to buy the underlying asset by a certain date for a certain price. Put Option is the right, but not the obligation, to sell the underlying asset by a certain date for a certain price. American options: are options that can be exercised at any time up-to the expiration date. Most exchange-traded options are American.

European options: are options that can be exercised only on the expiration date itself.

 Swaps SWAPS have been termed as private agreement between the two parties to exchange cash flows or payments which will take place in the future. SWAPS is also called as financial swap in global financial market. There are different types of swaps such as interest rate swaps, currency swaps, equity swaps etc. Features of swap A swap is nothing but the combination of Forwards, so it has all the properties of forward contract. It requires 2 parties with equal and opposite needs. There is no exchange of principal on the other hand fixed interest is exchanged for floating rate of interest. Swaps are in the nature of long term agreement and they are just like long dated forward contracts. Derivatives and Banks Derivatives are used by banks to hedge risks, to gain access to cheaper money and to make profits. Banks also help customers to cope with financial market volatility by offering various derivatives security services such as forward contract, swaps, options etc These activities are off balance sheet activities for which capital requirement is low. Financial Services Financial intermediaries provide key financial services such as merchant banking, leasing, hire purchase, credit-rating, and so on which indirectly deals with the management of money. Financial services rendered by the financial intermediaries bridge the gap between lack of knowledge on the part of investors and increasing sophistication of financial instruments and markets. These financial services are vital for creation of firms, industrial expansion, and economic growth.

 Classification of Financial Service Industry

Scope of Financial Services Financial services covers wide range of activities. They can be broadly classified into: 1) Traditional activities Fund based activities Dealing in foreign exchange market activities Involving in equipment leasing ,hire purchase, venture capital, seed capital etc Underwriting of or investment in shares, debentures, bonds etc of New issue market. Dealing in secondary activities Participating in Money market instruments such as CPs, CDs, T-bills etc

Scope of Financial Services Non Fund based activities This activity is also called as Fee based activity e.g. After sales service Project finance is arrangement of funds from FIs for the new project or new venture. Funds are also arranged for working capital requirements. Assisting in the procedural clearances from government. Management of pre and post issue of capital through IPO. e.g. Moratorium period

2) Modern Activities Management of portfolio of large public sector organization Acting as trustees to Debenture holders Planning for Merger and Acquisitions Hedging of risk due to exchange risk, interest rate risk, economic risk and political by using swaps and derivative products.

New Financial Products and Services Merchant Banking Only a body corporate other than a non-banking financial company shall be eligible to get registration as merchant banker. Without holding a certificate of registration granted by the Securities and Exchange Board of India, no person can act as a merchant banker. The validity period of certificate of registration is 3 years from the date of issue. Merchant Banking Managing of public issue of capital such as determining the type of securities to be issued Draft of prospectus and application forms Appointment of Registrar to deal with share application and transfers Listing of Securities Arrangement of underwriting Placing of issues Selection of brokers and bankers to the issue Publicity and advertising agent Private Placement of Securities Loan Syndication

 This is more or less Consortium Banking Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly, they analyze the pattern of the clients cash flows, based on which the terms of the borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate ( joining together). The banks then negotiate the terms of lending on the basis of which the final allocation is done. Mutual Fund

Structure of Mutual Fund

 Working of Mutual Fund

Types of Mutual Funds

Open Ended Schemes Accepts funds from investors on continuous basis. Repurchase facility available. No listing on the stock exchange. Better liquidity due to continuous repurchase. Sale and Repurchase based on NAV

 Closed Ended Schemes Schemes are opened for specified time period. Corpus normally does not change throughout the year. Such schemes are normally listed in the stock exchange. Otherwise repurchase facility provided. Liquidity normally at the time of redemption. Long term investment strategies depending on the life of the scheme. Market price may be below or above par. Growth Funds The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income Funds These funds provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income. Balance Funds Balanced funds work particularly well during a downturn in equity markets. These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion.

 While selecting a balanced fund, choose the conventional type 60:40 (equity: debt) with a steady track record. Make sure the fund manager sticks to the 60:40 mandates even during bullish times, when most balanced fund managers succumb to the temptation of over-allocation to equities for higher growth. They are ideal for medium to long-term investors who are willing to take moderate risks. Money Market Mutual Funds These mutual funds would invest exclusively in money market instruments. RBI introduced to provide an additional short- term avenue for investment and bring money market within reach of individuals. Index Funds Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc these schemes invest in the securities in the same weight age comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. Advantages of Mutual Funds Diversification Mutual funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion One achieves this diversification through a mutual fund with far less money than you can do on your own. Professional management Mutual funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.

 Advantages of Mutual Funds Return potential Over a medium to long-term, mutual funds have the potential funds to provide a higher return as they invest in a diversified basket of selected securities. Reduction in transaction cost Mutual funds are a relatively less expensive way to invest as compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. Flexibility Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans we can systematically invest or withdraw funds according to our needs and convenience. Advantages of Mutual Funds Choice of schemes Mutual funds offer a family of schemes to suit our varying needs over a life time. Liquidity In open-end schemes, the investor gets the money back promptly at net asset value related prices from the mutual fund. In the closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchased at NAV related prices by the mutual fund. Well regulated All mutual funds are registered SEBI and they function within the provisions of strict regulations designed to protect the interests of investors.

 Hire Purchase v/s Lease Lease Ownershi p Methods of Financin g Salvage value Transacti on Deprecia tion Tax benefits It rest with lessor. Hire Purchase It rest with buyer (hirer)

It is a method of financing business assets.

It is a method of financing business assets and consumer articles.

Lessee not the owner does not enjoy the salvage value of the assets. In this transaction we rent the goods. Depreciation & investment allowances cannot be claimed by the lessee. The entire lease rental is tax deductible expense.

Hirer the owner of the assets enjoys salvage value.

In this transaction we buy the goods.

Depreciation & investment allowances can be claimed by the hirer. Only the interest component of the hire purchase installment tax deductible

Venture Capital

 Corporate Governance Why Corporate Governance???

Corporate Governance and Responsibility issues have come into limelight in India since 1990s because of major corporate debacles and scandals. In nineties immediately after liberalization and opening up of the economy there was a spate of public issues by a large number of companies. Corporate governance has become a buzz word these days mainly due to Globalization. What is Corporate Governance??? The process and responsibility of the Board of Directors in ensuring the management of a corporation conducts business in such a way as to meet the expectations of its various stakeholders Besides financial returns for shareholders this also includes impact on employees environment and community at large. According to Cadbury Committee Corporate Governance is a system by which Companies are directed and controlled. Concept

Importance of Corporate Governance As we are increasingly moving towards open and market driven economic systems, a number of companies catering to international markets These companies are required to comply with enhanced disclosure and stringent listing requirements.

 Institutional investors, both foreign and domestic are becoming important players in the stock market. They are increasingly demanding more information and transparency in operations No. of International events (like joint ventures, mergers, takeovers) are taking place so it is required that proper corporate governance practices should be followed. E.g. Enron and Satyam scandal

Committees of the Board Audit committee is the link between the Board and External Auditors. It reviews the interim and final accounts. Remuneration committee It chalks out the remuneration or the package of the Directors or top level managers. Nomination committee These Committee is usually set up to select the new Non executive directors. Definitions, Nature and Function of Insurance Insurance Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of a guaranteed small loss to prevent a large, possibly devastating large loss. Insurance is Pray for the Best And be prepared for the WORST Historical Background Oriental Life Insurance Company was started by Europeans in Kolkata in 1818 to cater to the needs of European community. Discrimination among the life of foreigners and Indians with higher premiums being charged for the latter. It was only in the year 1870, Bombay Mutual Life Assurance Society, the first Indian insurance company covered Indian lives at normal rates.

 The era was however dominated by foreign insurance players like Albert Life Insurance, Royal Insurance, Liverpool and London Globe insurance. The oldest existing insurance company in India is National Insurance Company Ltd, which was founded in 1906 and is doing business even today. Related Acts

1. The Insurance Act, 1938 2. Life Insurance Corporation Act, 1956 3. General Insurance Business (Nationalization) Act, 4. IRDA ACT, 1999 Essential of Contract of Insurance Agreement should be between 2 competent parties Agreement must be in writing and parties must give free consent. It should not be a bet and an event must involve some amount of uncertainty. Risk should be not very small and should be capable of mathematical estimation to fix the premium. Roles of Insurance Provide protection Diversification of risk Provide certainty Prevention of losses Means of saving & investment Risk free trade Large number of products Relation Principles of Insurance 1972

Principles of Utmost good faith o It states that insurance contract must be made in absolute good faith on the part of both the parties. The insured must give insurer complete, true and correct information about the subject matter of the insurance. Material fact should not be hidden. This principle is applicable to all types of insurance contracts. Insurance is for protection and not for profit.

Principle of Insurable Interest o o A person must have physical existence of the object of insurance . In simple words insurer must suffer from some kind of Financial loss by the damage to the subject matter of insurance. Ownership is the most important test of Insurable interest. Insurance contracts without insurable interest is void. Insurable interest is not a sentimental concept but a pecuniary interest.

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Principle of Indemnity This is one important principle of insurance. This principle suggests that insurance contract is to protect and not to earn profit. Indemnity means security against loss. The amount of compensation in the insurance contract is limited to the amount assured or the actual loss whichever is less. Amount of compensation on the claim will be less than the insurable interest. Principle of Subrogation It is an extension and corollary of the principle of indemnity. It states that once the full compensation is paid by the insurance company all the rights of the insured is transferred to the insurer.

 The assured will not be able to keep the damaged property because he will realize more than actual loss suffered. This principle prevents the insured from making profit out of loss. In case of partial compensation paid no such rights are exercised by the insurance company.

Principle of Contribution There is no restriction as to the number of times the property can be insured. On the occurrence of the loss only the amount of actual loss can be realized from one insure or all the insurers together. This principle is however is not applicable to life insurance contract. Mitigation Loss According to this principle every insured should take all the necessary steps to minimize the loss. Risk must attach The subject matter should be exposed to risk. E.g. goods placed in godown cannot take marine insurance policy. They have to be insured against fire or theft. Causa Proxima It means when a loss has been caused by number of causes the proximate cause i.e. nearest cause should be taken into consideration to determine the liability of the insurer. Liability of the insurer is ascertain through this clause. Illustration A cargo has hole in the ship due to negligence of master so sea water entered the ship and cargo got damage. In this case only nearest cause of damage through sea water will be liable for insurance and nit the other. What Does Insurance Really Cover? Health insurance Health Insurance

 The term Health Insurance is generally used to describe a form of insurance that pays for medical expenses. It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs. It may be purchased on a group basis (e.g., by a firm to cover its employees) or purchased by individual consumers). Types Of Health Care Insurance Available: Medical Insurance Critical Illness Insurance

Home Insurance Home Insurance is a standard insurance policy to insure home and the things that are kept in it. It is also called a package policy. Which means it covers both, damage to your property and liability or legal responsibility for any injury and property damage you or any member of your family cause others. Commercial insurance Marine insurance Fire insurance Agriculture insurance Shop insurance Marine insurance It covers the loss or damage of goods at sea. Marine insurance typically compensates the owner of merchandise for losses sustained from fire, shipwreck, etc. Fire insurance Fire Insurance can avoid loss which can be generated from any explosion at your business enterprise.

 This fire must be a result of actual explosion and the consequential loss must be proximately caused by such explosion. One can go for fire Insurance of a property even if he doesnt own the property. He can insure the property if he holds a mortgage on the property. Credit Risk Credit Risk It is the risk of loss to the bank as a result of a default by the borrower. The amount of risk represented by the outstanding balance and the date of default may differ from the ultimate loss in the event of default because of potential recoveries. Recoveries would depend upon any credit risk mitigators, such as guarantees, either collateral or the third party guarantees, the capabilities of negotiating with the borrower and of funds available, if any, to repay the debt after repayment of other who lenders who may have a priority claim over the borrowers asset / funds. Default The non payment of obligations (interest on principal), breaking a covenant(formal agreement) or economic default. The default events include a delay in repayments, restructuring of borrower repayments, and bankruptcy. Economic Default It occurs when the economic value of the assets goes below the value of outstanding debts i.e. value of the collateral goes down against the loan amount. In simple words it means that market value of the asset drops below that of liabilities. Default Probability Default risk is measured by the probability of default occurring during a given period of time. It depends upon the credit standing of a borrower.

 Credit standing would depend upon factors such as market outlook for the borrowing company, the size of the company, its competitive factors, the quality of management etc. Exposure risk It is the risk generated by the uncertainty associated with future amount at risk. All the credit lines which there is a repayment schedule the exposure risk can be considered as small or negligible. Exposure risk arise with derivatives in which the source of uncertainty is not the clients behavior but the market movements. The value of the derivatives depends upon the market movements which changes constantly. The credit risk continuous during the whole life in OTC instruments. The recoveries in the event of default are not predictable. They depend upon the type of default and factors such as guarantees, collateral etc. Collateral Risk The existence of collateral (security or asset given against loan) minimizes credit risk if the collateral can be easily taken possession and sold. Collateralization is an increasingly common way to mitigate the credit risk. It reduces risk because if borrower does not pay the loan the collateral would be confiscated as repayment for the loan.

If collateral is used the risk becomes two folds: 1. Uncertainty with respect to sell off or dispose off the collateral 2. Uncertainty with respect to its value Operational Risk It is the potential risk of loss arising from inadequate or failed internal processes, people and systems from external events. It also includes potential legal risk involving claims, penalties and damages resulting from supervisory decisions.

When Operational risk arises : 1. Internal Fraud 2. External Fraud 3. Unfair employment practices 4. Clients and business practices 5. Ineffective Audit function Satyam scandal Examination Paper Pattern Q -1) a) b) 10 Marks 5 Marks

- - - - - - - - - - - - - - - - - - - - - - - OR - - - - - - - - - - - - - - - - - - - - - - - - Q -1) a) b) Q -2) Mr. Avadesh Q -3) Mr. Avadesh Q-4) Short Notes (Any 3 out of 5) Thank you 15 Marks 10 Marks 5 Marks 15 Marks 15 Marks