module 2 banks

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Dept. of Management Studies 3rd Semester

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Two marks question and answer

Financial Services

Meaning:

All types of activities which are of a financial nature could be brought under the termfinancial services.

The term Financial Services in a broad sense means mobilizing and allocating savings.

Thus, it includes all activities involved in the transformation of saving into investment.

The financial service can also be called financial intermediation.

Financial intermediation is a process by which funds are mobilized from a large number of

savers and make them available to all those who are in need of it and particularly to

corporate customers.

A well developed financial services industry is absolutely necessary to mobilize the savings

and to allocate them to various investable channels and thereby to promote industrial

development in a country.

Classification of financial services industry

The financial intermediaries in India can be traditionally classified into two:

i. Capital market intermediaries

ii. Money market intermediaries

The capital market intermediaries consist of term lending institutions and investinginstitutions which mainly provide long term funds.

On the other hand, money market consists of commercial banks, co-operative banks and

other agencies which supply only short term funds.

Scope of financial services

Financial services cover a wide range of activities. They can be broadly classified into two

namely:

i. Traditional activities

ii. Modern activities

Traditional activities

Traditionally, the financial intermediaries have been rendering a wide range of services

encompassing both capital and money market activities. They can be grouped under two

heads viz;

i. Fund based activities and


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ii. Non-fund based activities

Fund based activities

The traditional services which come under fund based activities are the following:

i. Underwriting of or investment in shares, debentures, bonds etc. of new issues (primary

market activities)ii. Dealing in secondary market activities

iii. Participating in money market instruments like commercial papers, certificate of

deposits, treasury bills, discounting of bills etc.

iv. Involving in equipment leasing, hire purchase, venture capital, seed capital etc.

v. Dealing in foreign exchange market activities.

Non-fund based activities

Financial intermediaries provide services on the basis of non-fund activities also. This can

also be called fee based activity. A wide variety of services, are being provided under this

head. They include the following:i. Managing the capital issues, i.e., management of pre-issue and post-issue activities

relating to the capital issue in accordance with the SEBI guidelines and thus enabling the

promoters to market their issues.

ii. Making arrangements for the placement of capital and debt instruments with investment

institutions.

iii. Arrangement of funds from financial institutions for the clients project cost or his

working capital requirements.

iv. Assisting in the process of getting all government and other clearances.

Modern activities

Besides the above traditional services, the financial intermediaries render innumerable

services in recent times. Most of them are in the nature of non-fund based activity.

i. Rendering project advisory services right from the preparation of the project report till

the raising of funds for starting the project with necessary government approval.

ii. Planning for mergers and acquisitions and assisting for their smooth carry out.

iii. Guiding corporate customers in capital restructuring.

iv. Acting as Trustees to the debenture holders

v. Structuring the financial collaboration/joint ventures by identifying suitable joint

venture partner and preparing joint venture agreement.

vi. Rehabilitating and reconstructing sick companies through appropriate scheme of

reconstruction and facilitating the implementation of the scheme.

vii. Hedging risks due to exchange rate risk, interest rate risk, economic risk and political

risk by using swaps and other derivative products.

viii. Managing the portfolio of large public sector corporations.

ix. Undertaking risk management services like insurance services, buy back options, capital

market etc.

x. Promoting credit rating agencies for the purpose of rating companies which want to go


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public by the issue of debt instruments.

Financial products and services

Today, the importance of financial services is gaining momentum all over the world.

In these days of complex finance, people expect a financial service company to play a verydynamic role not only as provider of finance but also as a departmental store of finance.

As a result, the clients both corporates and individuals are exposed to the phenomena of

volatility and uncertainty and hence they expect the financial service company to innovate

new products and services so as to meet their varied requirements.

1. Merchant Banking:

A merchant banker is a financial intermediary who helps to transfer capital from those

who possess it to those who need it. Merchant banking includes a wide range of activities

such as management of customers securities, portfolio management, project counselingand appraisal, underwriting of shares and debentures, loan syndication, acting as banker

for the refund orders, handling interest and dividend warrants etc. Thus merchant banker

renders a host of services to corporates and thus promotes industrial development in the

country.

2. Loan Syndication

This is more or less similar to consortium financing. But, this work is taken up by the

merchant banker as a lead manager. It refers to a loan arranged by a bank called lead

manager for a borrower who is usually a large corporate customer or a government

department. The other banks who are willing to lend can participate in the loan by

contributing a amount suitable to their own lending policies. Since a single bank cannot

provide such a huge sum as loan, a number of banks join together and form a syndicate. It

also enables the members of the syndicate to share the credit risk associated with a

particular loan among themselves.

3. Leasing

A lease is an agreement under which a company or a firm, acquires a right to make use of a

capital asset like machinery, on acquire any ownership to the asset, but he can use it and

have full control over it. He is expected to pay for all maintenance charges and repairing

and operating costs.

4. Mutual Funds

A mutual fund refers to a fund raised by a financial services company by pooling the

savings of the public. It is invested in a diversified portfolio with a view to spreading and

minimizing risk. The fund provides Investment Avenue for small investors who cannot

participate in the equities of big companies. It ensures low risks, steady returns, high

liquidity and better capital appreciation the long run.

5. Factoring


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Factoring refers to the process of managing the sales ledger of a client by a financial service

company. In other words, it is an arrangement under which a financial intermediary

assumes the credit risk in the collection of book debts for its clients. The entire

responsibility of collecting the book debts passes on to the factor. His services can be

compared to a del credre agent who undertakes to collect debts. But, a factor provides

credit information, collects debts, monitors the sales ledger and provides finance againstdebts. Thus, he provides a number of services apart from financing.

6. Forfaiting

Forfaiting is a technique by which a forfaitor (financing agency) discounts an export bill

and pay ready cash to the exporter who can concentrate on the export front without

bothering about collection of export bills. The forfeiter does so without any recourse to the

exporter and the exporter is protected against the risk of non-payment of debts by the

importers.

7. Venture capitalA venture capital is another method of financing in the form of equity participation. A

venture capitalist finances a project based on the potentialities of a new innovative project.

It is in contrast to the conventional security based financing. Much thrust is given to new

ideas or technological innovations. Finance is being provided not only for start-up capital

but also for development capital by the financial intermediary.

8. Custodial services

It is yet another line of activity which has gained importance, of late. Under this, a financial

intermediary mainly provides services to clients, particularly to foreign investors, for a

prescribed fee. Custodial services provide agency services like safe keeping of shares and

debentures, collection of interest and dividend and reporting of matters on corporate

developments and corporate securities to foreign investors.

9. Corporate advisory services

Financial intermediaries particularly banks have set up corporate advisory services

branches to render services exclusively to their corporate customers. For instance, some

banks have extended computer terminals to their corporate customers so that they can

transact some of their important banking transactions by sitting in their own office. As new

avenues of finance like Euro loans, GDRs etc. are available to corporate customers; this

service is immense help to the customers.

10. Securitization

Securitization is a technique whereby a financial company converts its ill-liquid, non-

negotiable and high value financial assets into securities of small value which are made

tradable and transferable. A financial institution might have a lot of its assets blocked up in

assets like real estate, machinery etc., which are long term in nature and which are non-

negotiable? In such cases, securitization would help the financial institution to raise cash

against such assets by means of issuing securities of small values to the public. Like any


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other security, they can be traded in the market.

11. Derivative security

A derivative security is a security whose value depends upon the values of other basic

variables backing the security. In most cases, these variables are nothing but the prices of

traded securities. A derivative security is basically used as a risk management tool and it isrestored to cover the risks due to price fluctuations by the investments manager. Derivative

helps to break the risk into various components such as credit risk, interest rate risk,

exchange rates risk and so on. It enables the various risk components to be identified

precisely and priced them and even traded them if necessary.

12. New products in forex market

New products have also emerged in the forex markets of developed countries. Some of

these products are yet to make full entry in Indian markets. Among them the following are

the important ones:

a) Forward contractsb) Options

c) Swaps

13. Letter of credit (LOC)

LOC is an arrangement of a financing institution/bank of one country with another

institutions / bank / agent to support the export of goods and services so as to enable the

importers to import no deferred payment terms. This may be backed by a guarantee

furnished by the institution / bank in the importing country. The LOC helps the exporters

to get payment immediately as soon as the goods are shipped. The greatest advantage is

that it saves a lot of time and money on mutual verification of bonafides, source of finance

etc. It serves as a source of forex.

Financial Services

Meaning:

All types of activities which are of a financial nature could be brought under the term

financial services.

The term Financial Services in a broad sense means mobilizing and allocating savings.

Thus, it includes all activities involved in the transformation of saving into investment.

The financial service can also be called financial intermediation.

Financial intermediation is a process by which funds are mobilized from a large number of

savers and make them available to all those who are in need of it and particularly to

corporate customers.

A well developed financial services industry is absolutely necessary to mobilize the savings


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and to allocate them to various investable channels and thereby to promote industrial

development in a country.

Classification of financial services industry

The financial intermediaries in India can be traditionally classified into two:

iii. Capital market intermediariesiv. Money market intermediaries

The capital market intermediaries consist of term lending institutions and investing

institutions which mainly provide long term funds.

On the other hand, money market consists of commercial banks, co-operative banks and

other agencies which supply only short term funds.

Scope of financial services

Financial services cover a wide range of activities. They can be broadly classified into twonamely:

iii. Traditional activities

iv. Modern activities

Traditional activities

Traditionally, the financial intermediaries have been rendering a wide range of services

encompassing both capital and money market activities. They can be grouped under two

heads viz;

iii. Fund based activities and

iv. Non-fund based activities

Fund based activities

The traditional services which come under fund based activities are the following:

vi. Underwriting of or investment in shares, debentures, bonds etc. of new issues (primary

market activities)

vii. Dealing in secondary market activities

viii. Participating in money market instruments like commercial papers, certificate of

deposits, treasury bills, discounting of bills etc.

ix. Involving in equipment leasing, hire purchase, venture capital, seed capital etc.

x. Dealing in foreign exchange market activities.

Non-fund based activities

Financial intermediaries provide services on the basis of non-fund activities also. This can

also be called fee based activity. A wide variety of services, are being provided under this

head. They include the following:

v. Managing the capital issues, i.e., management of pre-issue and post-issue activities


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relating to the capital issue in accordance with the SEBI guidelines and thus enabling the

promoters to market their issues.

vi. Making arrangements for the placement of capital and debt instruments with

investment institutions.

vii. Arrangement of funds from financial institutions for the clients project cost or his

working capital requirements.viii. Assisting in the process of getting all government and other clearances.

Modern activities

Besides the above traditional services, the financial intermediaries render innumerable

services in recent times. Most of them are in the nature of non-fund based activity.

xi. Rendering project advisory services right from the preparation of the project report till

the raising of funds for starting the project with necessary government approval.

xii. Planning for mergers and acquisitions and assisting for their smooth carry out.

xiii. Guiding corporate customers in capital restructuring.

xiv. Acting as Trustees to the debenture holdersxv. Structuring the financial collaboration/joint ventures by identifying suitable joint

venture partner and preparing joint venture agreement.

xvi. Rehabilitating and reconstructing sick companies through appropriate scheme of

reconstruction and facilitating the implementation of the scheme.

xvii. Hedging risks due to exchange rate risk, interest rate risk, economic risk and political

risk by using swaps and other derivative products.

xviii. Managing the portfolio of large public sector corporations.

xix. Undertaking risk management services like insurance services, buy back options,

capital market etc.

xx. Promoting credit rating agencies for the purpose of rating companies which want to go

public by the issue of debt instruments.

Financial products and services

Today, the importance of financial services is gaining momentum all over the world.

In these days of complex finance, people expect a financial service company to play a very

dynamic role not only as provider of finance but also as a departmental store of finance.

As a result, the clients both corporates and individuals are exposed to the phenomena of

volatility and uncertainty and hence they expect the financial service company to innovate

new products and services so as to meet their varied requirements.

14. Merchant Banking:

A merchant banker is a financial intermediary who helps to transfer capital from those

who possess it to those who need it. Merchant banking includes a wide range of activities

such as management of customers securities, portfolio management, project counseling

and appraisal, underwriting of shares and debentures, loan syndication, acting as banker


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for the refund orders, handling interest and dividend warrants etc. Thus merchant banker

renders a host of services to corporates and thus promotes industrial development in the

country.

15. Loan Syndication

This is more or less similar to consortium financing. But, this work is taken up by themerchant banker as a lead manager. It refers to a loan arranged by a bank called lead

manager for a borrower who is usually a large corporate customer or a government

department. The other banks who are willing to lend can participate in the loan by

contributing a amount suitable to their own lending policies. Since a single bank cannot

provide such a huge sum as loan, a number of banks join together and form a syndicate. It

also enables the members of the syndicate to share the credit risk associated with a

particular loan among themselves.

16. Leasing

A lease is an agreement under which a company or a firm, acquires a right to make use of a

capital asset like machinery, on acquire any ownership to the asset, but he can use it andhave full control over it. He is expected to pay for all maintenance charges and repairing

and operating costs.

17. Mutual Funds

A mutual fund refers to a fund raised by a financial services company by pooling the

savings of the public. It is invested in a diversified portfolio with a view to spreading and

minimizing risk. The fund provides Investment Avenue for small investors who cannot

participate in the equities of big companies. It ensures low risks, steady returns, high

liquidity and better capital appreciation the long run.

18. Factoring

Factoring refers to the process of managing the sales ledger of a client by a financial service

company. In other words, it is an arrangement under which a financial intermediary

assumes the credit risk in the collection of book debts for its clients. The entire

responsibility of collecting the book debts passes on to the factor. His services can be

compared to a del credre agent who undertakes to collect debts. But, a factor provides

credit information, collects debts, monitors the sales ledger and provides finance against

debts. Thus, he provides a number of services apart from financing.

19. Forfeiting

Forfeiting is a technique by which a forfeiter (financing agency) discounts an export bill

and pay ready cash to the exporter who can concentrate on the export front without

bothering about collection of export bills. The forfeiter does so without any recourse to the

exporter and the exporter is protected against the risk of non-payment of debts by the

importers.

20. Venture capital

A venture capital is another method of financing in the form of equity participation. A


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venture capitalist finances a project based on the potentialities of a new innovative project.

It is in contrast to the conventional security based financing. Much thrust is given to new

ideas or technological innovations. Finance is being provided not only for start -up capital

but also for development capital by the financial intermediary.

21. Custodial servicesIt is yet another line of activity which has gained importance, of late. Under this, a financial

intermediary mainly provides services to clients, particularly to foreign investors, for a

prescribed fee. Custodial services provide agency services like safe keeping of shares and

debentures, collection of interest and dividend and reporting of matters on corporate

developments and corporate securities to foreign investors.

22. Corporate advisory services

Financial intermediaries particularly banks have set up corporate advisory servicesbranches to render services exclusively to their corporate customers. For instance, some

banks have extended computer terminals to their corporate customers so that they can

transact some of their important banking transactions by sitting in their own office. As new

avenues of finance like Euro loans, GDRs etc. are available to corporate customers; this

service is immense help to the customers.

23. Securitization

Securitization is a technique whereby a financial company converts its ill-liquid, non-

negotiable and high value financial assets into securities of small value which are made

tradable and transferable. A financial institution might have a lot of its assets blocked up in

assets like real estate, machinery etc., which are long term in nature and which are non-

negotiable? In such cases, securitization would help the financial institution to raise cash

against such assets by means of issuing securities of small values to the public. Like any

other security, they can be traded in the market.

24. Derivative security

A derivative security is a security whose value depends upon the values of other basic

variables backing the security. In most cases, these variables are nothing but the prices of

traded securities. A derivative security is basically used as a risk management tool and it is

restored to cover the risks due to price fluctuations by the investments manager. Derivative

helps to break the risk into various components such as credit risk, interest rate risk,

exchange rates risk and so on. It enables the various risk components to be identified

precisely and priced them and even traded them if necessary.

25. New products in forex market

New products have also emerged in the forex markets of developed countries. Some of

these products are yet to make full entry in Indian markets. Among them the following are

the important ones:


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d) Forward contracts

e) Options

f) Swaps

26. Letter of credit (LOC)

LOC is an arrangement of a financing institution/bank of one country with anotherinstitutions / bank / agent to support the export of goods and services so as to enable the

importers to import no deferred payment terms. This may be backed by a guarantee

furnished by the institution / bank in the importing country. The LOC helps the exporters

to get payment immediately as soon as the goods are shipped. The greatest advantage is

that it saves a lot of time and money on mutual verification of bonafides, source of finance

etc. It serves as a source of forex.

Module 2 BANKS & INSTITUTIONS 12 hrs


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BanksOperations & Special Role of BanksSpecialized Financial Institutions

EXIM, NABARD, HUDCO, SIDBI, IFCI - Universal Banking & Innovations

SecuritizationRTGS & ECS - Cooperative BanksFeatures, Types, Structure

and Growth, Small Savings and Provident Funds - Provident Funds- Pension Funds

Life insurance Companies - General Insurance Corporation

Reserve Bank of India

Establishment

The Reserve Bank of India was established on April 1, 1935 in accordance

with the provisions of the Reserve Bank of India Act, 1934.

The Central Office of the Reserve Bank was initiall y established in

Calcutta but was permanently moved to Mumbai in 1937. The Central

Office is where the Governor sits and where policies are formulated.

Though originally privately owned, since nationalisation in 1949, the

Reserve Bank is fully owned by the Government of India.

Objective

Primary objective of BFS is to undertake consoli dated supervision of the

financial sector comprising commercial banks, f inancial institutions and

non-banking finance companies.

Monetary Authority:

Formulates implements and monitors the monetary policy.

Objective: maintaining price stabil ity and ensuring adequate f low of

credit to productive sectors.

Regulator and supervisor of the f inancial 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-ef fective banking services to

the public. Regulator and supervisor of the payment systems

o Authorises setting up of payment systems

o Lays down standards for operation of the payment system

o Issues direction, calls for returns/information from payment

system operators.
http://www.rbi.org.in/commonman/Upload/English/Content/PDFs/54435.pdfhttp://www.rbi.org.in/commonman/Upload/English/Content/PDFs/54435.pdf


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Manager of Foreign Exchange

Manages the Foreign Exchange Management Act, 1999.

Objective: to facil itate external trade and payment and promote

orderly development and maintenance of foreign exchange market in

India.

Issuer of currency:

Issues and exchanges or destroys currency and coins not f it 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 nationalobjectives.

Related Functions

Banker to the Government: performs merchant banking function for

the central and the state governments; also acts as their banker.

Banker to banks: maintains banking accounts of all scheduled

banks.

ORGANISATION STRUCTURE


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Monetary policy is the process by which monetary authority of a country, generally a

central bank controls the supply of money in the economy by exercising its control over

interest rates in order to maintain price stability and achieve high economic growth.[1]InIndia, the central monetary authority is theReserve Bank of India (RBI). is so designed as

to maintain the price stability in the economy. Other objectives of the monetary policy of

India, as stated by RBI, are:

1. Price Stability

Price Stability implies promoting economic development with considerable

emphasis on price stability. The centre of focus is to facilitate the

environment which is favourable to the architecture that enables the

developmental projects to run swiftly while also maintaining reasonable

price stability.

2.

Controlled Expansion Of Bank CreditOne of the important functions of RBI is the controlled expansion of bank

credit and money supply with special attention to seasonal requirement for

credit without affecting the output.

3. Promotion of Fixed Investment
http://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-1http://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-1http://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-1http://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-1http://en.wikipedia.org/wiki/Monetary_policy


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The aim here is to increase the productivity of investment by restraining non

essential fixed investment.

4. Restriction of Inventories

Overfilling of stocks and products becoming outdated due to excess of stock

often results is sickness of the unit. To avoid this problem the central

monetary authority carries out this essential function of restricting theinventories. The main objective of this policy is to avoid over-stocking and

idle money in the organization

5. Promotion of Exports and Food Procurement Operations

Monetary policy pays special attention in order to boost exports and

facilitate the trade. It is an independent objective of monetary policy.

6. Desired Distribution of Credit

Monetary authority has control over the decisions regarding the allocation of

credit to priority sector and small borrowers. This policy decides over the

specified percentage of credit that is to be allocated to priority sector and

small borrowers.

7.

Equitable Distribution of CreditThe policy of Reserve Bank aims equitable distribution to all sectors of the

economy and all social and economic class of people

8. To Promote Efficiency

It is another essential aspect where the central banks pay a lot of attention. It

tries to increase the efficiency in the financial system and tries to incorporate

structural changes such as deregulating interest rates, ease operational

constraints in the credit delivery system, to introduce new money market

instruments etc.

9. Reducing the Rigidity

RBI tries to bring about the flexibilities in the operations which provide a

considerable autonomy. It encourages more competitive environment and

diversification. It maintains its control over financial system whenever and

wherever necessary to maintain the discipline and prudence in operations of

the financial system.

Open Market Operations

An open market operation is aninstrument ofmonetary policy which involves

buying or selling of governmentsecurities from or to the public andbanks.This

mechanism influences the reserve position of the banks, yield ongovernment

securities and cost of bank credit. The RBI sellsgovernment securities to contract

the flow of credit and buys government securities to increase credit flow. Open

market operation makes bank rate policy effective and maintains stability in

government securities market.
http://en.wikipedia.org/wiki/Financial_instrumenthttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Government_securitieshttp://en.wikipedia.org/wiki/Government_securitieshttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Financial_instrument


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CRR Graph from 1992 to 2011[2]

Cash Reserve Ratio

Cash Reserve Ratio is a certain percentage ofbank deposits which banks are

required to keep with RBI in the form of reserves or balances .Higher the CRR with

the RBI lower will be theliquidity in the system and vice-versa.RBI is empowered to

vary CRR between 15 percent and 3 percent. But as per the suggestion by the

Narshimam committee Report the CRR was reduced from 15% in the 1990 to 5

percent in 2002. As of November 2012, the CRR is 4.25 percent.

[3]

SLR Graph from 1991 to 2011[4]

Statutory Liquidity RatioEvery financial institute have to maintain a certain amount of liquid assets from

their time and demand liabilities with the RBI. These liquid assets can be cash,

precious metals, approved securities like bonds etc. The ratio of the liquid assets to

time and demand liabilities is termed asStatutoryLiquidity Ratio.There was a

reduction from 38.5% to 25% because of the suggestion by Narshimam Committee.

The current SLR is 23%.[5]
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Bank Rate Graph from 1991 to 2011

Bank Rate Policy[6]

Bank rate is the rate of interest charged by the RBI for providing funds orloans to

the banking system. This banking system involves commercial and co-operative

banks, Industrial Development Bank of India,IFC,EXIM Bank, and other

approved financial institutes. Funds are provided either through lending directly orrediscounting or buying money market instruments like commercial bills and

treasury bills.Increase in Bank Rate increases the cost of borrowing by commercial

banks which results into the reduction in credit volume to the banks and hence

declines the supply of money. Increase in the bank rate is the symbol of tightening of

RBI monetary policy. Bank rate is also known asDiscount rate.The current Bank

rate is 6%.

Credit Ceiling

In this operation RBI issues prior information or direction that loans to the

commercial banks will be given up to a certain limit. In this case commercial bank

will be tight in advancing loans to the public. They will allocate loans to limited

sectors. Few example of ceiling are agriculture sector advances, priority sectorlending.

Credit Authorization Scheme

Credit Authorization Scheme was introduced in November, 1965 when P C

Bhattacharya was the chairman of RBI. Under this instrument of credit regulation

RBI as per the guideline authorizes the banks to advance loans to desired sector

Moral Suasion

Moral Suasion is just as a request by the RBI to the commercial banks to take so

and so action and measures in so and so trend of the economy. RBI may request

commercial banks not to give loans for unproductive purpose which does not add to

economic growth but increases inflation.

Securities and Exchange Board of India (frequently abbreviated SEBI) is theregulator for

thesecurities market in India.

It was formed officially by theGovernment of India in 1992 with SEBI Act 1992 being

passed by theIndian Parliament.SEBI is headquartered in the business district ofBandra

Kurla Complex complex inMumbai,and has Northern, Eastern, Southern and Western

regional offices inNew Delhi,Kolkata,Chennai andAhmedabad.

Controller of Capital Issues was the regulatory authority before SEBI came into existence;

it derived authority from the Capital Issues (Control) Act, 1947.

Initially SEBI was a non statutory body without any statutory power. However in 1995, the

SEBI was given additional statutory power by the Government of India through an

amendment to the Securities and Exchange Board of India Act 1992. In April, 1998 the
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Functions and responsibilities

The function of SEBI in monitoring the stock exchange:

1. The business of Stock Exchange the regulated.

2. Prevents fraudulent and unfair trade practises in stock exchange.

3. Regulates the acquisition of shares and takeover of companies.

4. Undertakes the checking and inspection of stock exchanges.

5. Conducting enquires and inspection of stock exchange.

6. Protects the interest of the investors.

The various powers of stock exchange:

1. Power relating to insider trading.

2. Power relating to stock exchange and dealing in securities.

3. Power relating to violation of rules and regulation.

4. Power to regulate business of stock exchange and control it unfair trade.

5. Power under securities contract act.

SEBI has to be responsive to the needs of three groups, which constitute the market:

The issuers of securities

The investors

The market intermediaries.


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SEBI has three functions rolled into one body:quasi-legislative,quasi-judicial and quasi-

executive. It drafts regulations in its legislative capacity, it conducts investigation and

enforcement action in its executive function and it passes rulings and orders in its judicial

capacity. Though this makes it very powerful, there is an appeals process to create

accountability. There is a Securities Appellate Tribunal which is a three-member tribunal

and is presently headed by a former Chief Justice of a High court - Mr. Justice NK Sodhi.A second appeal lies directly to theSupreme Court.

SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and

successively (e.g. the quick movement towards making the markets electronic and

paperless rolling settlement on T+2 basis). SEBI has been active in setting up the

regulations as required under law.

SEBI has also been instrumental in taking quick and effective steps in light of the global

meltdown and the Satyam fiasco It hadincreased the extent and quantity of disclosures to

be made by Indian corporate promoters. More recently, in light of the global meltdown,it

liberalised the takeover code to facilitate investments by removing regulatory structures. Inone such move, SEBI has increased the application limit for retail investors to Rs 2 lakh,

from Rs 1 lakh at present.

Powers

For the discharge of its functions efficiently, SEBI has been invested with the necessary

powers which are:

1. To approve bylaws of stock exchanges.

2. To require the stock exchange to amend their bylaws.

3.

Inspect the books of accounts and call for periodical returns from recognized stockexchanges.

4. Inspect the books of accounts of a financial intermediaries.

5. Compel certain companies to list their shares in one or more stock exchanges.

6. Levy fees and other charges on the intermediaries for performing its functions.

7. Grant license to any person for the purpose of dealing in certain areas.

8. Delegate powers exercisable by it.

9. Prosecute and judge directly the violation of certain provisions of the companies

Act.

SEBI Committees

1.

Technical Advisory Committee

2. Committee for review of structure of market infrastructure institutions

3. Members of the Advisory Committee for the SEBI Investor Protection and

Education Fund

4. Takeover Regulations Advisory Committee

5. Primary Market Advisory Committee (PMAC)
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6. Secondary Market Advisory Committee (SMAC)

7. Mutual Fund Advisory Committee

8. Corporate Bonds & Securitization Advisory Committee

9. Takeover Panel

10.SEBI Committee on Disclosures and Accounting Standards (SCODA)

11.

High Powered Advisory Committee on consent orders and compounding of offences12.Derivatives Market Review Committee

13.Committee on Infrastructure Funds

Role of SEBI in marketing of securities and protection of investor interest

The Securities and Exchange Board of India (SEBI) is a watchdog organization created to

control and ensure the orderly growth and functioning of the Indian capital markets and to

protect investors interest. This formal body began its operations on January30, 1992, with

its headquarters in Mumbai. SEBI India was created as the Indian economy opened up,

and there was a need to regulate the actively emerging stock market

Foster the development and regulation of the Indian securities market.

Control the functioning of stock exchanges and other securities markets, including IPOs

and mutual funds.

Prohibit the stock markets unfair trade practices and insider trading.

Regulate and register the participants of the securities market, including stock brokers,

share transfer agents, merchant bankers, underwrites, investment advisors, and bankers

and registrars to an issue.

Regulate the working of credit rating agencies, foreign institutional investors and

depositories, among others.

Use its power to seek information from banks or other bodies constituted by the

government

Seek investigation against violation of rules, if any, associated with the securities market.

Judge and penalize violators.

Not entering into an agreement with the clients or not addressing their complaints.


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Fraudulent trade practices.

Not informing about acquisitions and take overs.

Not observing the rules and regulations for a mutual company.

The board may also suspend the trading of a security, and prohibit or restrain certain

persons from dealing in securities.

BANKS

A bank is a financial institution that serves as a financial intermediary

A commercial bank (or business bank) is a type of financial institution and intermediary. It

is a bank that provides transactional, savings, and money market accounts and that accepts

time deposits.

The term "commercial bank" to refer to a bank or a division of a bank primarily dealing

with deposits and loans from corporations or large businesses.

The role of commercial banks

Commercial banks engage in the following activities:

1. processing of payments by way of telegraphic transfer, EFTPOS, internet banking,

or other means.

2. issuingbank drafts andbank cheques.

3. accepting money onterm deposit.

4. lending money byoverdraft,installment loan, or other means

5. providing documentary and standbyletter of credit,guarantees,performance

bonds,securities underwriting commitments and other forms of off balance sheet

exposures.

6. safekeeping of documents and other items insafe deposit boxes

7. distribution orbrokerage,with or without advice, ofinsurance,unit trusts and

similar financial products as a financial supermarket.
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ROLES OF BANKS ON ECONOMY

Banking system and the Financial Institutions play very significant role in the economy.

First and foremost is in the form of catering to the need of credit for all the sections of

society. The modern economies in the world have developed primarily by making best use

of the credit availability in their systems. An efficient banking system must cater to theneeds of high end investors by making available high amounts of capital for big projects in

the industrial, infrastructure and service sectors. At the same time, the medium and small

ventures must also have credit available to them for new investment and expansion of the

existing units. Rural sector in a country like India can grow only if cheaper credit is

available to the farmers for their short and medium term needs

The banks and the financial institutions also cater to another important need of the

society i.e. mopping up small savings at reasonable rates with several options. The

common man has the option to park his savings under a few alternatives, including

the small savings schemes introduced by the government from time to time and inbank deposits in the form of savings accounts, recurring deposits and time deposits.

Another option is to invest in the stocks or mutual funds.

NEFT refers to National Electronic Funds Transfer. It is an online system for

transferring funds from one financial institution to another withinIndia (usually

banks). The system was launched in November 2005.

RTGS is anacronym that stands for Real Time Gross Settlement. RTGS is a funds

transfer system where money is moved from one bank to another in real-time, andon gross basis. When using the banking method, RTGS is the fastest possible way to

transfer money. Real-time means that the payment transaction isnt subject to any

waiting period

The fundamental difference between RTGS and NEFT, is that while RTGS is based

on gross settlement, NEFT is based on net-settlement. Gross settlement is where a

transaction is completed on a one-to-one basis without bunching with other

transactions

RTGS transactions involve large amounts of cash, basically only funds above Rs

100,000 may be transferred using this system. For NEFT, any amount below Rs

100,000 may be transferred, and this system is generally for smaller valuetransactions involving smaller amounts of money.
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NABARD was established on the recommendations of Shivaraman Committee, by an act of

Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural

Development Act 1981

NABARD has following roles to implement:

Serves as an apex financing agency for the institutions providing investment andproduction credit for promoting the various developmental activities in rural areas

Takes measures towards institution building for improving absorptive capacity of

the credit delivery system, including monitoring, formulation of rehabilitation

schemes, restructuring of credit institutions, training of personnel, etc.

Co-ordinates the rural financing activities of all institutions engaged in

developmental work at the field level and maintains liaison withGovernment of

India,State Governments,Reserve Bank of India (RBI) and other national level

institutions concerned with policy formulation

Undertakes monitoring and evaluation of projects refinanced by it.

EXIM BANK

Export-Import Bank of India is the premierexport finance institution of the country,

established in 1982 under the Export-Import Bank of India Act 1981.[2]

The Export-Import (EXIM) Bank of India is the principal financial institution in India for

coordinating the working of institutions engaged in financing export and import trade. It is

a statutory corporation wholly owned by the Government of India. It was established on

January 1, 1982 for the purpose of financing, facilitating and promoting foreign trade ofIndia.

Capital:

The authorised capital of the EXIM Bank is Rs. 200 crore and paid up capital is Rs. 100

crore, wholly subscribed by the Central Government. The bank can raise additional

resources through:

(i) Loans/grants from Central Government and Reserve Bank of India ;

(ii) Lines of credit from institutions abroad ;

(iii) Funds raised from Euro Currency markets ;

(iv) Bonds issued in India.

What are the functions of Export-Import Bank of India:
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The main functions of the EXIM Bank are as follows:

(i) Financing of exports and imports of goods and services, not only of India but also of the

third world countries;

(ii) Financing of exports and imports of machinery and equipment on lease basis;

(iii) Financing of joint ventures in foreign countries;

(iv) Providing loans to Indian parties to enable them to contribute to the share capital of

joint ventures in foreign countries;

(v) to undertake limited merchant banking functions such as underwriting of stocks,

shares, bonds or debentures of Indian companies engaged in export or import; and

(vi) To provide technical, administrative and financial assistance to parties in connection

with export and import.

The Housing and Urban Development Corporation Limited (HUDCO) is agovernment-

owned corporation inIndia.One of thepublic sector undertakings,it is wholly owned by

theUnion Government and is under the administrative control of theMinistry of Housing

and Urban Poverty Alleviation.It is charged with buildingaffordable housing and carrying

outurban development.HUDCO describes its mission as:

To provide long termfinance for construction of houses for residential purposes or

finance or undertake housing and urban development programmes in the country;

to finance or undertake, wholly or partly, the setting up of new orsatellite towns;

to subscribe to thedebentures andbonds to be issued by the State Housing (and/orUrban Development) Boards, Improvement Trusts, Development Authorities etc.;

specifically for the purpose of financing housing and urban development

programmes;

to finance or undertake the setting up of industrial enterprises ofbuilding material;

to administer the moneys received, from time to time, from the Government of India

and other sources as grants or otherwise for the purposes of financing or

undertaking housing and urban development programmes in the country and;

to promote, establish, assist, collaborate and provide consultancy services for the

projects of designing and planning of works relating to Housing and Urban

Development programmes in India and abroad

HUDCO wasincorporated on April 25, 1970

. The stated objectives of the conference are as follows
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To make urban, applied research relevant to an increased spectrum of stakeholders

including academics, civil societies, policy think tanks, research institutes, media,

private sector, and citizens.

To leverage experience to generate useful evidence to promote applied research and

responsive policy-making.

To create new research initiatives and/ or collaborations with a potential forcreating tangible changes/ reforms for the benefit of urban India and its context.

To identify and explore research issues affecting urban India, by exploring through

a perspective of eight selected themes.

Publish research papers and evidence presented/ discussed in the form of case-

books, web publications, and potentially a special issue of a journal.

Small Industries Development Bank of India is an independentfinancial institution aimed

to aid the growth and development of micro, small and medium-scale enterprises (MSME)

inIndia.Set up on April 2, 1990 through an act of parliament, it was incorporated initiallyas a wholly owned subsidiary ofIndustrial Development Bank of India.Current

shareholding is widely spread among various state-owned banks, insurance companies and

financial institutions. Beginning as a refinancing agency to banks and state level financial

institutions for their credit to small industries, it has expanded its activities, including

direct credit to the SME through 100 branches in all major industrial clusters in

India.Besides, it has been playing the development role in several ways such as support to

micro-finance institutions for capacity building and onlending. Recently it has opened

seven branches christened as Micro Finance branches, aimed especially at dispensing loans

up to Rs. 5.00 lakh.

It is the Principal Financial Institution for the Promotion, Financing andDevelopment of the Micro, Small and Medium Enterprise (MSME) sector and for

Co-ordination of the functions of the institutions engaged in similar activities SIDBI

has also floated several other entities for related activities. Credit Guarantee Fund

Trust for Micro and Small Enterprises provides guarantees to banks for collateral-

free loans extended to SME. SIDBI Venture Capital Ltd.is a venture capital

company focussed at SME.SME Rating Agency of India Ltd. provides composite

ratings to SME. Another entity founded by SIDBI is ISARC - India SME Asset

Reconstruction Company in 2009, as specialized entities for NPA resolution for

SME.

Mr. Sushil Mahnot is thechairman of SIDBI since April 4, 2012

Industrial Finance Corporation of India

At the time ofindependence in 1947,India'scapital market was relatively underdeveloped.

Although there was significant demand for new capital, there was a dearth of providers.
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Merchant bankers andunderwriting firms were almost non-existent. Andcommercial

banks were not equipped to provide long-term industrial finance in any significant manner.

It is against this backdrop that the government established The Industrial Finance

Corporation of India (IFCI) on July 1, 1948, as the firstDevelopment Financial Institution

in the country to cater to the long-term finance needs of the industrial sector. The newly-established DFI was provided access to low-cost funds through the central bank'sStatutory

Liquidity Ratio or SLR which in turn enabled it to provide loans and advances to

corporate borrowers atconcessional rates.

This arrangement continued until the 1990s when it was recognized that there was need for

greater flexibility to respond to the changing financial system. It was also felt that IFCI

should directly access the capital markets for its funds needs. It is with this objective the

constitution of IFCI was changed in 1993 from a statutory corporation to a company under

the Indian Companies Act, 1956. Subsequently the name of the company was also changed

to 'IFCI Limited ' with effect from October 1999.

IFCI has fulfilled its original mandate as a DFI by providing long term financial support to

all segments of Indian Industry. It has also been chiefly instrumental in translating the

government's development priorities into reality. Until the establishment of ICICI in 1956,

IFCI remained solely responsible for implementation of the government's industrial policy

initiatives. Its contribution to the modernization of Indian Industry, export promotion,

import substitution, entrepreneurship development, pollution control, energy conservation

and generation of both direct and indirect employment is noteworthy.

At the time ofindependence in 1947,India'scapital market was relatively underdeveloped.

Although there was significant demand for new capital, there was a dearth of providers.

Merchant bankers andunderwriting firms were almost non-existent. Andcommercialbanks were not equipped to provide long-term industrial finance in any significant manner.

It is against this backdrop that the government established The Industrial Finance

Corporation of India (IFCI) on July 1, 1948, as the first Development Financial Institution

in the country to cater to the long-term finance needs of the industrial sector. The newly-

established DFI was provided access to low-cost funds through the central bank'sStatutory

Liquidity Ratio or SLR which in turn enabled it to provide loans and advances to

corporate borrowers atconcessional rates.

This arrangement continued until the 1990s when it was recognized that there was need for

greater flexibility to respond to the changing financial system. It was also felt that IFCIshould directly access the capital markets for its funds needs. It is with this objective the

constitution of IFCI was changed in 1993 from a statutory corporation to a company under

the Indian Companies Act, 1956. Subsequently the name of the company was also changed

to 'IFCI Limited ' with effect from October 1999.
http://en.wikipedia.org/wiki/Merchant_bankhttp://en.wikipedia.org/wiki/Underwritinghttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Development_finance_institutionhttp://en.wikipedia.org/wiki/Statutory_Liquidity_Ratiohttp://en.wikipedia.org/wiki/Statutory_Liquidity_Ratiohttp://en.wikipedia.org/wiki/Concessional_fundinghttp://en.wikipedia.org/wiki/Indian_independence_movementhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Capital_markethttp://en.wikipedia.org/wiki/Merchant_bankhttp://en.wikipedia.org/wiki/Underwritinghttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Development_finance_institutionhttp://en.wikipedia.org/wiki/Statutory_Liquidity_Ratiohttp://en.wikipedia.org/wiki/Statutory_Liquidity_Ratiohttp://en.wikipedia.org/wiki/Concessional_fundinghttp://en.wikipedia.org/wiki/Concessional_fundinghttp://en.wikipedia.org/wiki/Statutory_Liquidity_Ratiohttp://en.wikipedia.org/wiki/Statutory_Liquidity_Ratiohttp://en.wikipedia.org/wiki/Development_finance_institutionhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Underwritinghttp://en.wikipedia.org/wiki/Merchant_bankhttp://en.wikipedia.org/wiki/Capital_markethttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indian_independence_movementhttp://en.wikipedia.org/wiki/Concessional_fundinghttp://en.wikipedia.org/wiki/Statutory_Liquidity_Ratiohttp://en.wikipedia.org/wiki/Statutory_Liquidity_Ratiohttp://en.wikipedia.org/wiki/Development_finance_institutionhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Underwritinghttp://en.wikipedia.org/wiki/Merchant_bank


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IFCI has fulfilled its original mandate as a DFI by providing long term financial support to

all segments of Indian Industry. It has also been chiefly instrumental in translating the

government's development priorities into reality. Until the establishment of ICICI in 1956,

IFCI remained solely responsible for implementation of the government's industrial policy

initiatives. Its contribution to the modernization of Indian Industry, export promotion,

import substitution, entrepreneurship development, pollution control, energy conservationand generation of both direct and indirect employment is noteworthy.

Formation of IFCI

The IFCI was the 1st specialised financial institution setup in India to provide term finance

to large industries in India. It was established on 1st July, 1948 under The Industrial

Finance Corporation Act of 1948. In 1993 it was reconstituted as a company to impart

higher degree of operational flexibility.

Objectives of IFCI

The main objective of IFCI is to provide medium and long term financial assistance to

large scale industrial undertakings, particularly when ordinary bank accommodation does

not suit the undertaking or finance cannot be profitably raised by the concerned by the

issue of shares.

Functions of IFCI

1) For setting up a new industrial undertaking.

2) For expansion and diversification of existing industrial undertaking.

3) For renovation and modernisation of existing concerns.

4) For meeting the working capital requirements of industrial concerns in some exceptional

cases.

Definition of 'Universal Banking'

A banking system in which banks provide a wide variety of financial services, including

both commercial and investment services. Universal banking is common in some

European countries, including Switzerland. In the United States, however, banks are

required to separate their commercial and investment banking services. Proponents ofuniversal banking argue that it helps banks better diversify risk. Detractors think

dividing up banks' operations is a less risky strategy


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A securitization is a financial transaction in which assets are pooled andsecurities

representing interests in the pool are issued

Securitization is the financial practice of pooling various types of contractual debt such

as residential mortgages, commercial mortgages, auto loans or credit card debt

obligations and selling said consolidated debt asbonds,pass-through securities, orCollateralized mortgage obligation (CMOs), to various investors. The principal and

interest on the debt, underlying the security, is paid back to the various investors

regularly. Securities backed by mortgage receivables are calledmortgage-backed

securities (MBS), while those backed by other types of receivables areasset-backed

securities (ABS).

According to the International Co-operative Alliance Statement of co-operative identity, a

co-operative is an autonomous association of persons united voluntarily to meet their

common economic, social, and cultural needs and aspirations through a jointly-owned and

democratically-controlled enterprise. Co-operatives are based on the values of self-help,
http://www.riskglossary.com/articles/security.htmhttp://en.wikipedia.org/wiki/Bondshttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Mortgage-backed_securitieshttp://en.wikipedia.org/wiki/Mortgage-backed_securitieshttp://en.wikipedia.org/wiki/Asset-backed_securitieshttp://en.wikipedia.org/wiki/Asset-backed_securitieshttp://en.wikipedia.org/wiki/Asset-backed_securitieshttp://en.wikipedia.org/wiki/Asset-backed_securitieshttp://en.wikipedia.org/wiki/Mortgage-backed_securitieshttp://en.wikipedia.org/wiki/Mortgage-backed_securitieshttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Bondshttp://www.riskglossary.com/articles/security.htm


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self-responsibility, democracy, equality, equity and solidarity. In the tradition of their

founders, co-operative members believe in the ethical values of honesty, openness, social

responsibility and caring for others.

The 7 co-operative principles are :

1. Voluntary and open membership

2. Democratic member control

3. Member economic participation

4. Autonomy and independence

5. Education, training and information

6.

Co-operation among Co-operatives

7. Concern for Community

A co-operative bank is a financial entity which belongs to its members, who are at the same

time the owners and the customers of their bank. Co-operative banks are often created by

persons belonging to the same local or professional community or sharing a common

interest. Co-operative banks generally provide their members with a wide range of banking

and financial services (loans, deposits, banking accounts...).

Co-operative banks differ from stockholder banks by their organization, their goals, their

values and their governance. In most countries, they are supervised and controlled by

banking authorities and have to respect prudential banking regulations, which put them at

a level playing field with stockholder banks. Depending on countries, this control and

supervision can be implemented directly by state entities or delegated to a co-operative

federation or central body.

Even if their organizational rules can vary according to their respective national

legislations, co-operative banks share common features :


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Customer's owned entities : in a co-operative bank, the needs of the customers meet the

needs of the owners, as co-operative bank members are both. As a consequence, the first

aim of a co-operative bank is not to maximise profit but to provide the best possible

products and services to its members. Some co-operative banks only operate with their

members but most of them also admit non-member clients to benefit from their banking

and financial services.

Democratic member control : co-operative banks are owned and controlled by their

members, who democratically elect the board of directors. Members usually have equal

voting rights, according to the co-operative principle of "one person, one vote".

Profil allocation : in a co-operative bank, a significant part of the yearly profit, benefits or

surplus is usually allocated to constitute reserves. A part of this profit can also be

distributed to the co-operative members, with legal or statutory limitations in most cases.

Profit is usually allocated to members either through a patronage dividend, which is

related to the use of the co-operative's products and services by each member, or through

an interest or a dividend, which is related to the number of shares subscribed by each

member.

Co-operative banks are deeply rooted inside local areas and communities. They are

involved in local development and contribute to the sustainable development of their

communities, as their members and management board usually belong to the communities

in which they exercise their activities. By increasing banking access in areas or markets

where other banks are less present - SMEs, farmers in rural areas, middle or low income

households in urban areas - co-operative banks reduce banking exclusion and foster the

economic ability of millions of people. They play an influential role on the economic growth

in the countries in which they work in and increase the efficiency of the international

financial system. Their specific form of enterprise, relying on the above-mentioned

principles of organization, has proven successful both in developed and developing

countries.


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Module 3 NON-BANKING FINANCE COMPANIES 8 hrs

NBFCS. an Overview - Loan Companies - Investment CompaniesLeasing & Hire

Purchase - Housing Finance Chit Funds - Mutual Benefit Financial Companies

-Venture Capital Funds - Factors & Forfeiting - Credit Rating - Depository and Custodial

Services

INTRODUCTION

The activities of non-banking financial companies (NBFCs) in India have undergone

qualitative changes over the years through functional specialization. The role of NBFCs as

effective financial intermediaries has been well recognized as they have inherent ability to

take quicker decisions, assume greater risks, and customize their services and charges

more according to the needs of the clients. While these features, as compared to the banks,

have contributed to the proliferation of NBFCs, their flexible structures allow them to

unbundled services provided by banks and market the components on a competitive basis.

The importance of NBFCs in delivering credit to the unorganized sector and to smallborrowers at the local level in response to local requirements is well recognized. The rising

importance of this segment calls for increased regulatory attention and focused supervisory

scrutiny in the interests of financial stability and depositor protection.

Non-Banking Financial Entities

Regulated by the RBI

Non-banking financial entities partially or wholly regulated by the RBI include: (a) NBFCs

comprising equipment leasing (EL), hire purchase

finance (HP), loan (LC), investment (1C) (including primary dealers3 (PDs)) and residuarynonbanking (RNBC) companies; (b) mutual benefit

financial company (MBFC), i.e. nidhi company; (c) mutual benefit company (MBC), i.e.

potential nidhi company; (d) miscellaneous non-bankingcompany (MNBC), i.e. chi t fund

company

What is the difference between Commercial Bank and NBFI?

In spite of certain similarities, the commercial banks basically differ from non bank

financial intermediaries on the following grounds:

(i) Bank is a financial institution whose liabilities (i.e., deposits) are widely accepted as a

means of payment in the settlement of debt. Non-bank financial intermediaries, on the

other hand, are those institutions whose liabilities are not accepted as means of payment

for the settlement of debt.


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(ii) Commercial banks have the ability to generate multiple expansion of credit. The non-

bank intermediaries do not have such ability. They simply mobilize savings for investment.

(iii) The credit creation activities of the commercial banks are determined by the excess

reserves and the cash-reserve ratio of the banks. The activities of the non-bank

intermediaries (i.e., saving mobilization, lending activities, etc.) are largely governed by the

structure of interest rates.

(iv) Credit creation activities of the banks involve lesser time, while the lending activities of

the non-bank intermediaries involve longer time.

(v) The credit creation activities of the commercial banks are regulated and controlled by

the central bank. The non bank intermediaries are not generally under the control of

central bank, and thus, then1

activities may create hurdles in the way of effective

implementation of monetary policy.

(vi) Non bank intermediaries can influence liquidity and create economic destabilisation in

the economy. Destabilisation occurs when the financial claims on the non bankintermediaries increase at the cost of demand deposits of the banks.

(vii) Commercial banks raise funds costless because no interest is paid on demand deposits.

Non bank intermediaries, on the other hand, have to pay higher interest to attract more

funds.

(viii) People deposit money in the banks for safety, convenience and liquidity

considerations. However, they invest their savings in the non bank intermediaries with the

motive of earning extra income.

(ix) Banks form a homogeneous group, while non bank intermediaries form a

heterogeneous group in the financial structure of the economy.

(x) Bank generally deals with short-term loans in the money market, whereas the non bank

intermediaries mostly deal with all types of loans i.e., short-term, medium-term and long-

term loans.

The role of non-banking financial intermediaries

Non-banking Financial Institutions carry out financing activities but their resources are

not directly obtained from the savers as debt. Instead, these Institutions mobilise the public

savings for rendering other financial services including investment. All such Institutions

are financial intermediaries and when they lend, they are known as Non-Banking Financial

Intermediaries (NBFIs) or Investment Institutions.

Ex:

UNIT TRUST OF INDIA


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LIFE INSURANCE CORPORATION (LIC)

GENERAL INSURANCE CORPORATION (GIC)

CONCEPT AND MEANING OF HIRE

PURCHASE

Hire purchase is a type of instalment credit under which the hire purchaser, called thehirer, agrees to take the goods on hire at a stated rental, which is inclusive of the

repayment of principal as well as interest, with an option to purchase. Under this

transaction, the hire purchaser acquires the property (goods) immediately on signing

the hire purchase agreement but the ownership or title of the same is transferred only

when the last instalment is paid. The hire purchase system is regulated by the Hire

Purchase Act 1972. This Act defines a hire purchase as an agreement under which goods

are let on hire and under which the hirer has an option to purchase them in accordance

with the terms of the agreement and includes an agreement under which:

1) The owner delivers possession of goods thereof to a person on condition that

such person pays the agreed amount in periodic installments. 233

2) The property in the goods is to pass to such person on the payment of the last of suchinstallments, and

3) Such person has a right to terminate the agreement at any time before the property so

passes. Hire purchase should be distinguished from installment sale wherein property

passes to the purchaser with the payment of the first installment. But in case of HP

(ownership remains with the seller until the last installment is paid) buyer gets ownership

after paying the last installment. HP also differs form leasing.

Hire Purchase

"Finance of Plant & Machinery to small scale

industrial units/ enterprises on installment

terms."


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DIFFERENCE BETWEEN LEASE FINANCING

AND HIRE PURCHASE

BASIS LEASE FINANCING HIRE PURCHASE

Meaning A lease transaction is a

commercial arrangement,

whereby an equipment

owner or manufacturer

conveys to the equipment

user the right to use theequipment in return for a

rental.

Hire purchase is a type of

installment credit under

which the hire purchaser

agrees to take the goods

on

hire at a stated rental,which is inclusive of the

repayment of principal as

well as interest, with an

option to purchase

Option to user No option is provided to

the lessee (user) to

purchase the goods

Option is provided to the

hirer (user).

Nature of expenditure Lease rentals paid by the

lessee are entirely revenue

expenditure of the lessee.

Only interest element

included in the HP

installments is revenue

expenditure by nature.

Components Lease rentals comprise of

2 elements

(1) finance charge and (2)

capital

HP installments comprise

of 3 elements (1) normal

trading profit (2) finance

charge and (3) recovery of


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recovery. cost of goods/assets.

CONCEPT 0F LEASE FINANCING

Lease financing denotes procurement of assets through lease. The subject of leasing falls in

the category of finance. Leasing has grown as a big industry in the USA and UK andspread to other countries during the present century. In India, the concept was pioneered

in 1973 when the First Leasing Company was set up in Madras and the eighties have seen a

rapid growth of this business.

Lease as a concept involves a contract whereby the ownership, financing and risk taking of

any equipment or asset are separated and shared by two or more parties. Thus, the lessor

may finance and lessee may accept the risk through the use of it while a third party may

own it. Alternatively the lessor may finance and own it while the

lessee enjoys the use of it and bears the risk. There are various combinations in which the

above characteristics are shared by the lessor and lessee.

MEANING 0F LEASE FINANCING

A lease transaction is a commercial arrangement whereby an equipment owner or

Manufacturer conveys to the equipment user the right to use the equipment in return for a

rental. In other words, lease is a contract between the owner of an asset (the lessor) and its

user (the lessee) for the right to use the asset during a specified period

in return for a mutually agreed periodic payment (the lease rentals).

The important feature of a lease contract is separation of the ownership of the asset from

its usage.

Lease financing is based on the observation made by Donald B. Grant: Why own a cow

when the milk is so cheap? All you really need is milk and not the cow.

IMPORTANCE 0F LEASE FINANCING

Leasing industry plays an important role in the economic development of a country by

providing money incentives to lessee. The lessee does not have to pay the cost of asset at the

time of signing the contract of leases. Leasing contracts are more flexible so lessees can

structure the leasing contracts according to their needs for finance. The lessee can also pass

on the risk of obsolescence to the lessor by acquiring those appliances, which have high

technological obsolescence. To day, most of us are familiar with leases of houses,

apartments, offices, etc.

TYPES OF LEASE AGREEMENTS

Lease agreements are basically of two types. They are (a) Financial lease and (b) Operating

lease. The other variations in lease agreements are (c) Sale and lease back

(d) Leveraged leasing and (e) Direct leasing

module 2 banks

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