Professional Documents
Culture Documents
FUND BASED SERVICES. The financial system is an organization which seeks to provide people with adequate supply of finance or money. The financial system is composed of various institutions which provide finance on different affordable terms exists everywhere since the time immemorial. Finance is one of the most important problems faced by business activity anywhere in the world. In other words, finance is the back bone of any economy. No economy can take place without money. The business units need finance for expansion, modernization and diversification. They obtain finance for these purposes either through borrowing from outside or from their internal sources. The importance of business units is self-evident. They mobilize resources and use them for production and for making contribution to the gross domestic product of the country. Besides, they also contribute to the foreign exchange kitty through exports of their products. They provide employment to the people of the country and help meet their needs for goods and services. However, business firms can accelerate economic development only if there is a well organized financial system which can provide them with adequate funds as and when they need it.
Page 2
Page 3
Financial Institutions:
The agencies which provide credit in the financial system of a country are collectively known as financial institutions. These institutions make available continuous and uninterrupted supply of capital for setting up a new businesses as well as expansion or diversification of existing business. They contribute to accelerate industrial and economic development of a country. Financial institutions are primarily concerned with collecting the savings of small investors and mobilize these savings into productive investments avenues. They possess all the required professional knowledge and expertise needed for catering to the credit needs of different sectors of the economy. They provide efficient marketability and liquidity of securities that are traded in the stock market. Financial institutions provide working capital to the business therefore; they play an important role in the money market by ensuring tactful balancing of demand and supply of funds. Indian financial institutions from an important constituent of the money market. They provide all the financial and other facilities that are required for the industrial development of a healthy capital market through underwriting and merchant banking operations. They also
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 4
FUND BASED SERVICES. play a catalytic role in providing for the equilibrium in the capital market operations. Their financial help to new projects has provided employment opportunities to millions of people. They provide professional services to the investors as well as companies. Special financial institutions were set up for promoting the industrial development of the country by providing long-term finance and technical as well as administrative guidance to industrial
entrepreneurs. For example, IFLI, IDBI, state financial corporations. Financial institutions are business organizations who act as mobilizes and depositories of savings, and suppliers of credit or finance. These institutions provide various financial services to the business organizations and common people. Financial institutions can be divided into banking and non-banking institutions. Banking institutions deal is financial assets such as deposits, loans, securities etc. and non-financial institutions deal in real assets such as machinery, equipments, stock of goods and real estate. Their activities may be general or special. These institutions participate in the economys payment mechanism by providing transaction services, money supply and credit.
Page 5
Financial Markets:
A financial market is an institution that facilitates the exchange of financial instruments such as deposits, loans, corporate stocks and bonds, government bonds, etc. it is a market wherein financial instruments such as financial claims, assets and securities are traded. The financial transactions may take place either at a specific place or location like stock exchange or through the mechanism of telephone, telex, and other electronic media. The price for the use of funds is the interest paid on the funds transacted in this market. In other words, the place where people and intuitions wanting to borrow money are brought together with those having surplus funds is known as a financial market. Financial markets play a key role in arranging to invest funds. Flow of funds is made possible for productive purposes; these markets contribute to the development of the entrepreneurial class by making available necessary financial resources. The functions of the financial market are: 1) To allow lenders to earn interest or dividend on their surplus invertible funds.
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 6
FUND BASED SERVICES. 2) To allow for the productive use of the funds borrowed. 3) To provide a channel through which new savings flow to aid capital formation in the country. 4) To allow for the determination of the price of the traded financial asset through the interaction of buyers and sellers. 5) To provide mechanism for selling of a financial asset by an investor. 6) To disseminate information to the various segments of the market. 7) To provide funds to the borrowers to enable them to carry out their investment plans. 8) To provide liquidity in the market. 9) To provide the lenders with earning assets and to earn wealth. Financial markets can be divided into two parts. The primary market which deals in new financial claims or instruments. It is also called as new issue market. The secondary market deals in securities which are already issued by the companies. Stock exchange is an example of secondary market. The primary markets mobilize savings and supply additional capital to the companies. Secondary markets do not supply direct capital but indirectly help the companies and investors in providing liquidity. Financial markets are also classified as capital market and money market. The money market deals in the short-term claims with a maturity period of less than a year and capital market deals in the long term claims or securities. The capital market is co-extensive not only with the stock markets may be classified as organized or unorganized, formal or informal and domestic or foreign markets.
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 7
Financial Instruments:
Financial instruments are claims to the payment of sum of money in future or a periodic interval. The important financial instruments are shares, debentures, bonds, fixed deposits etc. regular payment in the form of interest or dividend is paid by the company to the investors. These instruments are classified as primary or secondary instruments. The primary instruments are issued by the ultimate investors directly to the ultimate savers such as equity shares, debentures. Secondary instruments are issued by financial intermediaries to the ultimate savers as bank deposits, units and insurance policies. The financial instruments differ from each other in respect of their investment characteristics. The important characteristics are liquidity, transferability, volatility, maturity, risk and return. It help in borrowing and lending money. The most liquid, short-term, debt obligations that are traded in the money are called money market instruments. Commercial paper, certificate of deposits, treasury bills, bonds, repurchase agreements, Euro dollars and bank acceptances are examples of money market instruments. On the other hand, equity shares, preference shares, bonds, mortgages, commercial loans and municipal bonds are the examples of capital market instruments.
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 8
Financial Services:
A financial service is any kind of service of a financial nature offered by a financial service provider. All banking and insurance related services are included in this concept. These services are intangible and invisible. There should be proximity between the service provider and the consumer in order to complete a service transaction. These services cover a wide range of economic activities. Financial services have developed to meet the needs of companies. Banking and insurance are traditional financial services. The modern financial services include over the counter services. Share transfer, pledging of shares, mutual funds, factoring, discounting, venture capital and credit cards. Financial services have started long back in western countries. In India, these services have started during 1980s. These services play a significant role in the changed business services. The financial services were developed in order to meet the needs of individual as well as companies. The financials of companies are expected to improve as a result of these financial services in the form
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 9
FUND BASED SERVICES. of lower debt equity ratio, improved liquidity and profitability ratios. The demand for these services has been increasingly. A recent estimate contained in Rakesh Mohan Committee Report points out that India needs about Rs. 750,000 crores to assemble a medium of infrastructure for the smooth functioning of industry, agricultural and services sectors. The financial service sector has to throw enough light on the sources of funds, the quantum that could be mobilized from such sources. The financial service industry has been growing at a rate of 14% per annum. Financial service industry services also facilitate international trade and flow of financial services. Indian financial services industry was rather unexciting until the early seventies. The financial services sector was started in mid-seventies when a series of innovative services of which leasing being the most notable. The first leasing company of India was set up in 1973. Leasing has emerged as an important supplementary source of finance to the industry. India has witnessed an explosive growth of leasing companies during the early eighties.
FUND BASED SERVICES. successful fee-based service program. For this survey, fee-based services were dened as library services, such as research, book loans, and article delivery, provided for a fee to identiable user groups which are not an institutions primary clientele. The survey was distributed to 121 ARL member libraries in April 2000. Sixty-four of the libraries (53%) responded to this survey. Of these, 39 (61%) indicated that they offer fee-based services as dened. However, a large proportion of these (87%) are offering fee based services to external users without the guidance and benet of a formal mission statement. Mission statements of most libraries do not explicitly cover the provision of fee-based services. Most libraries rely on clever interpretations of their existing library mission statements to cover feebased services, such as The mission includes a statement about services to the community beyond the university, but this statement does not mean or mention services that are feebased. Another library wrote, Fee-based services are not addressed directly, but there is a statement that, as a public institution, the library recognizes other communities and that we provide unique services to the community. A third library replied, Not in a specic waythe librarys mission statement states to the extent possible, library resources and services will be accessible to the wider community. There is one statement which could be interpreted as an implicit reference to it, but there is nothing explicit. Another stated, There is only a generalized statement about supporting information needs and intellectual inquiry of the state and the worldwide scholarly
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 11
FUND BASED SERVICES. community. It appears, as one library observed, that library mission statements focus on primary users and are more explicit in their goals and mission with this user group, while only giving passing mention to nonprimary clientele, if at all.
Page 12
LEASE FINANCE
Concept of 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 and spread 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.
Page 13
FUND BASED SERVICES. important feature of a lease contract is separation of the ownership of the asset from its usage.
Importance of Leasing:
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. Today, most of us are familiar with leases of houses, apartments, offices, etc.
Characteristics of Leasing:
The characteristics of a lease are as follows: 1. Parties to the lease: In case of leasing there are two parties namely the lessor and the lessee. The lessor a person who agrees to give the right to use an asset to another person called the lessee for a periodic rental payment. Lessee is a person who obtains the right to use the asset from the lessor for a periodic rental payment for a greed period of time.
Page 14
FUND BASED SERVICES. 2. Asset on Lease: Leasing is used for financing the use of assets possessing a high value. The asset is the property that is to be leased and may include plant and machinery, building a car, a house, etc. The main point to be noted here is the separation of the ownership of the asset from its usage. 3. Term of the Lease Contract: The term of the lease contract is called the lease period. It is illegal to have a lease without a specified term. In India, we find perpetual lease in operation where the lease period is for an indefinite period of time. In case of an operating lease, on the expiry of the least period, the asset is returned to the lessor. In case of a financial lease, the lease period is in consistence with the economic life of the asset, so that the lessee is given the advantage of making exclusive use of the asset throughout its useful life. 4. At time the lease period could be divided into two periods: Primary lease period and secondary lease period. During the primary lease period, the lessor desires to recoup the investment together with interest. In the secondary lease period he may desire to get only nominal rental in order to keep the lease contract operational. 5. Lease Rentals: This refers to the consideration payable by the lessee as specified in the lease contract to the lessor. The rentals payable by the lessee are usually determined to cover such costs as interest on the lessors investment, cost of any repairs and maintenance that are part
Page 15
FUND BASED SERVICES. of the lease package, depreciation on the leased asset any other service charges in connection them with lease contract.
Advantages of Leasing:
There are several extolled advantages of acquiring capital assets on lease: 1. Saving of capital: Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lessee is not to provide or pay any margin money as there is no down payment. In this way the saving in capital or financial resources can be used for other productive purposes e.g. purchase of inventories. 2. Flexibility and convenience: The lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees. 3. Planning cash flows: Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets 4. Improvement in liquidity: Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique.
Page 16
Disadvantages of Leasing:
1. The main drawback of lease is that ownership remains vested with lessor. 2. Long term leasing is generally more expensive to the lessee. 3. During the period of inflation the real estate values may increase during the lease 4. Period. In such case, the benefit of capital gain will be enjoyed by the lessor. The 5. Lessee losses the advantages of such appreciation in the value of asset. 6. Problems may arise if the lessee decides to alter the physical shape of the asset. 7. The interest cost on leasing is usually higher than the interest on debt. 8. Companies, which are not able to borrow at convenient terms, are forced to enter into a leasing arrangement with disadvantageous terms and conditions. 9. If a lessee is not able to honour the obligations of lease agreement, a lessor may suffer a loss.
Page 17
Participants In Leasing:
There are a numbers of players present in the leasing industry. A brief discussion of these players is presented below: 1. Lesser: There are different kinds of lesser. They are specialized leasing companies, one-off lesser, manufacturer lessor, bank-sponsored leasing companies, financial institution, in-house lesser, etc. a. Specialized leasing companies: Specialized leasing companies specialize in the business of leasing assets. They target their clients through advertisement, etc. the volume of business transacted by them is huge. They command a massive build-up of capital strength and expand their business operation through grand alliances and tie-ups. b. One-off leasers: One-off leasers are those companies which come to the leasing business for the purpose of availing the advantage of huge depreciation and tax benefits. c. Manufacturer lesser: Manufacturer lesser are those who are in the field of manufacturing capital assets, that are available for leasing. IBM, and United Shoe Machinery Corporation, US are some of the pioneering manufacturing companies which have ventured into the business of leasing.
Page 18
FUND BASED SERVICES. d. Bank-sponsored leasing companies: Bank-sponsored leasing companies are those which operate as subsidiaries of the bank, and have been established for the purpose of undertaking the leasing business. For instance, under the provisions of the Banking Regulations (Amendment) Act, 1984 banks in India have been permitted to set up their own associated for carrying out the leasing business. e. Financial institutions: Financial institutions constitution another important segment of the leasing business. In India, institutions such as ICICI, etc provide leasing services. 2. Lessees: The lessees constitute a wide range of companies, from blue chip companies to small unit: which avail the financial services from the lessor companies. The consideration for, and the condition under which, such companies operate vary. A characteristic of the Indian lessees is that most of them belong to the private sectors. 3. Lease brokers: Lease brokers are the intermediaries between the lesser and lessees who help find a suitable lessor for a prospective lessee and vice versa. Armed with information and rapport, lease brokers helps both lesser and lessees with financial advantage through tough negotiations and by providing a wider choice.
Page 19
FUND BASED SERVICES. 4. Lease financiers: Lease financiers are banking institutions which provide financial assistance to leasers for the purpose of acquiring the assets that are to be leased. Such assistance is usually secured by the hypothecation of the leased asset, and also by the assignment of lease rentals.
LEASE AGREEMENTS.
Financial lease Operating lease Sale and lease back Leveraged leasing Direct
leasing
a) Financial lease: Long-term, non-cancellable lease contracts are known as financial leases. The essential point of financial lease agreement is that it contains a condition whereby the lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost. At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the lease. Under this lease the lessor recovers 90% of the
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 20
FUND BASED SERVICES. fair value of the asset as lease rentals and the lease period is 75% of the economic life of the asset. The lease agreement is irrevocable. Practically all the risks incidental to the asset ownership and all the benefits arising there from are transferred to the lessee who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor. Financial lease is also known as capital lease. In India, financial leases are very popular with high-cost and high technology equipment. b) Operating lease: An operating lease stands in contrast to the financial lease in almost all aspects. This lease agreement gives to the lessee only a limited right to use the asset. The lessor is responsible for the upkeep and maintenance of the asset. The lessee is not given any uplift to purchase the asset at the end of the lease period. Normally the lease is for a short period and even otherwise is revocable at a short notice. Mines, Computers hardware, trucks and automobiles are found suitable for operating lease because the rate of obsolescence is very high in this kind of assets. c) Sale and lease back: It is a sub-part of finance lease. Under this, the owner of an asset sells the asset to a party (the buyer), who in turn leases back the same asset to the owner in consideration of lease rentals. However, under this arrangement, the assets are not physically exchanged but it all happens in records only. This is nothing but a paper transaction. Sale and lease back transaction is suitable for those assets, which are not
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 21
FUND BASED SERVICES. subjected depreciation but appreciation, say land. The advantage of this method is that the lessee can satisfy himself completely regarding the quality of the asset and after possession of the asset convert the sale into a lease arrangement. d) Leveraged leasing: Under leveraged leasing arrangement, a third party is involved beside lessor and lessee. The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e., lender and the asset so purchased is held as security against the loan. The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. The lessor, the owner of the asset is entitled to depreciation allowance associated with the asset. e) Direct leasing: Under direct leasing, a firm acquires the right to use an asset from the manufacturer directly. The ownership of the asset leased out remains with the manufacturer itself. The major types of direct lessor include manufacturers, finance companies, independent lease companies, special purpose leasing companies etc.
Page 22
Leasing Process:
The process of leasing takes the following steps:
Page 23
FUND BASED SERVICES. 3. Lease contract: Both the parties sign a lease agreement setting out the details of the terms of the lease contract. Leases will normally be fully payout to the lessor. 4. Lease period: During the currency of the lease period, the lessee will make lease payment at regular intervals, as agreed upon between the parties. The lessee will ensure the proper upkeep and maintenance of the asset leased. In addition, the lessee will also be entitled to warranties and aftersales services from the lessor. At the end of the lease period, the lessee may either renew the lease or terminate the lease, and retreat the asset to the lessor, or may even acquire the asset from the lessor. However, it is to be noted that there is no possibility of the lessee being given the purchase option in the lease agreement itself.
Page 24
HIRE PURCHASE
Concept And Meaning Of Hire Purchase:
Hire purchase is a type of installment credit under which the hire purchaser, called the hirer, 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 installment 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. 2. The property in the goods is to pass to such person on the payment of the last of such installments, and 3. Such person has a right to terminate the agreement at any time before the property so passes.
Page 25
Page 26
Page 27
Page 28
Page 29
Page 30
No option is provided to Option is provided to the the lessee (user) to Purchase the goods. 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. HP installments comprise of 3 elements: 1. normal trading Profit, 2. finance charge and 3. recovery of Cost of goods/assets.
Components
Lease rentals comprise of 2 elements: (1) Finance charge and (2)capital Recovery.
Page 31
CREDIT CARDS.
Meaning:
A credit card is a card or mechanism which enables cardholders to purchase goods, travel and dine in a hotel without making immediate payments. The holders can use the cards to get credit from banks upto 45 days. The credit card relieves the consumers from the botheration of carrying cash and ensures safety. It is a convenience of extended credit without formality. Thus, credit card is a passport to, safety, convenience, prestige and credit.
Page 32
TYPES OF CARD:
According to the purpose for which the cared cards are used, they can be classified into three main categories: 1. Credit card: It is a normal card where a holder is able to purchase without having to pay cash immediately. This credit card is built around revolving credit principle. Generally, a limit is set to the amount of money a cardholder can spend a month using the card. At the end of every month, the holder has to pay a percentage of outstanding. Interest is charged for the outstanding amount which varies from 30-360per cent annum. An average consumer prefers this type of card for his personal purchase as he is able to defer payment over several months. 2. Charge card: A charge card is intended to serve as a convenient means of payment for goods purchased at Member Establishments rather than a credit facility. Instead of purchase, this facility gives a consolidated bill for a specified period, usually one month. Bills are payable in full on presentation. There are no interest charges and no preset spending limits either. The charge card is useful during business trips and for entertainment expenses which are usually borne by the company. Andhra Bank card, BOB cards, CAN cards, Diners club card etc. belong to this category. 3. In-store card: The in-store cards are issued by retailers or companies. These cards have currency only at the issuers outlets for purchasing products of
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 33
FUND BASED SERVICES. the issuer company. Payment can be on monthly or extended credit basis. For extended credit facility, interest is charged. In India, such cards are normally issued by Five Star Hotels, resorts and big hotels.
FUND BASED SERVICES. card, the value is debited the balance comes down automatically. Once the monetary card comes down to nil, the balance is to be restored all over again for the card to become operational. The primary feature of smart card is security. It prevents card-related frauds and crimes. It provides communication security as it verifies whether the signature is genuine or not. The card also recognizes different voices and compare it with the recorded original voice. It is used for making purchases without necessarily requiring the authorisation of Personal Identification Number as in debit card. Smart card is an electronic purse which attempts to prove to be a panacea for all problems associated with traditional currency. In India, the Dena bank launched the smart card in Mumbai. 4. Debit cards: Credit cards have proliferated during the last couple of years in all countries and have became an acceptable alternative to paper currency. The developed countries like USA has moved a step
further. Debit card, an electronic product, has become more and more popular in these countries. The number of cardholder as at the end of March 1997 stood at 66.7 million, accounting for 1.2 million transactions aggregating $ 62.9 billion. 5. ATM cards: An ATM card is useful to a cardholder as it helps him to draw cash from banks even when they are closed. This can be done by inserting the card in the ATM installed at various bank location.
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 35
FUND BASED SERVICES. 6. Virtual cards: There is always a fear in the minds of credit cardholders that their credit card numbers might get into the hands of some unscrupulous persons who could siphon away whatever they can. For those who dont want to part with their credit card number to the merchant web site, the solution is to go for a Virtual Card. A virtual card is nothing but a card that can be generated by anybody at anytime provided he has already registered his name in the Banks web site. What is even better, one can also set monetary limits for each card-usually limited to the value of the item he intend to purchase. Of course, this value should be limited to his bank balance or the credit card.
FUND BASED SERVICES. departmental stores, restaurants, hotels, hospitals, travel agencies, petrol bulks, etc. Member establishments have to pay a certain percentage of discount on the credit card transactions to the issuer. Some organizations charge a specified sum as service charge.
Page 37
FUND BASED SERVICES. 2. Obtain cardholders signature in the space provided and check whether signature tallies with the signature on the card. 3. Prepare a chargeslip in triplicate given all details. Give one copy to the consumer, keep one copy for records and forward one copy to the bank.
Page 38
Page 39
FUND BASED SERVICES. ii. Cash Advance Facility: Under this facility, in case of any emergency, a credit cardholder can go to the nearest ATM and withdraw card upto a prescribed limit. iii. Dail A Draft Facility: This facility enables a cardholder to put a request for a loan by calling a call centre of a credit card company. The amount will be delivered in 4 or 5 days in the form of a draft. iv. Reward Point Facility: A cardholder can earn reward points for all purchases made using the credit card. Finally, those reward points could be redeemed to purchase any gifts offered by the credit card company.
Page 40
FUND BASED SERVICES. 3. Owing to revolving nature of credit, the customer can take advantage of it as and when he pleases within the overall limit. 4. Cash can be obtained at any branch of the issuer. The ATM facility is extended to cardholders who need not stand in queues and spend time unnecessarily at banks. By just inserting a card into an ATM, the holder can withdraw crisp new notes at time of day or night. 5. Overdraft facility is given to credit holders who are entiled to spend more than their actual limit. The amount of overdraft depends on the holders past credit rating. 2. Issuers: 1. Credit cards offer high profit for the banks. They get commission or discount, usually 2.5 per cent, on sale through credit cards. An interest charge of 1.5 per cent is made on a all outstandings. Thus, a single transaction through credit card, assuming the customer does not repay within the stipulated period will fetch income of 5 per cent to the bank which works out as much as 60 per cent per annum; miles ahead of the prime lending rate of many banks. As more and more take advantage of the credit facility, the credit card service becomes more profitable. 2. Where the card is issued to non-account holders, it may help to get new customers. 3. A credit card system helps control bank cost as it reduces the number of cheques issued by the customers.
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 41
FUND BASED SERVICES. 3. Member establishment: 1. The merchant have guarantee of payment and his account is credited immediately on submitting the chargeslip into his bank. No bad debt arises in credit card transaction. 2. A good cash flow is established because of the speedy settlement of bills by banks. 3. The acceptance of card in lieu of cash reduce security risk. 4. Member establishment are able to offer credit facility to their customers without setting up their own credit arrangements. 5. More and more people accept the practical advantage of credit cards and turn to suppliers to accept the card in settlement. This helps increase in volume of business to the member establishment.
FUND BASED SERVICES. 2. Credit cards tempt the holders for more purchases beyond their income and repayment capacity.
2. Issuers: 1. The cost involved in the credit card business is high which include cost of plastic card to be imported, cost of information, cost of placing and marketing cards, etc. unless the number of cardholders and the volume of business is high, the credit cards business will not be a profitable one. 2. The menace of frauds perpetuated by holders of bogus cards and sometimes in collusion with the member establishments is the major problems for the issuers. 3. The average utilization of credit card is only 20-30 per cent in India. The underutilization of this facility erodes the profitability of banks. 3. Member establishment: 1. The commission to be paid to the issuing banks/ credit cards organization is heavy. 2. Some banks make delay in payment due to lack of adequate system and trained personnel which affect the cash flow of the member establishment.
Page 43
VENTURE CAPITAL
Introduction:
The composer of the term venture capital is unknown, and there is no standard definition of it. It is, however, generally agreed that the traditional venture-capital era began in earnest in 1946, when General Georges Do riot, Ralph Flanders, Karl Compton, Merrill Griswold and others organized American Research & Development (AR&D), the first (and, after it went public, for many years the only) public corporation specializing in investing in illiquid securities of early stage issuers.
FUND BASED SERVICES. capital is popular among new companies, or ventures, with limited operating history, which cannot raise funds through a debt issue. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity. Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves. Broadly defined, Venture Capital (VC) is funds invested or available for investment in potentially highly profitable enterprises at considerable risk of loss. Venture capital is often used
interchangeably with other terms such as risk capital, patient capital or equity financing. Venture Capital is An Investment in a Start-up business that is perceived to have excellent growth prospects but does not have access to Capital markets. Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for startup companies. Venture Capitalists are companies or individuals who provide investment capital, management expertise and experience. In return for their investment, Venture Capitalists will take an equity position in the company, usually in proportion to the amount of their
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 45
FUND BASED SERVICES. investment and the level of risk involved. The future return on their investment is tied to the performance of your company.
FUND BASED SERVICES. favorable environment for success and minimizing risk to his/her investment.
Features:
There are three criteria which differentiate VCs from the conventional secured lenders such as banks: The Venture Capitalist is secured by way of (common) equity or quasi-equity (the right to convert other debt instruments to common equity) investment in the company. The investment is long term, typically 4 to 7 years. There is active involvement in the business by the Venture Capital Company. Venture capitalists generally: Financial new and rapidly growing companies, Purchase equity securities, Assist in development of new products or services, Add value to the company through active participation, Take higher risks with the expectation of higher rewards, and Have a long-term orientation.
Page 47
Page 48
Page 49
FUND BASED SERVICES. your financial requirements, you will be demonstrating your ability to plan properly. 4. Owners Financial Stake: One of the most important indicators of managements commitment to the venture is the financial resources you and the other owners have committed to the company. This includes financing from the friends, contacts, and families of the principals. If the Venture Capitalist is going to commit resources to your company they must be sure that the owner(s) is/are committed. This financial commitment is a strong indicator of your desire to see the business succeed.
FUND BASED SERVICES. investor may invest some time and money in it for further investigation. Start-up financing: If the idea/product/process is qualified for further investigation and/or investment, the process will go to the second stage; this is also called the start-up stage. At this point many exciting things happen. A business plan is presented by the attendant of the venture to the VC firm. A management team is being formed to run the venture. If the company has a board of directors, a person from the VC firms will take seats at the board of directors. While the organization is being set up, the idea/product gets its form. The prototype is being developed and fully tested. In some cases, clients are being attracted for initial sales. The management-team establishes a feasible production line to produce the product. The VC firm monitors the feasibility of the product and the capability of the management-team from the board of directors. To prove that the assumptions of the investors are correct about the investment, the VC firm wants to see result of market research to see whether the market size is big enough, if there are enough consumers to buy their product. They also want to create a realistic forecast of the investment needed to push the venture into the next stage. If at this stage, the VC firm is not satisfied about the progress or result from market research, the VC firm may stop their funding and the venture will have to search for another investor(s). When the cause
Page 51
FUND BASED SERVICES. relies on handling of the management in charge, they will recommend replacing (parts of) the management team. Early-stage financing: The European Venture Capital Association defines Early-stage finance as finance provided to companies that have completed development stage and requires further fund to initiated commercial manufacturing and sale. They will not yet be generating profits. This is the kind of financing required for completing the project. It is required immediately after the start-up stage of a project. The enterprise may need further investment before completion of the project. The need of additional funds arises when the project encounters cost and time overrun or when the completed project starts making losses, thus necessitating the infusion of equity type funding. This type of funding may also be required when the startup has been successful, and the business is growing. Follow-on financing: The European Venture Capital Association defines Follow-on financing or second round finance as the provision of capital to a firm which has previously been in receipt of external capital but whose financial needs have subsequently expanded. Later stage, in a project, implies that the project has passed the test of acceptability and has proved to b successful. Since project at this stage promises to be attractive in terms of earning potential, it is considered to be the most attractive stage for venture capital financing. Financing, at this
Page 52
FUND BASED SERVICES. point in the project, is preferred by venture capitalists around the world, particularly in the UK and USA. Expansion financing: The European Venture Capital Association defines Expansion capital or financing as the finance provided to fund the expansion or growth of a company which is breaking even or trading at a small profit. Expansion or development capital will be used to finance increased production capacity, market or product development and/or to provide additional working capital. This is one of the later-stage financing methods, whereby finance is provided by the venture capitalists for adding production capacity, once it has successfully gained a market share, and faces increased demand for the product. Financing is also made available for acquisition or takeover. Replacement financing: A later-stage financing method, also known as money-out deal, whereby venture capitalists extend financing for the purchase of existing shares from an entrepreneur or their association in order to reduce their holdings in the unlisted company, is known as replacement financing. This sale of shares may be by persons other than entrepreneur or their association. The venture capitalist may buy ordinary shares from vendors and may convert them into preference shares bearing a fixed dividend coupon. Such shares may be converted back into ordinary shares if the company is listed, an can thereafter be sold.
Page 53
FUND BASED SERVICES. Turnaround financing: This is the type of financing provided by the venture capitalists in the event of an enterprise becoming unprofitable after the launch of commercial production. This is provided in the form of relief package from the existing venture capital investor, and the enterprise is provided with specialist skills to recover. This form of financing is popular in the US. Finance is made available to a non-listed and nonprofitable venture in need of equity funds to allow for a turnaround. The finance may also be provided to sustain the current operation of the enterprise. Mezzanine finance: The last stage of equity related funding is known as Mezzanine financing. It is half-way between equity and loan capital, in term of risk and return. It is often the last type of financing supplied to a private company in the final run up to a trade sale, or a public floatation. Mezzanine financing is supplied as a layer, which ranks behind secured lending, but before ordinary share capital. Thus Mezzanine funding may be supplied either as debt (high coupon bond), or as high-ranking equity (preference shares). Mezzanine finance is intended as bridge finance, and has a maturity period of less than 2 years. When structuring a MBO, the provision of Mezzanine finance allows the management to retain a greater share of the business than could otherwise be afforded.
Page 54
management, directors and existing shareholders. c. Products: A complete description of the companys products or services. d. Markets: The markets which the company serves, including size and nature of the industry, location and characteristics of customer base, potential competition and unique selling points. e. Manufacturing: Manufacturing and operational aspects of the business, including a description of the technology used, access to sources of supply, manufacturing capacity and the premises owned or occupied.
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 55
f. Risks: An objective analysis of the fundamental risks and the managements plans to cope with the same. 2. Financial analysis The purpose of financial analysis is to set out the financial implications of a companys strategy and to performance. Following aspects are considered by a venture capitalist to determine the financial viability of the project: Earning growth potential. Sensitivity of earning to sale and margins. Likely time-lag between investment and return. Likely impact on cash flow. Expected value of the company at the notional time of divestment. Analysis of the financial risks and managements plans to cope with these. 3. Portfolio analysis: Portfolio analysis consists in examining the venture capitalists portfolio balance at the time the investment proposal is being considered. Accordingly, the proposed investment must be an acceptable addition to the venture capitalists portfolio, in terms o f its size, its stages of development, its geographic location and its industry sector. Following aspects are considered in this connection:
Page 56
FUND BASED SERVICES. a. Size of investment: The amount of money per investment has a significant impact on the size of the portfolio. Moreover, venture capitalist builds up a very large portfolio, hand-on management will be difficult. b. Stages of development: A venture capital portfolio will typically consist of some companies, which are in the start-up phase, some companies in a development stage and other in the mature phase of its life cycle, such as MOB investment. c. Geographic location: In order to reach an acceptable level of portfolio diversity and volume, many funds will go in search of foreign investment. The basic principle of an international investment policy is to a syndicate with a local fund, which will have a superior understanding of the markets, and also the social, investment and tax environment. d. Industry sector: This is the fourth factor in portfolio diversification. Venture capitalists attempts to diversify the portfolio in order to offset problematic or slow growth investment. 4. Divestment analysis: Divestment calls for venture capitalists to have a clear idea about the method, the timing and the valuation of the company upon divestment. There are fore principal means by which venture capitalists realists investments.
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 57
FUND BASED SERVICES. They are: a. Trade sale: The process of selling the investment to a company in the trade, i.e., a competitor wishing to buy the investees market shares or production capacity, a supplier intending to integrate forward, or a customer trying to integrate backward or tie up sources of supply, is referred to as trade sale. A trade sale is in the form of an unexpected and unsolicited bid. b. Take-out: The process of selling the investment to another professional investor, another venture capitalist, by way of private placement with a major institutional investor such as an insurance company or pension fund manager, or to a management holding company, is known as take-out. Under this arrangement, typically, only the venture capital company will sell its shares while entrepreneur retain its stake. c. Earn-out: In this method, the venture capital investment is realized through the entrepreneur buying back the venture capitalist shares with the proceeds of the project. For this purpose, the entrepreneur is given an option at the time of investment. d. Floatation: This is the final exit for the venture capital investment. Under this method, issue of securities is made in the stock market. In
Page 58
FUND BASED SERVICES. order to float, the company must have good and complete management team. The methods of floatation may vary as shown below: Placings, where a companys shares are placed with prearranged buyers. Offer for sale, where a company invests the public to subscribe to its shares at a fixed price, which is underwritten. Tender, where the public is invited to name the number of shares and the price it will pay, with a minimum price underwritten.
Page 59
FUND BASED SERVICES. The financial system in India has grown rapidly in the last three decades and more. The functional and geographical
coverage of the system is truly impressive. Nevertheless, data do show that there is exclusion and that poorer sections of the society have not been able to access adequately financial services from the organized financial system. There is an imperative need to modify the credit and financial services delivery system to achieve greater inclusion. The implementation of the recommendations made in this Report could go a long way to modify particularly the credit delivery system of the banks and other related institutions to meet the credit requirements of marginal and sub-marginal farmers in the rural areas in a fuller measure. However, creating an appropriate credit delivery system is only a necessary condition. This needs to be supplemented by efforts to improve the productivity of small and marginal farmers and other entrepreneurs so that the credit made available can be productively employed. While banks and other financial institutions can also take some efforts on their own to improve the absorptive capacity of the clients, it is equally important for Government at various levels to initiate actions to enhance the earnings capacity of the poorer sections of the society. The two together can bring about the desired change of greater inclusion quickly.
Page 60
BIBLIOGRAPHY
The information is collected from following sources:
Website:
www.google.com
V.E.S COLLEGE OF ARTS, SCIENCE AND COMMERCE. Page 61