FINANCIAL SERVICES

GOKHALE EDUCATION SOCIETYS

SHRI BHAUSAHEB VARTAK ARTS, COM. & SC.COLLEGE SHETH K.V. PAREKH ARTS &COM. Jr. COLLEGE
Gokhale Mahavidyalay Marg, M.H.B. Colony, Borivali (W), Mumbai

(NAAC B+ ACCREDITED & ISO 9001:2000 CERTIFIED)

PROJECT REPORT ON
FINANCIAL SERVICES

SUBMITTED BY
MS. VAISHALI SAWANT
T.Y.B.Com (Banking & Insurance) (Semester V)

SUBMITTED TO
UNIVERSITY OF MUMBAI

PROJECT GUIDE
Mr. AMEY GHATAGE

ACADEMIC YEAR:2009-2010

TYBCOM (BBI)

FINANCIAL SERVICES

DECLARATION
I Ms. VAISHALI MAHADEV SAWANT student of Shri Bhausaheb Vartak Arts, Com. & Sc. College of T.Y.B.Com. (Banking & Insurance) (Semester V) hereby declare that I have completed my project on FINANCIAL SERVICES in the academic year 2009-2010. The information submitted is true & original to best of my knowledge.

Signature of Student Place: Mumbai Date:

TYBCOM (BBI)

FINANCIAL SERVICES

TYBCOM (BBI)

FINANCIAL SERVICES

ACKNOWLEDGEMENT

I am highly obliged to acknowledge our Principal Dr. Mrs. S. V. SANT and for giving me an opportunity to conduct a detail study and analysis of topic relevant to my project. I would like to thank my Project guide and also our Course Coordinator Prof. Mrs. RAKHI PITKAR for helping me at every stage of this project, for inspiring me at every stage of this project, for motivating me and giving me access to such valuable information, without which my project would be incomplete. I would like to thank our Library staff for providing appropriate books on right time. Last but not least all my friends, family members who support me while preparing my project. These people have immensely helped me in getting the correct and up to date information required for the making of this project. This project report is the combination of the efforts of all the above mentioned people and myself. I have carried out sincere efforts on my part to make this project.

TYBCOM (BBI)

FINANCIAL SERVICES

Thanking You..

TYBCOM (BBI)

FINANCIAL SERVICES

Executive Summary
The Indian financial services industry has undergone a metamorphosis since 1990. During the late seventies and eighties the Indian financial services industry was dominated by commercial banks and other financial institution which cater to the requirements of Indian industry. In fact capital market played a secondary only. However after economic liberty to the entire financial sector has under gone a see-saw change and now we are witnessing the emergence of new financial services almost every day. Financial services constitute an important component of financial system. Financial services is a process by which funds are mobilized from a large number of savers and make them available to all those who is in need and particularly to corporate customers. The main participants who are playing a major role is providing financial services to serve the needs of individual, institutions and corporate. They render services such as mutual fund, merchant banking, hire purchase, leasing, factoring, housing finance etc. The origination development and delivery of financial services in India is subject to institutional regulation, prudential regulation, investor regulation, legislative regulation and self regulation. In India agencies such as SEBI, RBI and Department of banking and insurance of the government of India, through a plethora of legislations, regulate the functioning of financial service. Thus financial services contribute in good measure to speeding up the process of economic growth and development. This takes place through the mobilization of savings of a cross section of people; for the purpose of channeling them into productive investments.

TYBCOM (BBI)

FINANCIAL SERVICES

DETAILED CURRICULUM Section-I Financial Services

1.1 Introduction of Financial Services...1 1.2 Definition and Concept of Financial Services..3 1.3 History of Financial Services...4 1.4 Financial Services Regulatory Framework..5 1.5 Classification of Financial Services Industry .6 1.6 Participants Involved In Providing Financial Services7

Section-II Overview of Financial Services

2.1 Objectives of Financial Services.8 2.2 Structure of Indian Financial System. ......9 2.3 Scope of Financial Services..11 2.4 Features of Financial Service .......13 2.5 Growth of Financial Services ..14 2.6 Challenges faced by Financial Services Industry.15 2.7 Development of financial Services in India..16 2.8 Structure of the Indian Banking Industry..17

Section-III Bank as a Financial Service Provider

3.1 Introduction of Bank15
TYBCOM (BBI)

FINANCIAL SERVICES

3.2 Nationalisation of Banks in India16 3.3 Functions of a Bank...17 3.4 Financial Services by Banks in Rural Sector. 24 3.5 Banking Services Provided by Through Different channels21

Section-IV

Financial Services

4.1 Mutual Fund Services 4.1.1 Introduction Mutual Fund.26 4.1.2 Definition of Mutual Fund ...27 4.1.3 Types of Mutual Fund....28 4.1.4 Benefits of Investing in Mutual Fund..29 4.1.5 Risks in Involved in Investing in Mutual Fund ..31 4.1.6 Rights of Mutual Fund Holder in India33 4.2 Venture Capital Services

4.2.1 Introduction of Venture Capital....32 4.2.2 Meaning of Venture Capital..33 4.2.3 Features of Venture Capital..33 4.2.4 Scope of Venture Capital..34 4.2.5 Venture Capital Regulations in India36
TYBCOM (BBI)

FINANCIAL SERVICES

Section-V Finance Services

5.1 Derivative

5.1.1 Introduction of Derivatives.....37 5.1.2 Benefits of Derivatives38 5.1.3 Types of Derivatives..38 5.2 Merchant Banking

5.2.1 Introduction of Merchant Banking42 5.2.2 Mrechant Banking Indian Scenario..43 5.2.3 Guidelines for Merchant Bankers..44 5.2.4 Services Rendered by Merchant Banks..45

Section-VI Financial Services

6.1 Leasing Services 6.1.1 Introduction of Leasing ..46 6.1.2 Definition of Lease ....47 6.1.3 RBI Guidelines to Leasing Companies ..48 6.1.4 Types of a lease ....47

TYBCOM (BBI)

FINANCIAL SERVICES

6.2 Factoring Services 6.2.1 Introduction to Factoring..50 6.2.2 How does Factoring Works...51 6.2.3 RBI Guidelines for Factorings..52

6.2.4 Benefits of Factoring.53 6.2.5 Different types of Factoring.54 6.2.6 Bank Finance to Factoring Companies.55 .

Section-VII Risk and Benefits of Financial Services

7.1 Risks of Outsourcing Financial Services by banks..56 7.2 Pros of Financial Services...58 7.3 Cons of Financial Services..60

Section-VIII Scenario of Financial Services

8.1 Current Scenario of Financial Services...62 8.2 Future of Financial Services.63

TYBCOM (BBI)

FINANCIAL SERVICES

Case Study of Housing Loan 64

Conclusion of Financial Services..74

Articles.

Abbreviations.

Glossary.

TYBCOM (BBI)

FINANCIAL SERVICES

1.1 Introduction of Financial Services

A financial service is a term used to refer to the services provided by the finance industry. A financial service is also the terms used to describe organizations that deal with the management of money. Banks, investment banks, insurance companies, credit card companies and stock brokerages, are examples of the types of firms comprising the industry, which provides a variety of money and investment related services. Financial services are the largest industry (or industry category) in the world, in terms of earnings; as of 2004, the industry represents 20% of the market capitalization. Finance is the ability of funds management. Finance includes saving money and frequently includes lending money. The field of finance deals with the concepts of time, money and risk and how they are interconnected. Finance also deals with how funds are spent and budgeted. Services which are provided in the finance industry are known as financial services. There are number of services which are included in the category of the financial services and all these services are provided by the financial institutions. There are a number of other financial services which are provided by each financial institution like commercial banks carry out consumer financing and investment banks carry out securities trading. Financial services result in a huge market which is known as financial market. The programs and services such as planning and management of finances and planning of the banking investments and providing the insurance are all a part of the financial services. These financial services, which are provided by the financial institutions, comprise of the financial transactions. A financial transaction is process that enables a person to either make an investment or clear the debts, or investment in any other form.

TYBCOM (BBI)

FINANCIAL SERVICES

These days the method of transaction between the organizations and the individual has taken a new form and the concept of electronic. These are the services which an insurance company provides, which can be taxed.

The retrieval of money in any form through credit cards or the debit cards is all a form of financial transactions. The financial services are all aimed at providing facilities to the public, using which people can invest their money in a safe place. Insurance policies are important to help keep the future safe. These financial services are aimed to make the people financially stable. But any investment that a person makes must be well calculated. Financial services are an important part of any financial organization because only through these financial services does a financial organization grows. The main aim of all of the above mentioned industries is to provide the financial services to the general public.

Concept of Financial services

The Finance services industry though a highly profitable Industry with respect to earnings does not count for a large share of the market and also employs a lesser number of people as compared to some of the other Industries. Financial services through the network of elements such as financial institution, financial market, and financial instruments serve the individuals, institutions and corporates. Financial services are provided by banks, insurance companies, general financial institution, and stock exchanges

TYBCOM (BBI)

FINANCIAL SERVICES

1.2 Definition of Financial Services

Financial Service can be defined as the products and services offered by institutions like banks of various kinds for the facilitation of various financial transactions and other related activities in the world of finance like loans, insurance, credit cards, investment opportunities and money management as well as providing information on the stock market and other issues like market trends. .

1.3 History of Financial Services

The term financial services became more prevalent in the United States partly as a result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies in the US financial services industry to merge. Critics of this act say the term financial services attempts to make the unison (UNION) of these operations sound natural, ignoring the history of problems that have arisen from combining them, such as conflicts of interest and monopolization . Others, noting that many of the restrictions abolished by the Gramm-Leach-Bliley Act had never existed in other countries or had been abolished earlier than in the US, say the term financial services is a natural one, in long term use, which means nothing more than its constituent words. Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding company simply to diversify its earnings.

TYBCOM (BBI)

FINANCIAL SERVICES

1.4 Financial Services Regulatory Framework

The growth development of financial system is measured in terms of the width and depth of the range of products offered by it. There has been limited innovation in the realm of financial services products. It is imperative therefore that the financial services sector works to achieve growth and development, by innovating an introducing a wide range of financial products tailor-made to suit the needs of varying entrepreneurs. For instance, a number of tailors made and imaginatively designed financial packages may be offered by the venture capital fund to satisfy the needs of entrepreneurs.

TYBCOM (BBI)

FINANCIAL SERVICES

Similarly leasing firms should be encouraged to provide leasing facilities for a variety of capital equipment, besides ensuring that leasing companies are not created merely to trade in tax shields at government cost.

1.5 CLASSIFICATION OF FINANCIAL SERVICES INDUSTRY

I) Capital market intermediaries and II) Money market intermediaries. The capital market intermediaries consist of term lending institution 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. Hence, the term financial services

TYBCOM (BBI)

FINANCIAL SERVICES

industry includes all kinds of organizations which intermediate and facilitate financial transactions of both individuals and corporate customers. For e.g.
1) 2)

Capital Market Intermediaries:-Equity shares, Bonds Money Market Intermediaries:-Certificate of deposite, Commercial Paper, Treasury Bills.

The Difference between Banking and Financial Services

There are various types of financial institutions and they do have different services. Based on the various types of financial institutions, banks are resposible for collcting deposits of the customers as their savings or as investment in the case of investments banks, On the other hand, there are a number of financial services like insurance, mortgage services, loan lending etc (which are provided by other institutions). We can also say that there are many types of financial sercices and banks provide savings, depository and investment services while other services are offered by other institutions.

TYBCOM (BBI)

FINANCIAL SERVICES

1.6 Participants Involved in Providing Financial Services

TYBCOM (BBI)

FINANCIAL SERVICES Banks

It is one of the biggest financial services companies of the world. There are different types of banks in the world. Some of these are commercial banks, private banks and many more. There are some banks that work for the capital markets only. Banks provide a number of financial services to the clients. These services include depository services, lending services, credit card facilities and many more. These services are provided for both the individuals and the commercial sector. Intermediation or Advisory Services Company These companies are basically involved in providing investment services to the clients. These companies are designed to provide advises to the investors in selecting the right investment options that suit their investment plans and also the risk tolerance capacity. At the same time, the intermediation or advisory services companies are handling the investor's money and investing it according to the client's choice. Insurance Companies The insurance companies provide the clients with risk coverage services. These services are designed to cover a number of risks that are related to an individual's life, property and many more. These services are not only designed to provide security but at the same time there are a number of insurance plans that are designed to provide regular income to the clients. Credit Rating Agencies The credit rating agencies are those firms that evaluate different types of financial services companies. These ratings are based on a number of factors like the kind of services, risk factor involved with the services, customer facilitation and many more. Conglomerates A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking.
TYBCOM (BBI)

FINANCIAL SERVICES

2.1 Financial Services Objective

Fund Raising:

Financial Services help to raise the required funds from host of investors, individuals, institutions and corporates. For this purpose various instruments of finance are used. The funds are demanded by the corporates house, individuals, etc.

Funds deployment:

Arrays of financial services are available in financial markets which help the players to ensure an effective deployment of funds raised. Financial Services help in decision making regarding financing mix.

Specialized services:

The financial services sector provides specialized services such as merchant banking, mutual funds, factoring, housing finance,hire purchase, leasing etc. besides banking and insurance. Institutions and agencies such as stock exchanges specialized and general financial institutions, non-banking finance companies, also provide these services.

Regulation:

In India, agencies such as Securities and Exchange Board of India (SEBI), Reserve Bank of India and the Department of Banking and Insurance, Government of India, through a plethora of legislations, regulate the functioning of the financial service institutions.

TYBCOM (BBI)

FINANCIAL SERVICES

Economic growth:

Financial Services contribute, in good manner, to speeding up the process of economic growth and development. This takes place through the mobilization of the savings of a cross section of people, for the purpose of channeling them into productive investments.

TYBCOM (BBI)

FINANCIAL SERVICES

2.2 Structure of Indian Financial System

The financial system implies a set of complex and closely connected institutions, agents practices and markets. The following is the typically structure of financial system in any economy. Financial System

Financial Institutions

Financial Markets

Financial Instruments

Financial Services

A financial service is any kind of service of 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 service provider and consumer in order to complete a service transaction. These services cover a wide range of activities. A financial service has developed to meet the needs of companies. Banking and Insurance are traditional services. The modern financial services are mutual funds, factoring venture capital, credit cards, leasing, hire purchase, etc. Financial services have started long back in western countries. In India, the services have started during 1980s. These services play a significant and important role in the changed business services.

TYBCOM (BBI)

FINANCIAL SERVICES

2.3 Scope of financial services

1. Traditional Activities i) Fund based activities ii) Non fund based activities

2. Morden Activities

1. 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 ii) Non-fund based activities

i)Fund based activities The traditional services which come under fund based activities are the following:
a)

Underwriting of or investment in shares, debentures, bonds etc. of new issues (primary market activities)

b) Dealing in secondary market activities. c) Participating in money market instruments like commercial papers, certificate of deposits, treasury bills, discounting of bills etc. d) Involving in equipment leasing, hire purchase, venture capital, seed capital etc. e) Dealing in foreign market activities.

TYBCOM (BBI)

FINANCIAL SERVICES

ii)Non-fund based activities Financial intermediaries provide services on the basis of non-fund activities also. This can also be called fee based activity. Today, customers whether individual or corporate are not satisfied with mere provision of finance. They expect more from financial service companies. Hence, a wide variety of services, are being provided under this head. They include the following: a) 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. b) Making arrangements for the placement of capital and debt instruments with investment institutions. c) Arrangement of funds from financial institutions for the clients project cost or his working capital requirements. d) Assisting in the process of getting all Government and other clearances.

TYBCOM (BBI)

FINANCIAL SERVICES

2.Modern Activities Besides the above traditional services, the financial intermediaries of render innumerable services in recent times. Most of them are in the nature of non-fund based activity. In view of the importance, these activities have been discussed in brief under the head New financial products and services. However, some of the modern services provided by them are given in brief here under:
a)

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.

b) Planning for mergers and acquisitions and assisting for their smooth carry out. c) Guiding corporate customers in capital restructuring. d) Acting as Trustees to the debenture-holders.
e)

Hedging of risks due to exchange rate risk, interest rate risk, economic risk and political risk by using swaps and other derivative products. Managing the portfolio of large Public Sector Corporations.

f)

g) Guiding the clients in minimization of the cost of debt and the determination of the optimum debt equity mix.
h)

Undertaking risk management services like insurance services, buy-back options etc.

i) Undertaking services relating to the capital market such as:

TYBCOM (BBI)

FINANCIAL SERVICES

Clearing services,

Registration and transfers,

Safe-custody of securities, Collection of income on securities.

j)

Promoting credit rating agencies for the purpose of rating companies which want to go public by the issue of debt instruments. Recommending the financial collaboration / joint ventures by identifying suitable joint venture partner and preparing joint venture agreement.

k)

TYBCOM (BBI)

FINANCIAL SERVICES

2.4 Financial Services Features

Like any other services financial services are characterized by the following __
Intangibility: The basic features of financial services are that they are

intangible in nature. For financial service to be successfully created and marketed, the institution of provided them must have a good image and the confidence of its clients. Quality and innovativeness of services are the focal points for building credibility and gaining the trust of the clients.
Customer Orientation: The institution providing the financial services

study the needs of the customer in detail. Based on the results of the
TYBCOM (BBI)

FINANCIAL SERVICES

study, they come out with innovative financial strategies that give due regard to the costs, liquidity and maturity considerations for various financial products. This way, financial services are customer-oriented.

Inseparability: The functions of producing and supplying financial

services have to be carried out simultaneously. This calls for a perfect understanding between the financial service firms and their clients.

Perishability: Financial services have to be created and delivered to the

target clients. They cannot be stored. They have to be supplied according to the requirement of customers. Hence, it is imperative that the providers of the financial services ensure a match between demand and supply.

Dynamism: Financial services institutions must be proactive in nature,

and evolve new services by visualizing the expectations of the market .The financial services have to be constantly refined on the basis of socio-economic changes occurring in the economy, such as disposable income, standard of living, level of education, etc.

TYBCOM (BBI)

FINANCIAL SERVICES

2.5 GROWTH OF FINANCIAL SERVICES

The growth of financial sector in India at present is nearly 8.5% per year. The rise in the growth rate suggests the growth of the economy. The financial policies and the monetary policies are able to sustain a stable growth rate. The reforms pertaining to the monetary policies and the macro economic policies over the last few years has influenced the Indian economic to the core. The major step towards opening up of the financial market further was the nullification of the regulations restricting the growth of the financial sector in India. To maintain such a growth for a long term the inflation has to come down further. The financial sector in India has an overall growth of 15%, which has exhibited stability over the last few years although several other markets across the Asian region were going through a turmoil. The development of the system pertaining to the financial sector was the key to the growth of the same. With the opening of the financial market variety of products and services were introduced to suit the need of the customer. The Reserve Bank of India (RBI) played a dynamic role in the growth of the financial sector of India.

TYBCOM (BBI)

FINANCIAL SERVICES

A)Growth of the banking sector in India:

The banking system in India is the most extensive. The total asset value of the entire banking sector in India is nearly US$270 billion The total deposits is nearlyUS$220 billion. Banking sector in India has been transformed completely.

B)Growth of the Capital Market in India

The ratio of the transaction was increased with the share ratio and deposit system The removal of the pliable but ill-used forward trading mechanism The introduction of infotech systems in the National Stock Exchange (NSE) in order to cater to the various investors in different locations Privatization of stock exchanges

C)Growth in the Insurance sector in India

With the opening of the market, foreign and private Indian players are keen to convert untapped market potential into opportunity by providing tailor-made products: The insurance market is filled up with new players which has led to the introduction of several innovative insurance based products value addons, and services. Many foreign companies have also entered the arena such as Tokio Marine, Aviva, Allianz, Lombart General, AMP, New York Life, Standard Life, AIG, and Sun Life

TYBCOM (BBI)

FINANCIAL SERVICES

The competition among the companies has led to aggressive marketing, and distribution techniques

D)Growth of the Venture Capital market in India

The venture capital sector in India is one of the most active in the financial sector inspite of the hindrances by the external set up Presently in India there are around 34 national and 2 international SEBI registered venture capital funds.

TYBCOM (BBI)

FINANCIAL SERVICES

2.6 Challenges faced by Financial Service Companies

Market issue

In an increasingly competitive marketplace, successful players are focused on customer retention. Improvements in retention levels can often be achieved by improving the approach to customer management and customer segmentation. There is also a need to address increasing customer expectations for price and service.

Regulatory issues

TYBCOM (BBI)

FINANCIAL SERVICES

Regulation has reached such a level that many organisations are focused almost entirely on meeting regulatory requirements. This is causing businesses to put at risk other initiatives required to maintain a competitive position in the market

Operational issues Globalisation, consolidation, convergence and the increasing focus on competitiveness are all driving the need to improve the efficiency and effectiveness of operations. Cost control remains a management imperative. Operational risk systems and controls (driven by regulation) are necessities not options.

Technology issues All of this change in the marketplace, in the regulatory environment and in operations means that there is very often a need to replace and upgrade infrastructure, hardware and software.

TYBCOM (BBI)

FINANCIAL SERVICES

2.7 Development of Financial Services in India

In last few years, India gas emerged as the one of the most rapidly growing economies in the world. India has been categorized with nations like Brazil, Russia and China (BRIC Nations) who are going to be the prime drivers of world economy in next few decades. Since the time, India first opened its gates to foreign investment (FDI & FII), there has been a complete turnaround. Now the traditional Hindu rate of growth is a thing of past and clocking 8%-9% GDP growth rate is the common norm. India along with other Asian powerhouse China makes for the fastest growing nations in the entire world. In the recent time world economy has developed certain serious economic difficulties, in the first instance failing of banking & financial institutions and secondly the global economy has been badly affected by falling demand in major economies. The need for today is to build trust among the Financial Services Industry supported by effective policy measure taken by the regulatory authority which will raise standards of living. The Associated Chambers of Commerce and Industry of India (ASSOCHAM), the apex body of the Chambers of Commerce of India, has
TYBCOM (BBI)

FINANCIAL SERVICES

taken initiative by organizing a Banking & Financial Services Industry (BFSI) Summit 2009 where analysts and consultants from global industry can elaborate in more detail on issues and solutions affecting the BFSI sector & industries dealing with them.

TYBCOM (BBI)

FINANCIAL SERVICES

2.8 Structure of the Indian Banking Industry

Classification of Banks Number of Total (2007) Public Sector Banks Indian Private Banks Foreign Banks Total Banks 28 25 29 82 575 175 48 65

Assets

(US$ billions)

OPPORTUNITY

Foreign banks gaining prominence in India has a highly developed Financial Services sector and popularity in India.

OVERVIEW
Total banking assets expected to grow to US$1 trillion by 2010 a CAGR of 11% .Over US$70 billion additional equity needed for growth plus Basel II compliance. Consolidation in the banking space likely to be driven by private players. Mutual funds: Assets Under Management (AUM) are expected to grow by 15% till 2010 .Retail finance is expected to grow at an annual rate of 18%, from US$27.6 billion in 2003-04 to over US$75 billion by 2010.Demand for credit likely to grow at 25% p.a. with rapid GDP growth.

3.1 INTRODUCTION OF BANK

TYBCOM (BBI)

FINANCIAL SERVICES

In any economy Banks play a pivotal role. Without a sound and effective banking system in India it cannot have a healthy economy. The past three decades Indias banking system has several outstanding achievements to its credit. Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of Indias growth process. The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentines bankers. Banks perform activities such as accepting deposits and lendings. Banks' activities can be divided into retail banking, dealing directly with individuals; business banking, providing services to mid-size business; corporate banking dealing with large business entities; private banking, providing wealth management services to High Net Worth Individuals; and investment banking, relates to helping customers raise funds in the Capital Markets and advising on mergers and acquisitions The first bank in India, though conservative, was established in 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to1969 of India banks Nationalization of Indian bank and up to 1991prior to Indian banking sector reforms. New phase of Indian Banking System with the advent of Indian Financial and Banking sector reform after 1991.

TYBCOM (BBI)

FINANCIAL SERVICES

Definition of bank
Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise cheques, otherwise." and draft, withdrawable and order by or

Other Definition of bank

According to Oxford English Dictionary, Bank is, An establishment for custody of money received from or on behalf of, its customers. Its essential duty is the payment of the orders given on it by the customers, its profit mainly from the investment of money left unused by them.

Banks are now moving towards Universal Banking, which is a combination of commercial banking, investment banking and various other activities including insurance. The evolution of IT services outsourcing in the Indian banks has presently moved on to the level of Facilities Management (FM). Banks now looking at business process management (BPM) to increase returns on investment improve customer relationship management (CRM) and employee productivity.

TYBCOM (BBI)

FINANCIAL SERVICES

3.2 NATIONALISATION OF BANKS IN INDIA

The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. It nationalized 14 banks then. These banks were mostly owned by businessmen and even managed by them. Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank Indian Bank Indian Overseas Bank Bank of Baroda Union Bank Allahabad Bank United Bank of India UCO Bank Bank of India

Before the steps of nationalization of Indian Banks, only State Bank of India (SBI) was established. It took place in July 1955 under the SBI Act of 1955. The State Bank of India is Indias largest commercial bank.
TYBCOM (BBI)

FINANCIAL SERVICES

SCHEDULED BANKS The second schedule of the Reserve Bank of India Act contains a list of Banks which are described as Scheduled Banks. A bank in order to be designated as a Scheduled bank should have a paid up capital and reserved as prescribed by the Act. In terms of section 42(6) of RBI Act, 1934, the required amount is only Rs. 5 lakh. However, presently to start a Commercial Bank the RBI prescribed a minimum capital of Rs. 100 crore and its business must be managed in a manner which, in the opinion of Reserve Bank of India. The scheduled Banks are also required to maintain with the Reserve Bank of India a deposit in the form of Cash Reserve Ratio, based on its demand and time liabilities, at a prescribed rate.

NON-SCHEDULED BANKS The commercial banks, not included in the Second Schedule of the RBI Act are known as Non-Scheduled Banks. They are not entitled to facilities like refinance and rediscounting of bills, etc. from RBI. They do not get the prestige as do scheduled banks.

BANKS IN INDIA In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. The RBI has shown certain interest to involve more of foreign banks than the existing one recently.
TYBCOM (BBI)

FINANCIAL SERVICES

3.3 Functions of a Bank

Since Banking involves dealing directly with money, governments in most countries regulate this sector rather stringently. In India, the regulation traditionally has been very strict and in the opinion of certain quarters, responsible for the present condition of banks, where NPAs are of a very high order. Banks essentially perform the following functions:
A) Accepting Deposits from public/others (Deposits):

Banks are also called custodians of public money. Basically, the money is accepted as deposit for safe keeping. Type of deposit accounts (Domestic Customers)
Fixed Deposit Accounts: The term 'fixed' here

denotes

tenure.

Fixed

Deposit,

therefore,

presupposes a length of time for which the depositor decides to keep the money with the Bank and the rate of interest payable to the depositor is decided by this tenure. Rate of interest differs from Bank to Bank.

Savings Account: As the name denotes, this

account is ideal for parking your temporary savings. This account gives you a nominal rate of interest and you can withdraw money as and when the need arises.
TYBCOM (BBI)

FINANCIAL SERVICES

Current Account: Banks accept deposits in

current account and allow unlimit withdrawals subject to a minimum balance.No interest is payable on a current account. Opening of a current account is indicated in the case of a business enterprise or high worth individuals.

Recurring Deposit Account: Under

a Recurring Deposit account (RD account), a specific amount is invested in bank on monthly basis for a fixed rate of return. The deposit has a fixed tenure, at the end of which the principal sum as well as the interest earned during that period is returned to the investor.Loan/overdraft facility is also available against Recurring Bank Deposits.

TYBCOM (BBI)

FINANCIAL SERVICES

B) Lending money to the public Lending money is one of the two major activities of any Bank. Banks accept deposit from public for safe-keeping and pay interest to them. They then lend this money to earn interest on this money. In a way, the Banks act as intermediaries between the people who have the money to lend and those who have the need for money to carry out business transactions. The difference between the rate at which the interest is paid on deposits and is charged on loans, is called the "spread".Bank lends funds in following ways.

Overdraft: This type of advances are given to current account holders.

All entries are made in the current account. The word overdraft means the act of overdrawing from a Bank account. In other words, the account holder withdraws more money from a Bank Account than has been deposited in it. It is sanctioned to sole trading partnership firms,and joint stock companies.

Cash Credit: It can be given to current account holders as well as to the

others who do not have any account with the bank. Separate cash credit account is maintained. In the case of Cash Credit, a proper limit is sanctioned which normally is a certain percentage of the value of the commodities/debts pledged by the account holder with the Bank. The cash credit is given against the security of tangible assets and| or guarantees.

TYBCOM (BBI)

FINANCIAL SERVICES

Bill Discounting: When the seller (drawer) deposits genuine

commercial bills and obtains financial accommodation from a bank or financial institution, it is known as bill discounting. The seller, instead of discounting the bill immediately may choose to wait till the date of maturity. The bank can get the bill rediscounted with the All India Financial Institution such as Industrial Development Bank of India (IDBI) Export Import Bank of India (EXIM Bank), etc.

Term Loans: Lumpsum amounts are given. It is normally for short

term,say a period of one year of medium term say a period of five years.This type of loan is normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the borrower over a long period (exceeding at least one year). Purchases of plant and machinery, constructing building for factory, setting up new projects real estate fall in this category. Loans are normally secured against security of assets.

TYBCOM (BBI)

FINANCIAL SERVICES

3.4 Financial Services by Banks in Rural Sector

Recently,several policy initiatives have been taken to advance rural banking. These include additional capital contribution to NABARD by the RBI and the Government of India, recapitalisation and restructuring of RRBs, simplification oflending procedures as per the Gupta Committee recommendations, preparation of a special credit plans by public sector banks andlaunching of Kisan Credit Cards. Finally, a scheme linking self-help groups with banks has been launched under the aegis of NABARD to augment the resources of micro credit institutions. A Committee has gone into various measures for developing micro credit, and has submitted its report, which is under the consideration of the RBI. In a phase in the international development endeavour in which ideology is out of fashion, the search is on for practical, workable solutions to the deep-seated challenges of poverty. Micro-credit seems to provide just such a solution. By delivering financial services at a scale, and by mechanisms, appropriate to poor people, micro-credit can reach them. By providing poor people with credit for microenterprise it can help them work their own way out of poverty. And by providing loans rather than grants the micro-credit provider can become sustainable by recycling resources over and over again. In other words microcredit appears to deliver the 'holy trinity' of outreach, impact and sustainability. The micro-credit industry has sought to resolve the tensions between a focus on poverty and a commitment to sustainability by integrating them within a matrix defined by two axes, of outreach (or access) and financial sustainability.
TYBCOM (BBI)

FINANCIAL SERVICES

Micro Financial Services to Rural Sector

Basic Banking Services: Basic banking services that include savings

and withdrawal facilities meet the demand for liquidity whether it be for enterprise purposes or for emergencies. The availability of savings products, the design of which takes into account the cash flows of the poor, would be very crucial to the effective mobilization of savings. There is also a need to innovate for micro-investment products that enable the poor to maximize returns on their surplus.

Insurance Including Life, Disability, Health and Assets: The

vulnerability of the poor points to insurance being a crucial product. Existing ways of informal insurance among the poor are: drawing down on savings, reciprocal need-based gift exchange, selling physical assets and diversifying income sources. There is a need for a mechanism to pool, price and trade the risks of the poor and the means to do this would be an insurance product that is able to bring under its fold the poor with varying risk profiles.

TYBCOM (BBI)

FINANCIAL SERVICES

3.5 Banking Services Provided by Through Different channels

ATMs An automated teller machine (ATM) is a computerised telecommunications device that offers many banking services such as deposit and withdrawl of cash, balance enquiry, transfer of funds, pin change, request for cheque book, and statement of accounts.

Debit Cards Debit card offers direct withdrawl of funds a customers bank account electronically. Under system cardholders accounts are immediately debited against the amount of goods purchase. from this

Credit Card A plastic card, with a magnetic strip or an embedded microchip, connected to a credit account that may be used repeatedly to borrow money or buy products and services on credit.

TYBCOM (BBI)

FINANCIAL SERVICES

Demat Account In India, a demat account, the abbreviation for dematerialised account, is a type of banking account which dematerializes paper-based physical stock shares into electronic form. The dematerialised account is used to avoid holding physical shares,no stamp duty on transfer of securities, elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.

Telephone Banking or Phone Banking Telephone banking is a service provided by a financial institution which allows its customers to perform transactions over the telephone. It offers virtually all the features of an automated teller machine like account balance information and list of latest transactions, electronic bill payments, funds transfers between a customer's accounts, etc. Mobile Banking Mobile banking (also known SMS Banking) is a term used for performing balance checks, account transactions, payments etc. via a mobile device such as a mobile phone.
TYBCOM (BBI)

FINANCIAL SERVICES

Online Banking Online banking (or Internet banking) allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank.Through this, one can pay electric a bill, apply for a loan, new account, funds transfer etc.

Video Banking Video banking is a term used for performing banking transactions or professional banking consultations via a remote video connection.The functions are Cash Deposits, Check Deposits, Cash Withdrawal, Coin Withdrawals, Bill Payments, Account inquiries, Process New Accounts, Account Transfers etc. Electronic funds transfer Electronic funds transfer or EFT refers to the computer-based systems used to perform financial transactions electronically. EFTPOS (Electronic Funds Transfer at Point of Sale) also allows users of the system to withdraw cash at the time of purchasing a product or service through the merchant's EFTPOS terminal.

TYBCOM (BBI)

FINANCIAL SERVICES

Mail

Mail is part of the postal system which itself is a system wherein written documents typically enclosed in envelopes, and also small packages containing other matter, are delivered to destinations around the world.

TYBCOM (BBI)

FINANCIAL SERVICES

4.1.1 Mutual funds

Mutual funds are supposed to be the best mode of investment in the capital market since they are very cost beneficial and simple, and do not require an investor to figure out which securities to invest into. A mutual fund could simply be described as a financial medium used by a group of investors to increase their money with a predetermined investment. The responsibility for investing the pooled money into specific investment channels lies with the fund manager of said mutual fund. Therefore investment in a mutual fund means that the investor has bought the shares of the mutual fund and has become a shareholder of that fund. Diversification of investment Investors are able to purchase securities with much lower trading costs by pooling money together in a mutual fund rather than try to do it on their own. However the biggest advantage that mutual funds offer is diversification which allows the investor to spread out his money across a wide spectrum of investments. Therefore when one investment is not doing well, another may be doing taking off, thereby balancing the risk to profit ratio and considerably covering the overall investment. The best form of diversification is to invest in multiple securities rather than in just one security. Mutual funds are set up with the precise objective of investing in multiple securities that can run into hundreds. It could take week for an investor to investigate on this kind of scale, but with investment in mutual funds all this could be done in a matter of hours.

TYBCOM (BBI)

FINANCIAL SERVICES

4.1.2 Definition of Mutual Fund

The securities and exchange board of India (mutual fund) regulation, 1993 defines a mutual fund as A fund established in the form of a trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations

4.1.3 Mutual Fund Types:

Different types of mutual funds are as follows: Money market funds They are considered the safest mutual fund investments because till date these funds have maintained a 100 % success rate as none has ever folded up. Therefore serious investment objectives like storing money for emergencies, saving for the short term, or looking for a place to store cash from sale of an investment, are perfectly compatible with money market funds. These funds also invest in short term debt instruments occasionally and return accruals that are double of what bank securities offer. Additionally money markets allow investors to write checks out of their accounts and usually allow a high level of liquidity that is not found in bank securities
TYBCOM (BBI)

FINANCIAL SERVICES

Bond funds Investments in bond funds have more risk than those of the money market funds and are usually aimed at consolidating a portfolio by generating more income. Some of the main bond funds are:

Municipal bond funds Corporate bond funds Mortgage backed securities funds US government bond funds

Stock funds Stock funds promise more bang for the buck' but are fraught with the risk of investments being exposed to the turbulence that stock markets occasionally experience. Where money market funds and bond funds give an ROI that is barely above inflation, stock funds are way ahead with their high earning potential. Some of the main stock funds are: Strategic

Growth funds Value funds Blend funds

International Funds

TYBCOM (BBI)

FINANCIAL SERVICES

Global funds Foreign funds Country specific funds

Investing in Mutual Funds A mutual fund is pools the savings of a number of investors, with the objective of investing that money in capital market securities such as equity stocks, bonds, and debentures. The returns on these investments are shared by the investors whose money has been pooled. A mutual fund is considered to be the ideal investment option for the common person, allowing him to invest in a diversified, professionally managed assortment of securities at a relatively lower cost. On the basis of execution and operation

Open-ended Funds:- These funds do not have a fixed date of

redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds.

Close-ended Funds:- These funds are open initially for entry during

the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but
TYBCOM (BBI)

FINANCIAL SERVICES

the discount narrows as maturity nears. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed on stock exchanges (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.

4.1.4 Benefits of Investing in Mutual Funds:

There are several benefits from investing in a Mutual Fund: Small investments: Mutual funds help you to reap the benefit of returns by a

portfolio spread across a wide spectrum of companies with small investments. Professional Fund Management: Professionals having considerable

expertise, experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyze the markets and economy to pick good investment opportunities. Spreading Risk: An investor with limited funds might be able to invest in

only one or two stocks/bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified. Transparency: Mutual Funds regularly provide investors with information

on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type.
TYBCOM (BBI)

FINANCIAL SERVICES

Choice: The large amount of Mutual Funds offer the investor a wide variety

to choose from. An investor can pick up a scheme depending upon his risk/ return profile. Regulations: All the mutual funds are registered with SEBI and they

function within the provisions of strict regulation designed to protect the interests of the investor.

Concept of Mutual Funds

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

TYBCOM (BBI)

FINANCIAL SERVICES

4.1.5 Risks involved in investing in Mutual Funds:

Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest in shares, debentures, bonds etc. All these investments involve an element of risk. The unit value may vary depending upon the performance of the company and if a company defaults in payment of interest/principal on their debentures/bonds the performance of the fund may get affected. Besides incase there is a sudden downturn in an industry or the government comes up with new a regulation which affects a particular industry or company the fund can again be adversely affected. All these factors influence the performance of Mutual Funds. Some of the Risk to which Mutual Funds are exposed to is given below: Market risk:- If the overall stock or bond markets fall on account of overall

economic factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fund performance. Non-market risk:- Bad news about an individual company can pull down

its stock price, which can negatively affect fund holdings. This risk can be

TYBCOM (BBI)

FINANCIAL SERVICES

reduced by having a diversified portfolio that consists of a wide variety of stocks drawn from different industries. Interest rate risk:- Bond prices and interest rates move in opposite

directions. When interest rates rise, bond prices fall and this decline in underlying securities affects the fund negatively. Credit risk:- Bonds are debt obligations. So when the funds invest in

corporate bonds, they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a beating.

4.1.6 Rights of a Mutual Fund holder in India

As per SEBI Regulations on Mutual Funds, an investor is entitled to: Receive Unit certificates or statements of accounts confirming your

title within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund. Receive information about the investment policies, investment Receive dividend within 42 days of their declaration and receive the objectives, financial position and general affairs of the scheme. redemption or repurchase proceeds within 10 days from the date of redemption or repurchase. The trustees shall be bound to make such disclosures to the unit holders as are essential in order to keep them informed about any information, which may have an adverse bearing on their investments.
TYBCOM (BBI)

FINANCIAL SERVICES

75% of the unit holders with the

prior approval of SEBI can terminate the AMC of the fund. 75% of the unit holders can pass a An investor can send complaints to resolution to wind-up the scheme. SEBI, who will take up the matter with the concerned Mutual Funds and follow up with them till they are resolved.

4.2.1 Introduction of Venture Capital

Venture capital is seen as `you've-got-the-idea, we-have-the-money'. Venture Capital is a form of "risk capital .A venture capital fund is a pooled investment vehicle (often in the form of a limited partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital (also known as VC or Venture) is a type of private equity capital typically provided to early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capital provides long-term, committed share capital, to help unquoted companies grow and succeed. As shareholder venture capitalist's return is dependent on the growth and profitability of the business. This return is

TYBCOM (BBI)

FINANCIAL SERVICES

generally earned when the venture capitalist "exits" by selling its shareholding when the business is sold to another owner. Venture capital investors are only interested in companies with high growth prospects, which are managed by experienced and ambitious teams who are capable of turning their business plan into reality. The term of the investment is often linked to the growth profile of the business. Investments in more mature businesses, where the business performance can be improved quicker and easier, are often sold sooner than investments in early-stage or technology companies where it takes time to develop the business model.

4.2.2 Meaning of Venture Capital

Venture Capital is long-term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth. Venture Capitalist pools their resources including managerial abilities to assist new entrepreneurs in the early yeas of project. Once the project reaches the stage of profitability, they sell their equity holdings at high premium.

4.2.3 Features of Venture Capital

The main features of venture capital are: Venture Capital is usually in the form of equity participation. It may also take the form of convertible debt or long term loan..

TYBCOM (BBI)

FINANCIAL SERVICES

Venture capital finance caters largely to the needs of first-generation entrepreneurs who are technocrats, with innovative technological business ideas that have not so far been tapped in the industrial field Venture Capitalist joins the entrepreneur as a co-promoter in projects and shares the risks and rewards of the enterprise. Once the venture has reached the full potential the Venture Capitalist disinvests his holdings either to the promoters or in the market. The basic objective of investment is not profit but capital appreciation at the time of disinvestment.

4.2.4 Scope of Venture Capital

Venture Capital may take various forms at different stages of the project. There are four successive stages of development of a project to exploit the economics of scale and achieve stability. The various stages in the financing of Venture Capital are described below:
Development of an Idea seed finance: In the initial stage Venture Capitalists

provide seed capital for translating an idea into business proposition. At this stage investigation is made in depth which normally takes a year or more.
TYBCOM (BBI)

FINANCIAL SERVICES

Implementation stage start up finance: When the firm is set up to

manufacture a product or provide a service, start up finance is provided by the Venture Capitalists. The first and second stage capital is used for full scale manufacturing and further business growth.
Fledging stage additional finance: In the third stage, the firm has made some

headway and entered the stage of manufacturing a product but faces teething problems. It may not be able to generate adequate funds and so additional round of financing is proved to develop the marketing infrastructure.
Establishment finance: As this stage the firm is established in the market and

expected to expand at a rapid pace. It needs further financing for expansion and diversification so that it can reap economies of scale and attain stability.

4.2.5 Venture Capital Regulations in India

Registration with SEBI is mandatory to carry out the business of Venture Capital Funds in India. The regulations are as follows: Any company or trust or a body corporate or a foreign Venture Fund (vc) to carry on any activities of venture capital should apply to the SEBI. Minimum sum acceptable by the VC Fund from any investor is Rs. 5 lakh. Before the start of operations by the venture capital fund shall have commitment from the investor for contribution of an amount of Rs.5 crore. The Venture Capital fund should not carry on any other activities other than that of venture capital fund.
TYBCOM (BBI)

FINANCIAL SERVICES

Venture Capital fund should not invest more than 25% corpus of the fund in one venture. Any Venture Capital fund is not permitted to get its units listed on any recognized stock exchange for the first three years from the date of issuance of units. VC fund should maintain proper books of accounts as per the law.

5.1.1 Introduction of Derivative

A Derivative is a financial instrument that is derived from some other asset, index, event, value or condition (known as the underlying). Rather than trade or exchange the underlying itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying. A simple example is a futures contract: Derivatives can be used by investors to speculate and to make a profit if the value of the underlying moves the way they
TYBCOM (BBI)

FINANCIAL SERVICES

expect (e.g. moves in a given direction, stays in or out of a specified range, reaches a certain level). Alternatively, traders can use derivatives to hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out. Commodities whose value is derived from the price of some underlying asset like securities, commodities, bullion, currency, interest level, stock market index or anything else are known as Derivatives. In simpler form, derivatives are financial security such as an option or future whose value is derived in part from the value and characteristics of another security, the underlying it is a generic term for a variety of financial instruments. Essentially, this means you buy a promise to convey ownership of the asset, rather than the asset itself. The legal terms of a contract are much more varied and flexible than the terms of property ownership. In fact, its this flexibility that appeals to investors.

Derivatives are usually broadly categories are:

The relationship between the underlying and the derivative (e.g. forward, The type of underlying (e.g. Equity derivatives, FX derivatives, credit The market in which they trade (e.g. exchange traded or over-the-counter)

option, swap)

derivatives)

5.1.2Benefits
Nevertheless, the use of derivatives also has its benefits

Derivatives facilitate the buying and selling of risk and many people

consider this to have a positive impact on the economic system. Although

TYBCOM (BBI)

FINANCIAL SERVICES

someone loses money while someone else gains money with a derivative, under normal circumstances, trading in derivatives should not adversely affect the economic system because it is not zero sums in utility. Former Federal Reserve Board chairman Alan Greenspan commented in

2003 that he believed that the use of derivatives has softened the impact of the economic downturn at the beginning of the 21st century.

5.1.3 Types of derivatives OTC and exchange-traded Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds.
TYBCOM (BBI)

FINANCIAL SERVICES

Because OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counterparty risk, like an ordinary contract, since each counterparty relies on the other to perform. Exchange-traded derivatives Exchange-traded derivatives (ETD) are those derivatives products that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The world's largest[3] derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listed on equity exchanges. Forwards A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. Forward contracts are being used in India on a large scale in the foreign exchange market to hedge the currency risk. Forward contracts, being negotiated by the parties on one to one basis, offer them tremendous flexibility to articulate the contract in terms of price, quantity, quality delivery time and place. On the other side, forward contracts, being customized, are plagued with poor liquidity and default risk (credit risk).

TYBCOM (BBI)

FINANCIAL SERVICES

Futures A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts, such as futures of the Nifty index. In futures market, clearing corporation/house becomes the counter party to all the trades or provides the unconditional guarantee for their settlement i.e. assumes the financial integrity of the entire system. An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying, at a stated date and at a stated price. Options are of two types - Calls and Puts options: Calls give the buyer the right but not the obligations to buy a given quantity of the underlying asset, at a given price on or before a given future date.

Puts give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date. Presently, at NSE futures and options are traded on the Nifty, CNX IT, BANK Nifty and 116 single stocks.

5.1.1Introduction of Merchant Banking

The term Merchant Banking has its origin in U.K during eighteenth and early nineteenth century. Merchant banking activities was initiated into Indian capital market where Grind lays Bank (foreign bank) receive the license from the RBI
TYBCOM (BBI)

FINANCIAL SERVICES

in 1967. In 1972, the Banking Commission also recommended that India should also start merchant banking services so that they would to their clients. Hence State Bank of India started Indian Merchant Banking in 1972; its objective was to render corporate advice and assistance to small and medium entrepreneurs. The Commercial Banks that follow SBI were Central Bank of India, Bank of India, Syndicate Bank, Bank of Baroda and Standard Chartered Bank, Canara Bank, Indian Overseas Bank, ICICI Bank etc.Merchant Banking activities are regulated by the SEBI & Ministry of finance & Companies act of 1956. Definition of Merchant Banking The first authoritative definition for the term Merchant Banker has been given in the Rule 2 (e) of SEBI (Merchant Bankers) Rules, 1922. Accordingly, A Merchant Banker means any person who is engaged in the business of Issue Management either by making arrangements regarding selling, buying or subscribing to Securities as Manager, Consultant, Adviser of Corporate Advisory Service in relation to such Issue Management. rendering

5.1.2 Merchant banking Indian Scenario

Till early 1960s, there was no merchant banking in the Indian banking system. It was the grind lays Bank which started merchant services as far back as 1967. After Grind lays Bank, other foreign banks like Citibank and Chartered bank, started these services in India.Till 1970s, the main services rendered were management of share issues and sub-aspects of financial consultancies. In mid
TYBCOM (BBI)

FINANCIAL SERVICES

1970s, there was a boom in the capital market with the introduction of Foreign Exchange Regulation Act (FERA) (1973). This created awareness in the investing public about the capital market. Today, the Merchant Banking set up in the country is broadly divided into the following groups: Foreign Banks: Along with Grind lays Banks, Citibank, Chartered Bank and Hong Kong Bank are also active in merchant banking. Indian Banks: State Banks of India took the lead among Indian banks and is at present well established in the merchant banking field. Private Merchant Bankers: Today, firms like J.M. financial Consultants, Champaklal Investments and Financial consultancy, V.B. Desai Consultants etc. are some of the leading Private merchant bankers in our country. Financial Institutions: Industrial Credit and Investment Corporation of India (ICICI) has a well established merchant banking office.Its main concentration and attention is on mergers, amalgamations and takeover.

5.1.3 Guidelines for Merchant Bankers

Merchant Banking in India is governed by Securities and Exchange Board of India(SEBI)Regukatins,1992 to carry out the business of merchant banking.Now, as per new amendment passed in 2006,only on category exists that is Category I.An applicant should comply with the following norms:
Category I business includes activity of issue management ,acting as a

adviser,consultant,manager.
TYBCOM (BBI)

FINANCIAL SERVICES

The applicant should be a body corporate and should have a minimum net worth of Rs.5 crores The applicant should not carry on any business other than those connected with the securities market. The applicant must have at least two employees with prior experience in merchant banking and all the issues should be managed but at least by one lead manager. The applicant should not have been involved in any securities scam or proved guilt for any offence. Every merchant banker should furnish to the board half yearly unaudited financial results when required by the Board. SEBI can cancel /suspend registration of defaulter merchant bankers.

5.1.4 Services Rendered by Merchant Bank

Merchant banks are rendering diverse services and functions, which are as follows:

Issue Management: When companies seek to raise resources for

implementation of a new project or finance expansion or modernization or

TYBCOM (BBI)

FINANCIAL SERVICES

diversification of an existing unit or fund long term working capital requirement, they retain the services of a merchant banker. The merchant bankers help corporate to raise money from the markets through the issue of shares, debentures, bonds etc. Corporate Advisory Services Relating to Issue: The pricing of the issue

especially in a public issue is very important. The promoter also needs to decide whether to go in for a fresh issue or to go for a rights issue. However this will depend mainly on the quantum of funds that the company needs to raise. In this matter, the expert advice of merchant bankers is of immense importance.

Underwriting: Underwriting is like insurance against the failure of an issue.

It is a guarantee to the issuing the company, that the money that it requires for its project will definitely be raised. For the risk that the underwriter takes, he is paid commission. New companies entering the markets for the first time, always face number of problems in raising funds from the market. Issuing companies therefore approach different underwriters with a request to underwrite the issue.
Mergers and Acquisition: A merger is a combination of two companies to

form a new company, while an acquisition is the purchase of one company by another in which no new company is formed as due to competition the companies unable to survive or prosper on their own may like to merge and face competition and achieve growth targets.

TYBCOM (BBI)

FINANCIAL SERVICES

Project Counseling: The corporate seek

advice in respect of identification of profitable investment opportunities in the related business areas or as part of diversification process. The merchant bankers carry out detailed studies on product demand patterns, cost structures, etc., to enable the corporate in preparation of feasibility study.
Loan Syndication: It refers to assistance rendered by merchant banks to get

mainly term loans for project. Such loans may be obtained from a single development finance institution or a syndicate or consortium as in the case of large term loans. Merchant banks can also help corporate clients to raise syndicated loans from commercial banks.

Portfolio Management: Portfolio refers to investment in different kinds of

securities such as shares, debentures or bonds issued by different companies or by government. It refers to maintaining proper combinations of securities in a manner that they give high return with low risk.

6.1.1 Introduction of Leasing

A lease is a legally enforceable contract which defines the relationship between an owner, the lessor, and a renter, the lessee. Most consumers encounter a lease when renting housing or leasing a car. A lease can be very short-term (a few weeks or months), or it can be extended for a number of years. Many small businesses and retail stores have
TYBCOM (BBI)

FINANCIAL SERVICES

lease agreements for 10 years or more, and renewal of the lease may just be a formality. Apartment renters, however, rarely sign a lease extending past one year of occupancy. The lessee knows that he or she has full rights to the property without fear of sudden seizure or eviction. A lease also guarantees that the original rental terms will not change until the lease has expired. A lease arrangement does not always guarantee smooth sailing between landlord and tenant, however. Renters and leasers are not owners, therefore the property is always subject to scrutiny by the landlord and/or titled owner

6.1.2 Definition of Lease

A lease is a contractual agreement between the lessor (owner) and the lessee (second party) for a specified asset, which can be property, a house or apartment, business or office equipment, an automobile or even a horse. The lessee receives the right to total ownership for a spelled out period of time and conditions in return for payments .It is a contract that conveys the right to use property for a period of time in return for a consideration, usually rent, paid to the property owner.

6.1.3 RBI Guidelines to Leasing Companies

Leasing companies are expected to here the following norms while availing financial facility from banks: Formation of consortium by a bank is not necessary, even if credit limit per borrower exceeds Rs50 crores. Banks are permitted to extent credit using the need based approach.
TYBCOM (BBI)

FINANCIAL SERVICES

Banks are permitted to adopt syndication route instead of consortium route irrespective of the quantum of credit invdived, if the arrangements suits the borrower and financing banks. The level of loan and cash credit component in case borrower with a limit of less than Rs10 core would be settled between banks and the borrower. The loan component of working capital limit(MPBF) i.e. maximum permissible bank finance is enhanced to 80% and 75% in case of borrower enjoying working capital credit limit of Rs20 core and more, and between 10-20 core respectively the balance being in form of cash credit.

6.1.4 Types of Lease

Capital Lease: A finance lease or capital lease is a type of lease. It is a

commercial arrangement where lesee selects the equipment, settles the right and terms of sale and arranges with the leasing company to buy it. He enters into irrevocable and non-cancellable contract with the company. The lesee maintains it, insures and avail of after sales service and warranty backing.
TYBCOM (BBI)

FINANCIAL SERVICES

Operating lease: A lease for which the lessee acquires the property for only

a small portion of its useful life. An operating lease is commonly used to acquire equipment on a short-term basis. Any lease that is not a capital lease is an operating lease.
Sale and Leaseback: Leaseback, short for sale-and-leaseback, is a financial

transaction, where one sells an asset and leases it back for a long-term: thus one continues to be able to use the asset, but no longer owns it. This is generally done for fixed assets, real estate and planes.
Leveraged lease: A lease in which the lessor puts up some of the money

required to purchase the asset and borrows the rest from a lender. The lender is given a mortgage on the asset and an assignment of the lease and lease payments. The lessee makes payments to the lessor, who makes payments to the lender.
Cross-border lease: Cross-border leasing is also knows as international

lease. It is leasing arrangement where lessor and lessee are situated in different countries. To illustrate, if a leasing company in USA makes available an air bus on lease to air India, there would be a cross border lease.

Introduction to Factoring
Factoring is of recent origin in Indian Context. Kalyana Sundaram Committee recommended introduction of factoring in 1989.Banking Regulation Act, 1949, was amended in 1991 for Banks setting up factoring services. State Bank of India and Canara Bank has set up their Factoring Subsidiaries. SBI Factors Ltd, (April,
TYBCOM (BBI)

FINANCIAL SERVICES

1991),

CanBank

Factors

Ltd,

(August,1991). RBI has permitted Banks to undertake factoring services through subsidiaries. The parties involved in the factoring transaction are
Seller or a Client.

Buyer or a Customer. Financial Intermediary or a Factor. Factoring is the sale of book debt by a firm (client) to a financial institution (factor) on the understanding that the factor will pay for the book debt as and when they are collected or a guaranteed payment date. Normally, the factor makes a part payment up to 80% immediately after the debts are purchased thereby providing immediate liquidity to the client. Factoring in India is governed by the following act: Indian Contract Act Sales of Goods Act Transfer of Property Act Banking Regulation Act
1) Benefits of Factoring

Factoring offers a fast, reliable, continuous source of cash without the need to apply for a loan. So you can improve cash flow without incurring debt. The bank loan application process is frequently lengthy, and the outcome is often unpredictable. With factoring, this process is eliminated. Banks focus on

TYBCOM (BBI)

FINANCIAL SERVICES

your business debt/equity ratio; we focus on your sales and the financial strength of your customers. Factoring can reduce or eliminate your need for funds from venture capitalists, who generally want a percentage of your business, and will often demand a say in how your company is run. Factoring is extremely flexible. There is usually no limit to the amount you can factor. You decide what and when to factor, not us. Your company receives cash now for outstanding invoices, thereby reducing your administration costs. Factoring can allow you to pay your suppliers much faster, enabling you to take advantage of cash and early payment discounts. Factoring can reduce your companys bad debt. Factoring allows you to streamline credit approvals for new customers, as we will be verifying creditworthiness both on your and our behalf. Factoring is accessible to just about any viable company, even young, growing businesses without lengthy credit track records.

RBI Guidelines for Factoring RBI as a central authority has been engaged in initiating a number of measures for the development of factoring as a viable financial service. As a follow up to recommendations of the Kalyana Sundaram group the banking regulation

TYBCOM (BBI)

FINANCIAL SERVICES

ACT, 1949, was amended to enable commercial banks to undertake factoring business. In 1990, RBI issued following guidelines:

Prior approval: no business of factoring is to be undertaken by banks directly. However, indirect participation of banks in factoring services with the reserve banks prior approval will be allowed whereby banks would invest in shares of other factoring companies within the limits specified.

Subsidiaries: Banks are permitted to setup subsidiaries for undertaking the business of factoring, either individually or jointly with other banks with prior approval of RBI. Banks desirous of doing so, should apply to the chief officer, department of banking operations, RBI, central office, Mumbai in the form specified for the purpose.

Exclusive business: Factoring is to be undertaken by a factoring subsidiaries or joint venture factoring company, and such factors should not engage in financing other companies who are also engaged in business of factoring.

Investment limit: The investment limit of the bank in the shares of factoring companies, inclusive of its subsidiary in factoring business shall not exceed in aggregate 10% of paid up capital and reserves of bank.

Reporting: Factor banker shall submit periodical reports to the RBI regarding factoring business undertaken by it.

2) Different types of Factoring Recourse Factoring

TYBCOM (BBI)

FINANCIAL SERVICES

In recourse factoring, client undertakes to collect the debts from the customer. If the customer doesnt pay the amount on maturity, factor will recover the amount from the client. Recourse factoring is offered at a lower interest rate since the risk by the factor is low. Balance amount is paid to client when the customer pays the factor. Non Recourse factoring In non recourse factoring, factor undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. Factor purchases receivables on the condition that the factor has on recourse to the client; if the debt turns out to be non-recoverable. Higher commission is charged. Maturity Factoring Factor does not make any advance payment to the client. Factor pays on guaranteed payment date or on a collection of receivables. There is no risk to factor. He charges nominal commission. Full Service Factoring Under this, factor finance, administers the sales ledger, collects the debt at his risk and renders consultancy service. If the debtor fails to repay the debts, the entire responsibility falls on the shoulder of the factor since he assumes credit risk also.

8) Introduction of Housing Finance

TYBCOM (BBI)

FINANCIAL SERVICES

Loans to fulfill your dream.... to own a home...sweet home Of late, housing finance has not only become popular, but the procedure for obtaining loan has become so simplified that housing loans are simply available. The National housing Bank (NHB) was set up in 1988 as an apex institution for housing finance and a wholly-owned subsidiary of Reserve Bank of India (RBI). The main objective of the bank is to promote and establish the housing financial institutions in the country as well as to provide refinance facilities to housing finance corporations and scheduled commercial banks. In fact, the State Bank of India has set up a separate subsidiary for housing finance called SBI Home Finance. Similarly, the Canara Bank has set up a separate housing finance company. HUDCO provides refinance facility to the state government and also to financial institution involved in housing finance..The central government has adopted a five -year planning strategy through which it makes some fiscal concessions for housing. State governments have the power to legislate and have their own sources as specified in the National Housing and Habitat Policy (1998). Further, land development agencies can borrow from housing and land development agencies operating throughout the country.A set of all financial arrangements that are made available by Housing Finance Companies (HFFCs) to meet the requirements of housing is called housing finance

Housing Finance Companies

TYBCOM (BBI)

FINANCIAL SERVICES

Finance company " means a company engaged in the business of financing, whether by providing loans or advances or otherwise. Some of the leading finance companies providing housing loans are: HDFC Bank, IDBI Bank, ICICI Bank, State Bank of India, Punjab National Bank, Bank of Baroda, and Central Bank of India etc. These finance companies offer Home Loans to individuals to purchase (fresh / resale) or construct houses. Loans are also provided for home improvement or repair, extension of house etc. Home Finance Banks or Housing Finance Companies provide:
Equity Loans: A form of finance to the customer by way of mortgage of

existing property to the financier for taking a loan for some other purpose. The current market value of the property is the basis for providing home equity loans.
Home Extension Loans: The purpose of this loan is the extension of

existing houses tike the addition of rooms, toilet facilities etc. Such loans fall under the category of home loans.
Home Improvement Loans: These loans are provided mainly for repairs

and maintenance of existing houses- These could include internal and external repairing, waterproofing and roofing, complete interior renovation, tiling and flooring etc.
Home Purchase Loans: Finance provided for the purchase of ready-made

houses. 2) Housing Finance in India Growth-Factors

TYBCOM (BBI)

FINANCIAL SERVICES

Investment in and sale of commercial properties are recently gaining popularly in India thanks to real estate and attractive schemes being offered by various housing finance companies and banks. A developer who comes up with a new property rents it out and then sells it. Investing in a bank would generate hardly 6 to 7 percent interests, while the stock market is risky. Real estate will offer at least 10 to 15 percent returns, depending on the locality. The foreign companies are governed by RBI and FERA norms, which do not allow them to invest in real estate in India. Once these restrictions are waived, one will definitely see the emergence of real estate mutual funds in India too. Housing finance has received a boost through a combination of growing demand and rising affordability. According to HDFC, every rupee spent on housing leads to a 78 paisa increase in GDP. The positive fallout of real estate development on industries such as cement and steel has led the government to provide a fiscal stimulus for housing finance over the last few years. Between 1999 and 2001, the Union Budgets have provided significant tax benefits on housing loans, thereby offering fiscal stimulus to savings towards the construction sector. Main objective are as follows To increase the number of residential houses in the country by providing housing finance in a systematic and professional manner. To promote home ownership and to increase flow of funds to the housing sector. To strengthen housing finance by improving the domestic financial market and financial services. Providing direct loans to individuals and to diversify activities to client by entering into mutual fund, leasing, insurance, commercial banking etc.
TYBCOM (BBI)

FINANCIAL SERVICES

9)

Current Scenario of Financial Services

According to the latest Central Statistical Organization (CSO) data, financial services and real estate sector rose by 9.5 per cent in the first quarter of 2009-10. During 2008-09, State Bank of India (SBI) and associate banks advanced US$ 16.8 billion for infrastructure projects such as power plants and petroleum refineries. Mutual funds investing in the banking sector witnessed an increase in net values in September 2009 on the an average of 15.8 per cent, exceeding the 9.3 per cent rise. The government has taken a number of steps in recent months to revive the economy, including slashing interest rates, lowering factory levies. The financial services space is a rapidly growing one in India. The mutual fund industry has seen an 8.7 per cent increase in the asset base for the month of August 2009, against an increase of 2.8 per cent in July 2009, largely due to significant inflows into debt schemes. The average assets under management of the mutual fund industry stood at US$ 153.89 billion as at end August 2009, according to the data released by Association of Mutual Funds in India (AMFI).With the capital market showing signs of revival, banks and financial companies that had put their mutual fund plans on hold are gearing up to enter the segment. At present, nine players from the financial services sector are in various stages of entering the space.

TYBCOM (BBI)

FINANCIAL SERVICES

Dos of Financial Services

Reserve Bank of India prefers that commercial banks do not indulge in

merchant banking business directly. They should set up a separate subsidiary. This limits scope of commercial bank and gives space to merchant banker.
Mergers, takeovers, acquisitions, new Greenfield projects, fund raising for

government institutions, active money market are providing better prospects to merchant bankers. The primary advantage of venture capital is that they allow entrepreneurs to build their company with OPM (other people's money). If you need financing to build your technology or product and don't have the money to do it yourself, the idea is that the venture capitalists provides the capital to allow you to build. At nascent stage of business no other way of funding is available. Bankers are unwilling to extend loans..Venture Capital funds contribute not only funds but also management expertise which promoters may not be having adequately. Venture Capital funds provide investment opportunities in high risk new ventures.
Leasing may provide more flexibility to a business which expects to grow or

move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term. Hundred percent financing is available. Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than it could by purchasing the property
TYBCOM (BBI)

FINANCIAL SERVICES

In factoring there is instant access to your earnings instead of waiting to be paid by your customers. Instant cash against receivables leading to improved cash flows
The funds advanced will enable you to make bulk purchases and enjoy

quantity and early payment discounts from suppliers. The increase in cash will lead to further increase in sales. Housing Finance Company provides finance for the purchase of ready-made houses. Real estate will offer at least 10 to 15 percent returns, depending on the locality as compared to bank.
The real estate property acts as asset which can be used in case of need.

Moreover, the asset value increases year after year. There are also chances of capital appreciation.
Investors also benefit from the convenience and flexibility offered by Mutual

Funds. Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa. Because of diversification in mutual funds, it increases the potential returns of investor as well as it decrease the overall risk. Mutual funds offer a variety of tax benefits to investors. Investments up to Rs 1 lacs in Equity Linked Saving Scheme (ELSS) are exempt from tax under section 80 C.

TYBCOM (BBI)

FINANCIAL SERVICES

11.0 Donts of Financial Services

Company which is in merchant banking business would have expertise in underwriting, hire purchase, leasing, portfolio management etc. But RBI does not permit to get into these activities. So same promoters have to setup different companies for different purposes. Corporate like to use merchant bankers for malfide intensions. Giant professional or multinational merchant bankers are cautious in their approach to Indian market. The disadvantage is that securing a deal with a VC can be a long and complex process. Since the project is expected to run at start-up stage for several years, liquidity may be a greater problem. Unlike other projects, the ones that run under the venture finance may be subject to a higher degree of risk, as their result is uncertain or, at best, probable in nature. If circumstances dictate that a business must change its operations significantly, it may be expensive or otherwise difficult to terminate a lease before the end of the term. In factoring, since a third party will now deal directly with customers to collect amounts owed, this can negatively impact their perception of the

TYBCOM (BBI)

FINANCIAL SERVICES

business. This is especially true if the factor engages in aggressive or unprofessional practices when collecting accounts. Factoring cost is higher than discounting. It may not be of much use where companies have one time sales with customers. In hire purchase 20-25% of the cost of asset is to be paid by the hirer. The cost of maintenance of the hired asset is to borne by the hirer himself. Due to huge investment in one item, the benefits of diversification of investment are not available in real estate . Liquidity is low. Tax burden in form of stamp duty, capital gains tax, etc. is heavy. Repairs and maintenance cost is also high.
No investment is risk free. If the entire stock market declines in value, the

value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected.

TYBCOM (BBI)

FINANCIAL SERVICES

Future of Financial Services

The revised offer on financial services signals a substantial improvement. India has offered to bind the existing trade and investment regime. In the insurance sector, increasing the FDI investment limit up to 49 per cent over the next 3 years will allow greater infusion of capital, introduction of new instruments, market expansion and deeper penetration of insurance services. India can also undertake pre-commitments for merger and acquisitions between foreign banks and Indian private sector banks, especially as RBIs Roadmap envisions foreign banks entering into mergers and acquisitions with Indian private sector banks after 2009, subject to the 74 per cent investment limit. Another area where pre-commitment would send a positive signal to Indias trading partners would be regarding provision of national treatment to foreign banks involving solvency ratios, income tax, borrowing limits etc. Such pre-commitments would signal direction of future reforms and give domestic service providers and regulators time to prepare themselves for competition and put in place the required regulatory regime. Finally, given the move towards greater capital account convertibility and the advent of e-commerce in financial services, it would be advisable for India to undertake some commitments in financial services. This would also strengthen Indias case as it demands that developed countries
TYBCOM (BBI)

FINANCIAL SERVICES

provide full market access and national treatment commitment and data processing of financial services.

CASE STUDY OF FINANCIAL SERVICES

Mission
DENA BANK will provide its

Customers - premier financial services of great

value,

Staff - positive work environment and opportunity

for growth and achievement,

Shareholders - superior financial returns, Community - economic growth

Vision
DENA BANK will emerge as the

most preferred Bank of customer choice in its area of operations, by its reputation and performance

DENA BANK

TYBCOM (BBI)

FINANCIAL SERVICES

Export Services
Dena Bank offers wide range of services both at pre-shipment and post-shipment stage to exporters to help them realize business opportunities world over. We offer both Pre-shipment and Post-shipment credit in Rupee denominated terms as well as in Foreign Currency to exporters having firm export orders or confirmed Letters of Credit.

Pre Shipment Export Credit (Packing Credit) Dena Bank offers Pre-shipment Credit (Packing Credit) to the exporters for financing procuring, processing, manufacturing and/ or packing the goods for export. Packing Credit is granted for a period depending upon the circumstances of the individual case, such as the time required for procuring, manufacturing or processing (where necessary) and shipping the relative goods. Packing Credit is liquidated out of the proceeds of the Bill dawn for the exported commodities, once the Bill is purchased/ discounted etc., thereby converting pre-shipment credit into post-shipment credit. Packing Credit in Foreign Currency (PCFC) With a view to making credit available to exporters at internationally competitive rates, Dena Bank extends Pre-shipment Credit in Foreign Currency (PCFC) to exporters for domestic and imported inputs of exported goods at LIBOR/EURO LIBOR/ EURIBOR linked rates of interest. PCFC is available in major foreign currencies i.e. USD, GBP, EURO and YEN. Exporters can cover the cost of both domestic as well as imported inputs by these funds. PCFC can be liquidated out of proceeds of export documents on their submission for discounting/rediscounting under the EBR Scheme. Subject to mutual agreement between the exporter and the banker it can also be repaid / prepaid out of balances in EEFC A/c as also from

TYBCOM (BBI)

FINANCIAL SERVICES

rupee resources of the exporter to the extent exports have actually taken place.

Post Shipment Export Credit Dena Bank offers Post-Shipment Credit to exporters after shipment of goods till the date of realization of export proceeds and includes any loan / advance granted on the security of any duty drawback allowed by the Govt. from time to time. The exporter has the option to avail of pre-shipment and post-shipment credit either in rupee or in foreign currency. . The exporter can avail the following advances at postshipment stage: i. To get export bills purchased /discounted / negotiated; ii. To get advances against bills for collection; iii. To receive advances against duty drawback receivable from Govt.

Letter of Credit Advising/ Confirmation Dena Bank, having wide network of correspondent banks offers Letter of Credit advising services through SWIFT, fax, telephone to help exporters arrange for shipment and preparing the documents in advance. Bank Guarantees We offer bank guarantees on behalf of exporters to enable them to undertake big export contacts. The guarantees include bid-bond guarantee, Advance payment Guarantee etc. The guarantees are issued for eligible purposes as mentioned in FEMA. Exporters Gold Card Scheme Dena Bank has launched GOLD CARD SCHEME for exporters to meet
TYBCOM (BBI)

FINANCIAL SERVICES

the working capital needs of exporters with good track record and credit worthiness, subject to their fulfilling the specified eligibility norms.

Eligibility Criteria: i. Exporters whose accounts have been classified as Standard continuously for a period of 3 years and there are no irregularities / adverse features in the conduct of the account. ii. Established exporters having satisfactory track record with the branch for at least 3 years and enjoying Credit Rating stipulated by the Bank. Key benefits under the scheme are as following: i. Rate of interest is stipulated at 0.25% lower than the rate applicable for normal exporters for pre-shipment Rupee credit. ii. The charge schedule and fee structure are relatively lower than those provided to other exporters. iii. Preference given for grant of Packing Credit in Foreign Currency (PCFC). iv. Applications for credit are processed at norms simpler and under a process faster than for other exporters. Gold Card issued is valid for 3 years and will be renewed for a further period of 3 years subject to compliance of laid down sanction terms and conditions.

Import Services
Dena Bank provides various types of fund based and non-fund based services to the importers for facilitating the imports in the country. All the facilities are subject
TYBCOM (BBI)

FINANCIAL SERVICES

to the prevalent rules of the Bank / RBI guidelines. Our Fund based services include Rupee and Foreign Currency loans, External Commercial Borrowing facilitation etc. and Non-Fund based services include establishment of Letter of Credit, collection/ payment of import bill and issuance of various guarantees on behalf of importers. Letter of Credit Dena Bank offers L/C facility for the purchase of goods in the international market. With the Letter of Credit, importers can build up better trust/ confidence in their suppliers and develop other business relationship at a much faster pace. The L/C facility can be granted to the importers after assessing their requirement / credit worthiness / financial strength and other parameters being to the satisfaction of the Bank. We help importers drafting the terms of Letter of Credit so as to protect their interest. The bank's vast network of branches and correspondent banks enables your enterprise to sustain a seamless flow of business on a wide platform. Collection of Import Bills The import bills are collected through our Authorized Branches at very competitive rates. Our bank has correspondent banking relationship with reputed International Banks throughout the world and affects remittances for imports payment in any part of the globe. Bank Guarantees Dena Bank on behalf of importers/ other customers issues guarantees in favour of beneficiaries abroad. The Guarantees can be both Performance and Financial. The issuance of guarantee is allowed for the purposes defined under FEMA subject to availability of your credit limits or cash margin. Fund based Services We assist you to import desired goods by providing Rupee loans and Foreign Currency Loans. We facilitate buyers credit for your imports for the period
TYBCOM (BBI)

FINANCIAL SERVICES

specified under FEMA. We also assist our customers in raising foreign currency funds through External Commercial Borrowing (ECB) for expansion/ modernization of existing facilities and/ or import of capital goods etc.

Conclusion of Financial Services

Financial services constitute an important component of financial system. Financial services is a process by which funds are mobilized from a large number of savers and make them available to all those who is in need and particularly to corporate customers. The main participants who are playing a major role is providing financial services to serve the needs of individual, institutions and corporate. They render services such as mutual fund, merchant banking, leasing, factoring, housing finance etc. Financial Services contribute, in good manner, to speeding up the process of economic growth and development. This takes place through the mobilization of the savings of a cross section of people, for the purpose of channeling them into productive investments. Financial services help not only in raising the fund but also in ensuring their efficient distribution. The Financial Services industry though a highly profitable Industry with respect to earnings does not count for a large share of the market and also employs a lesser number of people as compared to some of the other Industries. In the world almost every company now which previously described themselves as a bank, insurance company, or brokerage house, now describes themselves in some way as a financial services
TYBCOM (BBI)

institution. The institution

FINANCIAL SERVICES

providing the financial services study the needs of the customer in detail. Based on the results of the study, they come out with innovative financial strategies that give due regard to the costs, liquidity and maturity considerations for various financial products.

Abbrevations

MF: Mutual Fund. NHB: National Housing Bank. RBI: Reserve Bank of India. SBI FACS: State Bank of India Factors and Commercial Services Limited. SEBI: Securities and Exchange Board of India. SRO: Self-Regulatory Organization. VCF: Venture Capital Fund. AMBI: Association of Merchant Bankers of India AMC: Asset Management Company. AMFI: Association of Mutual Funds Industry. EFTPOS: Electronic Funds Transfer at the Point-of-sale. HDFC: Housing Development and Finance Corporation. HFC: Housing Finance Company.

TYBCOM (BBI)

FINANCIAL SERVICES

BIBILIOGRAPHY

Books
Financial Market and Services Innovation and Banking and Insurance Banking and Financial Services Financial Services and System

Author
E Gordon, Dr.K.Natrajan Romeo.S.Mascarenhas Hemant.S.Ahluwalia Dr.S.Gurusamy

WEB

www.wikipediaorg.com www.banknetindia.com

www.sbihomefinance.com www.mapsofworld.com

TYBCOM (BBI)