innovation in banking and insurance 2010

8/3/2019 Innovation in Banking and Insurance 2010

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INNOVATION IN BANKING AND

INSURANCE - 2010

Presented by : Saurabh Shah

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CONTENTS

S.NO. Particulars

1 Evolution and Functioning of Banks

2 Retail Banking

3 Financial Services

er va ves

5 Credit Risk

6 Definitions, Nature and Functions of Insurance

7 Evolution of Insurance

8 Life Insurance

9 Corporate Governance

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SECTOR WISE DISTRIBUTION OF GDP

percent)

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(in


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DEFINITION - BANKING

Section 5 (1) (b) of Banking Regulation Act defines

banking as the accepting, for the purpose of lending

or investment, of deposits of money from public,

repayable on demand or otherwise and withdrawable

y cheque, draft, order or otherwise.

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INDIAN BANKING SYSTEM

Non-Scheduled BanksScheduled Banks

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CommercialBanks

Co-operativeBanks

Public

SectorBanks

ScheduledUrban Co-op.Banks

RegionalRuralBanks

Private

SectorBanks

Foreign

Banks inIndia

Nationalized

Banks

SBI & its

Associates

Scheduled

State Co-op.Banks


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EARLY PHASE FROM 1786 TO 1949 OF

INDIAN BANKS : PHASE 1

The General Bank of India was set up in the year 1786

The East India Company established Bank of Bengal (1809),

Bank of Bombay (1840) and Bank of Madras (1843) as

independent units and called it Presidency Banks.

These three banks were amalgamated in 1920 and Imperial Bank

of India was established which started as private shareholders

banks

Imperial Bank acted as banker to government until the

establishment of RBI in 1935

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CONTD: PHASE 1

The Reserve Bank of India began operations as private

shareholders' entity on April 1, 1935, which makes it 74 years

old. It was nationalized on January 1, 1949.

To streamline the functioning and activities of commercial banks,

the Government of India came up with The Banking Companies

Act, 1949 which was later changed to Banking Regulation Act,

1949

Reserve Bank of India was vested with extensive powers for the

supervision of banking in India as the Central Banking

Authority.7


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NATIONALIZATION OF INDIAN BANKS AND UP TO

1991PRIOR

: PHASE

2 Imperial Bank was nationalized in under State Bank of India Act

1955 which led to the emergence of State Bank of India and marked

the beginning of first phase of nationalization

Seven banks forming subsidiary of State Bank of India was

nationalized in 1960

To extend banking facilities on a large scale specially in rural and

semi-urban areas.

To act as the principal agent of RBI

To handle banking transactions of the Union and StateGovernments all over the country and to help to pursue broad

economic objectives8


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CONTD..PHASE2

SBI along with its associate banks account for 20% of total

branches of all commercial banks in India

In1969, major process of nationalization was carried out. 14 major

commercial banks in the country were nationalized.

Second phase of nationalization was carried out in 1980 with six

more banks.

This step brought 80% of the banking segment in India under

Government ownership.

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NATIONALIZATION OF COMMERCIAL BANKS

On July 19, 1969, 14 commercial banks got nationalized

Objectives

Removal of control by a few

Provision of adequate credit for agriculture and small

industry and export

Giving a professional bent to management

Encouragement of a new class of entrepreneurs

The provision of adequate training as well as terms of service

for bank staff

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14 BANKS THAT WERE NATIONALIZED

Central Bank of India

Bank of Maharashtra

Dena Bank

Punjab National Bank Syndicate Bank

Canara Bank

Indian Bank

Indian Overseas Bank Bank of Baroda

Union Bank

Allahabad Bank

United Bank of India

UCO Bank

Bank of India

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MAJOR MILESTONES IN BANKING HISTORY

1949 : Enactment of Banking Regulation Act

1955 : Nationalization of State Bank of India

1960 : Nationalization of SBI subsidiaries.

1969 : Nationalization of 14 major banks

1971 : Creation of credit guarantee corporation

1975 : Creation of regional rural banks.

1980 : Nationalization of six banks with deposits over 200 crore.

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NEW PHASE OF INDIAN BANKING SYSTEM

REFORMS AFTER 1991-PHASE3

This phase has introduced many more products and facilities inthe banking sector in its reforms measure

In 1991, under the chairmanship of M Narasimham, acommittee was set up by his name which worked for theliberalization of banking practices

The country is flooded with foreign banks and their ATMstations.

Efforts are being put to give a satisfactory service to customers

Phone banking and net banking is introduced. The entiresystem became more convenient and swift.

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BANKING SECTOR REFORMS

Measures for liberalization, like dismantling the complex

system of interest rate controls, eliminating prior approval of

the Reserve Bank of India for large loans, and reducing the

statutory requirements to invest in government securities

Measures designed to increase financial soundness, like

introducing capital adequacy requirements and other

prudential norms for banks and strengthening banking

supervision

Measures for increasing competition like more liberal licensing

of private banks and freer expansion by foreign banks.

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FUNCTIONS OF COMMERCIAL BANKS

PrimaryFunctions

Borrowing Lending

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TYPES OF LENDING

CASHCREDIT

OVERDRAFTBILLS

FINANCE

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Lending

RETAILFINANCE

TERMFINANCE


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SECONDARY FUNCTIONS

Collection of Cheques

Periodic Payment

Remittances

Other Collections

Issue of Letter of Credit

Issue of Travellers Cheque

Cash Credit

Debit Card

Agency Functions Utility Functions

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ATM

E-Banking

Safe Deposit Vault

Credit Information

Bank Guarantee


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SCHEDULED BANKS

Scheduled Banks are those which are included in second

scheduled of Banking Regulation Act 1965, other are non

scheduled banks.

To be included in scheduled category a bank

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

lakhs

(ii) must also satisfy the RBI that its affairs are not conducted in

a manner detrimental to the interests of its depositors.

Scheduled banks are required to maintain a certain amount of

reserves with the RBI, the in return enjoy the facility of

financial accommodation and remittance facilities at

concessional rates from the RBI 19


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FOREIGN BANKS

Foreign Commercial Banks are the branches in India of the

joint stock banks incorporated abroad.

Besides financing the foreign trade, they undertake banking

business within the country as well.

There are around 40 foreign banks in India. Standard

Chartered Grind lays is the ank with the largest ranches inIndia.

Foreign banks have brought latest technology and latest

banking practices in India. They have helped made Indian

Banking system more competitive and efficient.

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PRIVATE BANKS

Private Bank is a bank registered as a public limited company

under the Companies Act 1956.

The RBI may on merit grant a license under the Banking

regulation Act 1949 for such a bank.

The banks may also be included in Schedule II of the RBI at

the appropriate time.

While granting a license, preference may be given to those

banks the headquarters of which are proposed to be located in

a centre which does not have the headquarters of any other

bank.

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NON-SCHEDULED BANKS

Those banks which are not included in the second schedule of the

Banking Regulation Act 1965 are termed as non scheduled banks.

Usually they are small sized institutions which restrict their

activities to local areas.

Their paid up capital and reserves do not aggregate up to more

than Rs 5 lakhs.

Their banking activities are also limited e.g. they cannot deal in

foreign exchange.

The classification of Indian commercial banks into scheduled and

non scheduled banks had significance prior to nationalisation but

now almost all commercial unscheduled banks have been weeded

out. 22


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REGIONAL RURAL BANKS(RRBS)

RRBs are established under the Regional Rural Bank Act 1976having a minimum capital of Rs 5 crore in business of

(1)granting loans and advances, particularly to small and

marginal farmers and agricultural labourers, whether

individually or in groups, and to co-operative societies etc

(2)granting of loans and advances particularly to artisans,

small entrepreneurs and persons of small means engaged

in trade commerce or industry or other productive

activities

Of the issued capital 50% is subscribed by the central

government, 15% by the State Government and 35% by the

sponsor bank.

Apart from subscribing to the share capital, sponsor banks

also provide managerial assistance, help in recruitment and

training of personnel etc 23


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RESERVE BANK OF INDIA

The Reserve Bank of India began operations as private

shareholders' entity on April 1, 1935, which makes it 74 years

old. It was nationalized on January 1, 1949.

To streamline the functioning and activities of commercial

banks, the Government of India came up with The Banking

Companies Act, 1949 which was later changed to Banking

Regulation Act 1949.

Reserve Bank of India was vested with extensive powers for the

supervision of banking in India as the Central Banking

Authority.

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FUNCTIONS OF RBI

Monetary Authority :

Formulation and Implementation of monetary policies.

Objective-Maintaining price stability and ensuring adequate

flow of credit to the productive sectors. Regulator and supervisor of the financial system

Issuer of Currency :

Issues and exchanges or destroys currency and coins not fit forcirculation.

Objective: to give the public adequate quantity of supplies ofcurrency notes and coins and in good quality.

Developmental role

Performs a wide range of promotional functions to supportnational objectives.

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Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations within

which the country's banking and financial system functions

Objective - maintain public confidence in the system, protectdepositors' interest and provide cost-effective banking services

to the public.

FUNCTIONS OF RBI

Manager of Foreign Exchange Manages the Foreign Exchange Management Act, 1999.

Objective - to facilitate external trade and payment and

promote orderly development and maintenance of foreign

exchange market in India. Due to free mobility of capital, there is inter linkage between

domestic and international financial markets.27


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Banker to the government :

RBI performs merchant-banking function for the central and the

state governments, also acts as their banker.

It accepts money in deposit, permits withdrawal of cash by

cheque, receives/collects payments to the Governments and

transfers funds to various places in the country for the use of the

Govt.

FUNCTIONS OF RBI

orrows on e a o e overnmen s.

Banker to banks :

RBI maintains banking accounts of all scheduled banks.

The Reserve Bank of India acts as the bankers' bank. All the SCBs have to necessarily maintain their Current

Accounts with the RBI for maintaining CRR as well as for

smooth functioning of Clearing House functions. RBI also lends

to the banks through Repos transactions with them.

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DEPOSIT ACCOUNT

This is a core activity of the bank.

Public deposits comprise the major proportion of a bank

working funds which are used primarily to make loans and

advances and to purchase securities.

The size of deposit is a fair reflection of the confidence,

reposed y the public in that ank.

The growth and propensity of a bank depends on how they

are managed to maximize profits.

Banks accept various types of deposits, which are generally

categorized as demand or time deposits

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SAVING ACCOUNT

Such accounts are usually maintained by people who wish to save a part of

the current income to meet the future needs and also to earn some interest

thereon.

The banker pays interest against these accounts to the customers thoughat a lower rate than in case of fixed deposits.

Normally, the minimum amount to open an account in a nationalized bank

is Rs 100.

If cheque books are also issued, the minimum balance of Rs 500 has to be

maintained. However in some private or foreign bank the min.bal.is Rs 500

or more and can be up Rs. 10,000.

A Savings account can be opened either individually or jointly with another

individual.

There are restrictions on the number of withdrawals to be made out. 30


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CURRENT ACCOUNT

Such accounts are opened by business man/ corporate who do

not want any restriction on the operation of their account and

also wants to enjoy the available overdraft facility.

It is running and active account and the banker is under

obligation to repay these deposits only when the customer

demands payment through a cheque, card, otherwise.

As this accounts is a running account, this account does not

provide any interest and provides no limit on the number of

withdrawals from this account. A min. of Rs. 5000 has to be maintained in this account.

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RECURRING DEPOSIT ACCOUNT

In this account a certain fixed amount is to be deposited by

the account holder every month for a specified period of

time.

This account inculcates the habit of regular savings among

people.

The interest allowed on this account is more than savingsaccount but less than Fixed deposit account.

No withdrawals are allowed from this account till maturity.

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FIXED DEPOSIT ACCOUNT

In this account a fixed amount is deposited in a bank for a

specified period.

The objective of this account is to encourage people to

deposit surplus funds and earn higher rate of interest.

Banks pay maximum rate of interest on fixed deposit since

these amount can be reinvested by the banks at much higherrate.

Banks provide loan facility to FD account holders to a

maximum limit of 90% of the FD amount @ 2% interest.

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DEMAT ACCOUNT

Dematerialization is the process by which physical

certificates of an investor are converted to an equivalent

number of securities in electronic form and credited to the

investors account with his Depository Participant (DP).

It is introduced by the commercial banks to keep the record

of the shareholdings of the customer regarding the opening

stock and the closing stock of the shares.

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Liabilities of Bank

Share Capital

Reserve Funds

Deposits: Constitute 92% of total liabilities of all scheduled

BANKS BALANCE SHEET

AND PORTFOLIO MANAGEMENT

commercial banks

Demand Deposits

Term Deposits

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OTHER LIABILITIES OF BANKS

Among other liabilities demand and time deposits from banks

amount to three to four percent of total liabilities and

Borrowing from other Banks amount to another one or Two

percent

2.49 and 5.69 percent. However at present they are negligible

Apart from RBI, Banks also use non-deposit resources such as

borrowings from NABARD, EXIM Bank and bill rediscounted

with Financial Institutions

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ASSETS

Cash in Hand and Balances with RBI

Investments

In government and other approved securities (SLRSecurities)

Non- SLR Securities( CP, Units of Mutual funds, shares and

debentures of PSUs) Private corporate sector.

Bank credit : Types of advances provided are loans, cash credit,

overdrafts, demand loans, purchase and discounting of

commercial bills and installment or hire-purchase credit.

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OFF BALANCE SHEET ACTIVITIES

Transactions not appearing on balance sheet are called off

balance sheet items.

In India the off balance sheet activities of commercial banksinclude forward exchange contracts, loan commitments

guarantees such as Letter of credit whereby bank agrees to

pay a specified amount on presentation of evidence of default.

Banks interest in saving capital and avoiding reserve

requirements is one of the reason for the proliferation of

these activities.

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CHARGE

In lay mans term charge simply means individual legal claim.

Creditors have first charge, second charge ,pari-passu charge

depending upon encumbrance.

Mortgage Hypothecation

39Lien Pledge

Modes ofCharge

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This refers to create a charge over immovable property like

Land & Building as a collateral(security).

As per sec 58 of the transfer property act 1882 defines

mortgage as transfer of an interest in specific immovable

property for the purpose of securing money.

MORTGAGE

The transferor is called mortgagor the transferee is called

mortgagee.

Mortgage deed is the written legal document signed between

both parties by which transfer is affected.

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HYPOTHECATION

Hypothecation is another method of creating charge over movable

assets like current assets(e.g. book debts, raw material )

This method of lending is used by the banks for the purpose of

working capital requirement.

Neither possession nor ownership of the goods is transferred to the

creditor ut equitable charge is created at later stage.

The goods remains in the possession of the borrower.

The charge of hypothecation is converted into pledge and the

banker or hypothecator enjoys the power and the rights of the

pledge

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LIEN

Lien means to keep or retain the goods belonging to others as asecurity for the recovery of the reward.

There are 2 types of Lien

Particular Lien available against specific goods and not

all goods.

enera en ava a e aga ns a e goo s w e er

present or past.

As per sec 171,Indian contract bankers are given right of the

general lien on the banker.

The ownership of the goods is with customer and not with the

banker. 42


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PLEDGE

Goods delivered to another as a security for money borrowed is

called Pledge

It is one type of Bailment. Bailor in this case called the

Pledgor and the Bailee is called Pledgee

Illustration A borrows Rs. 4000 against security of his

ewe ery. e a men o ewe ery s a p e ge.

Pledge can be affected only of movable property and there is

only transfer of possession and not that of ownership.

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EVOLUTION OF BANCASSURANCE

Insurance Regulatory and Development Authority (IRDA) Act,1999

permitted commercial banks to enter into Insurance business.

RBI has issued certain guidelines in this context such as :

Min net worth of Rs 500 crores

Satisfy the criteria for capital adequacy, profitability, NPA level

Maximum equity holding y anks normally 50% in Joint

venture with risk participation

Banks not eligible for JV can participate without risk participation

up to 10% of net worth or Rs 50 crore whichever is lower.

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In India Banking and Insurance sector are regulated by 2

different entities RBI and IRDA.

IRDA has also issued certain guidelines :

Each bank that sells insurance must have chief insurance

executive to handle all the insurance activities.

EVOLUTION OF BANCASSURANCE

All the people involved in selling should undergo mandatory

training and institute accredited by IRDA.

Commercial banks, including cooperative banks and RRBs

may become corporate agents for one insurance company.

Banks cannot become insurance brokers.45


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FINANCIAL

INTERMEDIARIES

MEANING

BANCASSURANCE

Selling Insurance Products through Banks 46

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TIE-UPS IN BANCASSURANCE

INSURANCE BANKS

HDFC Standard Life Insurance Co. UNION Bank of India.

Birla Sun Life Insurance HDFC Bank, Deutsche Bank etc.

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ICICI Prudential Life Insurance Co. ICICI Bank, Citibank, etc

Life Insurance Corporation (LIC) Centurion Bank, Oriental Bank of

Commerce, etc

SBI Insurance Co State Bank of India, Associate Bank


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ADVANTAGES TO BANKS

Increased income to banks in form of revenue.

Infrastructure Costs. a) Distribution cost

b) Operation Cost

Creatin a Universal Bankin latform with wider Financial

Services.

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ADVANTAGES TO INSURANCE COMPANIES

Channel diversification (revenue).

Infrastructure and Administrative costs

Achieve the geographical reach within minimum time &cost.

Wider ran e of roducts.

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ADVANTAGES TO CUSTOMERS


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ADVANTAGES TO CUSTOMERS

One-stop Shop.

Convenience.

Easy tracking of insurance products along with bankingservices.

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Currently India

contributes 10% of the

total premium collectedacross the whole Asias

Life and Non-Life

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Insurance sector.

At it is expected to

contribute around 18 -20%

by 2010 -11.

DERIVATIVES


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DERIVATIVES

In recent years, financial markets have developed many new

products whose popularity has become phenomenal.

Derivative products initially emerged, as hedging devices

against fluctuations in commodity prices.

A derivative is an instrument whose value depends on

e va ues o one or more as c un er y ng var a es

called bases. The underlying variables are forex, equity,

commodity, bonds, debentures etc.

Illustration : Wheat farmers may wish to sell their harvest at

a future date to eliminate the risk of a change in prices by that

date. The price of this derivative is driven by the spot price of

wheat which is the underlying.

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DERIVATIVES


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DERIVATIVES

In derivative market when enter into a contract to buy or

sell particular underlying:

Long position means to have a buy position for particular

stock

Short position means to have a sell position for particular

stock

Bid price (buyers price) is the rate/price at which there is a

ready buyer for the stock.

Ask price (sellers price) is the rate/ price at which there isseller ready to sell his stock.

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TERMINOLOGIES RELATED TO FUTURES.


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Marked-to-market (M to M): in the futures market,

at the end of each trading day, the margin account is

adjusted to reflect the investors gain or loss dependingupon the futures closing price. This is called marked-to-

market.

TERMINOLOGIES RELATED TO FUTURES.

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OPTIONS TERMINOLOGY


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OPTIONS TERMINOLOGY

Option price/premium: Option price is the price which

the option buyer pays to the option seller. It is also

referred to as the option premium.

Strike price: The price specified in the options contract is

nown as e s r e pr ce or e exerc se pr ce.

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OPTIONS TERMINOLOGY


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OPTIONS TERMINOLOGY

In-the-money option: Spot price > Strike Price in case of call option.

Spot price < Strike Price in case of put option.

If exercised immediately it would lead to positive cash flow.

E.g.: Spot value of Nifty is 2157. An investor buys a one-

month nifty 2140 call option for a premium of Rs.7. the

option is?

Out-of-the-money option:

Spot price < Strike price in case of call option.

Spot price > Strike price in case of put option.

If exercised immediately it would lead to negative cash flow.

E.g.: Spot value of Nifty is 2140. An investor buys a one-

month nifty 2157 call option for a premium of Rs.7. the

option is? 57

KINDS OF DERIVATIVES


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Derivatives

orwar s

Options

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FORWARD CONTRACT


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A forward contract is a customized contract between twoentities, where settlement takes place on a specific date in the

future at todays pre-agreed price.

No cash is exchanged when the contract is entered into.

Illustration

Shyam wants to buy a TV, which costs Rs 10,000 but he has no cash to

buy it outright.

He can only buy it 3 months hence. He, however, fears that prices of

televisions will rise 3 months from now.

So in order to protect himself from the rise in prices Shyam enters into

a contract with the TV dealer that 3 months from now he will buy the

TV for Rs 10,000.

What Shyam is doing is that he is locking the current price of a TV for a

forward contract. The forward contract is settled at maturity.

The dealer will deliver the asset to Shyam at the end of three months

and Shyam in turn will pay cash equivalent to the TV price on delivery.

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FEATURES OF FORWARD CONTRACT


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They are bilateral contracts and hence exposed to counter

party risk.

Each contract is custom designed, and hence is unique in

terms of contract size, expiration date and the asset type and

quality.

The contract price is generally not available in public domain.

On the expiration date, the contract has to be settled by

delivery of the asset.

If the party wishes to reverse the contract, it has tocompulsorily go to the same counter-party, which often

results in high prices being charged. 60

FUTURES CONTRACT


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FUTURES CONTRACT

A future contract is similar to Forward account.

A futures contract is an agreement between two parties to

buy or sell an asset at a certain time in the future at a

certain price.

Futures contracts are special types of forward contracts in

the sense that the former are standardized exchange-tradedcontracts.

Index futures are all futures contracts where the underlying

is the stock index (Nifty or Sensex) and helps a trader to take

a view on the market as a whole.

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FEATURES OF FUTURES CONTRACT


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The standardized items in a futures contract are:

Quantity of the underlying

Quality of the underlying

The date and the month of deliver

The units of price quotation and minimum price change

Location of settlement

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FORWARDS V/S FUTURES


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Forwards Futures

OTC in natureTraded on organized stock

exchange

Contract terms are customized Contract terms are standardized

Re uires no mar in a ment Re uires mar in a ment

Settlement happens at end ofperiod

Follows daily settlement

One delivery date which is

specifiedRange of delivery dates

Some credit risk No credit risk

Counterparties have to take

exposure

Clearing house takes the

exposure on both the parties 63

TYPES OF FUTURES


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The different types of Futures are but different facets of the same

Futures.

Currencies

Commodities.

Interest Rates

Stocks

Index

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OPTIONS


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Option, as the word suggests, is a choice given to the

investor to either honor the contract; or if he chooses not to

walk away from the contract.

An option gives its owner the right but not the obligation to

purchase or sell an asset on or before some date in future.

The date when option expires is known as the exercise date,

the expiration date or the maturity date.

The price at which asset can be purchased or sold is known

as strike price.

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TYPES OF OPTIONS


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Call Option is the right, but not the obligation, to buy the

underlying asset by a certain date for a certain price.

Put Option is the right, but not the obligation, to sell theunderlying asset by a certain date for a certain price.

American options: are options that can be exercised at any

time up-to the expiration date. Most exchange-traded options

are American.

European options: are options that can be exercised only

on the expiration date itself.66

SWAPS


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SWAPS have been termed as private agreement between the two

parties to exchange cash flows or payments which will take place in

the future.

SWAPS is also called as financial swap in global financial market.

There are different types of swaps such as interest rate swaps,

currency swaps, equity swaps etc.

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FEATURES OF SWAP


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A swap is nothing but the combination of Forwards, so it has

all the properties of forward contract.

It requires 2 parties with equal and opposite needs.

There is no exchange of principal on the other hand fixed

interest is exchanged for floating rate of interest.

Swaps are in the nature of long term agreement and theyare just like long dated forward contracts.

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DERIVATIVES AND BANKS


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Derivatives are used by banks to hedge risks, to gain access

to cheaper money and to make profits.

Banks also help customers to cope with financial market

volatility by offering various derivatives security services

such as forward contract, swaps, options etc

These activities are off balance sheet activities for which

capital requirement is low.

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FINANCIAL SERVICES


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Financial intermediaries provide key financial services such

as merchant banking, leasing, hire purchase, credit-rating,

and so on which indirectly deals with the management of

money.

Financial services rendered by the financial intermediaries

bridge the gap between lack of knowledge on the part of

investors and increasing sophistication of financial

instruments and markets.

These financial services are vital for creation of firms,industrial expansion, and economic growth.

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CLASSIFICATION OF


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FINANCIAL SERVICE INDUSTRY

Financial Service

Industry

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Capital MarketIntermediaries

(Long term funds)

Money MarketIntermediaries

(Short term funds)

SCOPE OF FINANCIAL SERVICES


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Financial services covers wide range of activities. They can bebroadly classified into:

1) Traditional activities

Fund based activities

Dealing in foreign exchange market activities

, ,

capital, seed capital etc

Underwriting of or investment in shares, debentures, bonds

etc of New issue market.

Dealing in secondary activities

Participating in Money market instruments such as CPs,CDs, T-bills etc

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SCOPE OF FINANCIAL SERVICES

N F d b d ti iti


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Non Fund based activities

This activity is also called as Fee based activity e.g. Aftersales service

Project finance is arrangement of funds from FIs for the newproject or new venture. Funds are also arranged for workingcapital requirements.

Assisting in the procedural clearances from government.

Management of pre and post issue of capital through IPO. e.g.Moratorium period

Management of portfolio of large public sector organization Acting as trustees to Debenture holders

Planning for Merger and Acquisitions

Hedging of risk due to exchange risk, interest rate risk,economic risk and political by using swaps and

derivative products.

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NEWFINANCIAL PRODUCTS AND

ERVICES


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SERVICES

Merchant Banking

Only a body corporate other than a non-banking financial

company shall be eligible to get registration as merchantbanker.

Securities and Exchange Board of India, no person can act as

a merchant banker.

The validity period of certificate of registration is 3 years

from the date of issue.

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MERCHANT BANKING


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Managing of public issue of capital such as determining the

type of securities to be issued

Draft of prospectus and application forms Appointment of Registrar to deal with share application

and transfers

Listing of Securities

Arrangement of underwriting

Placing of issues

Selection of brokers and bankers to the issue

Publicity and advertising agent

Private Placement of Securities75

LOAN SYNDICATION


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This is more or less Consortium Banking

Merchant bankers arrange to tie up loans for their clients.

This takes place in a series of steps. Firstly, they analyze the

pattern of the clients cash flows, based on which the terms of

the borrowings can be defined.

Then the merchant banker prepares a detailed loan

memorandum, which is circulated to various banks and

financial institutions and they are invited to participate in the

syndicate ( joining together).

The banks then negotiate the terms of lending on the basis of

which the final allocation is done.76

MUTUAL FUND


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77

The value associated with each of these units is known as (NAV).

Mutual fund issue securities known as units to the investors known as

unit holders in accordance with quantum of money invested by them.

STRUCTURE OF MUTUAL FUND


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Trustees are

legal owners

Investors are

beneficial owners

78

Mutual is a Trust

WORKING OF MUTUAL FUND


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Investors

Pool their moneyPassed back to

un

Managers

Securities

Returns

79

Invest inGenerates

TYPES OF MUTUAL FUNDS


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Mutual Fund

Structure Investment

CloseEnded

OpenEnded

GrowthFund

IncomeFund

BalanceFund

IndexFunds

MoneyMarket

80

OPEN ENDED SCHEMES


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Accepts funds from investors on continuous basis.

Repurchase facility available.

No listing on the stock exchange.

Better li uidit due to continuous re urchase.

Sale and Repurchase based on NAV

81

CLOSED ENDED SCHEMES


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Schemes are opened for specified time period.

Corpus normally does not change throughout the year.

Such schemes are normally listed in the stock exchange.Otherwise repurchase facility provided.

.

Long term investment strategies depending on the life of the

scheme.

Market price may be below or above par.

82

GROWTH FUNDS


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The aim of growth funds is to provide capital appreciation overthe medium to long- term.

Such schemes normally invest a major part of their corpus in

equities. Such funds have comparatively high risks.

These schemes provide different options to the investors like

dividend option, capital appreciation, etc. and the investors

may choose an option depending on their preferences.

The mutual funds also allow the investors to change the

options at a later date.

Growth schemes are good for investors having a long-term

outlook seeking appreciation over a period of time. 83

INCOME FUNDS


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These funds provide regular and steady income to

investors.

Such schemes generally invest in fixed income securitiessuch as bonds, corporate debentures and Government

securities.

Income Funds are ideal for capital stability and regular

income.

84

BALANCE FUNDS


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Balanced funds work particularly well during a downturn in

equity markets.

These funds invest both in equity shares and fixed-income-

bearing instruments (debt) in some proportion.

While selecting a balanced fund, choose the conventional type

60:40 (equity: debt) with a steady track record.

Make sure the fund manager sticks to the 60:40 mandates even

during bullish times, when most balanced fund managers

succumb to the temptation of over-allocation to equities for

higher growth.

They are ideal for medium to long-term investors who are

willing to take moderate risks.85

MONEY MARKET MUTUAL FUNDS


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These mutual funds would invest exclusively in money

market instruments.

RBI introduced to provide an additional short- term avenue

for investment and bring money market within reach of

n v ua s.

86

INDEXFUNDS


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Index Funds replicate the portfolio of a particular index such

as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc

these schemes invest in the securities in the same weight age

comprising of an index.

NAVs of such schemes would rise or fall in accordance with the

rise or fall in the index, though not exactly by the samepercentage.

There are also exchange traded index funds launched by the

mutual funds which are traded on the stock exchanges.

87

ADVANTAGES OF MUTUAL FUNDS


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Diversification

Mutual funds invest in a number of companies across a broad

cross-section of industries and sectors.

This diversification reduces the risk because seldom do all

stocks decline at the same time and in the same proportion

One achieves this diversification through a mutual fund with

.

Professional management

Mutual funds provide the services of experienced and skilled

professionals, backed by a dedicated investment research team

that analyses the performance and prospects of companies andselects suitable investments to achieve the objectives of the

scheme.88


R t t ti l


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Return potential Over a medium to long-term, mutual funds have the potential

funds to provide a higher return as they invest in a diversified

basket of selected securities.

Reduction in transaction cost

Mutual funds are a relativel less ex ensive wa to invest as

compared to directly investing in the capital markets because

the benefits of scale in brokerage, custodial and other feestranslate into lower costs for investors.

Flexibility

Through features such as regular investment plans, regularwithdrawal plans and dividend reinvestment plans we can

systematically invest or withdraw funds according to our

needs and convenience.

89


Choice of schemes

M t l f d ff f il f h t it i d


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Mutual funds offer a family of schemes to suit our varying needs

over a life time.

Liquidity

In open-end schemes, the investor gets the money back promptly

at net asset value related prices from the mutual fund.

n e c ose -en sc emes, e un s can e so on a s oc

exchange at the prevailing market price or the investor can avail

of the facility of direct repurchased at NAV related prices by the

mutual fund.

Well regulated

All mutual funds are registered SEBI and they function within

the provisions of strict regulations designed to protect the

interests of investors.90

HIRE PURCHASE V/S LEASE

Lease Hire Purchase


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Lease Hire Purchase

Ownership It rest with lessor. It rest with buyer (hirer)

Methods of FinancingIt is a method of financing business

assets.

It is a method of financing business

assets and consumer articles.

91

Salvage value

essee no e owner oes no

enjoy the salvage value of the

assets.

Hirer the owner of the assets

enjoys salvage value.

TransactionIn this transaction we rent the

goods.

In this transaction we buy the

goods.

Depreciation

Depreciation & investment

allowances cannot be claimed bythe lessee.

Depreciation & investment

allowances can be claimed by thehirer.

Tax benefitsThe entire lease rental is tax

deductible expense.

Only the interest component of the

hire purchase installment tax

deductible

VENTURE CAPITAL


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Venture Capital is the early financing of new andyoung enterprises seeking to grow rapidly.

It is the support by investors of entrepreneurialtalents with finance and business skills to exploit

market opportunities and to obtain capital gains

92


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CORPORATE GOVERNANCE93

WHY CORPORATE GOVERNANCE???


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Corporate Governance and Responsibility issues

have come into limelight in India since 1990s

because of major corporate debacles and scandals.

In nineties immediatel after liberalization and

opening up of the economy there was a spate ofpublic issues by a large number of companies.

Corporate governance has become a buzz word

these days mainly due to Globalization.

94

WHAT IS CORPORATE GOVERNANCE???


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The process and responsibility of the Board of

Directors in ensuring the management of a

corporation conducts business in such a way as to

meet the expectations of its various stakeholders

Besides financial returns for shareholders this also

includes impact on employees environment andcommunity at large.

According to Cadbury Committee CorporateGovernance is a system by which Companies are

directed and controlled. 95

CONCEPT

Corporate governance calls for 3 factors:


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Accountability

Corporate governance calls for 3 factors:

Transparency

Integrity

96

DIFFERENCE


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GOOD

COMPANY

GREAT

COMPANY

Excellent Products

&

Services

Excellent

Products/services

&

Makes the world a better

place

97

IMPORTANCE OF CORPORATE

GOVERNANCE


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As we are increasingly moving towards open and market

driven economic systems, a number of companies catering to

international markets

These companies are required to comply with enhanceddisclosure and stringent listing requirements.

Institutional investors, both foreign and domestic are

ecoming important players in the stock market.

They are increasingly demanding more information andtransparency in operations

No. of International events (like joint ventures, mergers,

takeovers) are taking place so it is required that proper

corporate governance practices should be followed. E.g. Enron and Satyam scandal

98


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DEFINITIONS, NATURE AND

FUNCTION OF INSURANCE100

INSURANCE

Insurance is defined as the equitable transfer of the risk of a


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q

loss, from one entity to another, in exchange for a premium,

and can be thought of a guaranteed small loss to prevent a

large, possibly devastating large loss.

InsuranceInsuranceInsuranceInsurance isisisisPrayPrayPrayPray forforforfor thethethethe BestBestBestBest

AndAndAndAnd bebebebe preparedpreparedpreparedprepared forforforfor thethethethe WORSTWORSTWORSTWORST101

Insurance


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Life InsuranceNon Life

Insurance

Unit Linked

Plans (ULIPS)

Traditional

PlansFire Insurance

Marine Insurance

Health Insurance

Other Insurance

102

HISTORICAL BACKGROUND

Oriental Life Insurance Company was started by Europeans in Kolkata in


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1818 to cater to the needs of European community.

Discrimination among the life of foreigners and Indians with higher

premiums being charged for the latter.

It was only in the year 1870, Bombay Mutual Life Assurance Society, the

first Indian insurance company covered Indian lives at normal rates.

The era was however dominated by foreign insurance players like Albert

Life Insurance, Royal Insurance, Liverpool and London Globe insurance.

The oldest existing insurance company in India is National Insurance

Company Ltd, which was founded in 1906 and is doing business even

today.103

RELATED ACTS


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1. The Insurance Act, 1938

2. Life Insurance Corporation Act, 1956

. ,

4. IRDA ACT, 1999

104

ESSENTIAL OF CONTRACT OF

INSURANCE


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Agreement should be between 2 competent parties

Agreement must be in writing and parties must give free

consent.

It should not be a bet and an event must involve some amount

of uncertainty.

Risk should be not very small and should be capable of

mathematical estimation to fix the premium.

105

ROLES OF INSURANCE

Provide protection


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Diversification of risk

Provide certainty

Prevention of losses

Risk free trade

Large number of products

106

RELATION

Econom ro th


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Economy growth

Standard of living of people

increases

Assets of people and

Business enterprise increase

107

Demand for

General insurance

increases

Demand for

Life insuranceincreases

Demand for new types of

insurance products increases

PRINCIPLES OF INSURANCE

Principles of Utmost good faith -


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o It states that insurance contract must be made in absolute

good faith on the part of both the parties.

o The insured must give insurer complete, true and correct

information about the subject matter of the insurance.

o Material fact should not be hidden. This principle is applicable

to all types of insurance contracts.

o Insurance is for protection and not for profit.

108

Principle of Insurable Interest



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o A person must have physical existence of the object of

insurance .

o In simple words insurer must suffer from some kind of

Financial loss by the damage to the subject matter of insurance.

o Ownership is the most important test of Insurable interest.

o Insurance contracts without insurable interest is void.

o Insurable interest is not a sentimental concept but a pecuniary

interest.

109

Principle of Indemnity



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This is one important principle of insurance.

This principle suggests that insurance contract is to protect and

not to earn profit.

Indemnit means securit a ainst loss.

The amount of compensation in the insurance contract islimited to the amount assured or the actual loss whichever is

less.

Amount of compensation on the claim will be less than the

insurable interest.110

Principle of Subrogation

It is an extension and corollary of the principle of indemnity.



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t s a e te s o a d co o a y o t e p c p e o de ty.

It states that once the full compensation is paid by the

insurance company all the rights of the insured is transferred tothe insurer.

The assured will not e able to keep the damaged property

because he will realize more than actual loss suffered.

This principle prevents the insured from making profit out of

loss.

In case of partial compensation paid no such rights are

exercised by the insurance company. 111

Principle of Contribution



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There is no restriction as to the number of times the property

can be insured.

On the occurrence of the loss only the amount of actual loss

can be realized from one insure or all the insurers together.

This principle is however is not applicable to life insurance

contract.

112

Mitigation Loss

A di hi i i l i d h ld k ll h



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According to this principle every insured should take all the

necessary steps to minimize the loss.

Risk must attach

The subject matter should be exposed to risk. E.g. goods

placed in godown cannot take marine insurance policy. They

have to be insured against fire or theft.

113

Causa Proxima

I h l h b d b b f



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It means when a loss has been caused by number of causes

the proximate cause i.e. nearest cause should be taken into

consideration to determine the liability of the insurer.

Liability of the insurer is ascertain through this clause.

Illustration A cargo has hole in the ship due to negligence

of master so sea water entered the ship and cargo got

damage. In this case only nearest cause of damage through

sea water will be liable for insurance and nit the other.

114

WHAT DOES INSURANCE REALLY

COVER?


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115

HEALTH INSURANCE


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116

HEALTH INSURANCE

The term Health Insurance is generally used to describe a

form of insurance that pays for medical expenses


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form of insurance that pays for medical expenses.

It is sometimes used more broadly to include insurance

covering disability or long-term nursing or custodial care

needs.

It may be purchased on a group basis (e.g., by a firm to cover

its employees) or purchased by individual consumers).

Types Of Health Care Insurance Available:

Medical Insurance

Critical Illness Insurance117

HOME INSURANCE


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118

HOME INSURANCE

Home Insurance is a standard insurance policy to insure

home and the things that are kept in it


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home and the things that are kept in it.

It is also called a package policy.

Which means it covers both, damage to your property andliability or legal responsibility for any injury and property

damage you or any member of your family cause others.

119

COMMERCIAL INSURANCE

Marine insurance


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Fire insurance

Agriculture insurance

Sho insurance

120

MARINE INSURANCE

It covers the loss or damage of goods at sea.


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Marine insurance typically compensates the owner

of merchandise for losses sustained from fire,shipwreck, etc.

121

FIRE INSURANCE

Fire Insurance can avoid loss which can be generated from

any explosion at your business enterprise.


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any explosion at your business enterprise.

This fire must be a result of actual explosion and the

consequential loss must be proximately caused by such

explosion.

One can go for fire Insurance of a property even if he doesnt

own the property.

He can insure the property if he holds a mortgage on the

property.

122


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CREDIT RISK123

CREDIT RISK

It is the risk of loss to the bank as a result of a default by the

borrower.


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The amount of risk represented by the outstanding balance

and the date of default may differ from the ultimate loss inthe event of default because of potential recoveries.

Recoveries would depend upon any credit risk mitigators,

such as guarantees, either collateral or the third party

guarantees, the capabilities of negotiating with the borrower

and of funds available, if any, to repay the debt after

repayment of other who lenders who may have a priority

claim over the borrowers asset / funds.124

DEFAULT

The non payment of obligations (interest on principal),

breaking a covenant(formal agreement) or economic default.


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breaking a covenant(formal agreement) or economic default.

The default events include a delay in repayments,

restructuring of borrower repayments, and bankruptcy.

the assets goes below the value of outstanding debts i.e. value

of the collateral goes down against the loan amount.

In simple words it means that market value of the asset drops

below that of liabilities.

125

DEFAULT PROBABILITY

Default risk is measured by the probability of

default occurring during a given period of time


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default occurring during a given period of time.

It depends upon the credit standing of a borrower.

Credit standing would depend upon factors such as

market outlook for the borrowing company, the size

of the company, its competitive factors, the quality of

management etc.

126

EXPOSURE RISK

It is the risk generated by the uncertainty associated withfuture amount at risk.

All th dit li hi h th i t h d l th


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All the credit lines which there is a repayment schedule the

exposure risk can be considered as small or negligible.

Exposure risk arise with derivatives in which the source of

uncertainty is not the clients behavior but the market

movemen s.

The value of the derivatives depends upon the market

movements which changes constantly.

The credit risk continuous during the whole life in OTC

instruments.

The recoveries in the event of default are not predictable.

They depend upon the type of default and factors such as

guarantees, collateral etc.127

COLLATERAL RISK

The existence of collateral (security or asset given against

loan) minimizes credit risk if the collateral can be easily

take o e io a d old


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taken possession and sold.

Collateralization is an increasingly common way to mitigatethe credit risk.

It reduces risk ecause if orrower does not pay the loan the

collateral would be confiscated as repayment for the loan.

If collateral is used the risk becomes two folds:

1. Uncertainty with respect to sell off or dispose off the

collateral

2. Uncertainty with respect to its value128

OPERATIONAL RISK

It is the potential risk of loss arising from inadequate or

failed internal processes, people and systems from externalevents.

It l i l d t ti l l l i k i l i l i


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It also includes potential legal risk involving claims,

penalties and damages resulting from supervisory decisions.

When Operational risk arises :

1. Internal Fraud

2. External Fraud

3. Unfair employment practices

4. Clients and business practices

5. Ineffective Audit function Satyam scandal129


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