Management of Financial Services
Content
MS-46
An ISO 9001:2000 Certified Organization
Management Of Financial Services
Block 1 Financial system, Markets And Services
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Financial System
Financial system is a set of complex and closely connected or intermixed instructions,agents,practices,markets, transactions,claims and liabilities in the economy
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The financial system comprises of four major components. These are 1) Financial Institutions 2) Financial Markets 3) Financial Instruments 4) Financial Services
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1) Financial Institutions: These are institutions which mobilise and transfer the savings or funds from surplus units to deficit units. 2) Financial Markets: This is a place or mechanism where funds or savings are transferred from surplus units to deficit units. 3) Financial Instruments: the commodities that are traded or dealt in a financial market are financial assets or securities or financial instruments.
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4) Financial Services: Financial services include the services offered by both types of companies Asset Management Companies and Liability Management Companies
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ROLE OF FINANCIAL MARKETS
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CLASSIFICATION OF FINANCIAL MARKETS
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SECURITIES MARKETS
a) Government Securities b) Industrial Securities
The Government securities are issued by Central Government, State Governments and local govt. which includes the authorities like Municipalities, Autonomous Institutions like; Port Trusts, Improvement Trusts Agencies like; IDBI, IFCI, SFCs. SIDCs, Housing Boards
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• The instruments of raising funds in the industrial securities market are bonds,debentures, preference shares and equity shares. • The securities market, is divided into primary or new issue market and secondary market. The new issues of government and private corporate sectors are floated in the primary market. The secondary market provides liquidity to the outstanding securities or existing securities
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Over the Counter Exchange of India (OTCEI)
It was incorporated in 1990 under companies act 1956. Over The Counter (OTC) market is an informally organised group of brokers and dealers. The Over the Counter market is a negotiated market, because prices are settled through individual bargaining between buyers and sellers.
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GLOBALISATION OF FINANCIAL MARKETS
1) deregulation or liberalisation of markets and the activities of market participants in key financial centers of the world; 2) technological advances for monitoring world markets, executing orders, and analyzing financial opportunities; and 3) increased institutionalisation of financial markets
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CLASSIFICATION OF GLOBAL FINANCIAL MARKETS
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FINANCIAL MARKETS AND INSTITUTIONS
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FINANCIAL SERVICES
• financial services are services that ensure the smooth flow of financial activities in the economy. • Financial services sector is regulated by the Securities and Exchange Board of India(SEBI), Reserve Bank of India and the Department of Banking and Insurance,Government of India, through legislations
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CHARACTERISTICS OF FINANCIAL SERVICES
i) Customer-Specific ii) Intangibility iii) Concomitant iv) Tendency to Perish v) People based services vi) Market Dynamics
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EVOLUTION OF FINANCIAL SERVICES IN INDIA
• • • • The Stage of Infancy Modern Financial Services The Third Flush New Financial Instruments
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TYPES OF FINANCIAL SERVICES
• Fee Based Services • Fee based financial services are those services wherein financial institutions operate in specialised fields to earn a substantial income a) Issue Management b) Corporate Advisory Services c) Credit Rating d) Mutual Funds e) Asset Securitisation
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IMPACT OF TECHNOLOGY
From the Service Providers View • Cost Saving • Product Development • Marketing Tool • Delivery channel • Decision-making Aid • Globalisation
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From Customers View
• Accessibility • Convenience • Speedier Settlement of Transaction
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MANAGEMENT OF RISK IN FINANCIAL SERVICES
• EXTERNAL RISK a) Institutions Providing Direct Finance b) Insurance Services c) Stock Broking Services d) Leasing and Hire Purchase e) Institutions Offering Fee Based Services • INTERNAL RISK a) Institutions Providing Direct Finance b) Insurance Service
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c) Stock Broking Service d) Leasing and Hire Purchase e) Institutions Offering Fee Based Services TYPES OF RISK 1) Credit Risk 2) Asset-Liability Gap Risk 3) Due-Diligence Risk 4) Interest Rate Risk 5) Market Risk 6) Currency Risk
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MANAGEMENT OF RISK
• • • • • • Managing Credit Risk Managing Asset-Liability Gap Risk Managing Due-diligence Risk Managing Interest Rate Risk Managing Market Risk Managing Currency Risk
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REGULATORY FRAMEWORK
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Block 2
Financial market operations And Services
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Stock exchange:Functions and Organisation
Stock exchange is the place where buying and selling of securities take place . Market is divided into two a) Short term and b) long term capital market
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Primary Market
It is the segment in which new issues are made Three ways of new issue • Public issue • Right issue • Private placement
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• • • • •
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Steps of public issue Appointment of underwriter Appointment of bankers Appointment of Registrars Appointment of the Brokers to the Issue Filing of Prospectus with the Registrar of Companies Printing and Dispatch of Application forms Filing of Initial Listing Application
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• Statutory Announcement • Processing of Applications • Establishing the Liability of the Underwriter • Allotment of Shares • Listing of the Issue
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Rights Issue
• Selling of securities to the existing shareholders in the portion of their current holding. Private Placement • Sale of securities by public limited company • Securities are placed with Institutional investors, Mutual funds or other Financial Institutions
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BROKING AND TRADING IN EQUITY
• Stock Brokers are intermediary between buyers and sellers of securities
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DIFFERENT TYPES OF DEBT INSTRUMENTS
• • • • Fixed and Floating Rate Instruments Debt Instruments with Call and Put Option Zero Interest Debt Instruments Convertible Debt Instrument
Convertible Debt Instrument
• The Government Securities are issued on the basis of liquidity conditions in the market, Government borrowing programme and expectations of the market.
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Types of Government Securities i) Treasury Bill of 91 day, 182 day and 364 day
ii) Government of India dated securities iii) State Government securities Secondary market Govt. securities are negotiated between banks, PDs, MFs. RBI has introduced NDS.
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Corporate Debt Securities Market
• • • • • Commercial papers Certificate of Deposits Bonds issued by PSUs Bonds issued by Financial Institution Corporate Debentures
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Depositories
• Depository system is a scrip based system • It is an institution which maintains an electronic record of ownership Constituents • Depository • Depository Participants • Registrars • Investors
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Depository Account
• Dematerialisation (Demat)
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Rematerialisation (Remat)
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• • • • • •
Fungibility Delivery vs. Payment SWITCHING OVER TO DEPOSITORY Appointing DP Request for ‘Demat’ Approach the Company or Registrar of Transfer • Confirmation of Demat • Crediting the Client’s Account
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Block 3
Fee Based Services
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ISSUE MANAGEMENT
• Issue management refers to managing issues of corporate securities like equity • shares, preference shares and debentures or bonds. Issuing securities can be done in three ways • Public Issue • Right Issue • Private Placement
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SELECTING A PUBLIC ISSUE PROPOSAL
• Background of the Promoters/Management
• Company Profile • Project Profile • Capital Market Position
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PUBLIC ISSUE MANAGEMENT
Pre-Issue Activities 1) Memorandum of Understanding 2) Obtaining Appraisal Note 3) Appointment of Other Intermediaries 4) Inter-se Allocation of Responsibilities 5) Preparing Prospectus
6) Submission of Draft Offer Documents 7) Launching of a Public Issue
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• • • • •
Post-Issue Activities Finalisation of Basis of Allotment (BOA) Despatch of Share Certificates Issue of Advertisement in Newspapers Post-issue Obligations Post-issue Monitoring Reports
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Post-issue Monitoring Reports
• • • • • Necessity for Aggressive Sales Campaign Packaging and Marketing the Issue Launching Marketing Campaign Brokers’ and Investors’ Conferences Timing of the Issue
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CORPORATE ADVISORY SERVICES
Making of Public Issue and Issue Management • 1) Corporate Restructuring • 2) Project Counselling and Pre-Investment Studies • 4) Capital Structuring and Restructuring • 5) Loan Syndication • 6) Liaison with Foreign Collaborators and making preparation for Joint Ventures • 7) Raising Foreign Currency Loans Euro issues, FCCB’s etc • 8) Mergers and Acquisitions • 9) Making Valuation & Revaluation of Assets • 10) Consultancy for Rehabilitation of Sick Industrial units
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CREDIT RATING
• Credit rating may be defined as an expression, through use of symbols, of opinion about the quality of credit of the issuer of debt securities BENEFITS OF CREDIT RATING • Benefits to Investors • Safeguards against Bankruptcy • Recognition of Risk • Credibility of Issuer • Rating Facilitates Quick Investment decisions
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• No Need to Depend on Investment Advisors or Professionals • Choice of Investment • Benefits of Rating Surveillance Benefits of Credit Rating to Issuer Company • Lower Cost of Borrowing • Wider Audience for Borrowing • Rating as Marketing Tool • Self Discipline by Companies • Reduction of Cost in Public Issues • Motivation for Growth
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LIMITATIONS OF CREDIT RATING
• • • • Biased Rating and Misrepresentations Static study Concealment of material information Rating is no guarantee for soundness of the company • Down grade
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RATING PROCESS
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REGULATION OF CREDIT RATING AGENCIES
• Registration of Credit Rating Agencies • Promoter of Credit Rating Agency and Eligibility Criteria
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Credit Rating Agencies
• CRISIL Ltd (Credit Rating Information Services of India) • ICRA Ltd (Investment Information and Credit Rating Agency of India Ltd) • CARE Ltd (Credit Analysis And Research)
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RECENT DEVELOPMENTS
• • • • • Equity Grading Rating of Structured Obligations Utility Ratings Sovereign Ratings and Municipal Bonds Credit Rating of Non-Banking Finance Companies
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Mutual Funds
• It is mechanism of pooling together the savings of a large number of investors for collective investment • It receives money from shareholders invest it, attempts to make it grow and agrees to pay the shareholder as per the current value of the investment
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Schemes of Mutual Funds
• Schemes refers to the products they offer to investors
Operational classification
• Open ended scheme • Close ended scheme
Return based classification
• Income funds • Growth funds • Conservative funds
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Investment –base classification • Equity fund • Balanced fund • Fund of funds Sector-based classification Leveraged-based classification • others
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Constitution of Mutual Funds
• • • • Sponsors Trustees Custodians Asset Management Company
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Portfolio Management Process
• • • • Setting goal of scheme Identification of specific securities Portfolio designing Revising the portfolio
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Operational efficiency of Mutual fund • • • • NAV Load Disclosure Returns
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Asset Securitisation
• Asset Securitisation is defined as a process whereby assets like loans and receivables are used to create and sell asset backed securities BENEFITS OF SECURITISATION To the Issuers • To improve capital adequacy ratio • To ensure proper asset liability management • Issuer is in a position to improve income • Risk Diversification
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• New loans with same liabilities To Investors • Good Liquidity • Safety • Increased Yield • Diversification To the Financial System • Lowered Cost • Flow of Funds
• Stability • Effect on Market
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PROCESS AND MECHANISM OF SECURITISATION
• • • • • to identify homogeneous loan assets Creation of special purpose vehicle SPV issues security to the prospective investors The securities are issued from pool of assets SPV enter into an agreement with non life insurance companies • SPV obtains credit ratings from recognised credit rating agencies • The securities are issued to the investors through public issue or by private placement
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• securities are redeemed by the SPV along with interest due on such securities PARTIES INVOLVED IN TRANSACTION OF ASSET SECURITISATION • Originator • Merchant Bankers • Rating Agencies • Investors • Obligor
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ROLE OF SPECIAL PURPOSE VEHICLE
• A SPV must be capable of acquiring, holding and disposing of assets • It would undertake only the activity of asset securitisation and no other activity • It should be independent of bankruptcy of the originator • A SPV must be able to undertake multiple securitised transactions of asset securitisation
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INSTRUMENTS OF SECURITISATION • Pass and Pay Through Securities • Asset and Mortgage Backed Securities
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BLOCK 4
LEASING AND HIRE PURCHASE
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LEASING AND HIRE PURCHASE
• A lease is a contract whereby the owner of an asset grants to another person exclusive right to use the asset for an agreed period of time, in return for the payment of a rent (called lease rental). Capital assets like land, buildings, equipments, machinery, vehicles are the usual assets which are generally acquired on lease basis.
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Elements of Leasing
• • • • • • • A Valid Contract of Leasing Delivery of Goods Purpose Consideration Return of the Goods Ownership Methodology
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BENEFITS OF LEASING
• • • • • • Convenience in case of short-term need No Risk of Technological Obsolescence Efficient Maintenance Services Low Administrative and Transactions Costs Debt-Equity Ratio remains unchanged Benefit of Tax Shield
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TYPES OF LEASES • • • • • Operating Lease Financial Lease Sale and Lease Back Leveraged Lease Domestic Lease and International Lease
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MAIN CLAUSES IN THE LEASE AGREEMENT
• • • • • • • • • • Nature of the Lease Description of the Asset Duration of Lease Period Lease Rentals Delivery and Re-delivery Right to Use Repairs and Maintenance Alterations/Additions to Equipment Right to Inspect Equipment Damage to Equipment
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HIRE PURCHASE
• Hire purchase is another method of acquiring a capital asset for use, without paying its price immediately. • Under hire purchase arrangement goods are let on hire, the hirer (user) is allowed to pay the purchase price in instalments and enjoys an option to purchase the goods
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• The seller (hiree) purchases the asset from the supplier/manufacturer and hires it to the hirer who is required to make a cash down payment • The balance of the cost price of the asset with interest thereon is payable in instalments • Sometimes, in place of cash down payment, a fixed deposit is required to be made with the seller
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HOUSING FINANCE
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FEATURES
• • • • • • • • • • Eligibility for Loan Amount of loan Security for loan Fee and charges Interest rates Disbursement of loan Repayment period Equated monthly installments Repayment options Insurance of the property
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ROLE OF NATIONAL HOUSING BANK
1) Promotion and Development 2) Financing 3) Regulation and Supervision
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ROLE OF PRIMARY LENDING AGENCIES
• Commercial Banks • Housing and Urban Development Corporation Ltd. (HUDCO) • Housing Development Finance Corporation Ltd. (HDFC) • Cooperative Institutions
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CREDIT CARDS
• The Credit card is generally known as “plastic money’, as these cards are made of plastic, is widely used by the consumers.The convenience and safety factors add value to these cards. The changes in the consumer behaviour led to the growth of credit cards.
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TYPES OF CREDIT CARDS • • • • Travel and Entertainment Card Bank Card Store or Retail Card Fuel Card
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Additional Facilities and Services
• • • • • • • • • Free Insurance Protection Emergency Cash Withdrawl Twenty four hour Customer Service Photocard Option Travel Privileges Temporary Credit Line Increase Draft on Phone Choose when and how to Pay Buy anything on your Card
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Credit Card Business Cycle
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VENTURE CAPITAL
• Venture Capital may be broadly defined as long-term investment in business, which has potential for significant growth and financial returns. • FEATURES • provided largely in the form of equity • The venture capitalist aids and guides the management by providing the benefit of his skill, experience and expertise • The Venture Capitalist does not intend to retain his investment in the investee company forever • A Venture Capitalist intends to earn largely by way of capital gains arising out of sale of his equity holdings • A Venture Capitalist also provides conditional loans
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STAGES OF VENTURE CAPITAL FINANCING (i) Early stage financing (ii) Later stage financing Early Stage Financing includes: (i) Seed capital stage (ii) Start-up stage (iii) Second round financing
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MODES OF FINANCING • a) Equity Instruments • b) Debt Instruments
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EXIT ROUTES • • • • • • i) Initial Public Offering ii) Buy back of Shares by the Promoters: iii) Sale of Enterprise to another Company: iv) Sale to New Venture Capitalist: iv) Sale to New Venture Capitalist: vi) Liquidation of the Investee Company:
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REGULATORY FRAMEWORK
• The venture capital funds and venture capital companies in India were regulated by the Guidelines issued by the Controller of Capital Issues, Government of India, in1988. • In 1995, Securities and Exchange Board of India Act was amended which empowered SEBI to register and regulate the Venture Capital Funds • 1) Definitions • 2) Registration of Venture Capital Funds • 3) Resources for Venture Capital Fund
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• • • •
4) Investment Restrictions 5) Prohibition on Listing 6) Private Placement of Securities/Units 7) Winding up of Venture Capital Fund Scheme • 8) Powers of the Securities and Exchange Board of India
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Factoring
• Factoring is the conversion of credit sales into cash. • Factoring is an arrangement in which receivables on account of sale of goods are sold to the factor at a certain discount.
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Functions of the factor
• • • • To provide finance up to 90% of invoice value To collect cash against receivables To undertake sales ledger administration Under non recourse,if customer become insolvent,factor provides insurance facility to the client. • Factor provides other information such as sales analysis,expertise in the area of marketing,finance to the client
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Parties to the contract • Customer • Client • Factor Types of factoring • Full servicing • Recourse factoring • Maturity • Invoice discounting • Agency discounting
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Forfaiting
• Forfaiting is the purchase of receivables alongwith negotiable instruments due on specific date to be matured in future • Forfaiting is a source of trade finance which enables exporters to get funds from the institution called forfaiter on transferring the right to right to recover debt from the importer
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Features
• Specific form of trade finance • Export receivables are discounted • Debt instruments are bill of exchange and promissory notes • Payment of export receivables must be guaranteed by importer’s bank • Always without recourse to the seller • Full value is taken into consideration • Medium to long term maturities are considered
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Bill Discounting
• Under this form, seller of the goods draw a bill of exchange on the buyer • Seller discounts the bill of exchange with bank and avail the finance Parties to the bill of exchange • The Drawer • The Drawee • The Payee • The Endorser
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Block 5
Insurance Services
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LIFE INSURANCE
Insurance is a contract between two parties i.e. insurer and insured, whereby in consideration of payment of premium by the insured, the insurer agrees to reimburse a financial loss which the insured may incur due to an insured peril. peril cause of loss which is often beyond the control of human e.g. fire, lightening, flood, earthquake, theft, accident, explosion, etc.
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• Hazards are of two types viz. Physical Hazard and Moral Hazard. • Physical Hazard • Moral Hazard CLASSIFICATION OF RISKS • Objective Risk and Subjective Risk • Financial Risk and Non-Financial Risks • Pure Risk and Speculative Risk • Fundamental Risks and Particular Risks
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INSURABLE RISKS
• Personal risk is related to the loss of ability to earn income and include premature death, dependent old age, sickness or disability and unemployment losses. • Property risks: Individual owning property is exposed to property risk i.e. the risk of property damaged or lost or destroyed because of fire, lightening, flood, cyclone, earthquake or any other natural disasters. • Liability risks under the law of the land one can be held legally liable if one’s act results in serious bodily injury or property damage to someone else.
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BASIC PRINCIPLES OF INSURANCE • • • • • • Utmost Good Faith Principle of Insurable Interest Principle of Indemnity Subrogation Contribution Deductibles
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LIFE INSURANCE
• Life insurance is • an effective and efficient means of planning for adverse financial consequences in the event of untimely death of income earner for the average family. • PRODUCT DESIGN • Kind of Contingencies Covered • Pattern of Premium Payment • Pattern of Benefits Received
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RIDERS
• Riders are additional benefits that can be purchased alongwith a basic insurance policy, to make the basic policy to match individual’s present and future requirements 1) Accidental Death Benefit 2) Accelerated Death Benefit 3) Waiver of Premium 4) Guaranteed Insurability Option 5) Cost of Living Rider 6) Disability Income Benefit
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PREMIUM PAYMENT PATTERNS • • • • Single Premium Level Premium Limited Payment Flexible Premium Plan
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NON-LIFE INSURANCE
• non-life insurance covers various categories, such as fire insurance, marine insurance,liability insurance etc. • MARINE INSURANCE • Marine insurance gives protection against fortuitous losses that occur during marine adventure
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Classification of Marine Insurance
1) Time Policy 2) Voyage Policy 3) Mixed Policy 4) Building Risk Policy
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FIRE INSURANCE
• fire insurance policy is to provide compensation to the insured in the event of damage to the property insured • Perils Covered 1) Fire 2) Lightening Explosion/Implosion 3) Aircraft Damage Loss, Destruction or damage caused by Aircraft 4) Riot, Strike 5) Impact Damage 6) Subsidence and Landslide 7) Missile Testing operations 8) Bush Fire
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LIABILITY INSURANCE
Types of liability Insurance • Public Liability Insurance • Product Liability • Professional Indemnity • Contractual Liability • Employer-employee Liability
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INSURANCE BROKING SERVICES
INSURANCE AGENT AND INSURANCE BROKER • Insurance agent is a legal representative of the insurance company who induces the person to apply for insurance • Insurance broker is someone who legally represents the insured
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TYPES OF BROKERS
1) Direct Broker - General Insurance Brokers and/or Life Insurance Brokers 2) Reinsurance Brokers 3) Composite Brokers
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FUNCTIONS OF A DIRECT BROKER
• Obtaining detailed information of the client’s business • Familiarizing himself with the client’s business • Rendering advice • Maintaining detailed knowledge of available insurance markets, • Submitting quotation received from insurer/ • Providing requisite underwriting information • Acting promptly on instructions from a client • Assisting clients in paying premium • Providing services related to insurance
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FUNCTIONS OF A REINSURANCE BROKER
• • • • Familiarizing himself with the client’s business Maintaining clear records of the insurer’s business Rendering advice based on technical data Maintaining a database of available reinsurance markets Rendering consultancy and risk management services Selecting and recommending a re-insurer Negotiating with a re-insurer on the client’s behalf Maintaining proper records of claims Collecting and remitting premiums and claims within
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• • • •
IRDA REGULATIONS FOR POLICYHOLDERS’ PROTECTION • • • • • • IRDA Regulations Completion of Proposal Form IRDA Regulations Policy Document Wording IRDA Regulations Policy Servicing IRDA Regulations Claim Settlement IRDA Regulations Grievances Redressal IRDA Regulation of Investments
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An ISO 9001:2000 Certified Organization
Management Of Financial Services
Block 1 Financial system, Markets And Services
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Financial System
Financial system is a set of complex and closely connected or intermixed instructions,agents,practices,markets, transactions,claims and liabilities in the economy
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The financial system comprises of four major components. These are 1) Financial Institutions 2) Financial Markets 3) Financial Instruments 4) Financial Services
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1) Financial Institutions: These are institutions which mobilise and transfer the savings or funds from surplus units to deficit units. 2) Financial Markets: This is a place or mechanism where funds or savings are transferred from surplus units to deficit units. 3) Financial Instruments: the commodities that are traded or dealt in a financial market are financial assets or securities or financial instruments.
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4) Financial Services: Financial services include the services offered by both types of companies Asset Management Companies and Liability Management Companies
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ROLE OF FINANCIAL MARKETS
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CLASSIFICATION OF FINANCIAL MARKETS
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SECURITIES MARKETS
a) Government Securities b) Industrial Securities
The Government securities are issued by Central Government, State Governments and local govt. which includes the authorities like Municipalities, Autonomous Institutions like; Port Trusts, Improvement Trusts Agencies like; IDBI, IFCI, SFCs. SIDCs, Housing Boards
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• The instruments of raising funds in the industrial securities market are bonds,debentures, preference shares and equity shares. • The securities market, is divided into primary or new issue market and secondary market. The new issues of government and private corporate sectors are floated in the primary market. The secondary market provides liquidity to the outstanding securities or existing securities
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Over the Counter Exchange of India (OTCEI)
It was incorporated in 1990 under companies act 1956. Over The Counter (OTC) market is an informally organised group of brokers and dealers. The Over the Counter market is a negotiated market, because prices are settled through individual bargaining between buyers and sellers.
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GLOBALISATION OF FINANCIAL MARKETS
1) deregulation or liberalisation of markets and the activities of market participants in key financial centers of the world; 2) technological advances for monitoring world markets, executing orders, and analyzing financial opportunities; and 3) increased institutionalisation of financial markets
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CLASSIFICATION OF GLOBAL FINANCIAL MARKETS
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FINANCIAL MARKETS AND INSTITUTIONS
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FINANCIAL SERVICES
• financial services are services that ensure the smooth flow of financial activities in the economy. • Financial services sector is regulated by the Securities and Exchange Board of India(SEBI), Reserve Bank of India and the Department of Banking and Insurance,Government of India, through legislations
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CHARACTERISTICS OF FINANCIAL SERVICES
i) Customer-Specific ii) Intangibility iii) Concomitant iv) Tendency to Perish v) People based services vi) Market Dynamics
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EVOLUTION OF FINANCIAL SERVICES IN INDIA
• • • • The Stage of Infancy Modern Financial Services The Third Flush New Financial Instruments
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TYPES OF FINANCIAL SERVICES
• Fee Based Services • Fee based financial services are those services wherein financial institutions operate in specialised fields to earn a substantial income a) Issue Management b) Corporate Advisory Services c) Credit Rating d) Mutual Funds e) Asset Securitisation
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IMPACT OF TECHNOLOGY
From the Service Providers View • Cost Saving • Product Development • Marketing Tool • Delivery channel • Decision-making Aid • Globalisation
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From Customers View
• Accessibility • Convenience • Speedier Settlement of Transaction
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MANAGEMENT OF RISK IN FINANCIAL SERVICES
• EXTERNAL RISK a) Institutions Providing Direct Finance b) Insurance Services c) Stock Broking Services d) Leasing and Hire Purchase e) Institutions Offering Fee Based Services • INTERNAL RISK a) Institutions Providing Direct Finance b) Insurance Service
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c) Stock Broking Service d) Leasing and Hire Purchase e) Institutions Offering Fee Based Services TYPES OF RISK 1) Credit Risk 2) Asset-Liability Gap Risk 3) Due-Diligence Risk 4) Interest Rate Risk 5) Market Risk 6) Currency Risk
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MANAGEMENT OF RISK
• • • • • • Managing Credit Risk Managing Asset-Liability Gap Risk Managing Due-diligence Risk Managing Interest Rate Risk Managing Market Risk Managing Currency Risk
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REGULATORY FRAMEWORK
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Block 2
Financial market operations And Services
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Stock exchange:Functions and Organisation
Stock exchange is the place where buying and selling of securities take place . Market is divided into two a) Short term and b) long term capital market
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Primary Market
It is the segment in which new issues are made Three ways of new issue • Public issue • Right issue • Private placement
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• • • • •
• •
Steps of public issue Appointment of underwriter Appointment of bankers Appointment of Registrars Appointment of the Brokers to the Issue Filing of Prospectus with the Registrar of Companies Printing and Dispatch of Application forms Filing of Initial Listing Application
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• Statutory Announcement • Processing of Applications • Establishing the Liability of the Underwriter • Allotment of Shares • Listing of the Issue
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Rights Issue
• Selling of securities to the existing shareholders in the portion of their current holding. Private Placement • Sale of securities by public limited company • Securities are placed with Institutional investors, Mutual funds or other Financial Institutions
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BROKING AND TRADING IN EQUITY
• Stock Brokers are intermediary between buyers and sellers of securities
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DIFFERENT TYPES OF DEBT INSTRUMENTS
• • • • Fixed and Floating Rate Instruments Debt Instruments with Call and Put Option Zero Interest Debt Instruments Convertible Debt Instrument
Convertible Debt Instrument
• The Government Securities are issued on the basis of liquidity conditions in the market, Government borrowing programme and expectations of the market.
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Types of Government Securities i) Treasury Bill of 91 day, 182 day and 364 day
ii) Government of India dated securities iii) State Government securities Secondary market Govt. securities are negotiated between banks, PDs, MFs. RBI has introduced NDS.
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Corporate Debt Securities Market
• • • • • Commercial papers Certificate of Deposits Bonds issued by PSUs Bonds issued by Financial Institution Corporate Debentures
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Depositories
• Depository system is a scrip based system • It is an institution which maintains an electronic record of ownership Constituents • Depository • Depository Participants • Registrars • Investors
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Depository Account
• Dematerialisation (Demat)
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Rematerialisation (Remat)
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• • • • • •
Fungibility Delivery vs. Payment SWITCHING OVER TO DEPOSITORY Appointing DP Request for ‘Demat’ Approach the Company or Registrar of Transfer • Confirmation of Demat • Crediting the Client’s Account
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Block 3
Fee Based Services
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ISSUE MANAGEMENT
• Issue management refers to managing issues of corporate securities like equity • shares, preference shares and debentures or bonds. Issuing securities can be done in three ways • Public Issue • Right Issue • Private Placement
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SELECTING A PUBLIC ISSUE PROPOSAL
• Background of the Promoters/Management
• Company Profile • Project Profile • Capital Market Position
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PUBLIC ISSUE MANAGEMENT
Pre-Issue Activities 1) Memorandum of Understanding 2) Obtaining Appraisal Note 3) Appointment of Other Intermediaries 4) Inter-se Allocation of Responsibilities 5) Preparing Prospectus
6) Submission of Draft Offer Documents 7) Launching of a Public Issue
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• • • • •
Post-Issue Activities Finalisation of Basis of Allotment (BOA) Despatch of Share Certificates Issue of Advertisement in Newspapers Post-issue Obligations Post-issue Monitoring Reports
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Post-issue Monitoring Reports
• • • • • Necessity for Aggressive Sales Campaign Packaging and Marketing the Issue Launching Marketing Campaign Brokers’ and Investors’ Conferences Timing of the Issue
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CORPORATE ADVISORY SERVICES
Making of Public Issue and Issue Management • 1) Corporate Restructuring • 2) Project Counselling and Pre-Investment Studies • 4) Capital Structuring and Restructuring • 5) Loan Syndication • 6) Liaison with Foreign Collaborators and making preparation for Joint Ventures • 7) Raising Foreign Currency Loans Euro issues, FCCB’s etc • 8) Mergers and Acquisitions • 9) Making Valuation & Revaluation of Assets • 10) Consultancy for Rehabilitation of Sick Industrial units
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CREDIT RATING
• Credit rating may be defined as an expression, through use of symbols, of opinion about the quality of credit of the issuer of debt securities BENEFITS OF CREDIT RATING • Benefits to Investors • Safeguards against Bankruptcy • Recognition of Risk • Credibility of Issuer • Rating Facilitates Quick Investment decisions
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• No Need to Depend on Investment Advisors or Professionals • Choice of Investment • Benefits of Rating Surveillance Benefits of Credit Rating to Issuer Company • Lower Cost of Borrowing • Wider Audience for Borrowing • Rating as Marketing Tool • Self Discipline by Companies • Reduction of Cost in Public Issues • Motivation for Growth
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LIMITATIONS OF CREDIT RATING
• • • • Biased Rating and Misrepresentations Static study Concealment of material information Rating is no guarantee for soundness of the company • Down grade
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RATING PROCESS
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REGULATION OF CREDIT RATING AGENCIES
• Registration of Credit Rating Agencies • Promoter of Credit Rating Agency and Eligibility Criteria
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Credit Rating Agencies
• CRISIL Ltd (Credit Rating Information Services of India) • ICRA Ltd (Investment Information and Credit Rating Agency of India Ltd) • CARE Ltd (Credit Analysis And Research)
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RECENT DEVELOPMENTS
• • • • • Equity Grading Rating of Structured Obligations Utility Ratings Sovereign Ratings and Municipal Bonds Credit Rating of Non-Banking Finance Companies
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Mutual Funds
• It is mechanism of pooling together the savings of a large number of investors for collective investment • It receives money from shareholders invest it, attempts to make it grow and agrees to pay the shareholder as per the current value of the investment
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Schemes of Mutual Funds
• Schemes refers to the products they offer to investors
Operational classification
• Open ended scheme • Close ended scheme
Return based classification
• Income funds • Growth funds • Conservative funds
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Investment –base classification • Equity fund • Balanced fund • Fund of funds Sector-based classification Leveraged-based classification • others
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Constitution of Mutual Funds
• • • • Sponsors Trustees Custodians Asset Management Company
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Portfolio Management Process
• • • • Setting goal of scheme Identification of specific securities Portfolio designing Revising the portfolio
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Operational efficiency of Mutual fund • • • • NAV Load Disclosure Returns
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Asset Securitisation
• Asset Securitisation is defined as a process whereby assets like loans and receivables are used to create and sell asset backed securities BENEFITS OF SECURITISATION To the Issuers • To improve capital adequacy ratio • To ensure proper asset liability management • Issuer is in a position to improve income • Risk Diversification
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• New loans with same liabilities To Investors • Good Liquidity • Safety • Increased Yield • Diversification To the Financial System • Lowered Cost • Flow of Funds
• Stability • Effect on Market
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PROCESS AND MECHANISM OF SECURITISATION
• • • • • to identify homogeneous loan assets Creation of special purpose vehicle SPV issues security to the prospective investors The securities are issued from pool of assets SPV enter into an agreement with non life insurance companies • SPV obtains credit ratings from recognised credit rating agencies • The securities are issued to the investors through public issue or by private placement
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• securities are redeemed by the SPV along with interest due on such securities PARTIES INVOLVED IN TRANSACTION OF ASSET SECURITISATION • Originator • Merchant Bankers • Rating Agencies • Investors • Obligor
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ROLE OF SPECIAL PURPOSE VEHICLE
• A SPV must be capable of acquiring, holding and disposing of assets • It would undertake only the activity of asset securitisation and no other activity • It should be independent of bankruptcy of the originator • A SPV must be able to undertake multiple securitised transactions of asset securitisation
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INSTRUMENTS OF SECURITISATION • Pass and Pay Through Securities • Asset and Mortgage Backed Securities
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BLOCK 4
LEASING AND HIRE PURCHASE
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LEASING AND HIRE PURCHASE
• A lease is a contract whereby the owner of an asset grants to another person exclusive right to use the asset for an agreed period of time, in return for the payment of a rent (called lease rental). Capital assets like land, buildings, equipments, machinery, vehicles are the usual assets which are generally acquired on lease basis.
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Elements of Leasing
• • • • • • • A Valid Contract of Leasing Delivery of Goods Purpose Consideration Return of the Goods Ownership Methodology
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BENEFITS OF LEASING
• • • • • • Convenience in case of short-term need No Risk of Technological Obsolescence Efficient Maintenance Services Low Administrative and Transactions Costs Debt-Equity Ratio remains unchanged Benefit of Tax Shield
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TYPES OF LEASES • • • • • Operating Lease Financial Lease Sale and Lease Back Leveraged Lease Domestic Lease and International Lease
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MAIN CLAUSES IN THE LEASE AGREEMENT
• • • • • • • • • • Nature of the Lease Description of the Asset Duration of Lease Period Lease Rentals Delivery and Re-delivery Right to Use Repairs and Maintenance Alterations/Additions to Equipment Right to Inspect Equipment Damage to Equipment
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HIRE PURCHASE
• Hire purchase is another method of acquiring a capital asset for use, without paying its price immediately. • Under hire purchase arrangement goods are let on hire, the hirer (user) is allowed to pay the purchase price in instalments and enjoys an option to purchase the goods
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• The seller (hiree) purchases the asset from the supplier/manufacturer and hires it to the hirer who is required to make a cash down payment • The balance of the cost price of the asset with interest thereon is payable in instalments • Sometimes, in place of cash down payment, a fixed deposit is required to be made with the seller
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HOUSING FINANCE
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FEATURES
• • • • • • • • • • Eligibility for Loan Amount of loan Security for loan Fee and charges Interest rates Disbursement of loan Repayment period Equated monthly installments Repayment options Insurance of the property
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ROLE OF NATIONAL HOUSING BANK
1) Promotion and Development 2) Financing 3) Regulation and Supervision
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ROLE OF PRIMARY LENDING AGENCIES
• Commercial Banks • Housing and Urban Development Corporation Ltd. (HUDCO) • Housing Development Finance Corporation Ltd. (HDFC) • Cooperative Institutions
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CREDIT CARDS
• The Credit card is generally known as “plastic money’, as these cards are made of plastic, is widely used by the consumers.The convenience and safety factors add value to these cards. The changes in the consumer behaviour led to the growth of credit cards.
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TYPES OF CREDIT CARDS • • • • Travel and Entertainment Card Bank Card Store or Retail Card Fuel Card
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Additional Facilities and Services
• • • • • • • • • Free Insurance Protection Emergency Cash Withdrawl Twenty four hour Customer Service Photocard Option Travel Privileges Temporary Credit Line Increase Draft on Phone Choose when and how to Pay Buy anything on your Card
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Credit Card Business Cycle
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VENTURE CAPITAL
• Venture Capital may be broadly defined as long-term investment in business, which has potential for significant growth and financial returns. • FEATURES • provided largely in the form of equity • The venture capitalist aids and guides the management by providing the benefit of his skill, experience and expertise • The Venture Capitalist does not intend to retain his investment in the investee company forever • A Venture Capitalist intends to earn largely by way of capital gains arising out of sale of his equity holdings • A Venture Capitalist also provides conditional loans
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STAGES OF VENTURE CAPITAL FINANCING (i) Early stage financing (ii) Later stage financing Early Stage Financing includes: (i) Seed capital stage (ii) Start-up stage (iii) Second round financing
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MODES OF FINANCING • a) Equity Instruments • b) Debt Instruments
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EXIT ROUTES • • • • • • i) Initial Public Offering ii) Buy back of Shares by the Promoters: iii) Sale of Enterprise to another Company: iv) Sale to New Venture Capitalist: iv) Sale to New Venture Capitalist: vi) Liquidation of the Investee Company:
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REGULATORY FRAMEWORK
• The venture capital funds and venture capital companies in India were regulated by the Guidelines issued by the Controller of Capital Issues, Government of India, in1988. • In 1995, Securities and Exchange Board of India Act was amended which empowered SEBI to register and regulate the Venture Capital Funds • 1) Definitions • 2) Registration of Venture Capital Funds • 3) Resources for Venture Capital Fund
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• • • •
4) Investment Restrictions 5) Prohibition on Listing 6) Private Placement of Securities/Units 7) Winding up of Venture Capital Fund Scheme • 8) Powers of the Securities and Exchange Board of India
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Factoring
• Factoring is the conversion of credit sales into cash. • Factoring is an arrangement in which receivables on account of sale of goods are sold to the factor at a certain discount.
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Functions of the factor
• • • • To provide finance up to 90% of invoice value To collect cash against receivables To undertake sales ledger administration Under non recourse,if customer become insolvent,factor provides insurance facility to the client. • Factor provides other information such as sales analysis,expertise in the area of marketing,finance to the client
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Parties to the contract • Customer • Client • Factor Types of factoring • Full servicing • Recourse factoring • Maturity • Invoice discounting • Agency discounting
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Forfaiting
• Forfaiting is the purchase of receivables alongwith negotiable instruments due on specific date to be matured in future • Forfaiting is a source of trade finance which enables exporters to get funds from the institution called forfaiter on transferring the right to right to recover debt from the importer
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Features
• Specific form of trade finance • Export receivables are discounted • Debt instruments are bill of exchange and promissory notes • Payment of export receivables must be guaranteed by importer’s bank • Always without recourse to the seller • Full value is taken into consideration • Medium to long term maturities are considered
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Bill Discounting
• Under this form, seller of the goods draw a bill of exchange on the buyer • Seller discounts the bill of exchange with bank and avail the finance Parties to the bill of exchange • The Drawer • The Drawee • The Payee • The Endorser
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Block 5
Insurance Services
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LIFE INSURANCE
Insurance is a contract between two parties i.e. insurer and insured, whereby in consideration of payment of premium by the insured, the insurer agrees to reimburse a financial loss which the insured may incur due to an insured peril. peril cause of loss which is often beyond the control of human e.g. fire, lightening, flood, earthquake, theft, accident, explosion, etc.
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• Hazards are of two types viz. Physical Hazard and Moral Hazard. • Physical Hazard • Moral Hazard CLASSIFICATION OF RISKS • Objective Risk and Subjective Risk • Financial Risk and Non-Financial Risks • Pure Risk and Speculative Risk • Fundamental Risks and Particular Risks
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INSURABLE RISKS
• Personal risk is related to the loss of ability to earn income and include premature death, dependent old age, sickness or disability and unemployment losses. • Property risks: Individual owning property is exposed to property risk i.e. the risk of property damaged or lost or destroyed because of fire, lightening, flood, cyclone, earthquake or any other natural disasters. • Liability risks under the law of the land one can be held legally liable if one’s act results in serious bodily injury or property damage to someone else.
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BASIC PRINCIPLES OF INSURANCE • • • • • • Utmost Good Faith Principle of Insurable Interest Principle of Indemnity Subrogation Contribution Deductibles
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LIFE INSURANCE
• Life insurance is • an effective and efficient means of planning for adverse financial consequences in the event of untimely death of income earner for the average family. • PRODUCT DESIGN • Kind of Contingencies Covered • Pattern of Premium Payment • Pattern of Benefits Received
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RIDERS
• Riders are additional benefits that can be purchased alongwith a basic insurance policy, to make the basic policy to match individual’s present and future requirements 1) Accidental Death Benefit 2) Accelerated Death Benefit 3) Waiver of Premium 4) Guaranteed Insurability Option 5) Cost of Living Rider 6) Disability Income Benefit
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PREMIUM PAYMENT PATTERNS • • • • Single Premium Level Premium Limited Payment Flexible Premium Plan
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NON-LIFE INSURANCE
• non-life insurance covers various categories, such as fire insurance, marine insurance,liability insurance etc. • MARINE INSURANCE • Marine insurance gives protection against fortuitous losses that occur during marine adventure
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Classification of Marine Insurance
1) Time Policy 2) Voyage Policy 3) Mixed Policy 4) Building Risk Policy
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FIRE INSURANCE
• fire insurance policy is to provide compensation to the insured in the event of damage to the property insured • Perils Covered 1) Fire 2) Lightening Explosion/Implosion 3) Aircraft Damage Loss, Destruction or damage caused by Aircraft 4) Riot, Strike 5) Impact Damage 6) Subsidence and Landslide 7) Missile Testing operations 8) Bush Fire
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LIABILITY INSURANCE
Types of liability Insurance • Public Liability Insurance • Product Liability • Professional Indemnity • Contractual Liability • Employer-employee Liability
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INSURANCE BROKING SERVICES
INSURANCE AGENT AND INSURANCE BROKER • Insurance agent is a legal representative of the insurance company who induces the person to apply for insurance • Insurance broker is someone who legally represents the insured
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TYPES OF BROKERS
1) Direct Broker - General Insurance Brokers and/or Life Insurance Brokers 2) Reinsurance Brokers 3) Composite Brokers
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FUNCTIONS OF A DIRECT BROKER
• Obtaining detailed information of the client’s business • Familiarizing himself with the client’s business • Rendering advice • Maintaining detailed knowledge of available insurance markets, • Submitting quotation received from insurer/ • Providing requisite underwriting information • Acting promptly on instructions from a client • Assisting clients in paying premium • Providing services related to insurance
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FUNCTIONS OF A REINSURANCE BROKER
• • • • Familiarizing himself with the client’s business Maintaining clear records of the insurer’s business Rendering advice based on technical data Maintaining a database of available reinsurance markets Rendering consultancy and risk management services Selecting and recommending a re-insurer Negotiating with a re-insurer on the client’s behalf Maintaining proper records of claims Collecting and remitting premiums and claims within
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• • • •
IRDA REGULATIONS FOR POLICYHOLDERS’ PROTECTION • • • • • • IRDA Regulations Completion of Proposal Form IRDA Regulations Policy Document Wording IRDA Regulations Policy Servicing IRDA Regulations Claim Settlement IRDA Regulations Grievances Redressal IRDA Regulation of Investments
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